NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
Basis of Presentation and Significant Accounting Policies
|
Basis of Presentation
Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 29, 2018
.
The Company has made 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 condensed 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, employee benefit and pension plans, inventory valuation, accrued warranty, operating lease liabilities, business combinations, fair value measurement of investments and accounting for income taxes. Other less significant estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of intangible assets, and property, plant and equipment. 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 condensed consolidated financial statements will be affected.
The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 29, 2018
.
The Company reclassified certain amounts reported in previous periods to conform to the current presentation. Effective in the fourth quarter of 2018, the Company elected to present amortization of intangible assets and acquisition and integration costs as separate line items within cost of revenue and operating expenses. As a result, the costs previously reflected in cost of revenue and operating expenses were reclassified to amortization of intangible assets and acquisition and integration costs within total cost of revenue and total operating expenses. Prior period amounts have been revised to conform to the current period presentation. This change in presentation does not affect the Company's total cost of revenue or total operating expenses.
The following table shows reclassified amounts to conform to the current period's presentation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
Previously Reported
|
|
Change in Presentation Reclassification
|
|
Current Presentation
|
Cost of revenue:
|
|
|
|
|
|
Cost of product
|
$
|
107,665
|
|
|
$
|
(5,341
|
)
|
|
$
|
102,324
|
|
Cost of services
|
12,831
|
|
|
—
|
|
|
12,831
|
|
Amortization of intangible assets
(1)
|
—
|
|
|
5,341
|
|
|
5,341
|
|
Restructuring and related
|
17
|
|
|
—
|
|
|
17
|
|
Total
|
$
|
120,513
|
|
|
$
|
—
|
|
|
$
|
120,513
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Research and development
|
$
|
58,681
|
|
|
$
|
—
|
|
|
$
|
58,681
|
|
Sales and marketing
|
30,492
|
|
|
(1,607
|
)
|
|
28,885
|
|
General and administrative
|
17,836
|
|
|
—
|
|
|
17,836
|
|
Amortization of intangible assets
(1)
|
—
|
|
|
1,607
|
|
|
1,607
|
|
Restructuring and related
|
(163
|
)
|
|
—
|
|
|
(163
|
)
|
Total
|
$
|
106,846
|
|
|
$
|
—
|
|
|
$
|
106,846
|
|
|
|
(1)
|
These lines were not previously reported in the consolidated statements of operations.
|
To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended
March 30, 2019
,
one
customer accounted for
11%
of the Company's total revenue and for the corresponding period in 2018,
two
customers individually accounted for
29%
and
11%
of the Company's total revenue.
There have been no material changes in the Company’s significant accounting policies for the three months ended
March 30, 2019
as compare
d to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 29, 2018
, with the exception of the Company's lease accounting policy. Effective December 30, 2018, the Company adopted Accounting Standards Update 2016-02, “Leases (Topic 842)” ("Topic 842"). See Note 3, “Leases” to the Notes to Condensed Consolidated Financial Statements for discussion on the impact of the adoption of these standards on the Company's policy for leases.
|
|
2.
|
Recent Accounting Pronouncements
|
Accounting Pronouncements Recently Adopted
In August 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2018-15, “Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). The update provides guidance for determining if a cloud computing arrangement is within the scope of internal-use software guidance, and would require capitalization of certain implementation costs. The Company adopted ASU 2018-15 in the first quarter of 2019. The Company's adoption of ASU 2018-15 did not have a significant impact on its consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under ASU 2018-07, certain guidance on such payments to non-employees is aligned with the requirements for share-based payments granted to employees. The Company's adoption of ASU 2017-09 during its first quarter of 2019 did not have a significant impact on its consolidated financial statements.
In February 2016, the FASB issued Topic 842, which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. The Company adopted Topic 842 in the first quarter of 2019 utilizing the modified retrospective transition method through a cumulative-effect adjustment at the beginning of the first quarter
of 2019. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical lease classification, assessment on whether a contract was or contains a lease, and initial direct costs for leases that existed prior to December 30, 2018. The Company also elected to combine its lease and non-lease components and not recognize right-of-use (“ROU”) assets and lease liabilities for leases with an initial term of 12 months or less. The Company did not elect to apply the hindsight practical expedient when determining lease term and assessing impairment of ROU assets.
Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). The update eliminates, adds, and modifies certain disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. ASU 2018-14 is effective for the Company in its first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). The update eliminates, adds, and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for the Company in its first quarter of 2020 and early adoption is permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. The Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The guidance eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 will be effective for the Company's annual or any interim goodwill impairment tests in its first quarter of fiscal 2020.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
Effective December 30, 2018, the Company adopted Topic 842 using the alternative modified transition method, which requires a cumulative-effect adjustment, if any, to the opening balance of retained earnings to be recognized on the date of adoption with prior periods not restated.
The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from
one
to
10 years
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 determines if an arrangement contains a lease at inception. Operating leases are included in operating lease ROU assets, accrued expenses and operating lease liabilities on the Company's consolidated balance sheets. The Company does not have any finance leases.
Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Variable lease payments are expensed as incurred and are not included within the ROU asset and lease liability calculation. Variable lease payments primarily include reimbursements of costs incurred by lessors for common area maintenance and utilities. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for minimum lease payments is
recognized on a straight-line basis over the lease term. The Company rents or subleases certain real estate under agreements that are classified as operating leases.
Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not account for lease components (e.g., fixed payments including rent) separately from the non-lease components (e.g., common-area maintenance costs).
Adoption of Topic 842
The primary impact for the Company was the balance sheet recognition of operating lease ROU asset and operating lease liabilities. In addition, the Company's financing lease obligations that historically did not qualify for sale leaseback accounting under ASC 840-40, “Leases - Sale-Leaseback Transactions” (“ASC 840-40”) now meet the criteria for sale under Topic 842 and are recorded as operating leases. As a result, the Company reclassified financing liabilities of
$198.3 million
from accrued expenses and long-term financing lease obligations and assets of
$174.6 million
from property, plant and equipment, net, to
$23.8 million
accumulated deficit adjustment reflecting the cumulative effect of an accounting change related to the sale-leasebacks.
The following table summarizes the impacts of adopting Topic 842 on the Company's condensed consolidated balance sheet as of December 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported Balance as of December 29, 2018
|
|
Adjustments due to Topic 842
|
|
As Adjusted Balance as of December 29, 2018
|
Assets
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
342,820
|
|
|
$
|
(174,386
|
)
|
|
$
|
168,434
|
|
Operating lease right-of-use assets
|
|
$
|
—
|
|
|
$
|
78,855
|
|
|
$
|
78,855
|
|
Other non-current assets
|
|
$
|
14,849
|
|
|
$
|
(4,884
|
)
|
|
$
|
9,965
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
131,891
|
|
|
$
|
(7,343
|
)
|
|
$
|
124,548
|
|
Long-term financing lease obligation
|
|
$
|
193,538
|
|
|
$
|
(193,538
|
)
|
|
$
|
—
|
|
Other long-term liabilities
|
|
$
|
68,082
|
|
|
$
|
(4,907
|
)
|
|
$
|
63,175
|
|
Operating lease liabilities - short-term
|
|
$
|
—
|
|
|
$
|
19,209
|
|
|
$
|
19,209
|
|
Operating lease liabilities - long-term
|
|
$
|
—
|
|
|
$
|
62,467
|
|
|
$
|
62,467
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
956,970
|
|
|
$
|
(23,697
|
)
|
|
$
|
933,273
|
|
The Company has operating leases for real estate and automobiles. During the
three months ended March 30, 2019, operating lease expense was approximately
$16.2 million
(including
$10.2 million
of accelerated rent expense due to restructuring resulting in abandonment of lease facilities). Variable lease cost, short-term lease cost and sublease income were immaterial during the
three months ended March 30, 2019.
The following table presents maturity of lease liabilities under our non-cancelable operating leases as of March 30, 2019 (in thousands):
|
|
|
|
|
|
Remainder of 2019
|
|
$
|
18,190
|
|
2020
|
|
21,047
|
|
2021
|
|
13,663
|
|
2022
|
|
11,409
|
|
2023
|
|
8,984
|
|
Thereafter
|
|
29,033
|
|
Total lease payments
(1)
|
|
$
|
102,326
|
|
Less: interest
(2)
|
|
24,137
|
|
Present value of lease liabilities
|
|
$
|
78,189
|
|
|
|
(1)
|
Operating lease payments exclude
$3.2 million
of legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
(2)
|
Calculated using the interest rate for each lease.
|
The following table presents supplemental information for the three months ended March 30, 2019 (in thousands, except for weighted average):
|
|
|
|
|
|
Weighted average remaining lease term
|
|
5.1 years
|
|
Weighted average discount rate
|
|
8.6
|
%
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
6,471
|
|
Operating cash flow from operating leases
|
|
$
|
6,471
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
$
|
1,666
|
|
In addition, the Company has operating leases for office space that had not commenced as of March 30, 2019. The legally binding minimum lease payments for these leases is
$3.2 million
. The term of these leases is
three years
.
ASC 840-40 Disclosures
The following table presents future minimum lease payments related to the non-cancelable portion of operating leases as of December 29, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Operating lease payments
|
$
|
18,352
|
|
|
$
|
14,047
|
|
|
$
|
7,888
|
|
|
$
|
5,926
|
|
|
$
|
4,905
|
|
|
$
|
18,303
|
|
|
$
|
69,421
|
|
Financing Lease Obligations
The Company evaluated
two
sale-leaseback transactions that were executed by Coriant in the past and assumed by the Company in the Acquisition (as defined in Note 7, "Business Combination" to the Notes to Condensed Consolidated Financial Statements). It was determined that these transactions did not qualify for sale-leaseback accounting under ASC 840-40.
The Company leases a facility (land and all attached real property) in Naperville, Illinois that was sold to a third party and subsequently leased back. This was determined to be a failed sale-leaseback due to a
$31.5 million
imposition reimbursement payment to be made over
10 years
, which was linked to the total building income generated each year. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term. The assets will continue to be depreciated over their remaining useful lives under ASC 840-40.
Additionally, the Company leases a facility (land and all attached real property) in Finland, which was sold to a third party and subsequently leased back. The lease was determined to be a failed sale-leaseback due to the deposit being considered a form of collateral. The amount of the deposit was equal to one year of rental payments, whereas typical deposits are approximately two to three months of rental payments. As a result of purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease payments and expected value of the facility at the end of the occupancy period. The financing lease obligation will continue to be amortized over the remaining period of the lease term under ASC 840-40. The assets will continue to be depreciated over their remaining useful lives.
In the first quarter of 2019, in conjunction with the adoption of the new lease accounting standard, the transactions qualified for sale-leaseback accounting under Topic 842, as control of the underlying assets was transferred to the lessor. As such, the balances of fixed assets, accrued expenses and other long-term liabilities as of the transition date related to the Naperville, Illinois and Finland leases were reclassified to accumulated deficit as a cumulative effect of an accounting change.
4. Revenue Recognition
Capitalization of Costs to Obtain a Contract
T
he ending balance of the Company’s capitalized costs to obtain a contract as of March 30, 2019 and December 29, 2018 were
$0.3 million
and
$0.4 million
, respectively. The Company's amortization expense was not material for the three months ended March 30, 2019 and March 31, 2018.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
Product
|
$
|
223,007
|
|
|
$
|
171,629
|
|
Services
|
69,700
|
|
|
31,052
|
|
Total revenue
|
$
|
292,707
|
|
|
$
|
202,681
|
|
The Company sells its products directly to customers who are predominantly service providers and to channel partners that sell on its behalf. The following tables present the Company's revenue disaggregated by geography, based on the shipping address of the customer and by sales channel (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
United States
|
$
|
132,522
|
|
|
$
|
129,025
|
|
Other Americas
|
15,132
|
|
|
5,215
|
|
Europe, Middle East and Africa
|
98,992
|
|
|
59,199
|
|
Asia Pacific
|
46,061
|
|
|
9,242
|
|
Total revenue
|
$
|
292,707
|
|
|
$
|
202,681
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
Direct
|
$
|
248,196
|
|
|
$
|
188,462
|
|
Indirect
|
44,511
|
|
|
14,219
|
|
Total revenue
|
$
|
292,707
|
|
|
$
|
202,681
|
|
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
March 30,
2019
|
|
December 29, 2018
|
Accounts receivable, net
|
$
|
267,117
|
|
|
$
|
317,115
|
|
Contract assets
|
$
|
18,837
|
|
|
$
|
24,981
|
|
Deferred revenue
|
$
|
126,071
|
|
|
$
|
120,302
|
|
Revenue recognized for the three months ended
March 30, 2019
that was included in the deferred revenue balance at the beginning of the reporting period was
$36.8 million
. Changes in the contract asset and liability balances during the three months ended
March 30, 2019
were not materially impacted by other factors.
Transaction Price Allocated to the Remaining Performance Obligation
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
Revenue expected to be recognized in the future as of March 30, 2019
|
$
|
335,418
|
|
|
$
|
78,284
|
|
|
$
|
28,268
|
|
|
$
|
5,436
|
|
|
$
|
3,041
|
|
|
$
|
1,148
|
|
|
$
|
451,595
|
|
5. Fair Value Measurements
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 the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
|
|
|
|
|
|
Level 1
|
|
–
|
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
Level 2
|
|
–
|
|
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.
|
|
|
|
|
|
Level 3
|
|
–
|
|
Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
|
The Company measures its cash equivalents, foreign currency exchange forward contracts and marketable debt securities at fair value and classifies its investments 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, U.S. agency notes, 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.
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.
U.S. Agency Notes
The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.
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. If 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.
Foreign Currency Exchange Forward Contracts
As discussed in Note 6, “Derivative Instruments” to the Notes to Condensed 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.
The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 30, 2019
|
|
As of December 29, 2018
|
|
Fair Value Measured Using
|
|
Fair Value Measured Using
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
904
|
|
|
$
|
—
|
|
|
$
|
904
|
|
|
$
|
10,347
|
|
|
$
|
—
|
|
|
$
|
10,347
|
|
Corporate bonds
|
—
|
|
|
16,022
|
|
|
16,022
|
|
|
—
|
|
|
23,512
|
|
|
23,512
|
|
U.S. agency notes
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,999
|
|
|
2,999
|
|
U.S. treasuries
|
—
|
|
|
—
|
|
|
—
|
|
|
23,987
|
|
|
—
|
|
|
23,987
|
|
Total assets
|
$
|
904
|
|
|
$
|
16,022
|
|
|
$
|
16,926
|
|
|
$
|
34,334
|
|
|
$
|
26,511
|
|
|
$
|
60,845
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
(30
|
)
|
|
$
|
—
|
|
|
$
|
(91
|
)
|
|
$
|
(91
|
)
|
During the three months ended
March 30, 2019
, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of
March 30, 2019
and
December 29, 2018
, none of the Company’s existing securities were classified as Level 3 securities.
The Company classifies certain facilities-related charges within Level 3 of the fair value hierarchy and applies fair value accounting on a nonrecurring basis when impairment indicators exist or upon the existence of observable fair values. The fair values are classified as Level 3 measurements due to the significance of unobservable inputs. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates.
Facilities-related Charges
In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (the “2017 Restructuring Plan”). As a result of the 2017 Restructuring Plan, the Company calculated the fair value of its facilities-related charges of
$7.3 million
, based on estimated future discounted cash flows and unobservable inputs, which included the amount and timing of estimated sublease rental receipts that the Company could reasonably obtain over the remaining lease term and the discount rate. During the first half of 2018, the Company revised the estimates to its facilities-related accruals. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.
Cash, Cash Equivalents and Investments
Cash, cash equivalents and investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2019
|
|
Adjusted
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Cash
|
$
|
166,355
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166,355
|
|
Money market funds
|
904
|
|
|
—
|
|
|
—
|
|
|
904
|
|
Total cash and cash equivalents
|
$
|
167,259
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
167,259
|
|
Corporate bonds
|
16,048
|
|
|
—
|
|
|
(26
|
)
|
|
16,022
|
|
Total short-term investments
|
$
|
16,048
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
16,022
|
|
Total cash, cash equivalents and investments
|
$
|
183,307
|
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
183,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
Adjusted
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Cash
|
$
|
168,620
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168,620
|
|
Money market funds
|
10,347
|
|
|
—
|
|
|
—
|
|
|
10,347
|
|
U.S. treasuries
|
23,986
|
|
|
1
|
|
|
—
|
|
|
23,987
|
|
Total cash and cash equivalents
|
$
|
202,953
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
202,954
|
|
Corporate bonds
|
23,603
|
|
|
—
|
|
|
(91
|
)
|
|
23,512
|
|
U.S. agency notes
|
3,000
|
|
|
—
|
|
|
(1
|
)
|
|
2,999
|
|
Total short-term investments
|
$
|
26,603
|
|
|
$
|
—
|
|
|
$
|
(92
|
)
|
|
$
|
26,511
|
|
Total cash, cash equivalents and investments
|
$
|
229,556
|
|
|
$
|
1
|
|
|
$
|
(92
|
)
|
|
$
|
229,465
|
|
As of
March 30, 2019
, the Company’s available-for-sale investments have contractual maturity terms of up to
6 months
. Gross realized gains and losses on investments were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
As of
March 30, 2019
, the Company had
$183.3 million
of cash, cash equivalents and short-term investments, including
$70.2 million
of cash and cash equivalents held by its foreign subsidiaries. The Company's cash in foreign locations is used for operational and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States.
6. Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company transacts business in various foreign currencies and has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency exchange forward contracts, primarily short term in nature.
The Company periodically enters into foreign currency exchange forward contracts to manage its exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated receivables and restricted cash balances. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk.
The Company also enters into foreign currency exchange forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and Swedish kronor (“SEK”). The contracts are settled at maturity and at rates agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are recorded to the consolidated statement of operations line item, in the current period, to which the item that is being economically hedged is recorded.
For the three months ended
March 30, 2019
and
March 31, 2018
, the before-tax effect of the foreign currency exchange forward contracts was a net gain of
$0.7 million
and a loss
$0.6 million
, respectively. In each of these periods, the impact of the gross gains and losses was offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of
March 30, 2019
, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes and accordingly, changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. These contracts were entered into with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparties.
The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 30, 2019
|
|
As of December 29, 2018
|
|
Gross Notional
(1)
|
|
Other Accrued Liabilities
|
|
Gross Notional
(1)
|
|
Other Accrued Liabilities
|
Foreign currency exchange forward contracts
|
|
|
|
|
|
|
|
Related to euro denominated receivables
|
$
|
41,242
|
|
|
$
|
(30
|
)
|
|
$
|
40,068
|
|
|
$
|
(52
|
)
|
Related to British pound denominated receivables
|
$
|
—
|
|
|
—
|
|
|
$
|
6,412
|
|
|
(38
|
)
|
Related to euro denominated restricted cash
|
$
|
236
|
|
|
—
|
|
|
$
|
240
|
|
|
(1
|
)
|
|
|
|
|
$
|
(30
|
)
|
|
|
|
|
$
|
(91
|
)
|
|
|
(1)
|
Represents the face amounts of forward contracts that were outstanding as of the end of the period noted.
|
Accounts Receivable Factoring
The Company sells certain designated trade account receivables based on factoring arrangements to a large international banking institution. Pursuant to the terms of the arrangements, the Company accounts for these transactions in accordance with ASC 860, “Transfers and Servicing.” The Company's factor purchases trade accounts receivables on a non-recourse basis and without any further obligations. Trade accounts receivables balances sold are removed from the consolidated balance sheets and cash received are reflected as cash provided by operating activities in the consolidated statements of cash flow. The difference between the fair value of the Company's trade receivables and the proceeds received is recorded as interest expense in the Company's condensed consolidated statements of operations, and for the three months ended March 30, 2019, the Company's recognized factoring related interest expense was approximately
$0.2 million
. The gross amount of trade accounts receivables sold for the three months ended March 30, 2019, totaled approximately
$24.4 million
. The Company did not enter into any factoring arrangements during the three months ended March 31, 2018.
7. Business Combination
On October 1, 2018 (the “Acquisition Date”), the Company completed the acquisition of all the outstanding limited liability company interests of Telecom Holding Parent LLC (“Coriant”), a Delaware limited liability company (the “Acquisition”). The Acquisition positions the Company as one of the largest providers of vertically integrated transport networking solutions in the world, enhances the Company's ability to serve a global customer base and accelerates delivery of the innovative solutions its customers demand. This Acquisition also positions the Company to expand the breadth of customer applications it can address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network management and control. The Acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations” and consisted of the following (in thousands):
|
|
|
|
|
Cash
(1)
|
$
|
154,192
|
|
Equity consideration
(2)
|
129,628
|
|
Total
|
$
|
283,820
|
|
|
|
(1)
|
Cash consideration of
$154.2 million
includes
$10.0 million
that the Company held in escrow as of December 29, 2018.
|
|
|
(2)
|
Based on the closing price of the Company's common stock of
$6.18
on October 1, 2018, the
$129.6 million
equity consideration represents the fair value of approximately
21 million
shares of the Company's common stock issued to Coriant shareholders in accordance with the Purchase Agreement.
|
The Company financed the cash portion of the purchase price of the Acquisition with the net proceeds from its offering of
$402.5 million
in aggregate principal amount of its
2.125%
convertible senior notes due September 1, 2024 (the “2024 Notes”). See Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements for more information regarding the 2024 Notes.
The Company allocated the fair value of the purchase price of the Acquisition to the tangible and intangible assets acquired as well as liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities was recorded as goodwill.
The Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the Acquisition Date using preliminary information. In accordance with Accounting Standards Codification 805, "Business Combinations," during the measurement period an acquirer retrospectively adjusts the provisional amounts recognized at the Acquisition Date to reflect information obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of the Acquisition Date. Accordingly, the Company has recognized measurement period adjustments made during the first quarter of 2019 to the fair value of certain assets acquired and liabilities assumed as a result of additional information obtained. None of the adjustments had a material impact on the Company's financial results.
The following table summarizes the Company’s preliminary allocation of the purchase consideration based on the fair value of assets acquired and liabilities assumed at the Acquisition Date (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
Recognized as of Acquisition Date
|
|
Measurement Period Adjustments
|
|
Total
|
Cash and cash equivalents
|
$
|
15,549
|
|
|
$
|
—
|
|
|
$
|
15,549
|
|
Restricted cash
|
25,743
|
|
|
—
|
|
|
25,743
|
|
Accounts receivable
|
170,466
|
|
|
—
|
|
|
170,466
|
|
Inventory
|
96,067
|
|
|
—
|
|
|
96,067
|
|
Property, plant and equipment, net
|
217,991
|
|
|
—
|
|
|
217,991
|
|
Other assets
|
39,145
|
|
|
—
|
|
|
39,145
|
|
Intangible assets, net
|
200,700
|
|
|
—
|
|
|
200,700
|
|
Goodwill
|
48,235
|
|
|
503
|
|
|
48,738
|
|
Financing lease obligation
|
(194,700
|
)
|
|
—
|
|
|
(194,700
|
)
|
Deferred revenue
|
(43,502
|
)
|
|
211
|
|
|
(43,291
|
)
|
Other liabilities
|
(291,874
|
)
|
|
(714
|
)
|
|
(292,588
|
)
|
Total net assets
|
$
|
283,820
|
|
|
$
|
—
|
|
|
$
|
283,820
|
|
The Company expects to finalize the allocation of the purchase consideration as soon as practicable, pending finalization of income taxes and any other adjustments related to acquired assets or liabilities, but no later than 12 months from the Acquisition Date.
The following table presents details of the identifiable assets acquired at the Acquisition Date (in thousands, except estimated useful life):
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
Estimated Useful Life
(In Years)
|
Customer relationships and backlog
|
|
$
|
111,400
|
|
|
8
|
Developed technology
|
|
70,550
|
|
|
5
|
In-process technology
|
|
17,750
|
|
|
n/a
|
Trade name
|
|
1,000
|
|
|
1
|
Total
|
|
$
|
200,700
|
|
|
|
Goodwill generated from this business combination is primarily attributable to the synergies from combining the operations of Coriant with that of the Company, which resulted in strengthening the Company's ability to serve a global customer base and accelerate delivery of product solutions. The goodwill recorded in the Acquisition is not expected to be deductible for income tax purposes.
8. Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.
The following table presents details of the Company’s goodwill during the three months ended
March 30, 2019
(in thousands):
|
|
|
|
|
Balance as of December 29, 2018
|
$
|
227,231
|
|
Adjustment to goodwill acquired
|
503
|
|
Foreign currency translation adjustments
|
(6,217
|
)
|
Balance as of March 30, 2019
|
$
|
221,517
|
|
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. To date, the Company has
zero
accumulated impairment loss on goodwill.
Intangible Assets
The following tables present details of the Company’s intangible assets as of
March 30, 2019
and
December 29, 2018
(in thousands, except for weighted average):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2019
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Remaining Useful Life (In Years)
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
$
|
1,000
|
|
|
$
|
(500
|
)
|
|
$
|
500
|
|
|
NMF*
|
Customer relationships
|
156,486
|
|
|
(48,453
|
)
|
|
108,033
|
|
|
3.5
|
Developed technology
|
163,024
|
|
|
(73,343
|
)
|
|
89,681
|
|
|
1.6
|
Total intangible assets with finite lives
|
$
|
320,510
|
|
|
$
|
(122,296
|
)
|
|
$
|
198,214
|
|
|
5.1
|
In-process technology
|
17,750
|
|
|
—
|
|
|
17,750
|
|
|
|
Total intangible assets
|
$
|
338,260
|
|
|
$
|
(122,296
|
)
|
|
$
|
215,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Remaining Useful Life (In Years)
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Trade names
|
$
|
1,000
|
|
|
$
|
(250
|
)
|
|
$
|
750
|
|
|
NMF*
|
Customer relationships
|
158,110
|
|
|
(42,478
|
)
|
|
115,632
|
|
|
3.5
|
Developed technology
|
166,355
|
|
|
(67,368
|
)
|
|
98,987
|
|
|
1.7
|
Total intangible assets with finite lives
|
$
|
325,465
|
|
|
$
|
(110,096
|
)
|
|
$
|
215,369
|
|
|
5.2
|
In-process technology
|
17,750
|
|
|
—
|
|
|
17,750
|
|
|
|
Total intangible assets
|
$
|
343,215
|
|
|
$
|
(110,096
|
)
|
|
$
|
233,119
|
|
|
|
*NMF = Not meaningful
The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. Amortization expense was
$15.3 million
for the three months ended
March 30, 2019
and was
$6.9 million
for the corresponding period in 2018.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories.
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of
March 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
Total
|
|
Remainder of 2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024 and Thereafter
|
Total future amortization expense
|
$
|
198,214
|
|
|
$
|
44,554
|
|
|
$
|
42,096
|
|
|
$
|
29,558
|
|
|
$
|
27,031
|
|
|
$
|
21,131
|
|
|
$
|
33,844
|
|
9. Balance Sheet Details
Restricted Cash
The Company’s restricted cash balance is primarily comprised of certificates of deposit and money market funds, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts primarily
collateralize the Company’s issuances of standby letters of credit and bank guarantees. Additionally, the Company's restricted cash balance includes amounts pledged as collateral on its derivative instruments.
The following table provides details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
March 30
2019
|
|
December 29
2018
|
Inventory
|
|
|
|
Raw materials
|
$
|
82,528
|
|
|
$
|
74,435
|
|
Work in process
|
63,004
|
|
|
57,232
|
|
Finished goods
|
186,963
|
|
|
180,221
|
|
Total inventory
|
$
|
332,495
|
|
|
$
|
311,888
|
|
Property, plant and equipment, net
|
|
|
|
Computer hardware
|
$
|
16,556
|
|
|
$
|
15,633
|
|
Computer software
(1)
|
35,752
|
|
|
40,923
|
|
Laboratory and manufacturing equipment
|
305,866
|
|
|
304,889
|
|
Land and building
|
12,352
|
|
|
187,184
|
|
Furniture and fixtures
|
2,601
|
|
|
2,587
|
|
Leasehold and building improvements
|
44,956
|
|
|
46,038
|
|
Construction in progress
|
38,579
|
|
|
32,997
|
|
Subtotal
|
$
|
456,662
|
|
|
$
|
630,251
|
|
Less accumulated depreciation and amortization
|
(295,516
|
)
|
|
(287,431
|
)
|
Total property, plant and equipment, net
|
$
|
161,146
|
|
|
$
|
342,820
|
|
Accrued expenses and other current liabilities
|
|
|
|
Loss contingency related to non-cancelable purchase commitments
|
$
|
26,458
|
|
|
$
|
26,042
|
|
Professional and other consulting fees
|
9,046
|
|
|
10,442
|
|
Taxes payable
|
19,643
|
|
|
23,249
|
|
Accrued rebate and customer prepay liability
|
14,453
|
|
|
14,301
|
|
Restructuring accrual
|
30,977
|
|
|
13,097
|
|
Acquisition related funds in escrow
|
—
|
|
|
10,000
|
|
Short-term financing lease obligation
|
—
|
|
|
4,718
|
|
Short-term operating lease liability
|
18,240
|
|
|
—
|
|
Other accrued expenses and other current liabilities
|
22,270
|
|
|
30,042
|
|
Total accrued expenses
|
$
|
141,087
|
|
|
$
|
131,891
|
|
|
|
(1)
|
Included in computer software at
March 30, 2019
and
December 29, 2018
were
$14.6 million
and
$13.1 million
, respectively, related to enterprise resource planning (
“
ERP
”
) systems that the Company implemented. The unamortized ERP costs at
March 30, 2019
and
December 29, 2018
were
$4.8 million
and
$3.9 million
, respectively.
|
10. Restructuring and Related Costs
In December of 2018, the Company implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a comprehensive review of the Company's operations and ongoing integration activities in order to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018 Restructuring Plan, the Company hopes to reduce expenses, streamline the organization, and eliminate fixed costs to align more closely with its needs going forward. The Company expects to incur additional restructuring during 2019 as it progresses with the 2018 Restructuring Plan. The Company expects to substantially complete activities under the 2018 Restructuring Plan by the end of 2019.
In the fourth quarter of 2017, the Company implemented the 2017 Restructuring Plan in order to reduce expenses and establish a more cost-effective structure that better aligns the Company's operations with its long-term strategies.
The following table presents restructuring and other related costs included in cost of revenue and operating expenses in the accompanying consolidated statements of operations under the 2018 Restructuring Plan, Coriant's previous restructuring and reorganization plans, and the 2017 Restructuring Plan (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30, 2019
|
|
Cost of
Revenue
|
|
Operating Expenses
|
Severance and related expenses
|
$
|
20,698
|
|
|
$
|
5,850
|
|
Accelerated amortization of lease assets due to cease use
|
—
|
|
|
11,338
|
|
Asset impairment
|
768
|
|
|
—
|
|
Total
|
$
|
21,466
|
|
|
$
|
17,188
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
Cost of
Revenue
|
|
Operating Expenses
|
Severance and related expenses
|
$
|
17
|
|
|
$
|
945
|
|
Facilities
|
—
|
|
|
(1,084
|
)
|
Asset impairment
|
—
|
|
|
(24
|
)
|
Total
|
$
|
17
|
|
|
$
|
(163
|
)
|
Restructuring liabilities are reported within accrued expenses, operating lease liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2018
|
|
Charges
|
|
Cash
|
|
Non-cash Settlements and Other
|
|
March 30,
2019
|
Severance and related expenses
|
$
|
19,842
|
|
|
$
|
26,548
|
|
|
$
|
(6,203
|
)
|
|
$
|
(1,356
|
)
|
|
$
|
38,831
|
|
Accelerated amortization of lease assets due to cease use
|
|
|
11,338
|
|
|
|
|
(11,338
|
)
|
|
—
|
|
Facilities
|
4,266
|
|
|
—
|
|
|
—
|
|
|
(4,266
|
)
|
|
—
|
|
Asset impairment
|
243
|
|
|
768
|
|
|
(140
|
)
|
|
(768
|
)
|
|
103
|
|
Total
|
$
|
24,351
|
|
|
$
|
38,654
|
|
|
$
|
(6,343
|
)
|
|
$
|
(17,728
|
)
|
|
$
|
38,934
|
|
As of March 30, 2019, the Company's restructuring liability was comprised of
$38.8 million
severance and related expenses, primarily due to the planned closure of the Company's Berlin, Germany manufacturing facility, which is being transitioned to a third-party manufacturer. The Company has committed funding from a third party to cover the costs associated with the planned closure of this facility.
11. Accumulated Other Comprehensive Loss
Accumulated 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 income (loss) by component for the three months ended
March 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss on Other Available-for-Sale Securities
|
|
Foreign Currency Translation
|
|
Accumulated Tax Effect
|
|
Actuarial Gain (Loss) on Pension
|
|
Total
|
Balance at December 29, 2018
|
|
$
|
(91
|
)
|
|
$
|
(18,932
|
)
|
|
$
|
(964
|
)
|
|
$
|
(5,313
|
)
|
|
$
|
(25,300
|
)
|
Net current-period other comprehensive income (loss)
|
|
65
|
|
|
(5,557
|
)
|
|
—
|
|
|
78
|
|
|
(5,414
|
)
|
Balance at March 30, 2019
|
|
$
|
(26
|
)
|
|
$
|
(24,489
|
)
|
|
$
|
(964
|
)
|
|
$
|
(5,235
|
)
|
|
$
|
(30,714
|
)
|
12. 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 during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed release of outstanding restricted stock units (“RSUs”) and performance stock units (“PSUs”), and assumed issuance of common stock under the Company's Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of the 2024 Notes from the conversion spread (as further discussed in Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements). The Company would include the dilutive effects of the 2024 Notes in the calculation of diluted net income per common share if the average market price is above the conversion price. Upon conversion of the 2024 Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes being converted, therefore, only the conversion spread relating to the 2024 Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive. The Company includes the common shares underlying PSUs in the calculation of diluted net income per common share only when they become contingently issuable.
The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
Net loss
|
$
|
(121,601
|
)
|
|
$
|
(26,280
|
)
|
Weighted average common shares outstanding - basic and diluted
|
176,406
|
|
|
150,333
|
|
Net loss per common share - basic and diluted
|
$
|
(0.69
|
)
|
|
$
|
(0.17
|
)
|
The Company incurred net losses during the three months ended
March 30, 2019
and March 31, 2018, and as a result, potential common shares from stock options, RSUs, PSUs and the assumed release of outstanding shares under the ESPP were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive. Additionally, due to the net loss position during these periods, the Company excluded the potential shares issuable upon conversion of the 2024 Notes and the
$150.0 million
in aggregate principal amount of its
1.75%
convertible senior notes due June 1, 2018 (the “2018 Notes”) in the calculation of diluted earnings per share as their inclusion would have been anti-dilutive.
The following sets forth the potentially dilutive shares excluded from the computation of the diluted net loss per share because their effect was anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
Stock options
|
970
|
|
|
1,187
|
|
RSUs
|
12,473
|
|
|
9,439
|
|
PSUs
|
2,599
|
|
|
1,545
|
|
ESPP shares
|
1,325
|
|
|
2,247
|
|
Total
|
17,367
|
|
|
14,418
|
|
13. Debt
Mortgage Payable
In March 2019, the Company mortgaged a property it owns. The Company received proceeds of
$8.7 million
in connection with the loan. The loan carries a fixed interest rate of
5.25%
and is repayable in
59
equal monthly installments of approximately
$0.1 million
each with the remaining unpaid principal balance plus accrued unpaid interest due
five years
from the date of the loan. Payments commenced in April 2019. As of March 30, 2019, no payments had been made and the entire balance of
$8.7 million
remained outstanding, of which
$0.4 million
was included in accrued expenses and other current liabilities and
$8.3 million
was included in long-term debt.
2.125% Convertible Senior Notes due September 1, 2024
In September 2018, the Company issued the 2024 Notes due on September 1, 2024, unless earlier repurchased, redeemed or converted. The 2024 Notes are governed by a base indenture dated as of September 11, 2018 and a first supplemental indenture dated as of September 11, 2018 (together, the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured, and the Indenture does 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 the Company's other securities by the Company.
Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on March 1, 2019. The net proceeds to the Company were approximately
$391.4 million
, of which approximately
$48.9 million
was used to pay the cost of the capped call transactions with certain financial institutions (“Capped Calls”). The Company also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition, including fees and expenses relating thereto, and intends to use the remaining net proceeds for general corporate purposes.
The Capped Calls have an initial strike price of
$9.87
per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have initial cap prices of
$15.19
per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments,
40.8 million
shares of common stock. The capped call transactions are expected generally to reduce or offset potential dilution to the Company's common stock upon any conversion of the 2024 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls expire on various dates between July 5, 2024 and August 29, 2024. The Capped Calls were recorded as a reduction of the Company’s stockholders’ equity in the accompanying condensed consolidated balance sheets.
Upon conversion, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, the Company intends to pay or deliver, as the case may be, either cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is
101.2812
shares of common stock per
$1,000
principal amount of 2024 Notes, subject to anti-dilution adjustments, which is equivalent to a conversion price of approximately
$9.87
per share of common stock.
Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the 2024 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a 2024 Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Prior to June 1, 2024, holders may convert their 2024 Notes under the following circumstances:
|
|
•
|
during any fiscal quarter commencing after the fiscal quarter ended on December 29, 2018 (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 2024 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;
|
|
|
•
|
if the Company calls the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;
|
|
|
•
|
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 June 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances.
|
If the Company undergoes a fundamental change as defined in the Indenture governing the 2024 Notes, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes at a repurchase price equal to
100%
of the principal amount of the 2024 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 may, in certain circumstances, be required to increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.
The net carrying amounts of the debt obligation were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 30,
2019
|
|
December 29, 2018
|
Principal
|
$
|
402,500
|
|
|
$
|
402,500
|
|
Unamortized discount
(1)
|
(123,023
|
)
|
|
(127,264
|
)
|
Unamortized issuance cost
(1)
|
(8,030
|
)
|
|
(8,307
|
)
|
Net carrying amount
|
$
|
271,447
|
|
|
$
|
266,929
|
|
|
|
(1)
|
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the 2024 Notes, which is approximately
66 months
.
|
As of March 30, 2019, the carrying amount of the equity component of the 2024 Notes was
$128.7 million
.
In accounting for the issuance of the 2024 Notes, the Company separated the 2024 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 convertible 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 2024 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 discount”) is amortized to interest expense over the term of the 2024 Notes.
The Company allocated the total issuance costs incurred to the liability and equity components of the 2024 Notes based on their relative values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the 2024 Notes and will be amortized as interest expense over the term of the 2024 Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The Company recorded a deferred tax liability of
$30.9 million
in connection with the issuance of the 2024 Notes, and 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 2024 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 stockholders’ equity if freestanding.
The following table sets forth total interest expense recognized related to the 2024 Notes (in thousands):
|
|
|
|
|
|
Three Months Ended
|
|
March 30, 2019
|
Contractual interest expense
|
$
|
2,138
|
|
Amortization of debt issuance costs
|
277
|
|
Amortization of debt discount
|
4,241
|
|
Total interest expense
|
$
|
6,656
|
|
For the three months ended March 30, 2019, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of
10.07%
, to interest expense over the term of the 2024 Notes.
As of March 30, 2019, the fair value of the 2024 Notes was
$318.0 million
. The fair value was determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on March 29, 2019. The 2024 Notes are classified as Level 2 of the fair value hierarchy.
Based on the closing price of the Company’s common stock of
$4.34
on March 29, 2019 (last trading day of the fiscal quarter), the if-converted value of the 2024 Notes did not exceed their principal amount.
1.75% Convertible Senior Notes due June 1, 2018
In May 2013, the Company issued the 2018 Notes, which matured on June 1, 2018. Upon maturity of the 2018 Notes, the Company repaid in full all
$150.0 million
in aggregate principal amount and the final coupon interest of
$1.3 million
.
The following table sets forth total interest expense recognized related to the 2018 Notes (in thousands):
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
Contractual interest expense
|
$
|
656
|
|
Amortization of debt issuance costs
|
239
|
|
Amortization of debt discount
|
2,779
|
|
Total interest expense
|
$
|
3,674
|
|
The coupon rate was
1.75%
. For the three months ended
March 31, 2018
, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of
10.23%
, to interest expense over the term of the 2018 Notes.
14. Stockholders’ Equity
Stock-based Compensation Plans
The Company has stock-based compensation plans pursuant to which the Company has granted stock options, RSUs and PSUs. The Company also has an ESPP for all eligible employees.
In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan (“2016 Plan”) and the Company's stockholders approved the 2016 Plan in May 2016. As of
March 30, 2019
, the Company has reserved a total of
15.4 million
shares of common stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the Company due to failure to vest. The 2016 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. The 2007 Plan was canceled; however, it continues to govern outstanding grants under the 2007 Plan.
The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock
Options
|
|
Weighted Average
Exercise
Price
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 29, 2018
|
1,115
|
|
|
$
|
8.09
|
|
|
$
|
—
|
|
Stock options granted
|
—
|
|
|
$
|
—
|
|
|
|
Stock options exercised
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Stock options canceled
|
(145
|
)
|
|
$
|
7.05
|
|
|
|
|
Outstanding at March 30, 2019
|
970
|
|
|
$
|
8.24
|
|
|
$
|
—
|
|
Exercisable at March 30, 2019
|
970
|
|
|
$
|
8.24
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 29, 2018
|
6,746
|
|
|
$
|
10.83
|
|
|
$
|
26,446
|
|
RSUs granted
|
6,236
|
|
|
$
|
4.33
|
|
|
|
|
RSUs released
|
(139
|
)
|
|
$
|
11.20
|
|
|
$
|
669
|
|
RSUs canceled
|
(370
|
)
|
|
$
|
11.15
|
|
|
|
|
Outstanding at March 30, 2019
|
12,473
|
|
|
$
|
7.56
|
|
|
$
|
54,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Performance
Stock Units
|
|
Weighted
Average
Grant Date
Fair Value
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 29, 2018
|
1,129
|
|
|
$
|
16.10
|
|
|
$
|
4,425
|
|
PSUs granted
|
1,650
|
|
|
$
|
4.15
|
|
|
|
PSUs released
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
PSUs canceled
|
(180
|
)
|
|
$
|
16.50
|
|
|
|
Outstanding at March 30, 2019
|
2,599
|
|
|
$
|
8.15
|
|
|
$
|
11,280
|
|
Expected to vest at March 30, 2019
|
1,666
|
|
|
|
|
$
|
7,230
|
|
The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of
$4.34
at March 29, 2019 (the last trading day of the fiscal quarter) and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price of the underlying stock options.
The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of
$4.34
at March 29, 2019 (the last trading day of the fiscal quarter). The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.
The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of
March 30, 2019
. These costs are 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)
|
RSUs
|
$
|
70,848
|
|
|
2.35
|
PSUs
|
$
|
11,322
|
|
|
1.72
|
Employee Stock Options
The Company did
not
grant any stock options during the three months ended
March 30, 2019
. Amortization of stock-based compensation related to stock options in the three months ended
March 30, 2019
and the corresponding period in 2018 was insignificant.
Employee Stock Purchase Plan
The fair value of the shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):
|
|
|
|
|
|
Three Months Ended
|
Employee Stock Purchase Plan
|
March 30, 2019
|
|
March 31, 2018
|
Volatility
|
72%
|
|
62%
|
Risk-free interest rate
|
2.48%
|
|
1.90%
|
Expected life
|
0.5 years
|
|
0.5 years
|
Estimated fair value
|
$1.77
|
|
$3.13
|
Total stock-based compensation expense
|
$1,316
|
|
$1,555
|
Restricted Stock Units
During the three months ended
March 30, 2019
, the Company granted RSUs to employees and members of the Company's board of directors representing the right to receive
6.2 million
shares of the Company’s common stock. All RSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date. 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 stock-based compensation related to RSUs in the three months ended
March 30, 2019
and the corresponding period of 2018 was approximately
$6.0 million
and
$7.4 million
, respectively.
Performance Stock Units
Pursuant to the 2007 Plan and the 2016 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and other employees. All PSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date and if the performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.
PSUs granted to the Company’s executive officers and senior management under the 2007 Plan during 2016 are based on the total stockholder return (“TSR”) of the Company's common stock price as compared to the TSR of the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) over the span of
one year
,
two years
and
three years
. The number of shares to be issued upon vesting of these PSUs range from
zero
to
two
times the target number of PSUs granted depending on the Company’s performance against the SPGIIPTR.
PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during 2017 and the first half of 2018 are based on the TSR of the Company's common stock price relative to the TSR of the individual companies listed in the SPGIIPTR over the span of
one
year,
two
years and
three
years. The number of shares to be issued upon vesting of these PSUs range from
zero
to
two
times the target number of PSUs granted depending on the Company’s performance against the individual companies listed in the SPGIIPTR.
The ranges of estimated values of the PSUs granted that are compared to the SPGIIPTR, as well as the assumptions used in calculating these values were based on estimates as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Index volatility
|
|
33%
|
|
33% - 34%
|
|
18%
|
Infinera volatility
|
|
58% - 59%
|
|
55% - 56%
|
|
55%
|
Risk-free interest rate
|
|
2.37% - 2.40%
|
|
1.41% - 1.63%
|
|
0.95% - 1.07%
|
Correlation with index/index component
|
|
0.04 - 0.48
|
|
0.10 - 0.49
|
|
0.58 - 0.59
|
Estimated fair value
|
|
$14.99 - $19.46
|
|
$15.23 - $17.35
|
|
$10.31 - $16.62
|
PSUs granted to the Company's executive officers and senior management under the 2016 Plan during the first quarter of 2019 are based on performance criteria related to a specific financial target over the span of a
three
year performance period. These PSUs may become eligible for vesting before the end of the three year performance period if the applicable financial target is met. The number of shares to be issued upon vesting of these PSUs are capped at one time the target number of PSUs granted. In addition, one of the Company's executive officers was awarded a PSU that will be eligible to vest if the market price condition is met.
The following table summarizes by grant year, the Company’s PSU activity for the three months ended
March 30, 2019
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Year
|
|
|
Total Number of Performance Stock Units
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
Outstanding at December 29, 2018
|
|
1,129
|
|
|
210
|
|
|
481
|
|
|
437
|
|
|
—
|
|
PSUs granted
|
|
1,650
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,650
|
|
PSUs released
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
PSUs canceled
|
|
(180
|
)
|
|
(156
|
)
|
|
(11
|
)
|
|
(13
|
)
|
|
—
|
|
Outstanding at March 30, 2019
|
|
2,599
|
|
|
54
|
|
|
470
|
|
|
424
|
|
|
1,650
|
|
Amortization of stock-based compensation related to PSUs in the three months ended
March 30, 2019
and the corresponding period of 2018 was approximately
$1.7 million
and
$2.1 million
, respectively.
Stock-Based Compensation
The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
March 30,
2019
|
|
December 29,
2018
|
Stock-based compensation effects in inventory
|
$
|
5,094
|
|
|
$
|
4,750
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
Stock-based compensation effects included in net loss before income taxes
|
|
|
|
Cost of revenue
|
$
|
538
|
|
|
$
|
(122
|
)
|
Research and development
|
3,603
|
|
|
4,324
|
|
Sales and marketing
|
1,547
|
|
|
2,898
|
|
General and administration
|
2,235
|
|
|
2,767
|
|
|
$
|
7,923
|
|
|
$
|
9,867
|
|
Cost of revenue – amortization from balance sheet
(1)
|
790
|
|
|
1,116
|
|
Total stock-based compensation expense
|
$
|
8,713
|
|
|
$
|
10,983
|
|
|
|
(1)
|
Stock-based compensation expense deferred to inventory in prior periods and recognized in the current period.
|
15. Income Taxes
Income taxes for the three months ended
March 30, 2019
were a tax expense of
$0.2 million
on pre-tax losses of
$121.4 million
. This compared to a tax benefit of
$0.7 million
on a pre-tax loss of
$27.0 million
for the three months ended March 31, 2018. Provision for income taxes increased by approximately
$0.9 million
during the three months ended March 30, 2019 as a result of additional foreign tax expense from including the entities from the Acquisition.
The tax expense and benefit projected in the Company's effective tax rate primarily represents foreign taxes of the Company's overseas profitable subsidiaries, as well as results of the Company's Swedish operations, inclusive of purchase accounting amortization and other charges for the three months ended March 31, 2019.
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. In the past, the Company established a valuation allowance against its deferred tax assets as it determined that its ability to recover the value of these assets did not meet the “more-likely-than-not” standard. 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 on an on-going basis to determine whether it needs to maintain the valuation allowance recorded against its net deferred tax assets. The Company must consider all positive and negative evidence, including its forecasts of taxable income over the applicable carryforward periods, its current financial performance, its market environment and other factors in evaluating the need for a valuation allowance against its net U.S. deferred tax assets. At March 30, 2019, the Company does not believe that it is more-likely-than-not that it would be able to utilize its domestic deferred tax assets in the foreseeable future. Accordingly, the domestic net deferred tax assets continued to be fully reserved with a valuation allowance. To the extent that the Company determines that deferred tax assets are realizable on a more-likely-than-not basis, and adjustment is needed, that adjustment will be recorded in the period that the determination is made and would generally decrease the valuation allowance and record a corresponding benefit to earnings.
16. Segment Information
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 Company’s Chief Executive Officer (“CEO”). The Company’s CEO reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has
one
business activity as a provider of optical transport networking equipment, software and services. Accordingly, the Company is considered to be in a
single
reporting segment and operating unit structure.
The following table sets forth long-lived assets by geographic region (in thousands):
|
|
|
|
|
|
|
|
|
|
March 30,
2019
|
|
December 29, 2018
|
United States
|
$
|
120,113
|
|
|
$
|
288,614
|
|
Other Americas
|
2,730
|
|
|
2,370
|
|
Europe, Middle East and Africa
|
26,099
|
|
|
38,273
|
|
Asia Pacific
|
12,204
|
|
|
13,563
|
|
Total property, plant and equipment, net
|
$
|
161,146
|
|
|
$
|
342,820
|
|
For information regarding revenue disaggregated by geography, see Note 4, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements.
17. Guarantees
Product Warranties
Activity related to product warranty was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30, 2019
|
|
March 31, 2018
|
Beginning balance
|
$
|
41,021
|
|
|
$
|
30,909
|
|
Charges to operations
|
5,420
|
|
|
4,357
|
|
Utilization
|
(5,803
|
)
|
|
(4,438
|
)
|
Change in estimate
(1)
|
(887
|
)
|
|
20
|
|
Balance at the end of the period
|
$
|
39,751
|
|
|
$
|
30,848
|
|
|
|
(1)
|
The Company records product warranty liabilities based on the latest quality and cost information available as of the date the revenue is recorded. The changes in estimate shown here are due to changes in overall actual failure rates, the mix of new versus used units related to replacement of failed units, and changes in the estimated cost of repair. As the Company's products mature over time, failure rates and repair costs generally decline leading to favorable changes in warranty reserves.
|
Letters of Credit and Bank Guarantees
The Company had
$28.9 million
of standby letters of credit and bank guarantees outstanding as of
March 30, 2019
that consisted of
$23.0 million
related to customer performance guarantees,
$1.4 million
related to value added tax and customs' licenses,
$2.7 million
related to property leases,
$1.2 million
related to restructuring plans,
$0.5 million
related to credit cards and
$0.2 million
related to suppliers. The Company had
$30.0 million
of standby letters of credit and bank guarantees outstanding as of
December 29, 2018
. These consisted of
$23.4 million
related to customer performance guarantees,
$1.4 million
related to a value added tax license,
$2.9 million
related to property leases,
$1.8 million
related to Coriant's pre-Acquisition restructuring plans and
$0.5 million
related to credit cards.
As of
March 30, 2019
and
December 29, 2018
, the Company had a line of credit for approximately
$1.6 million
to support the issuance of letters of credit, of which
zero
been issued and outstanding for both periods. The Company has pledged approximately
$4.8 million
and
$4.9 million
of assets of a subsidiary to secure this line of credit and other obligations as of
March 30, 2019
and
December 29, 2018
, respectively.
18. Pension and Post-Retirement Benefit Plans
As a result of the Acquisition, the Company acquired a number of post-employment plans in Germany, as well as a number of smaller post-employment plans in other countries, including both defined contribution and defined benefit plans. The defined benefit plans expose the Company to actuarial risks such as, investment risk, interest rate risk, life expectancy risk and salary risk. The characteristics of the defined benefit plans and the risks associated with them vary depending on legal, fiscal and economic requirements.
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company's pension and other post-retirement benefit plans for the three months ended March 30, 2019 consisted of the following (in thousands):
|
|
|
|
|
Service cost
|
$
|
356
|
|
Interest cost
|
371
|
|
Expected return on plan assets
|
(604
|
)
|
Amortization of actuarial loss
|
418
|
|
Total net periodic benefit cost
|
$
|
541
|
|
Actuarial gains and losses are amortized using a corridor approach. The gain/loss corridor is equal to 10% of the greater of the pension benefit obligation and the market-related value of assets. Gains and losses in excess of the corridor are generally amortized over the average future working lifetime of the pension plan participants. All components of net periodic benefit cost are recorded in operating expense of the Company's condensed consolidated statements of operations.
19. Litigation and Contingencies
Legal Matters
On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against the Company in the United States District Court for the Eastern District of Texas. The complaint asserts infringement of U.S. Patent Nos. 6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327 (the “’327 patent”), 8,374,511 (the “‘511 patent”) and 8,913,898 (the “’898 patent”) (collectively, the “Oyster Optics patents in suit”). The complaint seeks unspecified damages and a permanent injunction. The Company filed its answer to Oyster Optics' complaint on February 3, 2017. The Company filed two petitions for Inter Partes Review (“IPR”) of the '898 patent with the U.S Patent and Trademark Office ("USPTO"). Other defendants have filed IPR petitions in connection with the remaining Oyster Optics patents in suit. The USPTO instituted two IPRs of the ‘511 patent and two IPRs of the ‘898 patent but denied IPR petitions in connection with the ‘327 patent. A Markman decision was issued on December 5, 2017 and fact discovery closed on December 22, 2017. Oyster Optics dropped the ‘511 and ‘898 patents, leaving only a few claims in the ‘327 patent at issue in the case. On May 15, 2018, Oyster Optics filed a new patent infringement complaint in the United States District Court for the Eastern District of Texas, naming the Company as a defendant. In its new complaint, Oyster Optics alleges infringement of the ‘327 patent, U.S. Patent No. 9,749,040 and the ‘898 patent. On June 8, 2018, the court granted the parties’ joint motion to sever and consolidate the first-filed lawsuit with the later filed case. The Company filed its answer to the new complaint on July 16, 2018. A case management conference was held on September 11, 2018, and the court set a trial date for November 4, 2019. On October 26, 2018, the Company filed an amended answer to include a license defense. On November 29, 2018, the Company filed a motion for summary judgment based on the license defense. The court issued a second Markman decision on May 3, 2019, in which the parties were ordered to schedule a mediation within 30 days of the decision. The Company is currently unable to predict the outcome of this litigation and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.
On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against the Company in the United States District Court for the Central District of California. The complaint asserts infringement of U.S. Patent No. 6,782,211 (the “Core Optical patent in suit”). The complaint seeks unspecified damages and a permanent injunction. The Company believes that it does not infringe any valid and enforceable claim of the Core Optical patent in suit, and intends to defend this action vigorously. The Company filed its answer to Core Optical's complaint on September 25, 2017. A Markman hearing was held on May 9, 2018 and the court has set a trial for March 2019. On June 14, 2018, the Company filed a petition for IPR of the Core Optical patent in suit in the USPTO. Core Optical contacted the Company on July 19, 2018 to propose that the case be stayed pending the IPR. The Company agreed to Core Optical’s proposal, and the parties filed a joint motion to stay, which the court granted on July 31, 2018. On October 17, 2018, Core Optical filed a response to the Company's IPR petition. On January 14, 2019, the USPTO denied the Company's IPR petition, and on February 13, 2019, the Company filed a request for rehearing in the USPTO requesting reconsideration of the dismissal of the Company's IPR petition. The parties participated in a mediation on March 15, 2019 and have agreed to a further mediation scheduled for late May 2019. The Company is unable to predict the outcome of this litigation at this time and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.
On June 8, 2017, a Civil Investigative Demand was issued to Coriant pursuant to a False Claims Act investigation by the U.S. government as to whether there has been any violation of 31 U.S.C. §3729. Coriant provided documents and other responses to the U.S. government, and the Company will continue to cooperate in the ongoing investigation.
In addition to the matters described above, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on its consolidated financial position, results of operations or cash flows.
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 the 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. In accordance with U.S. GAAP, an estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. As of March 30, 2019 and December 29, 2018, the Company has accrued the estimated liabilities associated with certain loss contingencies.
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. The terms of such indemnification obligations vary. These contracts may 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; and (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.
In addition, the Company has agreed to indemnify certain customers for claims made against the Company’s products, where such claims allege infringement of third party intellectual property rights, including, but not limited to, patents, registered trademarks, and/or copyrights. Under the aforementioned intellectual property indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim as well as the customer’s attorneys’ fees and costs. These indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.
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. The term of the indemnification period is for the officer’s or director’s lifetime for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements could be significant; 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.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include our expectations regarding revenue, gross margin, operating expenses, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations and personnel; statements regarding our acquisition of Coriant, including our ability to realize significant synergies, anticipated strategic and financial benefits, and integration plans; factors that may affect our operating results; our ability to leverage our vertically-integrated manufacturing infrastructure; anticipated customer acceptance of our solutions; statements concerning new products or services, including new product features; statements related to capital expenditures; statements related to liquidity; statements related to future economic conditions, performance, market growth or our sales cycle; our ability to identify, attract and retain highly skilled personnel; statements related to our convertible senior notes; statements related to the impact of tax regulations; statements related to the effects of litigation on our financial position, results of operations or cash flows; statements related to new accounting standards; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” or “will,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based
on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part II, Item 1A. of this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC"), including our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 filed on March 14, 2019. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a global supplier of networking solutions comprised of networking equipment, software and services. Our portfolio of solutions includes optical transport platforms, converged packet-optical transport platforms, optical line systems, disaggregated router platforms and SDN-based network automation solutions.
Our customers include telecommunications service providers, internet content providers (“ICPs”), cable providers, wholesale carriers, research and education institutions, large enterprises and government entities. Our networking solutions enable our customers to deliver business and consumer communications services. Our comprehensive portfolio of networking solutions also enables our customers to scale their transport networks as end-user services and applications continue to drive growth in demand for network bandwidth. These end-user services and applications include, but are not limited to, high-speed Internet access, business Ethernet services, 4G/5G mobile broadband, cable high-speed Internet distribution, cloud-based services, high-definition video streaming services, virtual and augmented reality and the Internet of Things (“IoT”).
Our systems are highly scalable, flexible and designed with open networking principles for ease of deployment. We build our systems using a combination of internally manufactured and third party components. Our portfolio includes systems that leverage our innovative optical engine technology comprised of large-scale photonic integrated circuits (“PICs”) and digital signal processors (“DSPs”). We optimize the manufacturing process by using indium phosphide to build our PICs, which enables the integration of hundreds of optical functions onto a set of semiconductor chips. This large-scale integration of our PICs and advanced DSPs allows us to deliver high-performance transport networking platforms with features that customers care about the most, including cost per bit, low power consumption and space savings. In addition, we design our optical engines to increase the capacity and reach performance of our products by leveraging coherent optical transmission. With the addition of new products to our portfolio, we plan to integrate our optical engine technology into a broader set of transport platforms in order to enhance customer value and lower production costs.
Over the past several years, we expanded our portfolio of solutions, evolving from our initial focus on the long-haul and subsea optical transport markets to offering a more complete suite of packet-optical networking solutions that address multiple markets within the end-to-end transport infrastructure. These markets include metro access, metro aggregation and switching, data center interconnect (“DCI”), long-haul and subsea.
We have grown our portfolio through internal development as well as acquisitions. In October 2018, we materially expanded our product portfolio and customer base through the acquisition of Telecom Holding Parent LLC ("Coriant"), a Delaware limited liability company (the "Acquisition"). The Acquisition positions us as one of the largest vertically integrated transport networking solutions providers in the world, strengthens our ability to serve a global customer base and accelerates delivery of innovative solutions our customers demand. This Acquisition also positions us to expand the breadth of customer applications we can address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network management and control.
In 2018, the majority of our product revenue was derived from transport systems built on the Infinite Capacity Engine (ICE), our optical engine technology. ICE enables different subsystems that can be customized for a variety of network applications in different transport markets, including the metro, DCI, long-haul and subsea. Our most recent technology generation delivers multi-terabit opto-electronic subsystems powered by our fourth-generation PIC and latest generation FlexCoherent DSP (the combination of which we market as “ICE4”).
Our products are designed to be managed by a suite of software solutions that enable end-to-end common network management, multi-layer service orchestration, and automated operations. We also provide software-enabled programmability that offers differentiated capabilities such as Instant Bandwidth (“IB”). Combined with our differentiated hardware solutions, IB enables our customers to purchase and activate bandwidth as needed through our unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives: (1) limit their initial network startup costs and investments; and (2) instantly activate new bandwidth as their customers’ and their own network needs evolve.
We believe our portfolio of solutions benefits our customers by providing a unique combination of highly scalable capacity and features that address various applications and ultimately simplify and automate packet-optical network operations. Over the long term, we believe the combination of providing our unique solutions together with the efforts and investments we have made to expand the markets and customers we serve, will enable us to grow revenue and achieve profitability. Our ability to grow revenue and achieve profitability is dependent on our successfully executing the integration of Coriant and realizing the anticipated cost synergies as well as the level of new and existing customers spending for our solutions.
For the three months ended
March 30, 2019
,
one
customer accounted for
11%
of our total revenue, and for the corresponding period in 2018,
two
customers individually accounted for
29%
and
11%
of our total revenue.
We are headquartered in Sunnyvale, California, with employees located throughout the Americas, Europe, Middle East and Africa ("EMEA"), and Asia Pacific regions. We primarily sell our products both through our direct sales force and indirectly through channel partners.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which we have prepared in accordance with the U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires a significant accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended
March 30, 2019
to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018.
Results of Operations
The result of operations for the three months ended March 30, 2019 reflected the inclusion of the Coriant business, which was acquired on October 1, 2018. The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 30, 2019
|
|
March 31, 2018
|
|
|
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
Change
|
|
% Change
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
223,007
|
|
|
76
|
%
|
|
$
|
171,629
|
|
|
85
|
%
|
|
$
|
51,378
|
|
|
30
|
%
|
Services
|
69,700
|
|
|
24
|
%
|
|
31,052
|
|
|
15
|
%
|
|
38,648
|
|
|
124
|
%
|
Total revenue
|
$
|
292,707
|
|
|
100
|
%
|
|
$
|
202,681
|
|
|
100
|
%
|
|
$
|
90,026
|
|
|
44
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
157,817
|
|
|
54
|
%
|
|
$
|
102,324
|
|
|
50
|
%
|
|
$
|
55,493
|
|
|
54
|
%
|
Services
|
36,676
|
|
|
12
|
%
|
|
12,831
|
|
|
6
|
%
|
|
23,845
|
|
|
186
|
%
|
Amortization of intangible assets
|
8,252
|
|
|
3
|
%
|
|
5,341
|
|
|
3
|
%
|
|
2,911
|
|
|
55
|
%
|
Acquisition and integration costs
|
2,064
|
|
|
1
|
%
|
|
—
|
|
|
—
|
%
|
|
2,064
|
|
|
100
|
%
|
Restructuring and related
|
21,466
|
|
|
7
|
%
|
|
17
|
|
|
—
|
%
|
|
21,449
|
|
|
NMF
|
|
Total cost of revenue
|
$
|
226,275
|
|
|
77
|
%
|
|
$
|
120,513
|
|
|
59
|
%
|
|
$
|
105,762
|
|
|
88
|
%
|
Gross profit
|
$
|
66,432
|
|
|
22.7
|
%
|
|
$
|
82,168
|
|
|
40.5
|
%
|
|
$
|
(15,736
|
)
|
|
(19
|
)%
|
*NMF = Not meaningful
Revenue
Total product revenue increased by
$51.4 million
, or
30%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. The increase was driven by Tier-1 and other service providers added from the Acquisition, and from customers expanding their networks with our ICE4-based products. This increase was partially offset by a revenue decline from Cable. Coming off an exceptionally strong result in the three months ended March 31, 2018, our largest Cable customer has signaled that it intends to spend more linearly across quarters in 2019, as opposed to it spending largely in the first half during 2018.
Total services revenue increased by
$38.6 million
, or
124%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. This increase was predominantly due to the Acquisition, as Coriant brought a large installed base of customers and annual services revenue that has historically been higher than ours.
We expect our total revenue will be slightly higher in the second quarter of 2019 as compared to the first quarter of 2019. In the second quarter of 2019, our expectation is that revenue from ICP customers should increase sequentially and more than offset a sequential revenue decline expected from certain large customers.
The following table summarizes our revenue by geography and sales channel for the periods presented (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 30, 2019
|
|
March 31, 2018
|
|
|
|
|
|
Amount
|
|
% of total revenue
|
|
Amount
|
|
% of total revenue
|
|
Change
|
|
% Change
|
Total revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
$
|
132,522
|
|
|
45
|
%
|
|
$
|
129,025
|
|
|
64
|
%
|
|
$
|
3,497
|
|
|
3
|
%
|
International
|
160,185
|
|
|
55
|
%
|
|
73,656
|
|
|
36
|
%
|
|
86,529
|
|
|
117
|
%
|
|
$
|
292,707
|
|
|
100
|
%
|
|
$
|
202,681
|
|
|
100
|
%
|
|
$
|
90,026
|
|
|
44
|
%
|
Total revenue by sales channel:
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
$
|
248,196
|
|
|
85
|
%
|
|
$
|
188,462
|
|
|
93
|
%
|
|
$
|
59,734
|
|
|
32
|
%
|
Indirect
|
44,511
|
|
|
15
|
%
|
|
14,219
|
|
|
7
|
%
|
|
30,292
|
|
|
213
|
%
|
|
$
|
292,707
|
|
|
100
|
%
|
|
$
|
202,681
|
|
|
100
|
%
|
|
$
|
90,026
|
|
|
44
|
%
|
Domestic revenue increased by
$3.5 million
, or
3%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. We benefitted from the inclusion of Coriant’s U.S.-based customers, which was nearly offset by a decline in our Cable business driven by our largest Cable customer both slowing its spend and spending more linearly throughout the year. While we see opportunities in upcoming quarters, we also incurred a year-over-year decline in our ICP revenue, driven by timing and lighter overall spending from customers in this vertical.
International revenue increased by
$86.5 million
, or
117%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. These increases were attributable to growth in all of our major sales regions: EMEA, Asia Pacific and Other Americas, stemming primarily from the inclusion of Coriant, whose historical revenue split was weighted more internationally.
Amortization of Intangible Assets
Amortization of intangible assets increased by
$2.9 million
during the three months ended March 30, 2019 compared to the corresponding period in 2018 due to an increase in intangible assets from the Acquisition in the first quarter of 2019.
Acquisition and Integration Costs
Acquisition and integration costs were
$2.1 million
in the first quarter of 2019 as a result of the Acquisition in the fourth quarter of 2018.
Restructuring and Related
Restructuring and related costs increased by
$21.4 million
during the three months ended March 30, 2019 compared to the corresponding period in 2018. The increase during the three months ended March 30, 2019 was primarily due to
$20.7 million
of severance and related expenses related to the planned closure of our Berlin, Germany manufacturing facility. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.
Cost of Revenue and Gross Margin
Gross margin was
22.7%
during the three months ended
March 30, 2019
, down from
40.5%
in the corresponding period in 2018, driven by $21.5 million in restructuring costs less favorable customer mix in the first quarter of 2019, and due to the Acquisition as Coriant's current gross margin levels are lower than our historical gross margin level.
We currently expect that gross margin in the second quarter of 2019 will be fairly consistent with that of the first quarter of 2019. In the second quarter, we have planned a large amount of new footprint deployments that are initially expected to have lower margins. The anticipated negative impact of these new footprint deployments is expected to be offset by a reduction in restructuring costs in the second quarter of 2019. Over time, we anticipate gross margin will improve and remain committed to lowering the cost structure of the overall company by driving cost synergies, including incorporating vertical integration across the combined company’s full solution set.
Operating Expenses
The following tables summarize our operating expenses for the periods presented (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
March 30, 2019
|
|
March 31, 2018
|
|
|
|
|
|
Amount
|
|
% of total
revenue
|
|
Amount
|
|
% of total
revenue
|
|
Change
|
|
% Change
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
73,660
|
|
|
25
|
%
|
|
$
|
58,681
|
|
|
29
|
%
|
|
$
|
14,979
|
|
|
26
|
%
|
Sales and marketing
|
40,037
|
|
|
14
|
%
|
|
28,885
|
|
|
14
|
%
|
|
11,152
|
|
|
39
|
%
|
General and administrative
|
33,044
|
|
|
12
|
%
|
|
17,836
|
|
|
9
|
%
|
|
15,208
|
|
|
85
|
%
|
Amortization of intangible assets
|
7,057
|
|
|
2
|
%
|
|
1,607
|
|
|
1
|
%
|
|
5,450
|
|
|
339
|
%
|
Acquisition and integration costs
|
7,134
|
|
|
2
|
%
|
|
—
|
|
|
—
|
%
|
|
7,134
|
|
|
100
|
%
|
Restructuring and related
|
17,188
|
|
|
6
|
%
|
|
(163
|
)
|
|
—
|
%
|
|
17,351
|
|
|
NMF*
|
|
Total operating expenses
|
$
|
178,120
|
|
|
61
|
%
|
|
$
|
106,846
|
|
|
53
|
%
|
|
$
|
71,274
|
|
|
67
|
%
|
*NMF = Not meaningful
Research and Development Expenses
Research and development expenses increased by
$15.0 million
, or
26%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. The increase in the first quarter of 2019 was primarily due to the addition of headcount in connection with the Acquisition and higher prototype spend. Research and development expenses increased at a much lower rate than overall revenue growth primarily due to headcount and other cost reductions undertaken in the fourth quarter of 2018.
Sales and Marketing Expenses
Sales and marketing expenses increased by
$11.2 million
, or
39%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. The overall change in sales and marketing was attributable to the addition of headcount in connection with the Acquisition. In addition, we had higher commission expenses attributable to higher revenue and an increase in trade show expenses. Those increases were slightly offset by lower spending on lab trials due to utilization of more used inventory in trials. Sales and marketing expenses grew at a slower rate than overall revenue primarily attributable to headcount and other cost reductions undertaken in the fourth quarter of 2018.
General and Administrative Expenses
General and administrative expenses increased
$15.2 million
, or
85%
, during the three months ended
March 30, 2019
compared to the corresponding period in 2018. The increase during the three months ended March 30, 2019 was primarily due to the addition of headcount in connection with the Acquisition and higher outside professional services costs to support the combined business.
Amortization of Intangible Assets
Amortization of intangible assets increased by
$5.5 million
during the three months ended March 30, 2019 compared to the corresponding period in 2018 due to an increase in intangible assets from the Acquisition during the fourth quarter of 2018.
Acquisition and Integration Costs
Acquisition and integration costs in the first quarter were
$7.1 million
during the three months ended March 30, 2019 as a result of the Acquisition during the fourth quarter of 2018.
Restructuring and Related
Restructuring and related costs increased by
$17.4 million
during the three months ended March 30, 2019 compared to the corresponding period in 2018. The increase during the three months ended March 30, 2019 was primarily due to accelerated amortization on cease use facility charges upon adoption of Topic 842. We also
incurred severance and related charges of
$5.9 million
during the three months ended March 30, 2019 compared to $0.1 million during the three months ended March 31, 2018. See Note 10, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30,
2019
|
|
March 31,
2018
|
|
Change
|
|
% Change
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Interest income
|
$
|
766
|
|
|
$
|
897
|
|
|
$
|
(131
|
)
|
|
(15
|
)%
|
Interest expense
|
(7,563
|
)
|
|
(3,683
|
)
|
|
(3,880
|
)
|
|
105
|
%
|
Other gain (loss), net
|
(2,923
|
)
|
|
506
|
|
|
(3,429
|
)
|
|
(678
|
)%
|
Total other expense, net
|
$
|
(9,720
|
)
|
|
$
|
(2,280
|
)
|
|
$
|
(7,440
|
)
|
|
326
|
%
|
Interest income during the three months ended
March 30, 2019
decreased by
$0.1 million
compared to the corresponding period in 2018 primarily due to lower average cash and investment balances in the first quarter of 2019. Interest expense during the three months ended
March 30, 2019
compared to the corresponding period in 2018 increased by
$3.9 million
primarily due to higher amortization of debt discount and debt issuance costs on the current convertible debt given the higher underlying principle. The change in other gain (loss), net, during the three months ended March 30, 2019 compared to the corresponding period in 2018 was primarily due to
$3.4 million
of foreign exchange losses related to the subsidiary's revaluation of foreign currency into functional currency.
Income Tax Benefit
Income taxes during the three months ended
March 30, 2019
included a tax expense of
$0.2 million
on a pre-tax loss of
$121.4 million
. This compares to a tax benefit of
$0.7 million
on a pre-tax loss of
$27.0 million
during the three months ended March 31, 2018. Provision for income taxes increased by approximately
$0.9 million
during the three months ended March 30, 2019 as a result of additional foreign tax expense from including the entities from the Acquisition.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30, 2019
|
|
March 31, 2018
|
|
|
|
|
|
(In thousands)
|
Net cash flow provided by (used in):
|
|
|
|
Operating activities
|
$
|
(56,154
|
)
|
|
$
|
(14,109
|
)
|
Investing activities
|
$
|
(6,048
|
)
|
|
$
|
39,163
|
|
Financing activities
|
$
|
16,324
|
|
|
$
|
10,547
|
|
|
|
|
|
|
|
|
|
|
|
March 30, 2019
|
|
December 29, 2018
|
|
|
|
|
|
(In thousands)
|
Cash and cash equivalents
|
$
|
167,259
|
|
|
$
|
202,954
|
|
Investments
|
16,022
|
|
|
26,511
|
|
Restricted cash
|
27,987
|
|
|
39,383
|
|
|
$
|
211,268
|
|
|
$
|
268,848
|
|
Cash, cash equivalents and short-term investments consist of highly-liquid investments in certificates of deposit, money market funds, commercial paper, corporate bonds, U.S. agencies and U.S. treasuries. Our restricted cash balance amounts are primarily pledged as collateral for certain standby and commercial letters of credit related to customer performance guarantees, value added tax licenses and property leases. Additionally, our restricted cash balance includes amounts pledged as collateral on our derivative instruments.
Operating Activities
Net cash used in operating activities during the three months ended
March 30, 2019
was
$56.2 million
compared to
$14.1 million
for the corresponding period in 2018.
Net loss adjusted for non-cash items was
$39.0 million
during the three months ended
March 30, 2019
compared to
$4.7 million
for the corresponding period in 2018, reflecting a higher net loss in 2019.
Net cash used to fund working capital was
$17.2 million
during the three months ended
March 30, 2019
. Accounts receivable decreased by
$49.8 million
commensurate with lower revenue and due to collecting cash from longer payment term deals inherited from the Coriant business. Inventory increased by
$24.9 million
as we built buffer inventory to reduce risk related to revenue plan execution and in preparation for the transition of our Berlin, Germany manufacturing facility to a third-party manufacturer. Accounts payable decreased by
$23.4 million
largely due to the significant decrease in cost of goods associated with lower revenue. Accrued liabilities and other expenses decreased by
$20.3 million
primarily due to purchases under our 2007 Employee Stock Purchase Plan in February 2019 and lower overall spend resulting from our cost reduction strategy. Deferred revenue increased by
$6.9 million
due to maintenance renewals on our installed base, which are typically contracted on an annual or multi-year basis.
Net cash provided by working capital was $18.8 million during the three months ended March 31, 2018. Accounts receivable increased by
$30.9 million
due to the timing of invoicing as customers in the first quarter typically take longer to place orders until annual budgets are finalized. Inventory increased by
$2.3 million
as we were balancing our inventory levels to meet customer demand for our new products, while decreasing the inventory levels of our prior generation products. Accounts payable increased by
$19.3 million
primarily reflecting increased inventory purchases and timing of payments. Accrued liabilities and other expenses decreased by
$6.2 million
primarily due to lower restructuring liabilities, resulting from payments and changes in estimates. Additionally, this decrease was attributable to the reduction of customer right of returns, net of an increase in customer prepayments due to our adoption of ASC 606. Deferred revenue increased
$5.3 million
due to maintenance renewals on our growing installed base, which are typically contracted on an annual or multi-year basis, net of adjustments related to our adoption of ASC 606.
Investing Activities
Net cash used in investing activities during the three months ended
March 30, 2019
was
$6.0 million
as compared to net cash provided by investing activities of
$39.2 million
in the corresponding period in 2018. Investing activities during the three months ended
March 30, 2019
included proceeds of
$10.5 million
associated with maturities of investments and capital expenditures of
$6.6 million
. Additionally,
$10.0 million
held in escrow related to the Acquisition was released during the three months ended March 30, 2019 due to the lack of underlying claims. Investing activities during the three months ended March 31, 2018 included net proceeds of $47.2 million associated with purchases and maturities of investments and capital expenditures of $8.0 million.
Financing Activities
Net cash provided by financing activities during the three months ended
March 30, 2019
was
$16.3 million
compared to net cash provided by financing activities of
$10.5 million
in the corresponding period of 2018. Financing activities during the three months ended March 30, 2019 included proceeds of
$8.6 million
from issuance of debt associated with mortgaging one of our facilities, which we own. Both periods included net proceeds from the issuance of shares under our 2007 Employee Stock Purchase Plan. Financing activities during the three months ended March 31, 2019 included the minimum tax withholdings paid on behalf of certain employees for net share settlements of restricted stock units.
Liquidity
We believe that our current cash, cash equivalents and investments along with committed funding related to the planned closure of our Berlin, Germany manufacturing facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures, including the interest payments on the 2024 Notes for at least 12 months. If these sources of cash are insufficient to satisfy our liquidity requirements, we may require additional capital from equity or debt financings to fund our operations, to respond to competitive pressures or strategic opportunities, or otherwise. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financings may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into
equity, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.
In September 2018, we issued the 2024 Notes, which will mature on September 1, 2024, unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, which commenced on March 1, 2019. The net proceeds from the 2024 Notes issuance were approximately $391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions. We also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition, including fees and expenses relating thereto, and intend to use the remaining net proceeds for general corporate purposes.
Upon conversion, it is our intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, we intend to pay or deliver, as the case may be, either cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. As of March 30, 2019, long-term debt, net, was
$271.4 million
, which represents the liability component of the $402.5 million principal balance, net of
$131.1 million
of unamortized debt discount and debt issuance costs. The debt discount and debt issuance costs are currently being amortized over the remaining term until maturity of the 2024 Notes on September 1, 2024. To the extent that the holders of the 2024 Notes request conversion during an early conversion window, we may require funds for repayment of such 2024 Notes prior to their maturity date.
As of March 30, 2019, contractual obligations related to the 2024 Notes are payments of $8.6 million due each year from 2020 through 2023 and $406.8 million due in 2024. These amounts represent principal and interest cash payments over the term of the 2024 Notes. Any future redemption or conversion of the Notes could impact the amount or timing of our cash payments. For more information regarding the 2024 Notes, see Note 13, “Debt” to the Notes to Condensed Consolidated Financial Statements.
As of
March 30, 2019
, we had
$183.3 million
of cash, cash equivalents and short-term investments, including
$70.2 million
of cash and cash equivalents held by our foreign subsidiaries. Our policy with respect to undistributed foreign subsidiaries' earnings is to consider those earnings to be indefinitely reinvested. As a result of the Tax Act, if and when funds are actually distributed in the form of dividends or otherwise, we expect minimal tax consequences, except for foreign withholding taxes, which would be applicable in some jurisdictions.
Off-Balance Sheet Arrangements
As of
March 30, 2019
, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
For a discussion of our exposure to market risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018. There have been no material changes to our market risk during the three months ended
March 30, 2019
.
|
|
Item 4.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
An evaluation was performed by management, with the participation of our chief executive officer (“CEO”) and our chief financial officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our CEO and CFO have concluded that, as of the end of the fiscal period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.