NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INFINERA CORPORATION
1. Organization and Basis of Presentation
Infinera Corporation (“Infinera” or the “Company”), headquartered in Sunnyvale, California, was founded in December 2000 and incorporated in the State of Delaware. Infinera provides Intelligent Transport Networks to help carriers address the increasing demand for cloud-based services and data center connectivity as they advance into the Terabit Era. Infinera is unique in its use of breakthrough semiconductor technology to deliver large scale photonic integrated circuits ("PICs") and the application of PICs to vertically integrated optical networking solutions that deliver the industry’s only commercially available 500 Gigabits per second ("Gbps") FlexCoherent super-channels. Infinera Intelligent Transport Network solutions include the DTN-X, DTN and ATN platforms.
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal years 2013 and 2012 were 52-week years that ended on December 28, 2013 and December 29, 2012, respectively. Fiscal year 2011 was a 53-week year that ended on December 31, 2011. The next 53-week year will end on December 31, 2016.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The Company reclassified certain amounts reported in previous periods to conform to the current presentation.
2. Significant Accounting Policies
Use of Estimates
The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). These accounting principles require the Company to make certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, inventory valuation, allowances for sales returns, allowances for doubtful accounts, accrued warranty, cash equivalents, fair value measurement of investments, other-than-temporary impairments, derivative instruments and accounting for income taxes. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.
Revenue Recognition
Substantially all of the Company’s product sales are sold in combination with software support services comprised of either software warranty or software subscription services. The Company also periodically sells training, installation and deployment services, spares management and on-site hardware replacement services with its product sales. Training services include the right to a specified number of training classes and installation and deployment services may include customer site assessments, equipment installation and testing. Training and installation and deployment services are generally delivered over a
90
-
120
day period. Software warranty provides customers with maintenance releases and patches during the warranty support period. Software subscription also includes maintenance releases and patches and provides customers with rights to receive unspecified software product upgrades released during the support period. These support services are generally delivered over a one-year period. Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements and are generally delivered over a one-year period.
The Company recognizes product revenue when all of the following have occurred: (1) it has entered into a legally binding arrangement with the customer; (2) delivery has occurred, which is when product title and risk of loss have transferred to the customer; (3) customer payment is deemed fixed or determinable; and (4) collectability is reasonably assured.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company allocates revenue to each element in its multiple-element arrangements based upon their relative selling prices. The Company determines the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met.
VSOE of selling price is used in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. In certain instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This mainly occurs where insufficient standalone sales transactions have occurred or where pricing for that element has not been consistent.
TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As the Company’s products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is typically difficult to obtain the reliable standalone competitive pricing necessary to establish TPE.
ESP represents the best estimate of the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through formal approval by the Company’s management, taking into consideration the overall go-to-market pricing strategy.
As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP. As a result, the Company’s future revenue recognition for multiple element arrangements could differ from that recorded in the current period. The Company regularly reviews VSOE, TPE and ESP and maintains internal controls over the establishment and update of these inputs.
The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges. The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting.
The Company has a limited number of software offerings which are not required to deliver the tangible product’s essential functionality and can be sold separately. Revenue from sales of these software products and related post-contract support will continue to be accounted for under software revenue recognition rules. The Company’s multiple-element arrangements may therefore have a software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue recognition accounting guidance. Revenues related to these software offerings are not expected to be significant.
Services revenue includes software subscription services, training, installation and deployment services, spares management, on-site hardware replacement services, extended software warranty and extended hardware warranty services. Revenue from software subscription, spares management, on-site hardware replacement services and extended software and hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally
one year
. Revenue related to training and installation and deployment services is recognized as the services are completed.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. Revenue is recognized only when title and risk of loss pass to customers and when the revenue recognition criteria have been met. In instances where acceptance of the product occurs upon formal written acceptance, revenue is deferred until such written acceptance has been received. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment terms to customers generally range from net
30
to
120
days from invoice, which are considered to be standard payment
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
terms. However, payment terms greater than
120 days
but less than or equal to
one year
from invoice may be considered standard if payment is supported by an irrevocable commercial letter of credit (“LOC”) issued by a creditworthy bank or the LOC has been accepted and confirmed by a creditworthy bank. In the event payment terms are provided that differ from the Company’s standard business practices, the fees are deemed to not be fixed or determinable and, therefore, revenue is not recognized until the fees become fixed or determinable which the Company believes is when they are legally due and payable. The Company assesses its ability to collect from its customers based primarily on the creditworthiness and past payment history of the customer.
For sales to resellers, the same revenue recognition criteria apply. It is the Company’s practice to identify an end-user prior to shipment to a reseller. The Company does not offer rights of return or price protection to its resellers.
Shipping charges billed to customers are included in product revenue and related shipping costs are included in product cost. The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the requisite service period (generally the vesting period) under the straight-line amortization method.
The Company estimates the fair value of the stock options granted using the Black-Scholes option pricing formula and a single option award approach. For new-hire grants, options typically vest with respect to
25%
of the shares
one year
after the option’s vesting commencement date and the remainder ratably on a monthly basis over
three years
, commencing
one year
after the vesting commencement date. For annual refresh grants, options typically vest ratably on a monthly basis over
three
,
four
or
five
years. In 2011, the Company granted performance-based stock options to executives as part of the Company’s annual refresh grant process. The performance-based stock options entitle the Company’s executive team to receive a number of options to purchase the Company’s common stock based on pre-established performance criteria over approximately
one year
. These performance metrics are classified as performance conditions, and the Company evaluates the performance status at the end of each period and records the expense when deemed probable.
The Company makes a number of estimates and assumptions in determining stock-based compensation related to options including the following:
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The expected forfeiture rate is estimated based on the Company’s historical forfeiture data and compensation costs are recognized only for those equity awards expected to vest. The estimation of the forfeiture rate requires judgment, and to the extent actual forfeitures differ from expectations, changes in estimate will be recorded as an adjustment in the period when such estimates are revised. Actual results may differ substantially from the estimates. The Company records stock-based compensation expense to adjust estimated forfeiture rates to actual.
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•
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The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The expected term is estimated based on the Company’s historical data on employee exercise patterns and post vesting termination behavior to estimate expected exercises over the contractual term of grants.
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•
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Expected volatility of the Company’s stock has been historically based on the weighted-average implied and historical volatility of Infinera and its peer group. The peer group is comprised of similar companies in the same industrial sector. As the Company gained more historical volatility data, the weighting of its own data in the expected volatility calculation associated with options gradually increased to 100% by 2013.
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The Company estimates the fair value of the rights to acquire stock under its Employee Stock Purchase Plan (“ESPP”) using the Black-Scholes option pricing formula. The Company’s ESPP typically provides for consecutive six-month offering periods and the Company uses its own historical volatility data in the valuation of ESPP shares.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company accounts for the fair value of restricted stock units (“RSUs”) using the closing market price of the Company’s common stock on the date of grant. For new-hire grants, RSUs typically vest ratably on an annual basis over
four years
. For annual refresh grants, RSUs typically vest ratably on an annual basis over
three
,
four
or
five
years.
The Company granted performance stock units ("PSUs") to its executive officers in 2013 as part of the Company's annual refresh grant process. These PSUs entitle the Company's executive officers to receive a number of shares of the Company's common stock based on its stock price performance compared to the NASDAQ Telecom Composite Index (“IXTC”) for the same period. The PSUs vest over the span of
one year
,
two years
, and
three years
and the number of shares to be issued upon vesting ranges from
0
to
1.5
times the number of PSUs granted depending on the relative performance of the Company's common stock price compared to IXTC. This performance metric is classified as a market condition.
The Monte Carlo simulation model is based on a discounted cash flow approach, with the simulation of a large number of possible stock price outcomes for the Company’s stock and the target composite index. The use of the Monte Carlo simulation model requires the input of a number of assumptions including expected volatility of the Company’s stock price, expected volatility of IXTC, correlation between changes in the Company’s stock price and changes in the target composite index, risk-free interest rate, and expected dividends. Expected volatility of the Company’s stock is based on the weighted-average implied and historical volatility of the Company’s peer group in the industry in which the Company does business. Expected volatility of IXTC is based on the historical and implied data. Correlation is based on the historical relationship between the Company’s peer group stock price and the target composite index average. The risk-free interest rate is based upon the treasury zero-coupon yield appropriate for the term of the PSU as of the grant date. The expected dividend yield is
zero
for the Company as it does not expect to pay dividends in the future. The expected dividend yield for the target composite index is the annual dividend yield expressed as a percentage of the composite average of the target composite index on the grant date.
In 2012, the Company granted PSUs with performance conditions and estimated the fair value using the closing market price of the Company’s common stock on the date of grant. These PSUs entitle the Company’s executive officers to receive a number of shares of the Company’s common stock based on pre-established performance criteria over approximately
two and a half years
. The PSUs cliff vest at
50%
upon achievement of specific revenue criteria and
50%
will cliff vest upon achievement of specific operating profit criteria. This performance metric is classified as a performance condition.
Inventory Valuation
Inventories consist of raw materials, work-in-process and finished goods and are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market. Market value is based upon an estimated selling price reduced by the estimated cost of disposal. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing and technological obsolescence of the Company’s products.
Inventory that is obsolete or in excess of the Company’s forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand. As of December 28, 2013 and December 29, 2012, the Company’s inventory value had been reduced by
$8.7 million
and
$6.9 million
, respectively, for excess and obsolescence. In valuing its inventory costs and deferred inventory costs, the Company considered whether the utility of the products delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. The Company concluded that, in the instances where the utility of the products delivered or expected to be delivered was less than cost, it was appropriate to value the inventory costs and deferred inventory costs at cost or market, whichever is lower, thereby recognizing the cost of the reduction in utility in the period in which the reduction occurred or can be reasonably estimated. The Company has, therefore, recognized inventory write-downs as necessary in each period in order to reflect inventory at the lower of cost or market (“LCM”). As of December 28, 2013 and December 29, 2012, the Company’s inventory value had been reduced by
$5.0 million
and
$7.5 million
, respectively, for LCM adjustments.
The Company considers whether it should accrue losses on firm purchase commitments related to inventory items. Given that the net realizable value of common equipment is below contractual purchase price, the Company has also recorded losses on these firm purchase commitments in the period in which the commitment is
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the purchase commitment.
Accounts Receivable and Allowances for Doubtful Accounts
Accounts receivable consist of trade receivables recorded upon recognition of revenue for product and services, reduced by reserves for estimated bad debts. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on evaluation of the customer’s financial condition. Management makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a review of all significant outstanding invoices. At December 28, 2013 and December 29, 2012, the Company’s allowance for doubtful accounts was not significant and
$0.1 million
, respectively.
Allowances for Sales Returns
Customer product returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns, where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are provided for as a reduction to revenue in 2013, 2012 and 2011. At December 28, 2013, December 29, 2012 and December 31, 2011, revenue was reduced for estimated sales returns by
$0.1 million
,
$1.3 million
and
$0.2 million
, respectively.
Accrued Warranty
The Company warrants that its products will operate substantially in conformity with product specifications. Upon delivery of the Company’s products, the Company provides for the estimated cost to repair or replace products or the related components that may be returned under warranty. The Company’s hardware warranty periods generally range from
one
to
five
years from date of acceptance for hardware and
90 days
for software warranty. The hardware warranty accrual is based on actual historical returns experience and the application of those historical return rates to the Company’s in-warranty installed base. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company has software warranty support obligations to a small number of its customers and the costs associated with providing these software warranties have been insignificant to the Company’s consolidated financial statements to date.
Cash, Cash Equivalents and Short-term and Long-term Investments
The Company considers all highly liquid instruments with an original maturity at the date of purchase of 90 days or less to be cash equivalents. These instruments may include cash, money market funds and commercial paper. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Marketable securities consist of certificates of deposit, commercial paper, corporate bonds, U.S. agency notes, U.S. treasuries and auction rate securities (“ARS”). The Company considers all debt instruments with original maturities at the date of purchase greater than 90 days and remaining time to maturity of one year or less to be short-term investments. The Company classifies debt instruments with remaining maturities greater than one year as long-term investments, unless the Company intends to settle its holdings within one year or less and in such case it is considered to be short-term investments. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date.
Available-for-sale investments are stated at fair market value with unrealized gains and losses recorded in Accumulated other comprehensive loss in the Company’s consolidated balance sheets. The Company evaluates its available-for-sale marketable debt securities for other-than-temporary impairments and records any credit loss portion in Other income (expense), net in the Company’s consolidated statements of operations. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and for any credit losses incurred on these securities. Gains and losses are recognized when realized in the Company’s consolidated statements of operations under the specific identification method.
Fair Value Measurement of Investments
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
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Level 1 —
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Quoted prices in active markets for identical assets or liabilities.
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Level 2 —
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Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3 —
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Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
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The Company measures its cash equivalents, derivative instruments and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.
The Company classifies its certificates of deposit, commercial paper, corporate bonds, and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:
Certificates of Deposit
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data, and result in the classification of these securities as Level 2 of the fair value hierarchy.
Commercial Paper
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par, and result in the classification of these securities as Level 2 of the fair value hierarchy.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Corporate Bonds
The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. Since sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end. As a result, the Company classifies its corporate bonds as Level 2 of the fair value hierarchy.
Foreign Currency Exchange Forward Contracts
As discussed in Note 5, “Derivative Instruments,” to the Notes to Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. As a result, the Company classifies its derivative instruments as Level 2 of the fair value hierarchy.
The Company classified its ARS within Level 3 of the fair value hierarchy. The Company’s ARS were classified within Level 3 because they were valued, in part, by using inputs that were unobservable in the market and were significant to the valuation. During 2013, the Company disposed of its remaining
$3.1 million
(par value) ARS, with
$0.1 million
of ARS called at par value and
$3.0 million
of ARS tendered at
95%
of par value. As of December 28, 2013, none of the Company’s existing securities were classified as Level 3 securities.
Other-Than-Temporary Impairments
The Company reviews its available-for-sale marketable debt securities on a regular basis to evaluate whether or not a security has experienced an other-than-temporary decline in fair value. If a debt security’s market value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the Company records an other-than-temporary impairment (“OTTI”) charge to earnings for the entire amount of the impairment.
When the Company does not intend to sell an impaired security and it is not more likely than not that the Company will be required to sell prior to recovery of its amortized cost basis, the Company separates the OTTI into credit and non-credit loss portions. The amount representing the credit loss is recognized in Other income (expense), net, and the amount related to all other factors is recognized in Accumulated other comprehensive loss.
In determining if a credit loss has occurred, it is the Company’s policy to isolate the credit loss related portion of the discount rate used to derive the fair market value of the security and apply this to the expected cash flows in order to determine the portion of the OTTI that is credit loss related. This credit related portion of the discount rate is based on the financial condition of the issuer, changes in rating agency credit ratings for the security or increases in credit related yield spreads on similar securities offered by the same issuer.
Once a credit impairment loss has been recognized in the Company’s consolidated statements of operations, the amortized cost basis of that available-for-sale security is reduced by the amount of the credit impairment loss, resulting in a new cost basis for the security. Any non-credit related unrealized gains and losses are recorded in Accumulated other comprehensive loss in the Company’s consolidated balance sheets. The Company will continue to monitor the security’s credit rating and credit spread and will accrete any reduction in the credit impairment loss to interest income over the expected life of the security.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. This includes enterprise-level business software that the Company customizes to meets its specific operational needs. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
straight-line method over the shorter of the lease term or estimated useful life of the asset. An assumption of lease renewal where a renewal option exists is used only when the renewal has been determined to be reasonably assured. Repair and maintenance costs are expensed as incurred. The estimated useful life for each asset category is as follows:
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Estimated Useful lives
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Laboratory and manufacturing equipment
|
1.5 to 10 years
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Furniture and fixtures
|
3 to 5 years
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Computer hardware and software
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1.5 to 3 years
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Enterprise-level software
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up to 7 years
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Leasehold improvements
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1 to 10 years
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The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or that the useful life is shorter than originally estimated. If impairment indicators are present and the projected future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the carrying value of the assets is depreciated over the newly determined remaining useful lives.
Deferred Inventory Costs
When the Company’s products have been delivered and ownership (typically defined as title and risk of loss) has transferred to the customer, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria, the Company also defers the related inventory costs for the delivered items and recognizes the inventory costs either ratably or when the related revenue meets the revenue recognition criteria.
Accounting for Income Taxes
As part of the process of preparing the Company’s consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income within the respective jurisdictions against which these deductions, losses and credits can be utilized within the applicable future periods.
The Company must assess the likelihood that some portion or all of its deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent the Company believes that recovery does not meet the “more-likely-than-not” standard, the Company must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. At December 28, 2013 and December 29, 2012, the Company’s domestic net deferred tax assets were fully reserved with a valuation allowance because, based on the available evidence, the Company believed at that time it was more likely than not that it would not be able to utilize those deferred tax assets in the future. The Company intends to maintain a valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance. The Company makes estimates and judgments about its future taxable income, by jurisdiction, based on assumptions that are consistent with its plans and estimates. Should the actual amounts differ from the Company’s estimates, the amount of its valuation allowance could be materially impacted.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentration of Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash equivalents, short-term investments, long-term investments, cost-method investments and accounts receivable. Investment policies have been implemented that limit investments to investment-grade securities.
As of December 28, 2013 and December 29, 2012, the Company has invested
$9.0 million
in a privately-held company. This investment has been accounted for as a cost-basis investment, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. See Note 4, “Cost-method Investment,” to the Notes to Consolidated Financial Statements for more information.
The risk with respect to accounts receivable is mitigated by ongoing credit evaluations that the Company performs on its customers. As the Company expands its sales internationally, it may experience increased levels of customer credit risk associated with those regions. Collateral is generally not required for accounts receivable but may be used in the future to mitigate credit risk associated with customers located in certain geographical regions.
As of December 28, 2013,
one
customer accounted for approximately
13%
of the Company’s accounts receivable balance. As of December 29, 2012,
no
customer accounted for more than 10% of the Company’s accounts receivable balance.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue. In 2013 2012, and 2011,
no
individual customer represented over 10% of the Company’s revenue.
The Company depends on a single or limited number of suppliers for components and raw materials. The Company generally purchases these single or limited source components and materials through standard purchase orders and does not have long-term contracts with many of these limited-source suppliers. While the Company seeks to maintain sufficient reserve stock of such components and materials, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such components and materials, the receipt of defective parts, an increase in the price of such components and materials or the Company’s inability to obtain reduced pricing from its suppliers in response to competitive pressures.
Derivative Instruments
The Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, specifically forward contracts, to reduce the impact of foreign exchange fluctuations on earnings. The forward contracts are with one high-quality institution and the Company monitors the creditworthiness of the counter party consistently. The Company’s objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets. None of the Company’s derivative instruments contain credit-risk related contingent features, any rights to reclaim cash collateral or any obligation to return cash collateral. The Company does not have any leveraged derivatives. The Company does not use derivative contracts for trading or speculative purposes.
The Company enters into foreign currency exchange forward contracts to manage its exposure to fluctuations in foreign exchange rates that arise primarily from its Euro denominated receivables and Euro denominated restricted cash balance amounts that are pledged as collateral for certain stand-by and commercial letters of credit. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk. The forward contracts are with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparty. The forward contracts entered into during 2013 were denominated in Euros and British Pound, and typically had maturities of
no more than 30 days
. The contracts are settled for U.S. dollars at maturity at rates agreed to at inception of the contracts.
Foreign Currency Translation and Transactions
The Company considers the functional currencies of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate as of the balance sheet date, and costs and expenses are translated at average exchange rates in effect during the period. Equity transactions are
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
translated using historical exchange rates. The effects of foreign currency translation adjustments are recorded as a separate component of Accumulated Comprehensive Loss in the accompanying consolidated balance sheets.
For all non-functional currency account balances, the re-measurement of such balances to the functional currency will result in either a foreign exchange transaction gain or loss which is recorded to Other gain (loss), net in the same period that the re-measurement occurred. Aggregate foreign exchange transaction loss recorded in 2013, 2012 and 2011 were
$1.4 million
,
$1.6 million
and
$1.0 million
, respectively.
The Company entered into foreign currency exchange forward contracts to reduce the impact of foreign exchange fluctuations on earnings from accounts receivable balances denominated in Euros and British Pound, and restricted cash denominated in Euros. The foreign currency transactions on these forward contracts amounted to a loss of
$2.1 million
in 2013, a loss of
$1.4 million
in 2012, and a gain of
$1.3 million
in 2011, and substantially offset the transaction gains and losses from the re-measurement of the related accounts receivable.
Advertising
All advertising costs are expensed as incurred. Advertising expenses in 2013, 2012 and 2011 were
$1.3 million
,
$1.6 million
and
$1.5 million
, respectively.
Research and Development
All costs to develop the Company’s hardware products are expensed as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Generally, the Company’s software products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company adopted the guidance for ASU 2013-02 beginning in its fiscal quarter ended March 30, 2013. Other than requiring additional disclosures, the Company’s adoption of ASU 2013-02 did not have an impact on the Company’s financial position, results of operations or cash flow.
In July 2013, the FASB issued Accounting Standards Update 2013-11, Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry forward, a Similar Tax Loss, or a Tax Credit Carry forwards Exists (“ASU 2013-11”). ASU 2013-11 requires entities to present the unrecognized tax benefits in the financial statements as a liability and not combine it with deferred tax assets to the extent a net operating loss carry-forward, a similar tax loss, or a tax credit carry-forward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning on or after December 15, 2013. The Company is currently evaluating ASU 2013-11 and does not expect its adoption to have an impact on the Company’s financial position, results of operations or cash flow.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
3. Fair Value Measurements and Other-Than-Temporary Impairments
Fair Value Measurements
The following tables represent the Company’s fair value hierarchy for its marketable securities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2013
|
|
As of December 29, 2012
|
|
Fair Value Measured Using
|
|
Fair Value Measured Using
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
51,749
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,749
|
|
|
$
|
25,560
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,560
|
|
Certificates of deposit
|
—
|
|
|
3,840
|
|
|
—
|
|
|
3,840
|
|
|
—
|
|
|
2,160
|
|
|
—
|
|
|
2,160
|
|
Commercial paper
|
—
|
|
|
85,860
|
|
|
—
|
|
|
85,860
|
|
|
—
|
|
|
14,843
|
|
|
—
|
|
|
14,843
|
|
Corporate bonds
|
—
|
|
|
150,595
|
|
|
—
|
|
|
150,595
|
|
|
—
|
|
|
57,467
|
|
|
—
|
|
|
57,467
|
|
U.S. treasuries
|
4,804
|
|
|
—
|
|
|
—
|
|
|
4,804
|
|
|
15,020
|
|
|
—
|
|
|
—
|
|
|
15,020
|
|
ARS
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,873
|
|
|
2,873
|
|
Foreign currency exchange forward contracts
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
$
|
56,553
|
|
|
$
|
240,324
|
|
|
$
|
—
|
|
|
$
|
296,877
|
|
|
$
|
40,580
|
|
|
$
|
74,470
|
|
|
$
|
2,873
|
|
|
$
|
117,923
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
112
|
|
|
$
|
—
|
|
|
$
|
112
|
|
During 2013 and 2012, there were no transfers of assets or liabilities between Level 1 and Level 2 and there were no transfers into or out of Level 3 financial assets.
The Company's remaining Level 3 financial assets were disposed during the first quarter of 2013. The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
2012
|
|
Total Net Gains
Included in Other
Comprehensive Income
|
|
Calls
|
|
|
Sold
|
|
December 28,
2013
|
ARS—available-for-sale
|
$
|
2,873
|
|
|
$
|
—
|
|
|
$
|
(92
|
)
|
(1)
|
|
$
|
(2,781
|
)
|
(2)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2011
|
|
Total Net Gains
Included in Other
Comprehensive Income
|
|
|
Calls
|
|
|
Sold
|
|
December 29,
2012
|
ARS—available-for-sale
|
$
|
7,675
|
|
|
$
|
146
|
|
(3)
|
|
$
|
(4,948
|
)
|
(1)
|
|
$
|
—
|
|
|
$
|
2,873
|
|
|
|
(1)
|
Amount represents the fair market value of the securities called. Realized gains on these calls were not significant in 2013 and
$0.5 million
in 2012.
|
|
|
(2)
|
Amount represents the fair market value of the securities sold at
95%
par value. Realized gains for 2013 were
$0.2 million
.
|
|
|
(3)
|
Amount represents the change in the non-credit loss related OTTI recorded in Accumulated other comprehensive loss in the accompanying consolidated balance sheets.
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2013
|
|
Adjusted
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Money market funds
|
$
|
51,749
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,749
|
|
Certificates of deposit
|
3,840
|
|
|
|
—
|
|
|
—
|
|
|
3,840
|
|
Commercial paper
|
85,870
|
|
|
|
2
|
|
|
(12
|
)
|
|
85,860
|
|
Corporate bonds
|
150,711
|
|
|
|
27
|
|
|
(143
|
)
|
|
150,595
|
|
U.S. treasuries
|
4,802
|
|
|
|
2
|
|
|
—
|
|
|
4,804
|
|
Total available-for-sale investments
|
$
|
296,972
|
|
|
|
$
|
31
|
|
|
$
|
(155
|
)
|
|
$
|
296,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012
|
|
Adjusted
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Money market funds
|
$
|
25,560
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,560
|
|
Certificates of deposit
|
2,160
|
|
|
|
—
|
|
|
—
|
|
|
2,160
|
|
Commercial paper
|
14,848
|
|
|
|
—
|
|
|
(5
|
)
|
|
14,843
|
|
Corporate bonds
|
57,451
|
|
|
|
22
|
|
|
(6
|
)
|
|
57,467
|
|
U.S. treasuries
|
15,015
|
|
|
|
5
|
|
|
—
|
|
|
15,020
|
|
ARS
|
2,707
|
|
(1)
|
|
166
|
|
|
—
|
|
|
2,873
|
|
Total available-for-sale investments
|
$
|
117,741
|
|
|
|
$
|
193
|
|
|
$
|
(11
|
)
|
|
$
|
117,923
|
|
|
|
(1)
|
Amount represents the par value less
$0.4 million
of credit-related OTTI recognized through earnings in prior years.
|
As of December 28, 2013, the Company’s available-for-sale investments in certificates of deposit, commercial paper, corporate bonds, and U.S. treasuries have a contractual maturity term of up to
17 months
. Proceeds from sales, maturities and calls of available-for-sale investments were
$128.5 million
,
$129.2 million
and
$291.9 million
in 2013, 2012 and 2011, respectively. Gross realized gains (losses) on short-term and long-term investments were insignificant for these periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
Other-Than-Temporary Impairments
As a result of the Company’s disposal of
$3.1 million
ARS (par value) during 2013, it recorded an approximately
$0.2 million
gain, which was recognized as Other gain (loss) in the Company’s consolidated statements of operations.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A roll-forward of amortized cost, cumulative OTTI recognized in earnings and Accumulated other comprehensive loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Cumulative
OTTI in
Earnings
|
|
|
Unrealized
Gain
|
|
OTTI Loss in
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Balance at December 31, 2011
|
$
|
7,367
|
|
|
$
|
(884
|
)
|
|
|
$
|
1,619
|
|
|
$
|
(1,312
|
)
|
|
$
|
307
|
|
Unrealized gain
|
—
|
|
|
—
|
|
|
|
146
|
|
|
—
|
|
|
146
|
|
Call on investments
|
(4,660
|
)
|
|
(490
|
)
|
|
|
(981
|
)
|
|
694
|
|
|
(287
|
)
|
Balance at December 29, 2012
|
$
|
2,707
|
|
|
$
|
(394
|
)
|
|
|
$
|
784
|
|
|
$
|
(618
|
)
|
|
$
|
166
|
|
Call on investments
|
(87
|
)
|
|
13
|
|
|
|
(25
|
)
|
|
20
|
|
|
(5
|
)
|
Investments sold
|
(2,620
|
)
|
|
381
|
|
|
|
(759
|
)
|
|
598
|
|
|
(161
|
)
|
Balance at December 28, 2013
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
4. Cost-method Investment
As of December 28, 2013 and December 29, 2012, the Company’s investment in a privately-held company was
$9.0 million
. This investment is accounted for as a cost-basis investment as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. The Company’s investment is in an entity that is not publicly traded and, therefore, no established market for the securities exists. The Company’s cost-method investment is carried at historical cost in its consolidated financial statements and measured at fair value on a nonrecurring basis when indicators of impairment exists. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company’s policy is to record an impairment charge in Other income (expense), net in the accompanying consolidated statements of operations to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. The Company regularly evaluates the carrying value of this cost-method investment for impairment. As of December 28, 2013 and December 29, 2012, no event had occurred that would be considered an indicator of impairment, therefore, the fair value of the cost-method investment is not estimated. The Company did not record any impairment charges for this cost-method investment during 2013, 2012 and 2011.
5. Derivative Instruments
Foreign Currency Exchange Forward Contracts
As of December 28, 2013, the Company did not designate foreign currency exchange forward contracts related to Euro and British Pound denominated receivables and restricted cash as hedges for accounting purposes, and, accordingly, changes in the fair value of these instruments are included in Other gain (loss), net in the accompanying consolidated statements of operations. The before-tax effect of foreign currency exchange forward contracts for Euro and British Pound denominated receivables and restricted cash not designated as hedging instruments was a loss of
$2.2 million
for
2013
, a loss of
$1.4 million
for
2012
, and a gain of
$1.3 million
in
2011
, included in Other gain (loss), net in the consolidated statements of operations.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of derivative instruments not designated as hedging instruments in the Company’s consolidated balance sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 28, 2013
|
|
As of December 29, 2012
|
|
Gross
Notional
(1)
|
|
Prepaid Expenses and Other Assets
|
|
Other
Accrued
Liabilities
|
|
Gross
Notional
(1)
|
|
Prepaid Expenses and Other Assets
|
|
Other
Accrued
Liabilities
|
Foreign currency exchange forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
Related to Euro denominated receivables
|
$
|
16,867
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
22,882
|
|
|
$
|
—
|
|
|
$
|
(105
|
)
|
Related to British Pound denominated receivables
|
$
|
13,271
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Related to restricted cash
|
$
|
1,391
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
1,495
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
Total
|
|
|
$
|
29
|
|
|
$
|
(26
|
)
|
|
|
|
$
|
—
|
|
|
$
|
(112
|
)
|
|
|
(1)
|
Represents the face amounts of forward contracts that were outstanding as of the period noted.
|
6. Balance Sheet Details
Restricted Cash
The Company’s long-term restricted cash balance is primarily comprised of certificates of deposit, of which the majority are not insured by the Federal Deposit Insurance Corporation. These amounts primarily collateralize the Company’s issuances of stand-by and commercial letters of credit. Additionally, the Company’s restricted cash balance includes a leave encashment fund for India employees.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2013
|
|
December 29,
2012
|
Inventory:
|
|
|
|
Raw materials
|
$
|
14,311
|
|
|
$
|
13,003
|
|
Work in process
|
49,172
|
|
|
57,281
|
|
Finished goods
(1)
|
60,202
|
|
|
57,525
|
|
Total
|
$
|
123,685
|
|
|
$
|
127,809
|
|
Property, plant and equipment, net:
|
|
|
|
Computer hardware
|
$
|
9,692
|
|
|
$
|
9,024
|
|
Computer software
(2)
|
16,988
|
|
|
15,834
|
|
Laboratory and manufacturing equipment
|
146,834
|
|
|
120,543
|
|
Furniture and fixtures
|
1,347
|
|
|
1,285
|
|
Leasehold improvements
|
35,913
|
|
|
33,370
|
|
Construction in progress
|
8,950
|
|
|
17,513
|
|
Subtotal
|
$
|
219,724
|
|
|
$
|
197,569
|
|
Less accumulated depreciation and amortization
(3)
|
(140,056
|
)
|
|
(117,226
|
)
|
Total
|
$
|
79,668
|
|
|
$
|
80,343
|
|
Accrued expenses:
|
|
|
|
Loss contingency related to non-cancelable purchase commitments
|
$
|
5,120
|
|
|
$
|
5,401
|
|
Professional and other consulting fees
|
1,411
|
|
|
3,703
|
|
Taxes payable
|
2,372
|
|
|
4,393
|
|
Royalties
|
1,540
|
|
|
1,516
|
|
Accrued rebate and customer prepay liability
|
3,807
|
|
|
1,284
|
|
Accrued interest on convertible senior notes
|
219
|
|
|
—
|
|
Other accrued expenses
|
7,962
|
|
|
9,991
|
|
Total
|
$
|
22,431
|
|
|
$
|
26,288
|
|
|
|
(1)
|
Included in finished goods inventory at December 28, 2013 and December 29, 2012 were
$9.2 million
and
$15.6 million
, respectively, of inventory at customer locations for which product acceptance had not occurred.
|
|
|
(2)
|
Included in computer software at December 28, 2013 and December 29, 2012 were
$7.7 million
and
$7.5 million
, respectively, related to an enterprise resource planning (“ERP”) system that the Company implemented during the third quarter of 2012. The unamortized ERP costs at December 28, 2013 and December 29, 2012 were
$6.2 million
and
$7.0 million
, respectively.
|
|
|
(3)
|
Depreciation expense was
$24.5 million
and
$23.5 million
(which includes amortization of capitalized ERP costs of
$1.1 million
and
$0.4 million
, respectively) for 2013 and 2012, respectively. Depreciation expense was
$17.7 million
for 2011.
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Comprehensive Loss
Other comprehensive loss includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive loss by component for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain
on Auction Rate
Securities
|
|
Unrealized Gain
on Other
Available-for-Sale
Securities
|
|
Foreign Currency Translation
|
|
Accumulated
Tax Effect
|
|
Total
|
Balance at December 25, 2010
|
$
|
(103
|
)
|
|
$
|
(37
|
)
|
|
$
|
(490
|
)
|
|
$
|
(631
|
)
|
|
$
|
(1,261
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(105
|
)
|
|
(1,117
|
)
|
|
(122
|
)
|
|
(1,344
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
410
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
410
|
|
Net current-period other comprehensive loss
|
410
|
|
|
(105
|
)
|
|
(1,117
|
)
|
|
(122
|
)
|
|
(934
|
)
|
Balance at December 31, 2011
|
$
|
307
|
|
|
$
|
(142
|
)
|
|
$
|
(1,607
|
)
|
|
$
|
(753
|
)
|
|
$
|
(2,195
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
158
|
|
|
(43
|
)
|
|
(7
|
)
|
|
108
|
|
Amounts reclassified from accumulated other comprehensive loss
|
(141
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(141
|
)
|
Net current-period other comprehensive loss
|
(141
|
)
|
|
158
|
|
|
(43
|
)
|
|
(7
|
)
|
|
(33
|
)
|
Balance at December 29, 2012
|
$
|
166
|
|
|
$
|
16
|
|
|
$
|
(1,650
|
)
|
|
$
|
(760
|
)
|
|
$
|
(2,228
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(140
|
)
|
|
(952
|
)
|
|
—
|
|
|
(1,092
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
(166
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(166
|
)
|
Net current-period other comprehensive loss
|
(166
|
)
|
|
(140
|
)
|
|
(952
|
)
|
|
—
|
|
|
(1,258
|
)
|
Balance at December 28, 2013
|
$
|
—
|
|
|
$
|
(124
|
)
|
|
$
|
(2,602
|
)
|
|
$
|
(760
|
)
|
|
$
|
(3,486
|
)
|
The following table provides details about reclassifications out of accumulated other comprehensive loss for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Accumulated Other Comprehensive Loss Components
|
|
Amount Reclassified from Accumulated Other
Comprehensive Loss
|
|
Affected Line Item in
the Statement Where
Net Loss is Presented
|
|
|
Years Ended
|
|
|
|
|
December 28, 2013
|
|
December 29, 2012
|
|
December 31, 2011
|
|
|
Unrealized gain on auction rate securities
|
|
$
|
(166
|
)
|
|
$
|
(141
|
)
|
|
$
|
410
|
|
|
Other gain (loss), net
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Provision for income taxes
|
Total reclassifications for the period
|
|
$
|
(166
|
)
|
|
$
|
(141
|
)
|
|
$
|
410
|
|
|
Total, net of income tax
|
8. Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed vesting of outstanding RSUs and PSUs, assumed exercise of outstanding warrants, assumed conversion of convertible senior notes and assumed issuance of stock under the Company’s ESPP using the treasury stock method. When there is a loss, these potentially diluted common shares are anti-dilutive and therefore, excluded from the diluted net loss calculation. The Company includes the common shares underlying PSUs in the calculation of diluted net loss per share when they become contingently issuable and excludes such shares when they are not contingently issuable.
The following table sets forth the computation of net loss per common share—basic and diluted (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Net loss
|
$
|
(32,119
|
)
|
|
$
|
(85,330
|
)
|
|
$
|
(81,744
|
)
|
Weighted average common shares outstanding - basic and diluted
|
117,425
|
|
|
110,739
|
|
|
105,432
|
|
Net loss per common share - basic and diluted
|
$
|
(0.27
|
)
|
|
$
|
(0.77
|
)
|
|
$
|
(0.78
|
)
|
The Company had the following equity awards outstanding that could potentially dilute basic net loss per common share in the future, but were excluded from the computation of diluted loss per common share in the periods presented as their effect would have been anti-dilutive under the treasury stock method (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Stock options outstanding
|
6,367
|
|
|
9,008
|
|
|
9,873
|
|
Restricted stock units
|
6,583
|
|
|
6,703
|
|
|
5,957
|
|
Performance stock units
|
721
|
|
|
1,368
|
|
|
2,595
|
|
Employee stock purchase plan shares
|
661
|
|
|
1,100
|
|
|
943
|
|
Warrants to purchase common stock
|
—
|
|
|
93
|
|
|
93
|
|
Total
|
14,332
|
|
|
18,272
|
|
|
19,461
|
|
In 2013, the Company excluded the convertible senior notes in the calculation of diluted earnings per share because the average market price was below the conversion price. In the future, the Company would include the dilutive effects of the convertible senior notes in the calculation of diluted net income per common share if the average market price is above the conversion price and the effect would be anti-dilutive. Upon conversion of the Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount and the conversion value of the Notes being converted, therefore, only the conversion spread relating to the Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive.
|
|
9.
|
Convertible Senior Notes
|
In May 2013, the Company issued
$150.0 million
of
1.75%
convertible senior notes due
June 1, 2018
(the “Notes”). The Notes will mature on June 1, 2018, unless earlier purchased by the Company or converted. Interest is
payable semi-annually in arrears on June 1 and December 1 of each year
, commencing December 1, 2013. The net proceeds to the Company were approximately
$144.5 million
.
The Notes are governed by an indenture dated as of May 30, 2013 (the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
Upon conversion, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount and the conversion value of the Notes being converted and cash, shares of common stock or a combination
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of cash and shares of common stock, at the Company’s election, for any remaining conversion obligation. The initial conversion rate is
79.4834
shares of common stock per
$1,000
principal amount of Notes, subject to anti-dilution adjustments. The initial conversion price is approximately
$12.58
per share of common stock.
Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Holders may convert their Notes under the following circumstances:
|
|
•
|
during any fiscal quarter commencing after the fiscal quarter ending on September 28, 2013 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price on each applicable trading day;
|
|
|
•
|
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per
$1,000
principal amount of Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
|
|
|
•
|
upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or
|
|
|
•
|
at any time on or after December 1, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
|
If the Company undergoes a fundamental change as defined in the Indenture governing the Notes, holders may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to
100%
of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
The amounts recorded in connection with the issuance of the Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Non-
Current
Assets
|
|
Long-term
Debt
|
|
Additional Paid-
in Capital
|
Principal amount
|
$
|
—
|
|
|
$
|
150,000
|
|
|
$
|
—
|
|
Debt discount/equity component
|
—
|
|
|
(45,000
|
)
|
|
45,000
|
|
Debt issuance cost
|
3,872
|
|
|
—
|
|
|
(1,659
|
)
|
Initial transaction amounts
|
$
|
3,872
|
|
|
$
|
105,000
|
|
|
$
|
43,341
|
|
Amortization of debt issuance cost
|
(358
|
)
|
|
—
|
|
|
—
|
|
Amortization of debt discount
|
—
|
|
|
4,164
|
|
|
—
|
|
Net carrying amount at December 28, 2013
|
$
|
3,514
|
|
|
$
|
109,164
|
|
|
$
|
43,341
|
|
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
discount”) is amortized to interest expense over the term of the Notes. The remaining debt discount amount to be amortized over the remaining term until maturity of the Notes was
$40.8 million
as of December 28, 2013.
In accounting for the issuance costs of
$5.5 million
related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were recorded as Other non-current assets and will be amortized to interest expense over the term of the Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Additionally, the Company initially recorded a deferred tax liability of
$17.0 million
in connection with the Notes, along with a corresponding reduction in valuation allowance; the impact of both was recorded to stockholders’ equity.
The Company determined that the embedded conversion option in the Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
Year Ended
|
|
December 28, 2013
|
Contractual interest expense
|
$
|
1,539
|
|
Amortization of debt issuance costs
|
358
|
|
Amortization of debt discount
|
4,164
|
|
|
$
|
6,061
|
|
The excess of the principal amount of the liability component over its carrying amount is amortized, using an effective interest rate of
5.12%
, to interest expense over the term of the Notes.
As of December 28, 2013, the fair value of the Notes was
$162.8 million
. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on December 27, 2013. The Notes are classified as Level 2 of the fair value hierarchy. Based on the closing price of the Company’s common stock of
$9.79
on December 27, 2013, the if-converted value of the Notes was less than their principal amount.
|
|
10.
|
Commitments and Contingencies
|
Operating Leases
The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from
one
to
ten
years, predominantly no longer than ten years each and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to
five years
. The Company has contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. At the inception of a lease with such conditions, the Company records an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. Asset retirement obligations were
$2.6 million
and
$3.0 million
as of December 28, 2013 and December 29, 2012, respectively. These obligations are classified as other long-term liabilities on the accompanying consolidated balance sheets.
The Company recognizes rent expense on a straight-line basis over the lease period factoring in leasehold improvement incentives, rent holidays and escalation clauses. Rent expense for all leases was
$6.8 million
,
$6.7 million
and
$6.1 million
for 2013, 2012 and 2011, respectively. The Company did not have any sublease rental income for 2013, 2012 and 2011.
Future annual minimum operating lease payments at December 28, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Thereafter
|
|
Total
|
Operating lease payments
|
$
|
5,738
|
|
|
$
|
5,491
|
|
|
$
|
5,370
|
|
|
$
|
5,378
|
|
|
$
|
5,110
|
|
|
$
|
13,989
|
|
|
$
|
41,076
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Purchase Commitments
The Company has service agreements with its major production suppliers, where the Company is committed to purchase certain parts. These obligations are typically less than the Company’s purchases. As of December 28, 2013, December 29, 2012 and December 31, 2011, these non-cancelable purchase commitments were
$69.6 million
,
$52.7 million
and
$58.8 million
, respectively.
Future purchase commitments at December 28, 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
Thereafter
|
|
Total
|
Purchase obligations
|
$
|
69,643
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,643
|
|
The contractual obligation tables above exclude tax liabilities of
$1.8 million
related to uncertain tax positions because the Company is unable to determine the timing of settlement if any, of these future payments with a reasonably reliable estimate.
Indemnification Obligations
From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. These contracts primarily relate to: (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and certain key employees, under which the Company may be required to indemnify such persons for liabilities; and (iii) certain provisions in the Company’s customer agreements that may require the Company to indemnify their customers and their affiliated parties against certain liabilities, including if the Company’s products infringe a third party’s intellectual property rights.
The terms of such indemnification obligations vary. Because the maximum obligated amounts under these agreements generally are not explicitly stated, the maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited.
To date, the Company has not incurred any material costs as a result of the indemnification obligations and has not accrued any liabilities related to such obligations in the Company’s consolidated financial statements. The Company may be obligated to indemnify the Company's customers in connection with the lawsuit filed by Cambrian Science Corporation (“Cambrian”) on July 7, 2011, to the extent the Company’s product is found to infringe the Cambrian patent at issue (Patent No. 6,775,312) (see Note 12, “Legal Matters,” to the Notes to Consolidated Financial Statements).
As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements whereby it indemnifies certain of its officers and each of its directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.
11. Guarantees
Product Warranties
Upon delivery of products, the Company provides for the estimated cost to repair or replace products or the related components that may be returned under hardware warranties. In general, hardware warranty periods range from
one
to
five
years. Hardware warranties provide the purchaser with protection in the event that the product does not perform to product specifications. During the warranty period, the purchaser’s sole and exclusive remedy in the event of such defect or failure to perform is limited to the correction of the defect or failure by repair, refurbishment or replacement, at the Company’s sole option and expense. The Company estimates its hardware warranty obligations based on the Company’s historical and industry experience of product failure rates, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition,
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
from time to time, specific hardware warranty accruals may be made if unforeseen technical problems arise with specific products. Management periodically assesses the adequacy of the Company’s recorded warranty liabilities and adjusts the amounts as necessary.
Activity related to product warranty was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2013
|
|
December 29,
2012
|
Beginning balance
|
$
|
16,482
|
|
|
$
|
12,865
|
|
Charges to operations
|
21,193
|
|
|
15,116
|
|
Utilization
|
(9,404
|
)
|
|
(7,701
|
)
|
Change in estimate
(1)
|
(5,363
|
)
|
|
(3,798
|
)
|
Balance at the end of the period
|
$
|
22,908
|
|
|
$
|
16,482
|
|
|
|
(1)
|
The Company records hardware warranty liabilities based on the latest quality and cost information available as of that date. The favorable changes in estimate shown here are due to continued improvements in overall actual failure rates and the impact of these improvements on the Company’s estimate of expected future returns and changes in the estimated cost of replacing failed units using either repaired or new units.
|
Letters of Credit
The Company had
$3.5 million
of standby letters of credit outstanding as of December 28, 2013. These consisted of
$1.4 million
related to a value added tax license,
$1.4 million
related to a customer proposal guarantee and
$0.7 million
related to property leases. The Company had
$3.6 million
of standby letters of credit outstanding as of December 29, 2012. These consisted of
$1.4 million
related to a customer proposal guarantee,
$1.5 million
related to a value added tax license and
$0.7 million
related to property leases.
Cheetah Patent Infringement Litigation
On May 9, 2006, the Company and Level 3 were sued by Cheetah in the U.S. District Court for the Eastern District of Texas Texarkana Division for alleged infringement of patent no. 6,795,605 (the “‘605 Patent”), and a continuation thereof. On May 16, 2006, Cheetah filed an amended complaint, which requested an order to enjoin the sale of the Company’s DTN platform and to recover all damages caused by the alleged willful infringement including any and all compensatory damages available by law, such as actual and punitive damages, attorneys’ fees, associated interest and Cheetah’s costs incurred in the lawsuit. Cheetah’s complaint does not request a specific dollar amount for these compensatory damages. The Company is contractually obligated to indemnify Level 3 for damages suffered by Level 3 to the extent its product supplied by the Company is found to infringe, and the Company has assumed the defense of this matter. On July 2, 2006, the Company and Level 3 filed an amended response denying all infringement claims under the ‘605 Patent and asserting that the claims of the ‘605 Patent are invalid and that the DTN platform does not infringe the ‘605 Patent. On November 28, 2006, Cheetah filed a second amended complaint and added patent no. 7,142,347 (the “‘347 Patent”) to the lawsuit. On December 18, 2006, the Company and Level 3 filed responses to Cheetah’s second amended complaint denying all infringement claims under the ‘347 Patent and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims are invalid and that the DTN platform does not infringe the patents.
On January 30, 2007, Cheetah filed a third amended complaint adding additional assertions of infringement for the two patents in suit. On February 16, 2007, the Company and Level 3 filed responses to Cheetah’s third amended complaint denying all infringement claims, and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims of the patents are invalid and that the DTN platform does not infringe the patents.
On March 14, 2007, the Company submitted requests to the U.S. Patent and Trademark Office (the “U.S. PTO”) for inter partes reexamination of the ‘605 Patent and the ‘347 Patent asking the U.S. PTO to reexamine the patents based on prior art in order to invalidate the patents or limit the scope of each patent’s claims.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On April 12, 2007, the court granted the motion staying all proceedings in the lawsuit. On June 26, 2007, the U.S. PTO also ordered reexamination of the ‘605 Patent and on August 1, 2007, the U.S. PTO ordered reexamination of the ‘347 Patent. As a result, all proceedings in this lawsuit were stayed until the final resolution of these reexaminations.
In a communication the Company received from the U.S. PTO dated December 4, 2009, the Company was advised that various claims in the ‘347 Patent reexamination have been allowed, while other claims have been rejected. In a communication the Company received from the U.S. PTO dated June 22, 2010, the Company was advised that various claims in the ‘605 Patent reexamination have been allowed, while other claims have been rejected.
On March 30, 2012, the Board Patent Appeals Interferences (“BPAI”) affirmed the Examiner’s allowance of certain claims in the reexamination of the ‘347 Patent and ‘605 Patent. The Company filed a request for reconsideration of the BPAI’s decision on April 30, 2012, which was denied in a Decision on Request for Rehearing dated September 27, 2012. The Company has appealed the BPAI’s decision to the Court of Appeals of the Federal Circuit in a Notice of Appeal dated November 26, 2012. On November 9, 2012, Cheetah’s counsel filed another motion requesting the court to lift the stay. The court granted Cheetah’s motion and lifted the stay in an order dated January 8, 2013.
A hearing was held on July 16, 2013, during which the parties presented evidence to the U.S. District Court for the Eastern District of Texas Texarkana Division regarding the interpretation of various claim terms of U.S. patent nos. 6,795,605 and 7,142,347. On July 24, 2013, the Court issued an order regarding claim construction, in which the Court agreed with some of the Company’s proposed claim constructions.
On June 10, 2013, the Company filed a Petition for Inter Partes Review to challenge the validity of Cheetah’s U.S. patent no. 6,888,661 (the “‘661 Patent”) in a separate proceeding before the United States Patent and Trademark Office. Cheetah has sued Finisar Corporation for infringement of the ‘661 Patent in the U.S. District Court for the Eastern District of Michigan.
On November 18, 2013, the Company entered into a settlement agreement with Cheetah to settle all outstanding issues between the Company and Cheetah. On December 3, 2013, the Company paid Cheetah an insignificant amount that did not result in a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows.
Cambrian Science Patent Infringement Litigation
On July 12, 2011, the Company was notified by Level 3 that Cambrian filed suit against Level 3 and six other defendants, including Cox Communications, Inc., XO Communications, LLC, Global Crossing Limited, 360Networks (USA), Inc., Integra Telecom, Inc. and IXC, Inc. dba Telekenex (collectively, the “Defendants”) in the U.S. District Court for the Central District of California alleging infringement of patent no. 6,775,312 (the “’312 Patent”) and requesting damages for such alleged infringement (the “Cambrian Claim”). The nature of the Cambrian Claim involves allegations of infringement of the ’312 Patent resulting from the Defendants’ use of certain products and systems in the Defendants’ networks, including the Company’s DTN platform. On August 24, 2011, Cambrian amended the complaint to name the Company as a defendant. The Company assumed the defense of the Cambrian Claim and filed an answer to Cambrian’s complaint on September 21, 2011, in which the Company denied infringement of the ‘312 Patent and raised other defenses. Cambrian filed a second amended complaint on October 6, 2011, which included many of the same allegations as in the original complaint. The Company filed an answer to the second amended complaint on October 21, 2011, in which the Company maintained the same denials and defenses as in its initial answer. On December 23, 2011, the Company filed a motion requesting that the court stay the case with respect to each of the above-noted customer Defendants. Cambrian filed its opposition to the Company’s motion on December 30, 2011. The Company’s request was denied in the court’s decision on March 7, 2012. The Company presented evidence on the appropriate meanings of relevant key words used in the patent claims during a claim construction hearing on November 20, 2012.
On June 17, 2013, the U.S. District Court for the Central District of California issued an order regarding claim construction, in which the Court agreed with some of our proposed claim constructions.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Based on the information available at this time, the Company concluded that the likelihood of a loss with respect to this suit is reasonably possible. The Company has further concluded that the range of the reasonably possible loss is an insignificant amount and will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. Accordingly, the Company accrued an insignificant amount during the fourth quarter of 2013 which did not have a material adverse effect on the Company’s business, consolidated financial position, results of operations, or cash flows. Factors that the Company considered in the determination of the likelihood of a loss and the estimate of that loss in respect to this matter included the merits of the case, the nature of the litigation (including the complex and technical nature of patent litigation), the length of time the matter has been pending, the status of the plaintiff as a non-operating entity and the likelihood of the plaintiff accepting the estimated amount. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties.
Loss Contingencies
The Company is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. In preparation of its quarterly and annual financial statements, the Company considers the likelihood of loss or the incurrence of a liability, including whether it is probable, reasonably possible or remote that a liability has been incurred, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. As of December 28, 2013, the Company had no material accruals for loss contingencies.
2000 Stock Plan, 2007 Equity Incentive Plan and Employee Stock Purchase Plan
In December 2000, the Company adopted the 2000 Stock Plan (“2000 Plan”). Under the 2000 Plan, as amended, the Company had reserved an aggregate of
14.2 million
shares of its common stock for issuance. As of December 28, 2013, options to purchase
1.2 million
shares of the Company’s common stock were outstanding under the 2000 Plan. The Company’s board of directors decided not to grant any additional options or other awards under the 2000 Plan following the Company’s IPO in 2007. The 2000 Plan expired on December 6, 2010. However, the 2000 Plan will continue to govern the terms and conditions of the outstanding options previously granted under the plan.
In February 2007, the Company’s board of directors adopted the 2007 Equity Incentive Plan (“2007 Plan”) and the Company’s stockholders approved the 2007 Plan in May 2007. As of December 28, 2013, the Company reserved a total of
43.8 million
shares of common stock for issuance of options, RSUs and PSUs to employees, non-employees and members of the Company’s board of directors, pursuant to the 2007 Plan. The 2007 Plan has a maximum term of
10
years from the date of adoption, or it can be earlier terminated by the Company’s board of directors.
Additionally, in February 2007, the Company’s board of directors adopted, and in May 2007, its stockholders approved the Company’s ESPP. The ESPP has a
20
-year term, and as of December 28, 2013, the Company had authorized the issuance of approximately
7.9 million
shares of common stock.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Equity Incentive Plans
The Company’s stock-based compensation plans include stock options, RSUs, PSUs and employee stock purchases under the Company’s ESPP. As December 28, 2013, there were a total of
16.7 million
shares available for grant under the Company’s 2007 Plan. The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 25, 2010
|
7,815
|
|
|
$
|
6.52
|
|
|
$
|
30,923
|
|
Options granted
|
2,571
|
|
|
$
|
8.17
|
|
|
|
Options exercised
|
(378
|
)
|
|
$
|
3.81
|
|
|
$
|
1,691
|
|
Options canceled
|
(135
|
)
|
|
$
|
8.63
|
|
|
|
Outstanding at December 31, 2011
|
9,873
|
|
|
$
|
7.03
|
|
|
$
|
7,924
|
|
Options granted
|
127
|
|
|
$
|
7.18
|
|
|
|
Options exercised
|
(582
|
)
|
|
$
|
4.39
|
|
|
$
|
1,484
|
|
Options canceled
|
(410
|
)
|
|
$
|
8.50
|
|
|
|
Outstanding at December 29, 2012
|
9,008
|
|
|
$
|
7.13
|
|
|
$
|
5,726
|
|
Options exercised
|
(2,217
|
)
|
|
$
|
6.59
|
|
|
$
|
7,583
|
|
Options canceled
|
(424
|
)
|
|
$
|
8.04
|
|
|
|
Outstanding at December 28, 2013
|
6,367
|
|
|
$
|
7.26
|
|
|
$
|
17,452
|
|
Vested and expected to vest as of December 28, 2013
|
6,359
|
|
|
|
|
$
|
17,434
|
|
Exercisable at December 28, 2013
|
6,114
|
|
|
$
|
7.24
|
|
|
$
|
16,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
Weighted-Average
Grant Date
Fair Value
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 25, 2010
|
6,783
|
|
|
$
|
9.03
|
|
|
$
|
69,927
|
|
RSUs granted
|
2,490
|
|
|
$
|
8.18
|
|
|
|
RSUs released
|
(2,937
|
)
|
|
$
|
8.84
|
|
|
$
|
25,968
|
|
RSUs canceled
|
(379
|
)
|
|
$
|
8.91
|
|
|
|
Outstanding at December 31, 2011
|
5,957
|
|
|
$
|
8.77
|
|
|
$
|
37,407
|
|
RSUs granted
|
3,620
|
|
|
$
|
7.51
|
|
|
|
RSUs released
|
(2,495
|
)
|
|
$
|
9.07
|
|
|
$
|
17,742
|
|
RSUs canceled
|
(379
|
)
|
|
$
|
8.27
|
|
|
|
Outstanding at December 29, 2012
|
6,703
|
|
|
$
|
8.01
|
|
|
$
|
38,873
|
|
RSUs granted
|
3,602
|
|
|
$
|
7.63
|
|
|
|
|
RSUs released
|
(3,070
|
)
|
|
$
|
8.26
|
|
|
$
|
25,028
|
|
RSUs canceled
|
(652
|
)
|
|
$
|
7.63
|
|
|
|
Outstanding at December 28, 2013
|
6,583
|
|
|
$
|
7.72
|
|
|
$
|
64,443
|
|
Expected to vest as of December 28, 2013
|
6,418
|
|
|
|
|
$
|
62,837
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Performance
Stock Units
|
|
Weighted-Average
Grant Date
Fair Value Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 25, 2010
|
2,682
|
|
|
$
|
10.51
|
|
|
$
|
27,660
|
|
PSUs granted
|
—
|
|
|
$
|
—
|
|
|
|
PSUs released
|
—
|
|
|
$
|
—
|
|
|
|
PSUs canceled
|
(87
|
)
|
|
$
|
10.43
|
|
|
|
Outstanding at December 31, 2011
|
2,595
|
|
|
$
|
10.51
|
|
|
$
|
16,304
|
|
PSUs granted
|
515
|
|
|
$
|
7.85
|
|
|
|
PSUs released
|
(883
|
)
|
|
$
|
9.40
|
|
|
$
|
5,448
|
|
PSUs canceled
|
(859
|
)
|
|
$
|
10.04
|
|
|
|
Outstanding at December 29, 2012
|
1,368
|
|
|
$
|
10.53
|
|
|
$
|
7,933
|
|
PSUs granted
|
552
|
|
|
$
|
6.63
|
|
|
|
|
PSUs released
|
(684
|
)
|
|
$
|
10.53
|
|
|
$
|
4,284
|
|
PSUs canceled
|
(515
|
)
|
|
$
|
11.31
|
|
|
|
Outstanding at December 28, 2013
|
721
|
|
|
$
|
7.04
|
|
|
$
|
7,054
|
|
Expected to vest as of December 28, 2013
|
505
|
|
|
|
|
$
|
4,947
|
|
The aggregate intrinsic value of unexercised options, unreleased RSUs and PSUs is calculated as the difference between the closing price of the Company’s common stock of
$9.79
at December 27, 2013 and the exercise prices of the underlying equity awards. The aggregate intrinsic value of the options which have been exercised and RSUs and PSUs released is calculated as the difference between the fair market value of the common stock at the date of exercise or release and the exercise price of the underlying equity awards.
The following table presents total stock-based compensation cost granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of December 28, 2013, which is expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted-average period):
|
|
|
|
|
|
|
|
Unrecognized
Compensation
Expense, Net
|
|
Weighted-
Average Period
(in years)
|
Stock options
|
$
|
813
|
|
|
1.1
|
RSUs
|
$
|
29,695
|
|
|
2.2
|
PSUs
|
$
|
1,638
|
|
|
1.2
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about options outstanding at December 28, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Vested and Exercisable
Options
|
Exercise Price
|
|
Number of
Shares
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
(In thousands)
|
|
(In years)
|
|
|
|
(In thousands)
|
|
|
$0.76 - $ 4.04
|
|
1,058
|
|
|
2.25
|
|
$
|
2.07
|
|
|
1,058
|
|
|
$
|
2.07
|
|
$6.30 - $ 7.25
|
|
1,125
|
|
|
6.19
|
|
$
|
6.86
|
|
|
1,022
|
|
|
$
|
6.87
|
|
$7.45 - $ 7.61
|
|
982
|
|
|
4.88
|
|
$
|
7.53
|
|
|
960
|
|
|
$
|
7.53
|
|
$7.68 - $ 8.19
|
|
1,365
|
|
|
4.83
|
|
$
|
8.09
|
|
|
1,298
|
|
|
$
|
8.11
|
|
$8.39 - $ 8.61
|
|
1,036
|
|
|
6.87
|
|
$
|
8.58
|
|
|
1,001
|
|
|
$
|
8.58
|
|
$8.85 - $ 22.36
|
|
801
|
|
|
4.70
|
|
$
|
11.21
|
|
|
775
|
|
|
$
|
11.24
|
|
|
|
6,367
|
|
|
4.96
|
|
$
|
7.26
|
|
|
6,114
|
|
|
$
|
7.24
|
|
Employee Stock Options
In February 2012, the Compensation Committee of the Company’s board of directors shortened the maximum term of future option grants under the 2007 Plan from
10
years to
7
years. The weighted-average remaining contractual term of options outstanding and exercisable was
4.9
years as of December 28, 2013. Total fair value of stock options granted to employees and directors that vested during 2013, 2012 and 2011 was approximately
$3.2 million
,
$10.0 million
and
$9.0 million
, respectively, based on the grant date fair value.
The ranges of estimated values of stock options and performance-based stock options granted, as well as ranges of assumptions used in calculating these values were based on estimates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Volatility
|
N/A
|
|
65% - 68%
|
|
58% - 62%
|
Risk-free interest rate
|
N/A
|
|
0.7% - 1.0%
|
|
1.7% - 2.6%
|
Expected life
|
N/A
|
|
4.0 - 5.3 years
|
|
4.6 - 5.5 years
|
Estimated fair value
|
N/A
|
|
$3.75 - $3.76
|
|
$3.47 - $4.63
|
Total stock-based compensation expense (in thousands)
|
$
|
2,792
|
|
|
$
|
8,436
|
|
|
$
|
12,590
|
|
N/A Not applicable because the Company did not grant any options to employees for the period presented.
Employee Stock Purchase Plan
The fair value of the ESPP shares was estimated at the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Volatility
|
46% - 49%
|
|
54% - 57%
|
|
51% - 66%
|
Risk-free interest rate
|
0.10% - 0.14%
|
|
0.16% - 0.17%
|
|
0.12% - 0.20%
|
Expected life
|
0.5 years
|
|
0.5 years
|
|
0.5 years
|
Estimated fair value
|
$1.87 - $3.00
|
|
$1.73 - $2.63
|
|
$2.09 - $2.70
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s ESPP activity for the following periods was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Stock-based compensation expense
|
$
|
3,022
|
|
|
$
|
3,586
|
|
|
$
|
3,561
|
|
Employee contributions
|
$
|
8,559
|
|
|
$
|
9,030
|
|
|
$
|
8,462
|
|
Shares purchased
|
1,656
|
|
|
1,653
|
|
|
1,309
|
|
Restricted Stock Units
During 2013, 2012 and 2011, the Company granted RSUs to employees and members of the Company’s board of directors to receive an aggregate of
3.6 million
,
3.6 million
and
2.5 million
shares of the Company’s common stock, respectively, at no cost. The Company accounted for the fair value of the RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of RSU stock-based compensation in 2013, 2012 and 2011 was approximately
$23.8 million
,
$27.9 million
and
$25.5 million
, respectively.
Performance Stock Units
Pursuant to the Company’s 2007 Equity Incentive Plan, during 2013, the Company granted
0.6 million
shares of PSUs to certain of the Company’s executive officers. The number of shares to be issued upon vesting of PSUs range from
0
to
1.5
times the number of PSUs granted depending on the relative performance of the Company’s common stock price compared to the NASDAQ Telecom Composite Index over the span of one, two and three years of total shareholder returns.
The ranges of estimated values of the PSUs granted, as well as assumptions used in calculating these values were based on estimates as follows:
|
|
|
|
Year Ended
|
|
December 28,
2013
|
Infinera Volatility
|
55%
|
NASDAQ Telecom Composite Index Volatility
|
23%
|
Risk-free interest rate
|
0.42%
|
Correlation with NASDAQ Telecom Composite Index
|
0.56
|
Estimated fair value
|
$6.27 - $7.06
|
During 2012, the Company granted
0.5 million
shares of PSUs to certain of the Company’s executive officers. These PSUs will only vest upon the achievement of certain specific revenue and operating profit criteria and are subject to each named executive officer’s continued service to the Company. If the financial performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled. The Company estimated the fair value of the PSUs using the closing market price of the Company’s common stock on the date of grant. During 2013, the Company released
0.2 million
shares of these PSUs upon achievement of certain performance goals.
During 2009, the Company granted PSUs primarily to members of the Company’s board of directors and executive officers. The number of shares to be issued upon vesting of PSUs range from
0.5
to
2.0
times the number of PSUs granted depending on the relative performance of the Company’s common stock price compared to the NASDAQ Composite Index over a three-year or four-year period. During 2013, the Company released
0.5 million
shares of these PSUs based on a payout of
0.5
of the target number of PSUs.
Amortization of stock-based compensation related to PSUs in 2013, 2012 and 2011 was approximately
$0.7 million
,
$3.3 million
and
$9.2 million
, respectively.
Common Stock Warrants
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2013, warrants to purchase
92,592
shares of common stock were net exercised. The aggregate consideration for such exercises was approximately
$0.5 million
. As of December 28, 2013, there were no warrants of common stock outstanding.
Stock-based Compensation Expense
The following tables summarize the effects of stock-based compensation on the Company’s consolidated balance sheets and statements of operations for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Stock-based compensation effects in inventory
|
$
|
3,189
|
|
|
$
|
4,891
|
|
|
$
|
3,479
|
|
Stock-based compensation effects in deferred inventory cost
|
$
|
15
|
|
|
$
|
42
|
|
|
$
|
179
|
|
Stock-based compensation effects in fixed assets
|
$
|
145
|
|
|
$
|
146
|
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effects in net loss before income taxes
|
|
|
|
|
|
Cost of revenue
|
$
|
1,871
|
|
|
$
|
2,710
|
|
|
$
|
2,923
|
|
Research and development
|
10,900
|
|
|
13,306
|
|
|
14,990
|
|
Sales and marketing
|
7,624
|
|
|
10,450
|
|
|
8,818
|
|
General and administrative
|
5,956
|
|
|
9,529
|
|
|
18,502
|
|
|
26,351
|
|
|
35,995
|
|
|
45,233
|
|
Cost of revenue—amortization from balance sheet
(1)
|
5,625
|
|
|
5,824
|
|
|
4,924
|
|
Total stock-based compensation expense
|
$
|
31,976
|
|
|
$
|
41,819
|
|
|
$
|
50,157
|
|
|
|
(1)
|
Represents stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.
|
Shares Reserved for Future Issuances
Common stock reserved for future issuance was as follows (in thousands):
|
|
|
|
|
|
|
December 28,
2013
|
Outstanding stock options and awards
|
13,671
|
|
Reserved for future option and award grants
|
16,656
|
|
Reserved for future ESPP
|
—
|
|
Total common stock reserved for stock options and awards
|
30,327
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a geographic breakdown of the provision for (benefit from) income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
(133
|
)
|
|
$
|
(107
|
)
|
State
|
(135
|
)
|
|
22
|
|
|
213
|
|
Foreign
|
1,719
|
|
|
2,169
|
|
|
1,841
|
|
Total current
|
$
|
1,584
|
|
|
$
|
2,058
|
|
|
$
|
1,947
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
70
|
|
|
132
|
|
|
(256
|
)
|
Total deferred
|
$
|
70
|
|
|
$
|
132
|
|
|
$
|
(256
|
)
|
Total provision
|
$
|
1,654
|
|
|
$
|
2,190
|
|
|
$
|
1,691
|
|
Income before provision for income taxes from international operations was
$5.8 million
,
$5.5 million
and
$5.3 million
for the years ended December 28, 2013, December 29, 2012 and December 31, 2011, respectively.
The provisions for income taxes differ from the amount computed by applying the statutory federal income tax rates as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Expected tax benefit at federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
0.3
|
%
|
|
—
|
%
|
|
(0.1
|
)%
|
Research credits
|
4.9
|
%
|
|
—
|
%
|
|
2.9
|
%
|
Stock-based compensation
|
(12.2
|
)%
|
|
(3.9
|
)%
|
|
(4.1
|
)%
|
Change in valuation allowance
|
(34.2
|
)%
|
|
(33.5
|
)%
|
|
(36.1
|
)%
|
Other
|
0.8
|
%
|
|
(0.2
|
)%
|
|
0.3
|
%
|
Effective tax rate
|
(5.4
|
)%
|
|
(2.6
|
)%
|
|
(2.1
|
)%
|
The Company recognized income tax expense of approximately
$1.7 million
,
$2.2 million
and
$1.7 million
in each of fiscal years 2013, 2012 and 2011, on pre-tax book losses of
$30.5 million
,
$83.1 million
, and
$80.1 million
, respectively. The resulting effective tax rates of
5.4%
,
2.6%
, and
2.1%
for 2013, 2012, and 2011, respectively, differs from the expected statutory rate of
35%
based upon unbenefited U.S. losses, non-deductible stock compensation charges and foreign taxes provided on foreign subsidiary earnings. The decrease in 2013 tax expense compared to 2012 tax expense relates primarily to the release of tax reserves due to the lapsing of the statute of limitations. The increase in the 2012 tax expense compared to 2011 expense relates primarily to reductions of benefits from Canadian research credits.
During 2013, 2012 and 2011, the income tax benefits were not significant for each year and were allocated to the tax provision from continuing operations, related to the tax effects of items credited directly to other comprehensive income (“OCI”). Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided within the intra-period tax allocations rules when there is a pre-tax loss from continuing operations and there are items charged or credited to other categories, including OCI, in the current
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
year. The intra-period tax allocation rules related to items charged or credited directly to OCI can result in disproportionate tax effects that remain in OCI until certain events occur.
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
$
|
123,908
|
|
|
$
|
120,022
|
|
Research credits
|
33,647
|
|
|
29,092
|
|
Nondeductible accruals
|
39,905
|
|
|
31,354
|
|
Property, plant and equipment
|
1,453
|
|
|
3,226
|
|
Intangible assets
|
3,446
|
|
|
4,871
|
|
Stock-based compensation
|
15,454
|
|
|
25,040
|
|
Total deferred tax assets
|
$
|
217,813
|
|
|
$
|
213,605
|
|
Valuation allowance
|
(202,747
|
)
|
|
(213,449
|
)
|
Net deferred tax assets
|
$
|
15,066
|
|
|
$
|
156
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
(161
|
)
|
|
(117
|
)
|
Convertible senior notes
|
(14,941
|
)
|
|
—
|
|
Total deferred tax liabilities
|
$
|
(15,102
|
)
|
|
$
|
(117
|
)
|
Net deferred tax assets (liabilities)
|
$
|
(36
|
)
|
|
$
|
39
|
|
The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are scheduled to be deductible or taxable. Based on the available objective evidence, management believes it is more likely than not that the domestic net deferred tax assets will not be realizable. Accordingly, the Company has provided a full valuation allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of December 28, 2013 and December 29, 2012.
As of December 28, 2013, the Company has net operating loss carryforwards of approximately
$351.1 million
for federal tax purposes and
$297.1 million
for state tax purposes. If not utilized, these carryforwards will begin to expire in 2021 for federal tax purposes and 2015 for state tax purposes. Additionally, the Company has federal and California research and development credits available to reduce future income taxes payable of approximately
$25.5 million
and
$25.7 million
, respectively, as of December 28, 2013. Infinera Canada Inc., a wholly owned subsidiary
,
has Scientific Research and Experimental Development Expenditures ("SRED") credits available of
$1.9 million
to offset future Canadian Income tax payable as of December 28, 2013. The federal research credits will begin to expire in the year
2021
if not utilized, while the California research credits have no expiration date. Canadian SRED credits will begin to expire in the year 2030 if not fully utilized.
The Company maintains net operating losses generated from excess tax benefits associated with the accumulated stock award attributes in a memo account, not included in the deferred tax inventory balances. The additional tax benefit associated with these stock award attributes, of which the net operating loss amounts are included in the carryforward amounts noted above, is not recognized until the deduction reduces cash taxes payable. At December 28, 2013, the Company had unbenefited stock option deductions for federal and state tax purposes of
$38.4 million
and
$36.2 million
, respectively. When utilized, the estimated tax benefits of approximately
$16.4 million
will result in a credit to stockholders’ equity.
Under the Tax Reform Act of 1986, the amount of benefit from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than
50 percent
as defined, over a three-year testing period. As of December 28, 2013,
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the Company has determined that ownership changes have occurred that would result in limitations on the current and future utilization of its net operating loss carryforwards. However, based on the work performed, the limitations are not significant enough to impact the future utilization of the tax attributes.
The Company’s policy with respect to its undistributed foreign subsidiaries’ earnings is to consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various foreign countries. At December 28, 2013, the undistributed earnings approximated
$17.6 million
. The future tax consequence of the remittance of these earnings is negligible because of the significant net operating loss carryforwards for U.S. and state purposes and full valuation allowance provided against such carryforwards.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Beginning balance
|
$
|
13,902
|
|
|
$
|
13,066
|
|
|
$
|
8,970
|
|
Tax position related to current year
|
|
|
|
|
|
Additions
|
1,676
|
|
|
1,437
|
|
|
2,759
|
|
Tax positions related to prior years
|
|
|
|
|
|
Additions
|
32
|
|
|
75
|
|
|
1,810
|
|
Reductions
|
(132
|
)
|
|
(580
|
)
|
|
(210
|
)
|
Lapses of statute of limitations
|
(330
|
)
|
|
(96
|
)
|
|
(263
|
)
|
Ending balance
|
$
|
15,148
|
|
|
$
|
13,902
|
|
|
$
|
13,066
|
|
As of December 28, 2013, the cumulative unrecognized tax benefit was
$15.1 million
, of which
$13.6 million
was netted against deferred tax assets, which would have otherwise been subjected with a full valuation allowance. Of the total unrecognized tax benefit as of December 28, 2013, approximately
$1.8 million
, if recognized, would impact the Company’s effective tax rate.
As of December 28, 2013, December 29, 2012 and December 31, 2011, the Company had
$0.2 million
each year of accrued interest or penalties related to unrecognized tax benefits, respectively, of which less than
$0.1 million
was included in the Company’s provision for income taxes each for the years ended December 28, 2013, December 29, 2012 and December 31, 2011.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.
The Company is potentially subject to examination by the Internal Revenue Service and the relevant state income taxing authorities under the statute of limitations for years 2002 and forward.
The Company has received assessments of tax resulting from a transfer pricing examinations in India for fiscal years ending March 31, 2008 through March 31, 2009. The Company is appealing the assessment and does not expect a significant adjustment to unrecognized tax benefits as a result of this inquiry. Fiscal years subsequent to March 2009 remain open to examination in India.
The Company does not currently believe there to be a reasonable possibility of a significant change in total unrecognized tax benefits that would occur within the next 12 months and, as such, amounts are classified as other long-term liabilities on the accompanying consolidated balance sheets as of December 28, 2013.
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company’s chief executive officer. The Company’s chief executive officer makes operating decisions, allocates resources and evaluates performance for the Company on a consolidated basis. The Company is organized on a functional basis, selling integrated network solutions across all geographies. The Company operates a single, global sales and services organization and manages its research and development resources on a company-wide basis. Accordingly, the Company is considered to be in a single operating segment.
Revenue by geographic region is based on the shipping address of the customer. The following tables set forth revenue and long-lived assets by geographic region (in thousands):
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 28,
2013
|
|
December 29,
2012
|
|
December 31,
2011
|
Americas:
|
|
|
|
|
|
United States
|
$
|
345,734
|
|
|
$
|
296,849
|
|
|
$
|
283,443
|
|
Other Americas
|
10,377
|
|
|
11,811
|
|
|
11,543
|
|
|
$
|
356,111
|
|
|
$
|
308,660
|
|
|
$
|
294,986
|
|
Europe, Middle East and Africa
|
150,912
|
|
|
116,663
|
|
|
93,428
|
|
Asia Pacific
|
37,099
|
|
|
13,114
|
|
|
16,463
|
|
Total revenue
|
$
|
544,122
|
|
|
$
|
438,437
|
|
|
$
|
404,877
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
December 28,
2013
|
|
December 29,
2012
|
United States
|
$
|
76,850
|
|
|
$
|
78,309
|
|
Other Americas
|
319
|
|
|
222
|
|
Asia Pacific
|
1,451
|
|
|
1,812
|
|
Europe, Middle East and Africa
|
1,048
|
|
|
—
|
|
Total property, plant and equipment, net
|
$
|
79,668
|
|
|
$
|
80,343
|
|
|
|
16.
|
Employee Benefit Plan
|
The Company has established a savings plan under Section 401(k) of the Internal Revenue Code (the “Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible U.S. employees. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. Expenses related to the Company’s 401(k) plan were insignificant for 2013, 2012 and 2011.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
17.
|
Financial Information by Quarter (Unaudited)
|
The following table sets forth the Company’s unaudited quarterly consolidated statements of operations data for 2013 and 2012. The data has been prepared on the same basis as the audited consolidated financial statements and related notes included in this report. The table includes all necessary adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair presentation of this data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended (Unaudited)
|
|
|
|
2013
|
|
|
|
2012
|
|
Dec. 28
|
|
Sep. 28
|
|
Jun. 29
|
|
Mar. 30
|
|
Dec. 29
|
|
Sep. 29
|
|
Jun. 30
|
|
Mar. 31
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
115,102
|
|
|
$
|
121,332
|
|
|
$
|
120,647
|
|
|
$
|
108,343
|
|
|
$
|
109,444
|
|
|
$
|
99,303
|
|
|
$
|
78,366
|
|
|
$
|
92,922
|
|
Services
|
23,990
|
|
|
20,688
|
|
|
17,738
|
|
|
16,282
|
|
|
18,620
|
|
|
12,911
|
|
|
15,092
|
|
|
11,779
|
|
Total revenue
|
139,092
|
|
|
142,020
|
|
|
138,385
|
|
|
124,625
|
|
|
128,064
|
|
|
112,214
|
|
|
93,458
|
|
|
104,701
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
73,385
|
|
|
66,685
|
|
|
80,198
|
|
|
75,447
|
|
|
77,127
|
|
|
66,612
|
|
|
56,183
|
|
|
59,515
|
|
Cost of services
|
9,795
|
|
|
6,964
|
|
|
6,533
|
|
|
6,476
|
|
|
7,669
|
|
|
4,102
|
|
|
4,901
|
|
|
4,759
|
|
Total cost of revenue
|
83,180
|
|
|
73,649
|
|
|
86,731
|
|
|
81,923
|
|
|
84,796
|
|
|
70,714
|
|
|
61,084
|
|
|
64,274
|
|
Gross profit
|
55,912
|
|
|
68,371
|
|
|
51,654
|
|
|
42,702
|
|
|
43,268
|
|
|
41,500
|
|
|
32,374
|
|
|
40,427
|
|
Operating expenses
|
62,993
|
|
|
61,926
|
|
|
60,262
|
|
|
57,644
|
|
|
58,781
|
|
|
59,705
|
|
|
61,773
|
|
|
60,311
|
|
Income (loss) from operations
|
(7,081
|
)
|
|
6,445
|
|
|
(8,608
|
)
|
|
(14,942
|
)
|
|
(15,513
|
)
|
|
(18,205
|
)
|
|
(29,399
|
)
|
|
(19,884
|
)
|
Other income (expense), net
|
(2,683
|
)
|
|
(2,790
|
)
|
|
(800
|
)
|
|
(6
|
)
|
|
75
|
|
|
(442
|
)
|
|
377
|
|
|
(149
|
)
|
Income (loss) before income taxes
|
(9,764
|
)
|
|
3,655
|
|
|
(9,408
|
)
|
|
(14,948
|
)
|
|
(15,438
|
)
|
|
(18,647
|
)
|
|
(29,022
|
)
|
|
(20,033
|
)
|
Provision for income taxes
|
414
|
|
|
308
|
|
|
601
|
|
|
331
|
|
|
650
|
|
|
434
|
|
|
527
|
|
|
579
|
|
Net income (loss)
|
$
|
(10,178
|
)
|
|
$
|
3,347
|
|
|
$
|
(10,009
|
)
|
|
$
|
(15,279
|
)
|
|
$
|
(16,088
|
)
|
|
$
|
(19,081
|
)
|
|
$
|
(29,549
|
)
|
|
$
|
(20,612
|
)
|
Net income (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.19
|
)
|
Diluted
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.19
|
)
|
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal years 2013 and 2012 were 52-week years that ended on December 28, 2013 and December 29, 2012, respectively. The quarters for fiscal years 2013 and 2012 were 13-week quarters.