NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Infinera Corporation (“Infinera” or the “Company”), headquartered in Sunnyvale, California, was founded in December 2000 and incorporated in the State of Delaware. Infinera is a leader in optical transport networking solutions, providing equipment, software and services to telecommunications service providers, internet content providers, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities across the globe. Optical transport networks are deployed by customers facing significant demand for optical bandwidth prompted by increased use of high-speed internet access, business Ethernet services, mobile broadband, cloud-based services, high-definition video streaming services, virtual and augmented reality, and the Internet of Things (IoT).
During the third quarter of 2015, the Company completed its public offer to the shareholders of Transmode AB (“Transmode”), acquiring
95.8%
of the outstanding common shares and voting interest in Transmode. This acquisition was accounted for as a business combination, and accordingly, the Company has consolidated the financial results of Transmode with its financial results for the period from August 20, 2015, the date the acquisition closed (the “Acquisition Date”). The noncontrolling interest position is reported as a separate component of consolidated equity attributable to Transmode's shareholders. The noncontrolling interest in the Transmode entity's net loss is reported as a separate component of consolidated net income attributable to Transmode's shareholders.
In August 2016, the Company received advance title and paid an undisputed purchase price of
$16.8 million
to acquire the remaining
4.2%
of Transmode shares not tendered in the initial offer. The additional
$16.8 million
paid resulted in the elimination of the noncontrolling interest and an increase in additional paid-in capital. During 2017, in association with the compulsory acquisition proceedings in accordance with Swedish law, the Company paid
$0.5 million
to the minority shareholders of Transmode based on the final determination of the arbitration tribunal.
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal year 2017 was a 52-week year that ended on December 30, 2017. Fiscal year 2016 was a 53-week year that ended on December 31, 2016, and 2015 was a 52-week year that ended on December 26, 2015. The next 53-week year will end on December 31, 2022.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The Company reclassified certain amounts reported in previous periods to conform to the current presentation.
2. Significant Accounting Policies
Use of Estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). These accounting principles require the Company to make certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, inventory valuation, accrued warranty, business combinations and accounting for income taxes. Other estimates, assumptions and judgments made by management include restructuring and other related costs, allowances for sales returns, allowances for doubtful accounts, useful life and recoverability of property, plant and equipment, fair value measurement of the liability component of the convertible senior notes, cost-method investment and derivative instruments. Management believes that the estimates, assumptions and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition
Many of the Company's product sales are sold in combination with installation and deployment services along with initial hardware and software support. Periodically, the Company's product sales are also sold with spares management, on-site hardware replacement services, network management operations, software subscription, extended hardware warranty or training. Initial software and hardware support services are generally delivered over a one-year period in connection with the initial purchase. Software warranty provides customers with maintenance releases during the warranty support period and hardware warranty provides replacement or repair of equipment that fails to perform in line with specifications. Software subscription service includes software warranty and additionally provides customers with rights to receive unspecified software product upgrades released during the support period.
Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements. Network operations management includes the day-to-day operation of a customer's network. These services are generally delivered on an annual basis. Training services include the right to a specified number of instructor-led or web based training classes, and installation and deployment services may include customer site assessments, equipment installation and testing. These services are generally delivered over a
30
to
120
day period.
The Company recognizes product revenue when all of the following have occurred: (1) it has entered into a legally binding arrangement with the customer; (2) delivery has occurred, which is when product title and risk of loss have transferred to the customer; (3) customer payment is deemed fixed or determinable; and (4) collectability is reasonably assured.
The Company allocates revenue to each element in its multiple-element arrangements based upon their relative selling prices. The Company determines the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”) if VSOE is not available, or estimated selling price (“ESP”) if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met.
VSOE of selling price is used in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. In certain instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This mainly occurs where insufficient standalone sales transactions have occurred or where pricing for that element has not been consistent.
TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As the Company’s products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is typically difficult to obtain the reliable standalone competitive pricing necessary to establish TPE.
ESP represents the best estimate of the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through formal approval by the Company’s management, taking into consideration the overall go-to-market pricing strategy. The Company regularly reviews VSOE, TPE and ESP and maintains internal controls over the establishment and update of these inputs.
The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges. The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting.
The Company has a limited number of software offerings which are not required to deliver the tangible product’s essential functionality and can be sold separately. Revenue from sales of these software products and related post-contract support will continue to be accounted for under software revenue recognition rules. The Company’s multiple-element arrangements may therefore have a software deliverable that is subject to the
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the revenue recognition accounting guidance. Revenue related to these offerings have historically not been material.
Services revenue includes software subscription services, installation and deployment services, spares management, on-site hardware replacement services, network operations management, extended hardware warranty services and training. Revenue from software subscription, spares management, on-site hardware replacement services, network operations management and extended hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally
one year
. Revenue related to training and installation and deployment services is recognized as the services are completed.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. Revenue is recognized only when title and risk of loss pass to customers and when the revenue recognition criteria have been met. In instances where acceptance of the product occurs upon formal written acceptance, revenue is recognized only after such written acceptance has been received. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment terms to customers generally range from net
30
to
120
days from invoice, which are considered to be standard payment terms. The Company assesses its ability to collect from its customers based primarily on the creditworthiness and past payment history of the customer.
For sales to resellers, the same revenue recognition criteria apply. It is the Company’s practice to identify an end-user prior to shipment to a reseller. The Company does not offer rights of return or price protection to its resellers.
Shipping charges billed to customers are included in product revenue and related shipping costs are included in product cost. The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
Commission Expense
Sales commissions are recorded as sales and marketing expense and accrued compensation and related benefits. The Company generally records commission expense when it bills the customers; thus no contract acquisition costs are capitalized.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the requisite service period (generally the vesting period) under the straight-line amortization method. The expected forfeiture rate was estimated based on the Company's historical forfeiture data and compensation costs were recognized only for those equity awards expected to vest. The estimation of the forfeiture rate required judgment, and to the extent actual forfeitures differed from expectations, changes in estimate were recorded as an adjustment in the period when such estimates were revised. The Company historically recorded stock-based compensation expense by applying the forfeiture rates and adjusted estimated forfeiture rates to actual. During the third fiscal quarter beginning on June 26, 2016, the Company elected to early adopt ASU 2016-09. The Company also elected to change its accounting policy to account for forfeitures when they occur on a modified retrospective basis.
The Company makes a number of estimates and assumptions in determining stock-based compensation related to stock options including the following:
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•
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The expected term represents the weighted-average period that the stock options are expected to be outstanding prior to being exercised. The expected term is estimated based on the Company’s historical data on employee exercise patterns and post vesting termination behavior to estimate expected exercises over the contractual term of grants.
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INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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•
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Expected volatility of the Company’s stock is based on the weighted-average implied and historical volatility of the Company.
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The Company estimates the fair value of the rights to acquire stock under its Employee Stock Purchase Plan (“ESPP”) using the Black-Scholes option pricing formula. The Company’s ESPP provides for consecutive six-month offering periods and the Company uses its own historical volatility data in the valuation of ESPP shares.
The Company accounts for the fair value of restricted stock units (“RSUs”) using the closing market price of the Company’s common stock on the date of grant. For new-hire grants, RSUs typically vest ratably on an annual basis over
four years
. For annual refresh grants, RSUs typically vest ratably on an annual basis over
three
or
four
years.
The Company granted performance stock units (“PSUs”) to its executive officers and senior management in 2015, 2016 and 2017 as part of the Company's annual refresh grant process. These PSUs entitle the Company's executive officers and senior management to receive a number of shares of the Company's common stock based on its stock price performance compared to a specified target composite index for the same period. These PSUs vest over the span of
one year
,
two years
and
three years
, and the number of shares to be issued upon vesting ranges from
zero
to
two
times the number of PSUs granted depending on the relative performance of the Company's common stock price compared to the targeted composite index. This performance metric is classified as a market condition.
The Company uses a Monte Carlo simulation model to determine the fair value of PSUs on the date of grant. The Monte Carlo simulation model is based on a discounted cash flow approach, with the simulation of a large number of possible stock price outcomes for the Company's stock and the target composite index. The use of the Monte Carlo simulation model requires the input of a number of assumptions including expected volatility of the Company's stock price, expected volatility of target composite index, correlation between changes in the Company's stock price and changes in the target composite index, risk-free interest rate, and expected dividends as applicable. Expected volatility of the Company's stock is based on the weighted-average historical volatility of its stock. Expected volatility of target composite index is based on the historical and implied data. Correlation is based on the historical relationship between the Company's stock price and the target composite index average. The risk-free interest rate is based upon the treasury zero-coupon yield appropriate for the term of the PSU as of the grant date. The expected dividend yield is
zero
for the Company as it does not expect to pay dividends in the future. The expected dividend yield for the target composite index is the annual dividend yield expressed as a percentage of the composite average of the target composite index on the grant date.
In addition, the Company has granted other PSUs to certain employees that only vest upon the achievement of specific operational performance criteria. The Company assesses the achievement status of these PSUs on a quarterly basis and records the related stock-based compensation expenses based on the estimated achievement payout.
Research and Development
All costs to develop the Company’s hardware products are expensed as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Generally, the Company’s software products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred.
Advertising
All advertising costs are expensed as incurred. Advertising expenses in 2017, 2016 and 2015 were
$1.8 million
,
$1.9 million
and
$1.8 million
, respectively.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting for Income Taxes
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with SAB 118, the Company determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance, which resulted in no tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities. Additionally, the Company has provisionally recorded no tax expense in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an aggregate tax loss of its foreign subsidiaries, as a reasonable estimate at December 30, 2017. Additional work may be necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings. Any subsequent adjustment to these amounts will be recorded in 2018 when the analysis is complete.
As part of the process of preparing the Company’s consolidated financial statements, the Company is required to estimate its taxes in each of the jurisdictions in which it operates. The Company estimates actual current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s consolidated statements of operations become deductible expenses under applicable income tax laws, or loss or credit carryforwards are utilized. Accordingly, realization of the Company’s deferred tax assets is dependent on future taxable income within the respective jurisdictions against which these deductions, losses and credits can be utilized within the applicable future periods.
The Company must assess the likelihood that some portion or all of its deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent the Company believes that recovery does not meet the “more-likely-than-not” standard, the Company must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining the Company’s provision for income taxes, the Company’s deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. In evaluating the need for a full or partial valuation allowance, all positive and negative evidence must be considered, including the Company's forecasts of taxable income over the applicable carryforward periods, its current financial performance, its market environment, and other factors. Based on the available objective evidence, at December 30, 2017, management believes it is not more likely than not that the domestic net deferred tax assets will be realizable in the foreseeable future. Accordingly, the domestic net deferred tax assets are subject to a full valuation allowance. To the extent that the Company determines that deferred tax assets are realizable on a more likely than not basis, and an adjustment is needed, that adjustment will be recorded in the period that the determination is made.
Foreign Currency Translation and Transactions
The Company considers the functional currencies of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate as of the balance sheet date, and costs and expenses are translated at average exchange rates in effect during the period. Equity transactions are translated using historical exchange rates. The effects of foreign currency translation adjustments are recorded as a separate component of accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets.
For all non-functional currency account balances, the re-measurement of such balances to the functional currency will result in either a foreign exchange transaction gain or loss which is recorded to other gain (loss), net in the same period that the re-measurement occurred. Aggregate foreign exchange transactions recorded in 2017, 2016 and 2015 were a loss of
$0.3 million
, a loss of
$1.8 million
and a gain of
$2.4 million
, respectively.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company entered into foreign currency exchange forward contracts to reduce the impact of foreign exchange fluctuations on earnings from accounts receivable balances denominated in euros and British pounds, and restricted cash denominated in euros.
During 2017, the Company also entered into foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pounds and Swedish kronor (“SEK”). The contracts are generally settled for U.S. dollars, euro and British pound at maturity under an average rate method 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.
Cash, Cash Equivalents and Short-term and Long-term Investments
The Company considers all highly liquid instruments with an original maturity at the date of purchase of 90 days or less to be cash equivalents. These instruments may include cash, money market funds, commercial paper and U.S. treasuries. The Company also maintains a portion of its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash, cash equivalents and short-term investments consist of highly-liquid investments in certificates of deposits, money market funds, commercial paper, U.S. agency notes, corporate bonds and U.S. treasuries. Long-term investments primarily consist of certificates of deposits, commercial paper, U.S. agency notes, corporate bonds and U.S. treasuries. The Company considers all debt instruments with original maturities at the date of purchase greater than 90 days and remaining time to maturity of one year or less to be short-term investments. The Company classifies debt instruments with remaining maturities greater than one year as long-term investments, unless the Company intends to settle its holdings within one year or less and in such case it is considered to be short-term investments. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date.
Available-for-sale investments are stated at fair market value with unrealized gains and losses recorded in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. The Company evaluates its available-for-sale marketable debt securities for other-than-temporary impairments and records any credit loss portion in other income (expense), net, in the Company’s consolidated statements of operations. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and for any credit losses incurred on these securities. Gains and losses are recognized when realized in the Company’s consolidated statements of operations under the specific identification method. Because the Company does not intend to sell its debt securities and it is not more likely than not that it will be required to sell the investment before recovery of their amortized cost basis, which may be maturity.
Fair Value Measurement
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
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fair value hierarchy:
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Level 1
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–
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Quoted prices in active markets for identical assets or liabilities.
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Level 2
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–
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Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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Level 3
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–
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Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
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The Company measures its cash equivalents, foreign currency exchange forward contracts, and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy on a recurring basis. 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 the following assets 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.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign Currency Exchange Forward Contracts
As discussed in Note 5, "Derivative Instruments," to the Notes to Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.
The Company classifies the following assets and liabilities within Level 3 of the fair value hierarchy and applies fair value accounting on a nonrecurring basis, only if impairment is indicated:
Facilities-related Charges
The Company estimates the fair value of its facilities-related charges associated with the 2017 Restructuring Plan, 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.
Cost-method Investment
The Company estimates the fair value of its cost-method investment by using the guideline public company method and the guideline transaction method of the market approach to determine the implied total equity value on a minority interest basis. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates.
Accounts Receivable and Allowances for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company reviews its aging by category to identify significant customers or invoices with known dispute or collectability issues. The Company makes judgments as to its ability to collect outstanding receivables based on various factors including ongoing customer credit evaluations and historical collection experience. The Company provides an allowance for receivable amounts that are potentially uncollectible and when receivables are determined to be uncollectible, amounts are written off.
Allowances for Sales Returns
Customer product returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are provided for as a reduction to revenue. At December 30, 2017, December 31, 2016 and December 26, 2015, revenue was reduced for estimated sales returns by
$0.9 million
,
$0.6 million
and
$0.6 million
, respectively.
Concentration of Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash equivalents, short-term investments, long-term investments and accounts receivable. Investment policies have been implemented that limit investments to investment-grade securities.
The risk with respect to accounts receivable is mitigated by ongoing credit evaluations that the Company performs on its customers. As the Company continues to expand its sales internationally, it may experience increased levels of customer credit risk associated with those regions. Collateral is generally not required for accounts receivable but may be used in the future to mitigate credit risk associated with customers located in certain geographical regions.
As of December 30, 2017,
two
customers accounted for approximately over 10% of the Company's net accounts receivable balance. One customer accounted for approximately
11%
of the Company's net accounts receivable balance, and another customer, which completed a merger in late 2017, was combination of two of our historically larger customers, accounted for approximately
16%
of the Company's net accounts receivable
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
balance. As of December 31, 2016,
two
customers accounted for approximately
17%
and
15%
of the Company’s net accounts receivable balance, respectively.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue.
One
customer, which completed a merger in late 2017 as mentioned above, was a combination of two of the Company's historically larger customers who merged in 2017 and accounted for approximately
18%
of the Company's revenue in 2017. These two historically larger customers each individually accounted for approximately
16%
and
8%
of the of the Company's revenue in 2016, respectively, and approximately
17%
and
13%
of the Company's revenue in 2015, respectively. No other customers accounted for over 10% of the Company's revenue for these periods.
The Company depends on sole source or limited source suppliers for several key components and raw materials. The Company generally purchases these sole source or limited source components and raw materials through standard purchase orders and does not have long-term contracts with many of these limited-source suppliers. While the Company seeks to maintain sufficient reserve stock of such components and raw materials, the Company’s business and results of operations could be adversely affected if any of our sole source or limited source suppliers suffer from capacity constraints, lower than expected yields, deployment delays, work stoppages or any other reduction or disruption in output.
Derivative Instruments
The Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, specifically forward contracts, to reduce the impact of foreign exchange fluctuations on earnings. The forward contracts are with one high-quality institution and the Company monitors the creditworthiness of the counter parties consistently. The Company’s objective is to offset gains and losses resulting from these exposures with gains and losses on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets. None of the Company’s derivative instruments contain credit-risk related contingent features, any rights to reclaim cash collateral or any obligation to return cash collateral. The Company does not have any leveraged derivatives. The Company does not use derivative contracts for trading or speculative purposes.
The Company enters into foreign currency exchange forward contracts to manage its exposure to fluctuations in foreign exchange rates that arise primarily from its euro and British pound denominated receivables and euro denominated restricted cash balance amounts that are pledged as collateral for certain stand-by letters of credit. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk. The Company also entered into foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pounds and SEK. These contracts are generally settled for U.S. dollars, euros and British pound at maturity under an average rate method agreed to at inception of the contracts. The forward contracts are with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparty.
Inventory Valuation
Inventories consist of raw materials, work-in-process and finished goods and are stated at standard cost adjusted to approximate the lower of actual cost or market. Costs are recognized utilizing the first-in, first-out method. Market value is based upon an estimated selling price reduced by the estimated cost of disposal. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing and technological obsolescence of the Company’s products.
Inventory that is obsolete or in excess of the Company’s forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand. In valuing its inventory costs and deferred inventory costs, the Company considered whether the utility of the products delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. The Company concluded that, in the instances where the utility of the products delivered or expected to be delivered was less than cost, it was appropriate to value the inventory costs and deferred inventory costs at
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
cost or market, whichever is lower, thereby recognizing the cost of the reduction in utility in the period in which the reduction occurred or can be reasonably estimated. The Company has, therefore, recognized inventory write-downs as necessary in each period in order to reflect inventory at the lower of actual cost or market.
The Company considers whether it should accrue losses on firm purchase commitments related to inventory items. Given that the net realizable value of common equipment is below contractual purchase price, the Company has also recorded losses on these firm purchase commitments in the period in which the commitment is made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the purchase commitment.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. This includes enterprise-level business software that the Company customizes to meets its specific operational needs. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. An assumption of lease renewal where a renewal option exists is used only when the renewal has been determined to be reasonably assured. Repair and maintenance costs are expensed as incurred. The estimated useful life for each asset category is as follows:
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Estimated Useful Lives
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Building
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20 years
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Laboratory and manufacturing equipment
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1.5 to 10 years
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Furniture and fixtures
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3 to 5 years
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Computer hardware and software
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1.5 to 7 years
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Leasehold and building improvements
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1 to 10 years
|
The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or that the useful life is shorter than originally estimated. If impairment indicators are present and the projected future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the carrying value of the assets is depreciated over the newly determined remaining useful lives.
Accrued Warranty
The Company warrants that its products will operate substantially in conformity with product specifications. Hardware warranties provide the purchaser with protection in the event that the product does not perform to product specifications. During the warranty period, the purchaser’s sole and exclusive remedy in the event of such defect or failure to perform is limited to the correction of the defect or failure by repair, refurbishment or replacement, at the Company’s sole option and expense. The Company's hardware warranty periods generally range from
one
to
five
years from date of acceptance for hardware and the Company's software warranty is
90
days. Upon delivery of the Company's products, the Company provides for the estimated cost to repair or replace products that may be returned under warranty. The hardware warranty accrual is based on actual historical returns and cost of repair experience and the application of those historical rates to the Company's in-warranty installed base. The provision for warranty claims fluctuates depending upon the installed base of products and the failure rates and costs of repair associated with these products under warranty. Furthermore, the Company's costs of repair vary based on repair volume and its ability to repair, rather than replace, defective units. In the event that actual product failure rates and costs to repair differ from the Company's estimates, revisions to the warranty provision are required. In addition, from time to time, specific hardware warranty accruals may be made if unforeseen technical problems arise with specific products. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amortization of Intangible Assets
Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. In-process research and development represents the fair value of incomplete research and development projects that have not reached technological feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Once projects have been completed they are transferred to developed technology, which are subject to amortization, while assets related to projects that have been abandoned are impaired and expensed to research and development.
Impairment of Intangible Assets and Goodwill
Goodwill is evaluated for impairment on an annual basis in the fourth quarter of the Company's fiscal year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company has elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of its single reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of its single reporting unit is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of its single reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss. The Company evaluates events and changes in circumstances that could indicate carrying amounts of purchased intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of these assets by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, the Company records an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Restructuring and Other Related Costs
The Company records costs associated with exit activities related to restructuring plans in accordance with ASC 420, “Exit or Disposal Cost Obligations.” Liabilities for costs associated with an exit or disposal activity are recognized in the period in which the liability is incurred. The timing of the associated cash payments is dependent upon the type of exit cost and extend over an approximately
four
-year period. The Company records restructuring cost liabilities in “Accrued Expenses” and "Other Long-term Liabilities" in the Consolidated Balance Sheet.
Restructuring costs include termination costs, facility consolidation and closure costs, equipment write-downs and inventory write-downs. One-time termination benefits are recognized as a liability at estimated fair value when the approved plan of termination has been communicated to employees, unless employees must provide future service, in which case the benefits are recognized ratably over the future service period. Ongoing termination benefits arrangements are recognized as a liability at estimated fair value when the amount of such benefits becomes estimable and payment is probable. For the facility-related restructuring costs, the Company recognizes a liability upon exiting all or a portion of a leased facility and meeting cease-use and other requirements. The amount of restructuring costs is based on the fair value of the lease obligation for the abandoned space, which includes a sublease assumption that could be reasonably obtained.
Restructuring charges require significant estimates and assumptions, including sublease income and expenses for severance and other employee separation costs. Management estimates involve a number of risks and uncertainties, some of which are beyond control, including future real estate market conditions and the Company's ability to successfully enter into subleases or termination agreements with terms as favorable as those assumed when arriving at its estimates. The Company monitors these estimates and assumptions on at least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are recorded in its statement of operations in the period when such changes are known.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recent Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements, and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. This guidance is effective for the Company in its first quarter of fiscal 2018, with early adoption permitted. The Company does not expect the new guidance to have any material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update 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. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. The Company is required to adopt ASU 2016-18 on a retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning with its first quarter of fiscal 2018. Early adoption is permitted, including adoption in an interim period. Subsequent to the adoption of ASU 2016-18, the change in restricted cash would be excluded from the change in cash flows from investing and financing activities and included in the change in total cash, restricted cash and cash equivalents as reported in the statement of cash flows. Upon adoption of ASU 2016-18, the Company will amend the presentation in its consolidated statements of cash flows to include restricted cash with cash and cash equivalents and it will retrospectively reclassify all periods presented.
In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The Company early adopted ASU 2016-15 on a retrospective basis during the third quarter of fiscal 2017. The Company's adoption of 2016-15 had no impact on its consolidated statements of cash flows.
In June 2016, the FASB issued Accounting Standards Update 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.
In May 2016, the FASB issued Accounting Standards Update 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)” (“ASU 2016-11”), which rescinds various standards codified as part of Topic 605, Revenue Recognition in relation to the future adoption of Topic 606. These rescissions include changes to topics pertaining to revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. This guidance is effective for the Company in its first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-11 will have on its consolidated financial statements.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), 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. This guidance is effective for the Company in its first quarter of fiscal 2019 and early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements and expects to have increases in the assets and liabilities of its consolidated balance sheets.
In July 2015, the FASB issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”), to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first-out or the retail inventory method. Under ASU 2015-11, inventory should be at the lower of cost and net realizable value. The Company adopted ASU 2015-11 during the first quarter of fiscal 2017. The Company's adoption of 2015-11 had no impact on the Company's financial position, results of operations or cash flows.
In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts from Customers (Topic 606)” (“ASU 2014-09”), which creates a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with U.S. GAAP. Under ASU 2014-09, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards update 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 by one year with early adoption permitted beginning after December 15, 2016. The updated standard is effective for interim and annual periods beginning after December 15, 2017. In April 2016, the FASB issued Accounting Standards Update 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued Accounting Standards Update 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to increase stakeholders' awareness of the proposals and to expedite improvements to ASU 2014-09. ASU 20140-09 also includes Subtopic 340-40, "Other Assets and Deferred Costs - Contracts with Customers," which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to ASU 2014-09 and Subtopic 340-40 as the new standard.”
These standards will be effective for the Company's first quarter of 2018. The Company has determined that it will elect to adopt the standard using the modified retrospective method with the cumulative effect recognized as an adjustment to the opening balance of its accumulated deficit as of December 31, 2017. Prior periods will not be retrospectively adjusted and will continue to be reported under the accounting standards in effect for those periods. However, the Company will include additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change.
The Company has substantially completed its assessment of the impact of the new standard but is still evaluating the adjustment to the opening balance of its accumulated deficit. The Company’s assessment will be finalized during the first quarter of 2018. The Company has performed an assessment of nearly all of its open customer contracts under the new guidance. The new standard will impact the Company's operations, policies and accounting in the areas of customer purchase commitments, contract termination rights, variable consideration, stand-alone selling price and capitalization of costs to obtain a contract.
To evaluate the impact of the new revenue standards on its accounting policies, internal controls, processes and system requirements, the Company assigned internal resources in addition to the engagement of third party service providers to assist in this evaluation. The Company has completed the implementation of a new IT solution as part of the adoption of the new standard. In addition, the Company has made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
revenue standard. The Company is currently implementing the necessary operational and internal control structural changes.
3. Fair Value Measurements
The following tables represent the Company’s fair value hierarchy for its marketable securities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2017
|
|
As of December 31, 2016
|
|
Fair Value Measured Using
|
|
Fair Value Measured Using
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
20,371
|
|
|
$
|
—
|
|
|
$
|
20,371
|
|
|
$
|
41,773
|
|
|
$
|
—
|
|
|
$
|
41,773
|
|
Certificates of deposit
|
—
|
|
|
240
|
|
|
240
|
|
|
—
|
|
|
1,881
|
|
|
1,881
|
|
Commercial paper
|
—
|
|
|
26,912
|
|
|
26,912
|
|
|
—
|
|
|
39,310
|
|
|
39,310
|
|
Corporate bonds
|
—
|
|
|
118,558
|
|
|
118,558
|
|
|
—
|
|
|
88,324
|
|
|
88,324
|
|
U.S. agency notes
|
—
|
|
|
5,480
|
|
|
5,480
|
|
|
—
|
|
|
11,759
|
|
|
11,759
|
|
U.S. treasuries
|
35,408
|
|
|
—
|
|
|
35,408
|
|
|
52,092
|
|
|
—
|
|
|
52,092
|
|
Foreign currency exchange forward contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
187
|
|
Total assets
|
$
|
55,779
|
|
|
$
|
151,190
|
|
|
$
|
206,969
|
|
|
$
|
93,865
|
|
|
$
|
141,461
|
|
|
$
|
235,326
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange forward contracts
|
$
|
—
|
|
|
$
|
(204
|
)
|
|
$
|
(204
|
)
|
|
$
|
—
|
|
|
$
|
(71
|
)
|
|
$
|
(71
|
)
|
During 2017 and 2016, there were no transfers of assets or liabilities between Level 1 and Level 2. As of December 30, 2017 and December 31, 2016, none of the Company’s existing securities were classified as Level 3 securities.
In connection with the 2017 Restructuring Plan, the Company calculated the fair value of the
$7.3 million
in facilities-related charges based on estimated future discounted cash flows and classified the fair value as a Level 3 measurement due to the significance of 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. See Note 8, “Restructuring and Other Related Costs,” to the Notes to Consolidated Financial Statements for more information on the 2017 Restructuring Plan.
As of December 30, 2017, the Company determined that its cost-method investment was impaired, resulting in an impairment charge of
$1.9 million
to adjust the carrying value to estimated fair value. The Company classified the fair value as a Level 3 measurement due to the significance of unobservable inputs. The Company used the guideline public company method and the guideline transaction method of the market approach to determine the implied total equity value on a minority interest basis. These analyses require management to make assumptions and estimates regarding industry and economic factors, future operating results and discount rates. See Note 4, “Cost-method Investment,” to the Notes to Consolidated Financial Statements for more information.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash, cash equivalents and investments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
Adjusted
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Cash
|
$
|
87,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87,991
|
|
Money market funds
|
20,371
|
|
|
—
|
|
|
—
|
|
|
20,371
|
|
U.S. treasuries
|
7,984
|
|
|
—
|
|
|
(1
|
)
|
|
7,983
|
|
Total cash and cash equivalents
|
$
|
116,346
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
116,345
|
|
Certificates of deposit
|
240
|
|
|
—
|
|
|
—
|
|
|
240
|
|
Commercial paper
|
26,924
|
|
|
—
|
|
|
(12
|
)
|
|
26,912
|
|
Corporate bonds
|
90,685
|
|
|
—
|
|
|
(155
|
)
|
|
90,530
|
|
U.S. agency notes
|
2,500
|
|
|
—
|
|
|
(11
|
)
|
|
2,489
|
|
U.S. treasuries
|
27,495
|
|
|
—
|
|
|
(70
|
)
|
|
27,425
|
|
Total short-term investments
|
$
|
147,844
|
|
|
$
|
—
|
|
|
$
|
(248
|
)
|
|
$
|
147,596
|
|
Corporate bonds
|
28,186
|
|
|
—
|
|
|
(158
|
)
|
|
28,028
|
|
U.S. agency notes
|
3,002
|
|
|
—
|
|
|
(11
|
)
|
|
2,991
|
|
Total long-term investments
|
$
|
31,188
|
|
|
$
|
—
|
|
|
$
|
(169
|
)
|
|
$
|
31,019
|
|
Total cash, cash equivalents and investments
|
$
|
295,378
|
|
|
$
|
—
|
|
|
$
|
(418
|
)
|
|
$
|
294,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Adjusted
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
Cash
|
$
|
109,978
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109,978
|
|
Money market funds
|
41,773
|
|
|
—
|
|
|
—
|
|
|
41,773
|
|
Commercial paper
|
8,892
|
|
|
—
|
|
|
(1
|
)
|
|
8,891
|
|
U.S. agency notes
|
1,999
|
|
|
—
|
|
|
—
|
|
|
1,999
|
|
Total cash and cash equivalents
|
$
|
162,642
|
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
162,641
|
|
Certificates of deposit
|
1,881
|
|
|
—
|
|
|
—
|
|
|
1,881
|
|
Commercial paper
|
30,425
|
|
|
—
|
|
|
(6
|
)
|
|
30,419
|
|
Corporate bonds
|
63,097
|
|
|
1
|
|
|
(59
|
)
|
|
63,039
|
|
U.S. agency notes
|
7,285
|
|
|
—
|
|
|
(8
|
)
|
|
7,277
|
|
U.S. treasuries
|
39,093
|
|
|
9
|
|
|
(21
|
)
|
|
39,081
|
|
Total short-term investments
|
$
|
141,781
|
|
|
$
|
10
|
|
|
$
|
(94
|
)
|
|
$
|
141,697
|
|
Corporate bonds
|
25,374
|
|
|
—
|
|
|
(89
|
)
|
|
25,285
|
|
U.S. agency notes
|
2,499
|
|
|
—
|
|
|
(16
|
)
|
|
2,483
|
|
U.S. treasuries
|
13,032
|
|
|
2
|
|
|
(23
|
)
|
|
13,011
|
|
Total long-term investments
|
$
|
40,905
|
|
|
$
|
2
|
|
|
$
|
(128
|
)
|
|
$
|
40,779
|
|
Total cash, cash equivalents and investments
|
$
|
345,328
|
|
|
$
|
12
|
|
|
$
|
(223
|
)
|
|
$
|
345,117
|
|
As of December 30, 2017, the Company’s available-for-sale investments have a contractual maturity term of up to
21 months
. Gross realized gains and losses on short-term and long-term investments were
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
insignificant for all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
As of December 30, 2017, the Company had
$263.9 million
of cash, cash equivalents and short-term investments, including
$62.1 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.
|
|
4.
|
Cost-method Investments
|
In 2016, the Company invested
$7.0 million
in a privately-held company. In addition, this investment included a customer supply agreement and warrants to purchase up to
$10.0 million
of additional shares of preferred stock. The warrants vest and become exercisable upon certain conditions being met. Additionally, in 2016, the Company recognized a gain of
$9.0 million
from the sale of an existing cost-method investment. As of December 30, 2017 and December 31, 2016, the Company's cost-method investment balance was
$5.1 million
and
$7.0 million
, respectively.
This investment is accounted for as cost-basis investments as the Company owns less than
20%
of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. The Company regularly evaluates the carrying value of its cost-method investment for impairment. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company’s policy is to record an impairment charge in other income (expense), net, in the accompanying consolidated statements of operations.
Based on the Company's review during the fourth quarter of 2017, it determined that the carrying amount of its cost-method investment exceeded its fair value and the decline in value was determined to be other-than-temporary. As a result, the Company recorded an impairment charge of
$1.9 million
to adjust the carrying value to estimated fair value.
During 2016 and 2015, no impairment charges were recorded as there had not been any events or changes in circumstances that the Company believed would have a significant adverse effect on the fair value of its investment.
5. 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 forward contracts, primarily short term in nature.
Historically, the Company 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.
During 2017, the Company also entered into foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and SEK. The contracts are generally settled for U.S. dollars, euros and British pounds at maturity under an average rate method 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.
In April 2015, the Company entered into a foreign currency exchange forward contract with a notional amount of SEK
831 million
(
$95.3 million
) to hedge currency exposures associated with the cash consideration of the offer to acquire Transmode. In July 2015, the Company entered into a series of additional foreign currency
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
exchange option contracts to purchase up to an additional SEK
1.3 billion
(
$153.8 million
) and to sell up to SEK
650 million
(
$76.9 million
), which achieves the economic equivalent of a “participating forward” in order to hedge the anticipated foreign currency cash outflows associated with the additional cash consideration related to the enhanced offer to acquire the shares of Transmode. As these contracts are not formally designated as hedges, the gains and losses were recognized in the statement of operations. For 2015, the Company recorded a realized gain of
$1.6 million
, which was included in other gain (loss), net, in the accompanying consolidated statements of operations.
The before-tax effect of foreign currency exchange forward contracts was a loss of
$3.5 million
for
2017
, a loss of
$0.9 million
for
2016
and a gain of
$3.8 million
in
2015
, included in other gain (loss), net, in the consolidated statements of operations. In each of these periods, the impact of the gross gains and losses were offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of December 30, 2017, 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 consolidated statements of operations. These contracts were 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 consolidated balance sheets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2017
|
|
As of December 31, 2016
|
|
Gross
Notional
(1)
|
|
Prepaid Expenses and Other Assets
|
|
Other
Accrued
Liabilities
|
|
Gross
Notional
(1)
|
|
Prepaid Expenses and Other Assets
|
|
Other
Accrued
Liabilities
|
Foreign currency exchange forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
Related to euro denominated receivables
|
$
|
24,794
|
|
|
$
|
—
|
|
|
$
|
(202
|
)
|
|
$
|
23,887
|
|
|
$
|
137
|
|
|
$
|
(71
|
)
|
Related to British pound denominated receivables
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,353
|
|
|
$
|
48
|
|
|
$
|
—
|
|
Related to euro denominated restricted cash
|
$
|
252
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
242
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
(204
|
)
|
|
|
|
$
|
187
|
|
|
$
|
(71
|
)
|
|
|
(1)
|
Represents the face amounts of forward contracts that were outstanding as of the period noted.
|
|
|
6.
|
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 for the year ended December 30, 2017 (in thousands):
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
176,760
|
|
Foreign currency translation adjustments
|
18,855
|
|
Accumulated impairment loss
|
—
|
|
Balance as of December 30, 2017
|
$
|
195,615
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK.
Intangible Assets
The following table presents details of the Company’s intangible assets as of December 30, 2017 and December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Remaining Useful Life (In Years)
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
51,050
|
|
|
$
|
(15,007
|
)
|
|
$
|
36,043
|
|
|
5.6
|
Developed technology
|
104,708
|
|
|
(48,563
|
)
|
|
56,145
|
|
|
2.7
|
Total intangible assets
|
$
|
155,758
|
|
|
$
|
(63,570
|
)
|
|
$
|
92,188
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Remaining Useful Life (In Years)
|
Intangible assets with finite lives:
|
|
|
|
|
|
|
|
Trade names
|
$
|
220
|
|
|
$
|
(220
|
)
|
|
$
|
—
|
|
|
0.0
|
Customer relationships
|
46,125
|
|
|
(7,793
|
)
|
|
38,332
|
|
|
6.6
|
Developed technology
|
94,320
|
|
|
(24,715
|
)
|
|
69,605
|
|
|
3.7
|
Other intangible assets
|
819
|
|
|
(567
|
)
|
|
252
|
|
|
4.6
|
Total intangible assets with finite lives
|
$
|
141,484
|
|
|
$
|
(33,295
|
)
|
|
$
|
108,189
|
|
|
4.7
|
Acquired in-process technology
|
286
|
|
|
—
|
|
|
286
|
|
|
|
Total intangible assets
|
$
|
141,770
|
|
|
$
|
(33,295
|
)
|
|
$
|
108,475
|
|
|
|
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 these assets are denominated in SEK. Amortization expense was
$26.6 million
and
$26.0 million
for the years ended December 30, 2017 and December 31, 2016, respectively.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories. During 2017, the Company recorded an impairment charge to research and development expenses of $0.3 million related to other intangible assets, which the Company has determined that the carrying value will not be recoverable. During the first quarter of 2017, the Company transferred $0.3 million of its in-process technology to developed technology, which is being amortized over a useful life of five years.
During 2016, the Company transferred
$3.8 million
of its in-process technology to developed technology, which is being amortized over a maximum useful life of
seven
years. Additionally, during 2016, the Company recorded an impairment charge of
$11.3 million
related to in-process research and development, resulting from the Company's decision to abandon previously acquired in-process technologies.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
Total
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022 and Thereafter
|
Total future amortization expense
|
$
|
92,188
|
|
|
$
|
27,591
|
|
|
$
|
26,968
|
|
|
$
|
19,681
|
|
|
$
|
7,194
|
|
|
$
|
10,754
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 stand-by letters of credit and bank guarantees.
The following table provides details of selected balance sheet items (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Inventory:
|
|
|
|
Raw materials
|
$
|
27,568
|
|
|
$
|
33,158
|
|
Work in process
|
59,662
|
|
|
74,533
|
|
Finished goods
|
127,474
|
|
|
125,264
|
|
Total
|
$
|
214,704
|
|
|
$
|
232,955
|
|
Property, plant and equipment, net:
|
|
|
|
Computer hardware
|
$
|
13,881
|
|
|
$
|
12,775
|
|
Computer software
(1)
|
32,521
|
|
|
26,779
|
|
Laboratory and manufacturing equipment
|
246,380
|
|
|
222,311
|
|
Land and building
|
12,347
|
|
|
—
|
|
Furniture and fixtures
|
2,474
|
|
|
2,075
|
|
Leasehold and building improvements
|
43,475
|
|
|
42,267
|
|
Construction in progress
|
34,816
|
|
|
33,633
|
|
Subtotal
|
$
|
385,894
|
|
|
$
|
339,840
|
|
Less accumulated depreciation and amortization
(2)
|
(249,952
|
)
|
|
(215,040
|
)
|
Total
|
$
|
135,942
|
|
|
$
|
124,800
|
|
Accrued expenses:
|
|
|
|
Loss contingency related to non-cancelable purchase commitments
|
$
|
6,379
|
|
|
$
|
5,555
|
|
Professional and other consulting fees
|
5,305
|
|
|
4,955
|
|
Taxes payable
|
3,707
|
|
|
2,384
|
|
Royalties
|
5,404
|
|
|
5,375
|
|
Restructuring accrual
|
5,490
|
|
|
—
|
|
Other accrued expenses
|
13,497
|
|
|
13,311
|
|
Total
|
$
|
39,782
|
|
|
$
|
31,580
|
|
|
|
(1)
|
Included in computer software at December 30. 2017 and December 31, 2016 were
$11.4 million
and
$9.1 million
, respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at December 30, 2017 and December 31, 2016 were
$4.7 million
and
$4.0 million
, respectively.
|
|
|
(2)
|
Depreciation expense was
$39.4 million
,
$35.5 million
and
$26.8 million
(which includes depreciation of capitalized ERP costs of
$1.7 million
,
$1.2 million
and
$1.2 million
, respectively) for 2017, 2016 and 2015, respectively.
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
8.
|
Restructuring and Other Related Costs
|
In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (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. As part of the 2017 Restructuring Plan, the Company is making several changes it believes will help its research and development efficiency, with consolidation of its development sites, including closure of its Beijing, China design center, process changes to more broadly leverage the Company's engineering resources across regions and product line development, and prioritization of research and development initiatives. Outside of engineering, the Company has also made changes to allow it to operate more efficiently as it scales the business, including reducing the Company's facilities footprint and writing off certain equipment that will not be utilized in the future. Finally, the Company realigned its inventory levels to match its new technology cadence and go to market strategies. As of December 30, 2017, the 2017 Restructuring Plan had been substantially completed and we do not expect to record significant future charges under this plan in 2018.
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 2017 Restructuring Plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
December 30, 2017
|
|
|
Cost of Revenue
|
|
Operating Expenses
|
|
|
Severance and related expenses
|
$
|
1,510
|
|
|
$
|
7,931
|
|
|
Facilities
|
—
|
|
|
7,300
|
|
|
Asset impairment
|
4,004
|
|
|
875
|
|
|
Inventory write-downs
|
13,627
|
|
|
—
|
|
|
Total
|
$
|
19,141
|
|
|
$
|
16,106
|
|
Restructuring liabilities are reported within accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Charges
|
|
Cash
|
|
Non-cash Settlements and Other
|
|
December 30, 2017
|
|
|
Severance and related expenses
|
$
|
—
|
|
|
$
|
9,441
|
|
|
$
|
(5,769
|
)
|
|
$
|
—
|
|
|
$
|
3,672
|
|
|
Facilities
|
—
|
|
|
7,300
|
|
|
(180
|
)
|
|
(173
|
)
|
|
6,947
|
|
|
Asset impairment
|
—
|
|
|
4,879
|
|
|
—
|
|
|
(4,879
|
)
|
|
—
|
|
|
Inventory write-downs
|
—
|
|
|
13,627
|
|
|
—
|
|
|
(13,627
|
)
|
|
—
|
|
|
Total
|
$
|
—
|
|
|
$
|
35,247
|
|
|
$
|
(5,949
|
)
|
|
$
|
(18,679
|
)
|
|
$
|
10,619
|
|
As of December 30, 2017, the Company's restructuring liability comprised of
$6.9 million
related to facility closures, with leases through January 2022, and
$3.7 million
of severance and related expenses, which are expected to be substantially paid in 2018.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
9.
|
Comprehensive Income (Loss)
|
Other comprehensive income (loss) includes certain changes in equity that are excluded from net income (loss). The following table sets forth the changes in accumulated other comprehensive income (loss) by component for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain (Loss) on Available-for-Sale Securities
|
|
Foreign Currency Translation
|
|
Accumulated Tax Effect
|
|
Total
|
Balance at December 27, 2014
|
$
|
(444
|
)
|
|
$
|
(3,414
|
)
|
|
$
|
(760
|
)
|
|
$
|
(4,618
|
)
|
Other comprehensive loss before reclassifications
|
(62
|
)
|
|
5,803
|
|
|
—
|
|
|
5,741
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive income
|
(62
|
)
|
|
5,803
|
|
|
—
|
|
|
5,741
|
|
Balance at December 26, 2015
|
$
|
(506
|
)
|
|
$
|
2,389
|
|
|
$
|
(760
|
)
|
|
$
|
1,123
|
|
Other comprehensive income before reclassifications
|
297
|
|
|
(29,625
|
)
|
|
(119
|
)
|
|
(29,447
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive loss
|
297
|
|
|
(29,625
|
)
|
|
(119
|
)
|
|
(29,447
|
)
|
Balance at December 31, 2016
|
$
|
(209
|
)
|
|
$
|
(27,236
|
)
|
|
$
|
(879
|
)
|
|
$
|
(28,324
|
)
|
Other comprehensive loss before reclassifications
|
(209
|
)
|
|
34,787
|
|
|
—
|
|
|
34,578
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period other comprehensive income
|
(209
|
)
|
|
34,787
|
|
|
—
|
|
|
34,578
|
|
Balance at December 30, 2017
|
$
|
(418
|
)
|
|
$
|
7,551
|
|
|
$
|
(879
|
)
|
|
$
|
6,254
|
|
|
|
10.
|
Basic and Diluted Net Income (Loss) Per Common Share
|
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to Infinera Corporation by the weighted average number of common shares outstanding during the period. Diluted net income (loss) attributable to Infinera Corporation per common share is computed using net income (loss) attributable to Infinera Corporation 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 RSU and PSUs, and assumed issuance of common stock under the ESPP using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of the Notes from the conversion spread (as defined and discussed in Note 11, “Convertible Senior Notes” to the Notes to Consolidated Financial Statements). The Company includes the common shares underlying PSUs in the calculation of diluted net income per share only when they become contingently issuable. In net loss periods, these potentially diluted common shares have been excluded from the diluted net loss calculation.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the computation of net income (loss) per common share attributable to Infinera Corporation - basic and diluted (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Numerator:
|
|
|
|
|
|
Net income (loss) attributable to Infinera Corporation
|
$
|
(194,506
|
)
|
|
$
|
(23,927
|
)
|
|
$
|
51,413
|
|
Denominator:
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
147,878
|
|
|
142,989
|
|
|
133,259
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Employee equity plans
|
—
|
|
|
—
|
|
|
5,686
|
|
Assumed conversion of convertible senior notes from conversion spread
|
—
|
|
|
—
|
|
|
4,226
|
|
Dilutive weighted average common shares outstanding
|
147,878
|
|
|
142,989
|
|
|
143,171
|
|
|
|
|
|
|
|
Net income (loss) per common share attributable to Infinera Corporation
|
|
|
|
|
|
Basic
|
$
|
(1.32
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
0.39
|
|
Diluted
|
$
|
(1.32
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
0.36
|
|
The Company incurred net losses during 2017 and 2016, and as a result, potential common shares from stock options, RSUs, PSUs, assumed release of outstanding stock under the ESPP and assumed conversion of the Notes from the conversion spread were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive.
During 2015, the Company included the dilutive effects of the Notes in the calculation of diluted net income per common share as the applicable average market price was above the conversion price of the Notes. The effects of other potentially dilutive common shares from stock options, RSUs, PSUs and assumed release of outstanding stock under the ESPP were not included in the calculation of diluted net income per share for 2015 because their effect were anti-dilutive under the treasury stock method or the performance condition of the award had not been met.
Prior to the fourth quarter of 2017, upon conversion of the Notes, the Company intended to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the Notes being converted, therefore, only the conversion spread relating to the Notes were included in the Company's diluted net income per share calculation. In November 2017, the Company made an election to settle any remaining conversion obligation in cash. See Note 11, ”Convertible Senior Notes” to the Notes to Consolidated Financial Statements for more information.
The following sets forth the potentially dilutive shares excluded from the computation of the diluted net income (loss) per share because their effect was anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Stock options outstanding
|
1,461
|
|
|
2,042
|
|
|
8
|
|
Restricted stock units
|
6,856
|
|
|
5,302
|
|
|
415
|
|
Performance stock units
|
1,420
|
|
|
896
|
|
|
73
|
|
Employee stock purchase plan shares
|
810
|
|
|
1,010
|
|
|
225
|
|
Total
|
10,547
|
|
|
9,250
|
|
|
721
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
11.
|
Convertible Senior Notes
|
In May 2013, the Company issued the
$150.0 million
of
1.75%
convertible senior notes due June 1, 2018 (the “Notes”), which will mature on June 1, 2018, unless earlier purchased by the Company or converted. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2013. The net proceeds to the Company were approximately
$144.5 million
and were intended to be used for working capital and other general corporate purposes. To date, the Company has not utilized the net proceeds due to its sufficient cash position.
The Notes are governed by an indenture dated as of May 30, 2013 (the “Indenture”), between the Company, as issuer, and U.S. Bank National Association, as trustee. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
Upon conversion, it is the Company's intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the Notes. For any remaining conversion obligation, the Company intends to pay cash. For all conversions that occur on or after December 1, 2017, the Company has elected a cash settlement method. The current conversion rate is 79.4834 shares of common stock per
$1,000
principal amount of Notes, subject to anti-dilution adjustments. The initial conversion price is approximately
$12.58
per share of common stock.
Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Holders may convert their Notes under the following circumstances:
|
|
•
|
during any fiscal quarter commencing after the fiscal quarter ending on September 28, 2013 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price on each applicable trading day (the “Stock Price Conversion Trigger”);
|
|
|
•
|
during the
five
business day period after any
5
consecutive trading day period (the “measurement period”) in which the trading price per
$1,000
principal amount of Notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
|
|
|
•
|
upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or
|
|
|
•
|
at any time on or after December 1, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
|
If the Company undergoes a fundamental change as defined in the Indenture governing the Notes, holders may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to
100%
of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The net carrying amounts of the debt obligation were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30, 2017
|
|
December 31, 2016
|
Principal
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Unamortized discount
(1)
|
(4,670
|
)
|
|
(15,114
|
)
|
Unamortized issuance cost
(1)
|
(402
|
)
|
|
(1,300
|
)
|
Net carrying amount
|
$
|
144,928
|
|
|
$
|
133,586
|
|
|
|
(1)
|
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the Notes, which is approximately
5 months
.
|
As of December 30, 2017 and December 31, 2016, the carrying amount of the equity component of the Notes was
$43.3 million
.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated 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 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 Notes.
In accounting for the issuance costs of
$5.5 million
related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were recorded as other non-current assets and will be amortized to interest expense over the term of the Notes. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. The Company adopted ASU 2015-03 during the first quarter of 2016. The December 26, 2015 balance sheet was retrospectively adjusted to reclassify
$2.1 million
from other non-current assets to a reduction of the Notes payable liability.
The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Additionally, the Company initially recorded a deferred tax liability of
$17.0 million
in connection with the issuance of the 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 Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.
The following table sets forth total interest expense recognized related to the Notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30, 2017
|
|
December 31, 2016
|
|
December 26, 2015
|
Contractual interest expense
|
$
|
2,625
|
|
|
$
|
2,625
|
|
|
$
|
2,625
|
|
Amortization of debt issuance costs
|
898
|
|
|
813
|
|
|
735
|
|
Amortization of debt discount
|
10,444
|
|
|
9,447
|
|
|
8,546
|
|
Total interest expense
|
$
|
13,967
|
|
|
$
|
12,885
|
|
|
$
|
11,906
|
|
The coupon rate was
1.75%
. For the years ended December 30, 2017 and December 31, 2016, 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 Notes.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a result of the Notes maturing on June 1, 2018, the net carrying amount was reclassified from long-term debt to short-term debt in the Company's consolidated balance sheets during the second quarter of 2017. As of December 30, 2017, the fair value of the Notes was
$149.1 million
. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on December 29, 2017. The Notes are classified as Level 2 of the fair value hierarchy.
During the third quarter of 2017, the closing price of the Company's common stock did not meet the Stock Price Conversion Trigger; therefore, holders of the Notes could not convert their Notes during the fourth quarter of 2017 pursuant to the Stock Price Conversion Trigger. The Notes became convertible at the option of the holders beginning on December 1, 2017 and will be convertible until the close of business on the second scheduled trading day immediately preceding the maturity date. Based on the closing price of the Company’s common stock of
$6.33
on December 29, 2017 (the last trading day of the fiscal quarter), the if-converted value of the Notes did not exceed their principal amount.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12.
Commitments and Contingencies
Operating Leases
The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from
one
to
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 has contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. At the inception of a lease with such conditions, the Company records an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. Asset retirement obligations were
$3.5 million
and
$3.6 million
as of December 30, 2017 and December 31, 2016, respectively. These obligations are classified as other long-term liabilities on the accompanying consolidated balance sheets.
The Company recognizes rent expense on a straight-line basis over the lease period factoring in leasehold improvement incentives, rent holidays and escalation clauses. Rent expense for all leases was
$12.0 million
,
$8.6 million
and
$7.2 million
for 2017, 2016 and 2015, respectively. The Company did not have any sublease rental income for 2017, 2016 and 2015.
Future annual minimum operating lease payments at December 30, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Operating lease payments
|
$
|
11,319
|
|
|
$
|
10,015
|
|
|
$
|
8,595
|
|
|
$
|
2,306
|
|
|
$
|
413
|
|
|
$
|
61
|
|
|
$
|
32,709
|
|
In the fourth quarter of 2017, the Company implemented the 2017 Restructuring Plan, which included vacating certain leased facilities. See Note 8, "Restructuring and Other Related Costs," to the Notes to Consolidated Financial Statements for more information.
Purchase Commitments
The Company has service agreements with its major production suppliers, where the Company is committed to purchase certain parts. These obligations are typically less than the Company’s purchase needs. As of December 30, 2017, December 31, 2016 and December 26, 2015, these non-cancelable purchase commitments were
$96.1 million
,
$111.9 million
and
$137.4 million
, respectively.
Future purchase commitments at December 30, 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
Thereafter
|
|
Total
|
Purchase obligations
|
$
|
96,053
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96,053
|
|
The contractual obligation tables above exclude tax liabilities of
$2.9 million
related to uncertain tax positions because the Company cannot reliably estimate the timing and amount of future payments, if any.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 U.S. Patent Nos. 6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327, 8,374,511 and 8,913,898 (collectively, the “Oyster Optics patents 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 Oyster Optics patents in suit, and intends to defend this action vigorously. The Company filed its answer to Oyster Optics' complaint on February 3, 2017. On October 23, 2017, the Company filed a petition for Inter Partes Review (“IPR”) of one of the Oyster Optics patents in suit, U.S. Patent No. 8,913,898 (the “'898 patent”), with the U.S. Patent and Trademark Office, and, on December 1, 2017, the Company filed a second petition for IPR of the '898 patent. Other defendants have filed IPR petitions in connection with the Oyster Optics patents in suit. The Court has set a trial date for June 2018. 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 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. Because this action is in the early stages, 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.
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 December 30, 2017, 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. Although historically, the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
13.
Guarantees
Product Warranties
Activity related to product warranty was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
Beginning balance
|
$
|
40,342
|
|
|
$
|
38,844
|
|
Charges to operations
|
18,283
|
|
|
25,135
|
|
Utilization
|
(14,985
|
)
|
|
(16,884
|
)
|
Change in estimate
(1)
|
(12,731
|
)
|
|
(6,753
|
)
|
Balance at the end of the period
|
$
|
30,909
|
|
|
$
|
40,342
|
|
|
|
(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. In addition, during 2017, due to product quality improvements, the Company revised certain estimates used in calculating its product warranties that resulted in a one-time reduction to the warranty accrual of
$2.2 million
.
|
Letters of Credit and Bank Guarantees
The Company had
$4.2 million
of standby letters of credit and bank guarantees outstanding as of December 30, 2017. These consisted of
$2.2 million
related to customer performance guarantees,
$1.3 million
value added tax and customs' licenses, and
$0.7 million
related to property leases. The Company had
$8.7 million
of standby letters of credit and bank guarantees outstanding as of December 31, 2016. These consisted of
$4.5 million
related to property leases,
$3.1 million
related to customer performance guarantees and
$1.1 million
related to a value added tax and customs authorities' licenses.
As of December 30, 2017 and December 31, 2016, the Company has a line of credit for approximately
$1.6 million
and
$1.1 million
, respectively, to support the issuance of letters of credit, of which
zero
and
$0.3 million
had been issued and outstanding, respectively. The Company has pledged approximately
$5.2 million
and
$4.5 million
of assets of a subsidiary to secure this line of credit and other obligations as of December 30, 2017 and December 31, 2016, respectively.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2007 Equity Incentive Plan, 2016 Equity Incentive Plan and Employee Stock Purchase Plan
In February 2007, the Company’s board of directors adopted the 2007 Equity Incentive Plan (the “2007 Plan”) and the Company’s stockholders approved the 2007 Plan in May 2007. The Company reserved a total of
46.8 million
shares of common stock for issuance under the 2007 Plan. Upon stockholder approval of the 2016 Equity Incentive Plan (the “2016 Plan”), the Company has ceased granting equity awards under the 2007 Plan, however the 2007 Plan will continue to govern the terms and conditions of the outstanding options and awards previously granted under the 2007 Plan. As of December 30, 2017, options to purchase
1.4 million
shares of the Company's common stock were outstanding and
2.7 million
RSUs were outstanding under the 2007 Plan.
In February 2016, the Company's board of directors adopted the 2016 Plan and the Company's stockholders approved the 2016 Plan in May 2016. In May 2017, the Company's stockholders approved an amendment to the 2016 Plan to increase the number of shares authorized for issuance under the 2016 Plan by
6.4 million
shares. As of December 30, 2017, the Company reserved a total of
13.9 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 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 ESPP was adopted by the board of directors in February 2007 and approved by the stockholders in May 2007. The ESPP was last amended by the stockholders in May 2014 to increase the shares authorized under the ESPP to a total of
16.6 million
shares of common stock. The ESPP has a
20
-year term. Eligible employees may purchase the Company’s common stock through payroll deductions at a price equal to
85%
of the lower of the fair market values of the stock as of the beginning or the end of
six
-month offering periods. An employee’s payroll deductions under the ESPP are limited to
15%
of the employee’s compensation and employees may not purchase more than
$25,000
of stock during any calendar year.
Shares Reserved for Future Issuances
Common stock reserved for future issuance was as follows (in thousands):
|
|
|
|
|
December 30, 2017
|
Outstanding stock options and awards
|
9,555
|
|
Reserved for future option and award grants
|
9,480
|
|
Reserved for future ESPP
|
2,524
|
|
Total common stock reserved for stock options and awards
|
21,559
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 27, 2014
|
4,298
|
|
|
$
|
7.29
|
|
|
$
|
32,833
|
|
Options granted
|
—
|
|
|
$
|
—
|
|
|
|
Options exercised
|
(1,787
|
)
|
|
$
|
7.33
|
|
|
$
|
21,566
|
|
Options canceled
|
—
|
|
|
$
|
—
|
|
|
|
Outstanding at December 26, 2015
|
2,511
|
|
|
$
|
7.26
|
|
|
$
|
28,288
|
|
Options granted
|
—
|
|
|
$
|
—
|
|
|
|
Options exercised
|
(825
|
)
|
|
$
|
4.97
|
|
|
$
|
4,433
|
|
Options canceled
|
(31
|
)
|
|
$
|
12.46
|
|
|
|
Outstanding at December 31, 2016
|
1,655
|
|
|
$
|
8.30
|
|
|
$
|
965
|
|
Options granted
|
—
|
|
|
$
|
—
|
|
|
|
Options exercised
|
(196
|
)
|
|
$
|
7.78
|
|
|
$
|
373
|
|
Options canceled
|
(62
|
)
|
|
$
|
14.11
|
|
|
|
Outstanding at December 30, 2017
|
1,397
|
|
|
$
|
8.11
|
|
|
$
|
1
|
|
Exercisable at December 30, 2017
|
1,397
|
|
|
$
|
8.11
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Stock Units
|
|
Weighted-Average
Grant Date
Fair Value
Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 27, 2014
|
6,042
|
|
|
$
|
8.14
|
|
|
$
|
90,085
|
|
RSUs granted
|
2,202
|
|
|
$
|
18.48
|
|
|
|
RSUs released
|
(3,035
|
)
|
|
$
|
7.88
|
|
|
$
|
53,892
|
|
RSUs canceled
|
(277
|
)
|
|
$
|
10.95
|
|
|
|
Outstanding at December 26, 2015
|
4,932
|
|
|
$
|
12.76
|
|
|
$
|
91,285
|
|
RSUs granted
|
2,992
|
|
|
$
|
13.94
|
|
|
|
RSUs released
|
(2,303
|
)
|
|
$
|
11.06
|
|
|
$
|
26,407
|
|
RSUs canceled
|
(328
|
)
|
|
$
|
13.90
|
|
|
|
Outstanding at December 31, 2016
|
5,293
|
|
|
$
|
14.10
|
|
|
$
|
44,939
|
|
RSUs granted
|
4,281
|
|
|
$
|
9.66
|
|
|
|
|
RSUs released
|
(2,198
|
)
|
|
$
|
13.56
|
|
|
$
|
20,791
|
|
RSUs canceled
|
(585
|
)
|
|
$
|
13.24
|
|
|
|
Outstanding at December 30, 2017
|
6,791
|
|
|
$
|
11.55
|
|
|
$
|
42,988
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Performance
Stock Units
|
|
Weighted-Average
Grant Date
Fair Value Per Share
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 27, 2014
|
876
|
|
|
$
|
7.49
|
|
|
$
|
13,067
|
|
PSUs granted
|
332
|
|
|
$
|
18.23
|
|
|
|
PSU performance earned
(1)
|
129
|
|
|
$
|
7.32
|
|
|
|
PSUs released
|
(413
|
)
|
|
$
|
7.00
|
|
|
$
|
7,231
|
|
PSUs canceled
|
(193
|
)
|
|
$
|
8.03
|
|
|
|
Outstanding at December 26, 2015
|
731
|
|
|
$
|
12.35
|
|
|
$
|
13,540
|
|
PSUs granted
|
647
|
|
|
$
|
15.28
|
|
|
|
PSU performance earned
(1)
|
234
|
|
|
$
|
12.28
|
|
|
|
PSUs released
|
(614
|
)
|
|
$
|
11.34
|
|
|
$
|
8,077
|
|
PSUs canceled
|
(94
|
)
|
|
$
|
15.18
|
|
|
|
Outstanding at December 31, 2016
|
904
|
|
|
$
|
14.13
|
|
|
$
|
7,672
|
|
PSUs granted
|
916
|
|
|
$
|
10.88
|
|
|
|
|
PSUs released
|
(26
|
)
|
|
$
|
11.83
|
|
|
$
|
225
|
|
PSUs canceled
|
(427
|
)
|
|
$
|
12.20
|
|
|
|
Outstanding at December 30, 2017
|
1,367
|
|
|
$
|
16.28
|
|
|
$
|
8,651
|
|
Expected to vest as of December 30, 2017
|
55
|
|
|
|
|
$
|
348
|
|
|
|
(1)
|
Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant.
|
The aggregate intrinsic value of unexercised options is calculated as the difference between the closing price of the Company’s common stock of
$6.33
at December 29, 2017 and the exercise prices of the underlying stock options. The aggregate intrinsic value of the options which 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
$6.33
at December 29, 2017. 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 December 30, 2017. 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)
|
Stock options
|
$
|
1
|
|
|
0.04
|
RSUs
|
$
|
56,474
|
|
|
2.5
|
PSUs
|
$
|
9,620
|
|
|
1.5
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about options outstanding at December 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Vested and Exercisable
Options
|
Exercise Price
|
|
Number of
Shares
|
|
Weighted-
Average
Remaining
Contractual Life
|
|
Weighted-
Average
Exercise
Price
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
(In thousands)
|
|
(In years)
|
|
|
|
(In thousands)
|
|
|
$6.30 - $ 7.25
|
|
261
|
|
|
1.65
|
|
$
|
6.88
|
|
|
261
|
|
|
$
|
6.88
|
|
$7.45 - $ 7.61
|
|
270
|
|
|
1.38
|
|
$
|
7.51
|
|
|
270
|
|
|
$
|
7.51
|
|
$7.68 - $ 8.19
|
|
235
|
|
|
2.45
|
|
$
|
8.07
|
|
|
235
|
|
|
$
|
8.07
|
|
$ 8.58
|
|
509
|
|
|
3.12
|
|
$
|
8.58
|
|
|
509
|
|
|
$
|
8.58
|
|
$9.02 - $13.54
|
|
122
|
|
|
1.54
|
|
$
|
10.22
|
|
|
122
|
|
|
$
|
10.23
|
|
|
|
1,397
|
|
|
2.26
|
|
$
|
8.11
|
|
|
1,397
|
|
|
$
|
8.11
|
|
Employee Stock Options
The weighted-average remaining contractual term of options outstanding and exercisable was
2.3
years as of December 30, 2017. The Company did not grant any stock options during 2017, 2016 or 2015. Total fair value of stock options granted to employees and directors that vested during 2017 and 2016 was insignificant in both periods and was approximately
$0.2 million
2015
based on the grant date fair value. Amortization of stock-based compensation expense related to stock options in
2017 and 2016 was insignificant in both periods, and was
$0.2 million
in 2015
.
The estimated values of stock options, as well as assumptions used in calculating these values were based on estimates as follows (expense amounts in thousands):
|
|
|
|
Year Ended
|
Employee and Director Stock Options
|
December 27,
2014
|
Volatility
|
52%
|
Risk-free interest rate
|
1.3%
|
Expected life
|
4.3 years
|
Estimated fair value
|
3.85
|
Employee Stock Purchase Plan
The fair value of the ESPP shares was estimated at the date of grant using the following assumptions:
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Volatility
|
47% - 51%
|
|
56% - 67%
|
|
39% - 53%
|
Risk-free interest rate
|
0.81% - 1.16%
|
|
0.51% - 0.52%
|
|
0.13% - 0.26%
|
Expected life
|
0.5 years
|
|
0.5 years
|
|
0.5 years
|
Estimated fair value
|
$2.44 - $3.46
|
|
$3.16 - $4.53
|
|
$5.15 - $6.43
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s ESPP activity for the following periods was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Stock-based compensation expense
|
$
|
6,049
|
|
|
$
|
6,094
|
|
|
$
|
4,472
|
|
Employee contributions
|
$
|
16,410
|
|
|
$
|
13,609
|
|
|
$
|
12,253
|
|
Shares purchased
|
2,140
|
|
|
1,369
|
|
|
1,229
|
|
Restricted Stock Units
The Company granted RSUs to employees and members of the Company’s board of directors to receive 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 expense related to RSUs in 2017, 2016 and 2015 was approximately
$30.5 million
,
$29.6 million
and
$22.9 million
, respectively.
Performance Stock Units
Pursuant to the 2007 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and certain 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.
A number of PSUs granted to the Company’s executive officers and senior management are based on the total shareholder return of the Company's common stock price as compared to the total shareholder return 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.
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:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Index
|
|
SPGIIPTR
|
|
SPGIIPTR
|
|
SPGIIPTR
|
Index volatility
|
|
33% - 34%
|
|
18%
|
|
18% - 19%
|
Infinera volatility
|
|
55% - 56%
|
|
55%
|
|
48%
|
Risk-free interest rate
|
|
1.41% - 1.63%
|
|
0.95% - 1.07%
|
|
0.97% - 1.10%
|
Correlation with index
|
|
0.10 - 0.49
|
|
0.58 - 0.59
|
|
0.52
|
Estimated fair value
|
|
$15.23 - $17.35
|
|
$10.31 - $16.62
|
|
$18.08 - $19.29
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In addition, the Company has granted other PSUs to certain employees that only vest upon the achievement of specific operational performance criteria.
The following table summarizes by grant year, the Company’s PSU activity for the year ended December 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Year
|
|
|
Total Number of Performance Stock Units
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
Outstanding at December 31, 2016
|
|
904
|
|
|
123
|
|
|
148
|
|
|
633
|
|
|
—
|
|
PSUs granted
|
|
916
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
916
|
|
PSUs released
|
|
(26
|
)
|
|
(20
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
PSUs canceled
|
|
(427
|
)
|
|
(102
|
)
|
|
(65
|
)
|
|
(213
|
)
|
|
(47
|
)
|
Outstanding at December 30, 2017
|
|
1,367
|
|
|
1
|
|
|
77
|
|
|
420
|
|
|
869
|
|
|
|
(1)
|
Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant since the original grants were at 100% of target amounts.
|
Amortization of stock-based compensation expense related to PSUs in 2017, 2016 and 2015 was approximately
$9.5 million
,
$6.6 million
and
$5.0 million
, respectively.
Stock-based Compensation Expense
The following tables summarize the effects of stock-based compensation on the Company’s consolidated balance sheets and statements of operations for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Stock-based compensation effects in inventory
|
$
|
5,255
|
|
|
$
|
4,911
|
|
|
$
|
3,129
|
|
Stock-based compensation effects in fixed assets
|
$
|
41
|
|
|
$
|
67
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation effects in net income (loss) before income taxes
|
|
|
|
|
|
Cost of revenue
|
$
|
3,065
|
|
|
$
|
2,966
|
|
|
$
|
2,405
|
|
Research and development
|
15,845
|
|
|
13,732
|
|
|
11,055
|
|
Sales and marketing
|
11,288
|
|
|
11,043
|
|
|
8,081
|
|
General and administrative
|
10,776
|
|
|
9,295
|
|
|
7,354
|
|
|
$
|
40,974
|
|
|
$
|
37,036
|
|
|
$
|
28,895
|
|
Cost of revenue—amortization from balance sheet
(1)
|
4,746
|
|
|
3,497
|
|
|
3,685
|
|
Total stock-based compensation expense
|
$
|
45,720
|
|
|
$
|
40,533
|
|
|
$
|
32,580
|
|
|
|
(1)
|
Represents stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following is a geographic breakdown of the provision for (benefit from) income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
32
|
|
|
$
|
—
|
|
State
|
69
|
|
|
861
|
|
|
1,239
|
|
Foreign
|
4,679
|
|
|
2,288
|
|
|
3,482
|
|
Total current
|
$
|
4,748
|
|
|
$
|
3,181
|
|
|
$
|
4,721
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
(6,178
|
)
|
|
(7,932
|
)
|
|
(3,640
|
)
|
Total deferred
|
$
|
(6,178
|
)
|
|
$
|
(7,932
|
)
|
|
$
|
(3,640
|
)
|
Total provision (benefit)
|
$
|
(1,430
|
)
|
|
$
|
(4,751
|
)
|
|
$
|
1,081
|
|
Loss before provision for income taxes from international operations was
$22.6 million
,
$23.1 million
and
$6.3 million
, respectively, for the years ended December 30, 2017, December 31, 2016 and December 26, 2015.
The provisions for (benefit from) income taxes differ from the amount computed by applying the statutory federal income tax rates as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Expected tax (benefit) at federal statutory rate
|
(35.0
|
)%
|
|
(35.0
|
)%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
—
|
%
|
|
2.2
|
%
|
|
1.5
|
%
|
Research credits
|
(1.8
|
)%
|
|
(8.9
|
)%
|
|
(5.0
|
)%
|
Stock-based compensation
|
6.0
|
%
|
|
22.3
|
%
|
|
9.6
|
%
|
Change in valuation allowance
|
26.8
|
%
|
|
(5.9
|
)%
|
|
(43.0
|
)%
|
Foreign rate differential
|
3.3
|
%
|
|
9.4
|
%
|
|
4.0
|
%
|
Other
|
—
|
%
|
|
(0.4
|
)%
|
|
—
|
%
|
Effective tax rate
|
(0.7
|
)%
|
|
(16.3
|
)%
|
|
2.1
|
%
|
The Company recognized an income tax benefit of
$1.4 million
on a loss before income taxes of
$195.9 million
, income tax benefit of
$4.8 million
on a loss before income taxes of
$29.2 million
and income tax expense of
$1.1 million
on income before income taxes of
$52.0 million
in fiscal years 2017, 2016 and 2015, respectively. The resulting effective tax rates were
(0.7)%
,
(16.3)%
and
2.1%
for 2017, 2016 and 2015, respectively. The 2017 and 2016 effective tax rates differ from the expected statutory rate of
35%
based on the Company's ability to benefit U.S. loss carryforwards, offset by state income taxes, non-deductible stock-based compensation expenses and foreign taxes provided on foreign subsidiary earnings. The lower 2017 income tax benefit compared to the 2016 income tax benefit primarily relates to a lower acquisition related amortization expenses and lower state income taxes offset by an increase in tax reserves, and taxable foreign profits in certain jurisdictions. The tax benefit for 2016 compared to tax expense in 2015 is primarily due to acquisition related
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
amortization expenses and charges lower state taxes, and reduction in tax reserves, offset by an increase in taxable foreign profits.
Because of the Company's U.S. operating loss in 2017 and significant loss carryforward position with a corresponding full valuation allowance in 2016 and 2015, it has not been subject to federal or state tax on U.S. income because of the availability of loss carryforwards, with the exception of amounts for certain states’ taxes for which the losses are limited by statute or amount in 2016 and more significantly in 2015, and federal and state taxes associated with a discontinued US subsidiary. If these losses and other tax attributes become fully utilized, taxes will increase significantly to a more normalized, expected rate on U.S. earnings. The release of transfer pricing reserves in the future will have a beneficial impact to tax expense, but the timing of the impact depends on factors such as expiration of the statute of limitations or settlements with tax authorities.
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering the federal corporate income tax rate from
35%
to
21%
effective January 1, 2018, while also imposing a repatriation tax on deemed repatriated earnings of the Company's foreign subsidiaries in 2017, and implementing a quasi-territorial tax system on future foreign earnings.
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. In accordance with SAB 118, the Company determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance, which resulted in no tax expense recorded in connection with the re-measurement of certain deferred tax assets and liabilities from
35%
to
21%
to reflect the new corporate tax rate. Additionally, the Company has provisionally recorded no tax expense in connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an aggregate tax loss of its foreign subsidiaries, as a reasonable estimate at December 30, 2017. Additional work may be necessary for a more detailed analysis of the Company's deferred tax assets and liabilities and its historical foreign earnings. Any subsequent adjustment to these amounts will be recorded in 2018 when the analysis is complete.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows, reduced by the effects of the change in the U.S. corporate tax rate from 35% to 21%, as applicable (in thousands):
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
Deferred tax assets:
|
|
|
|
Net operating losses
|
$
|
66,122
|
|
|
$
|
77,670
|
|
Research and foreign tax credits
|
74,434
|
|
|
47,405
|
|
Nondeductible accruals
|
28,801
|
|
|
42,507
|
|
Inventory valuation
|
29,197
|
|
|
30,449
|
|
Property, plant and equipment
|
1,919
|
|
|
1,692
|
|
Intangible assets
|
3
|
|
|
119
|
|
Stock-based compensation
|
6,325
|
|
|
9,412
|
|
Total deferred tax assets
|
$
|
206,801
|
|
|
$
|
209,254
|
|
Valuation allowance
|
(205,241
|
)
|
|
(200,476
|
)
|
Net deferred tax assets
|
$
|
1,560
|
|
|
$
|
8,778
|
|
Deferred tax liabilities:
|
|
|
|
Depreciation
|
(67
|
)
|
|
(239
|
)
|
Accruals, reserves and prepaid expenses
|
(1,154
|
)
|
|
(4,008
|
)
|
Acquired intangible assets
|
(20,348
|
)
|
|
(24,088
|
)
|
Convertible senior notes
|
(1,191
|
)
|
|
(5,653
|
)
|
Total deferred tax liabilities
|
$
|
(22,760
|
)
|
|
$
|
(33,988
|
)
|
Net deferred tax liabilities
|
$
|
(21,200
|
)
|
|
$
|
(25,210
|
)
|
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. The Company must consider all positive and negative evidence, including the Company's 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 full or partial valuation allowance against its net U.S. deferred tax assets. Based on the available objective evidence, management believes it is not more likely than not that the domestic net deferred tax assets will be realizable in the foreseeable future. Accordingly, the Company has provided a full valuation allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of December 30, 2017 and December 31, 2016. The net deferred tax assets and full valuation allowance thereon as of December 30, 2017 reflects a reduction of approximately
$66.1 million
due to a lower effective tax rate under the Tax Act.
To the extent that the Company determines that deferred tax assets are realizable on a more likely than not basis, and an 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.
As of December 30, 2017, the Company has net operating loss carryforwards of approximately
$273.1 million
for federal tax purposes and
$138.8 million
for state tax purposes. The carryforward balance reflects expected generation of both federal and state net operating losses for the year ended December 30, 2017. Federal net operating loss carryforwards will begin to expire in 2025 while certain unutilized California losses have expired in 2017. Additionally, the Company has federal research and development and foreign tax credits, and California research and development credits available to reduce future income taxes payable of approximately
$52.6 million
and
$43.2 million
, respectively, as of December 30, 2017. Infinera Canada Inc., an indirect wholly owned subsidiary, has Scientific Research and Experimental Development Expenditures (“SRED”)
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
credits available of
$2.7 million
to offset future Canadian income tax payable as of December 30, 2017. Federal credits will begin to expire in the year
2022
if not utilized and California research credits have no expiration date. Canadian SRED credits will begin to expire in the year 2030 if not fully utilized.
Under the Tax Reform Act of 1986, the amount of benefit from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than
50 percent
as defined over a three-year testing period. As of December 30, 2017, the Company had determined that while ownership changes had occurred in the past, the resulting limitations were not significant enough to impact the utilization of the tax attributes against its taxable profits earned to date.
Prior to the enactment of the Tax Act, the Company’s policy with respect to undistributed foreign subsidiaries’ earnings was to consider those earnings to be indefinitely reinvested. Under the Tax Act, undistributed earnings of foreign subsidiaries are deemed to be repatriated for U.S. corporate tax purposes and a one-time toll tax at a reduced U.S. corporate tax rate is applicable in 2017. However, because of the aggregated net tax loss of our foreign subsidiaries, no tax is accruable in 2017. If and when funds are actually distributed in the form of dividends or otherwise, foreign withholding taxes may be applicable in some jurisdictions. The Company's policy with respect to certain undistributed foreign subsidiaries’ earnings is to continue to consider those earnings to be indefinitely reinvested and therefore the Company has not accrued such withholding taxes.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
Beginning balance
|
$
|
22,282
|
|
|
$
|
19,130
|
|
|
$
|
16,978
|
|
Tax position related to current year
|
|
|
|
|
|
Additions
|
2,234
|
|
|
2,548
|
|
|
2,891
|
|
Tax positions related to prior years
|
|
|
|
|
|
Additions
|
—
|
|
|
1,292
|
|
|
—
|
|
Reductions
|
(4,728
|
)
|
|
—
|
|
|
(497
|
)
|
Lapses of statute of limitations
|
(2
|
)
|
|
(688
|
)
|
|
(242
|
)
|
Ending balance
|
$
|
19,786
|
|
|
$
|
22,282
|
|
|
$
|
19,130
|
|
As of December 30, 2017, the cumulative unrecognized tax benefit was
$19.8 million
, of which
$16.9 million
was netted against deferred tax assets, which would have otherwise been subjected with a full valuation allowance. Of the total unrecognized tax benefit as of December 30, 2017, approximately
$2.9 million
, if recognized, would impact the Company’s effective tax rate.
As of December 30, 2017, December 31, 2016 and December 26, 2015, the Company had
$0.7 million
,
$0.5 million
and
$0.5 million
, respectively, of accrued interest or penalties related to unrecognized tax benefits, of which less than
$0.2 million
was included in the Company’s provision for income taxes in each of the years ended December 30, 2017, December 31, 2016 and December 26, 2015, respectively.
The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes.
The Company is potentially subject to examination by the Internal Revenue Service and the relevant state income taxing authorities under the statute of limitations for years 2002 and forward.
The Company has received assessments of tax resulting from transfer pricing examinations in India for most years in the range of fiscal years ending March 2005 through March 2014. While some of the assessment years have been settled with no change from the original tax return position, the Company intends to appeal all
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
remaining assessment years, and does not expect a significant adjustment to unrecognized tax benefits as a result of these inquiries. The Company believes that the resolution of these disputed issues will not have a material impact on our financial statements.
Included in the balance of income tax liabilities, accrued interest and penalties at December 30, 2017 is
$0.4 million
related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions within the next twelve months.
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.
Revenue by geographic region is based on the shipping address of the customer. The following tables set forth revenue and long-lived assets by geographic region (in thousands):
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
December 30,
2017
|
|
December 31,
2016
|
|
December 26,
2015
|
United States
|
$
|
428,592
|
|
|
$
|
541,889
|
|
|
$
|
602,433
|
|
Other Americas
|
20,070
|
|
|
40,036
|
|
|
65,075
|
|
Europe, Middle East and Africa
|
234,972
|
|
|
243,783
|
|
|
174,380
|
|
Asia Pacific and Japan
|
57,105
|
|
|
44,427
|
|
|
44,826
|
|
Total revenue
|
$
|
740,739
|
|
|
$
|
870,135
|
|
|
$
|
886,714
|
|
Property, plant and equipment, net
|
|
|
|
|
|
|
|
|
|
December 30,
2017
|
|
December 31,
2016
|
United States
|
$
|
128,582
|
|
|
$
|
117,715
|
|
Other Americas
|
661
|
|
|
218
|
|
Europe, Middle East and Africa
|
3,527
|
|
|
3,822
|
|
Asia Pacific and Japan
|
3,172
|
|
|
3,045
|
|
Total property, plant and equipment, net
|
$
|
135,942
|
|
|
$
|
124,800
|
|
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
17.
|
Employee Benefit Plan
|
Defined Contribution Plans
The Company has established a savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the 401(k) Plan provides tax-deferred salary contributions for eligible U.S. employees. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. The Company made voluntary cash contributions and matched a portion of employee contributions of
$2.2 million
,
$2.1 million
and
$1.7 million
for 2017, 2016 and 2015, respectively. Expenses related to the 401(k) Plan were insignificant for each of the years 2017, 2016 and 2015.
In connection with the Company's acquisition of Transmode during the third quarter of 2015, the Company has an ITP pension plan covering its Swedish employees. Commitments for old-age and survivors' pension for salaried employees in Sweden are vested through an insurance policy. Expenses related to the ITP pension plan were
$3.3 million
for 2017,
$2.6 million
for 2016 and
$0.8 million
from the Acquisition Date through December 26, 2015.
The Company also provides defined contribution plans in certain foreign countries where required by local statute or at the Company's discretion.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
18.
|
Financial Information by Quarter (Unaudited)
|
The following table sets forth the Company’s unaudited quarterly consolidated statements of operations data for 2017 and 2016. The data has been prepared on the same basis as the audited consolidated financial statements and related notes included in this report. The table includes all necessary adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair presentation of this data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended (Unaudited)
|
|
|
|
2017
|
|
|
|
2016
|
|
Dec. 30
|
|
Sep. 30
|
|
Jul. 1
|
|
Apr. 1
|
|
Dec. 31
|
|
Sep. 24
|
|
Jun. 25
|
|
Mar. 26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
$
|
160,543
|
|
|
$
|
159,579
|
|
|
$
|
143,360
|
|
|
$
|
147,053
|
|
|
$
|
151,365
|
|
|
$
|
156,188
|
|
|
$
|
227,532
|
|
|
$
|
216,082
|
|
Services
|
35,273
|
|
|
33,001
|
|
|
33,461
|
|
|
28,469
|
|
|
29,678
|
|
|
29,264
|
|
|
31,290
|
|
|
28,736
|
|
Total revenue
|
195,816
|
|
|
192,580
|
|
|
176,821
|
|
|
175,522
|
|
|
181,043
|
|
|
185,452
|
|
|
258,822
|
|
|
244,818
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product
|
115,681
|
|
|
111,803
|
|
|
100,302
|
|
|
99,332
|
|
|
101,702
|
|
|
91,064
|
|
|
122,438
|
|
|
118,062
|
|
Cost of services
|
13,708
|
|
|
12,951
|
|
|
11,687
|
|
|
12,134
|
|
|
10,309
|
|
|
9,786
|
|
|
12,638
|
|
|
10,418
|
|
Restructuring and other related costs
|
19,141
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total cost of revenue
|
148,530
|
|
|
124,754
|
|
|
111,989
|
|
|
111,466
|
|
|
112,011
|
|
|
100,850
|
|
|
135,076
|
|
|
128,480
|
|
Gross profit
|
47,286
|
|
|
67,826
|
|
|
64,832
|
|
|
64,056
|
|
|
69,032
|
|
|
84,602
|
|
|
123,746
|
|
|
116,338
|
|
Operating expenses
|
117,793
|
|
|
102,074
|
|
|
105,337
|
|
|
101,883
|
|
|
114,900
|
|
|
95,461
|
|
|
107,664
|
|
|
101,467
|
|
Income (loss) from operations
|
(70,507
|
)
|
|
(34,248
|
)
|
|
(40,505
|
)
|
|
(37,827
|
)
|
|
(45,868
|
)
|
|
(10,859
|
)
|
|
16,082
|
|
|
14,871
|
|
Other income (expense), net
|
(4,449
|
)
|
|
(2,772
|
)
|
|
(2,846
|
)
|
|
(2,782
|
)
|
|
5,589
|
|
|
(2,854
|
)
|
|
(3,295
|
)
|
|
(2,847
|
)
|
Income (loss) before income taxes
|
(74,956
|
)
|
|
(37,020
|
)
|
|
(43,351
|
)
|
|
(40,609
|
)
|
|
(40,279
|
)
|
|
(13,713
|
)
|
|
12,787
|
|
|
12,024
|
|
Provision for (benefit from) income taxes
|
(971
|
)
|
|
211
|
|
|
(512
|
)
|
|
(158
|
)
|
|
(4,026
|
)
|
|
(2,416
|
)
|
|
1,475
|
|
|
216
|
|
Net income (loss)
|
$
|
(73,985
|
)
|
|
$
|
(37,231
|
)
|
|
$
|
(42,839
|
)
|
|
$
|
(40,451
|
)
|
|
$
|
(36,253
|
)
|
|
$
|
(11,297
|
)
|
|
$
|
11,312
|
|
|
$
|
11,808
|
|
Less: Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(125
|
)
|
|
(171
|
)
|
|
(207
|
)
|
Net income (loss) attributable to Infinera Corporation
|
$
|
(73,985
|
)
|
|
$
|
(37,231
|
)
|
|
$
|
(42,839
|
)
|
|
$
|
(40,451
|
)
|
|
$
|
(36,253
|
)
|
|
$
|
(11,172
|
)
|
|
$
|
11,483
|
|
|
$
|
12,015
|
|
Net income (loss) per common share attributable to Infinera Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.50
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
$
|
0.09
|
|
Diluted
|
$
|
(0.50
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal year 2017 was a 52-week year that ended on December 30, 2017. Fiscal year 2016 was a 53-week year that ended on December 31, 2016, and 2015 was a 52-week year that ended on December 26, 2015. The quarters for fiscal years 2017 and 2015 were 13-week quarters, and the quarters for fiscal year 2016 were 14-week quarters.
During the fourth quarter of 2016, the Company recorded an impairment charge of
$11.3 million
related to in-process research and development, resulting from the Company's decision to abandon previously acquired in-process technologies. Additionally, during the same period, the Company recognized a gain of
$9.0 million
on the sale of a cost-method investment.
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a result of the 2017 Restructuring Plan implemented during the fourth quarter of 2017, the Company incurred charges of
$19.1 million
within cost of revenue, including inventory write-downs of
$13.6 million
, manufacturing equipment impairments of
$4.0 million
, and severance related charges of
$1.5 million
. Within operating expenses, the Company recorded charges of
$16.1 million
, including
$7.9 million
of severance related costs,
$7.3 million
of facilities impairment costs and test equipment impairments of
$0.9 million
. For more information, see Note 8, “Restructuring and Other Related Costs,” to the Notes to Consolidated Financial Statements.
During the fourth quarter of 2017, the carrying amount of the Company's cost-method investment exceeded its fair value and the decline in value was determined to be other-than-temporary. As a result, the Company recorded an impairment charge of
$1.9 million
during the fourth quarter of 2017.