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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 26, 2022
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-33486
INFINERA CORPORATION
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Delaware | | 77-0560433 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
6373 San Ignacio Avenue
San Jose, CA 95119
(Address of principal executive offices, including zip code)
(408) 572-5200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of exchange on which registered |
Common stock, par value $0.001 per share | | INFN | | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated Filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 29, 2022, 215,194,919 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.
INFINERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED MARCH 26, 2022
INDEX
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1A. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements (Unaudited)
INFINERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash | $ | 191,937 | | | $ | 190,611 | |
Short-term restricted cash | 6,528 | | | 2,840 | |
Accounts receivable, net | 276,056 | | | 358,954 | |
Inventory | 291,690 | | | 291,367 | |
Prepaid expenses and other current assets | 161,188 | | | 147,989 | |
Total current assets | 927,399 | | | 991,761 | |
Property, plant and equipment, net | 158,397 | | | 160,218 | |
Operating lease right-of-use assets | 38,469 | | | 45,338 | |
Intangible assets | 76,266 | | | 86,574 | |
Goodwill | 249,534 | | | 255,788 | |
Long-term restricted cash | 5,563 | | | 9,070 | |
Other long-term assets | 39,910 | | | 38,475 | |
Total assets | $ | 1,495,538 | | | $ | 1,587,224 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 188,460 | | | $ | 216,404 | |
Accrued expenses and other current liabilities | 142,903 | | | 147,029 | |
Accrued compensation and related benefits | 79,850 | | | 88,021 | |
Short-term debt, net | 495 | | | 533 | |
Accrued warranty | 21,000 | | | 23,204 | |
Deferred revenue | 129,796 | | | 137,297 | |
Total current liabilities | 562,504 | | | 612,488 | |
Long-term debt, net | 599,474 | | | 476,789 | |
| | | |
Long-term accrued warranty | 18,585 | | | 21,106 | |
Long-term deferred revenue | 29,907 | | | 31,612 | |
Long-term deferred tax liability | 2,280 | | | 2,364 | |
Long-term operating lease liabilities | 50,404 | | | 54,326 | |
Other long-term liabilities | 62,179 | | | 64,768 | |
Commitments and contingencies (Note 13) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.001 par value Authorized shares – 25,000 and no shares issued and outstanding | — | | | — | |
Common stock, $0.001 par value Authorized shares – 500,000 as of March 26, 2022 and December 25, 2021 Issued and outstanding shares – 213,231 as of March 26, 2022 and 211,381 as of December 25, 2021 | 213 | | | 211 | |
Additional paid-in capital | 1,851,002 | | | 2,026,098 | |
Accumulated other comprehensive loss | (15,610) | | | (4,496) | |
Accumulated deficit | (1,665,400) | | | (1,698,042) | |
Total stockholders' equity | 170,205 | | | 323,771 | |
Total liabilities and stockholders’ equity | $ | 1,495,538 | | | $ | 1,587,224 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 26, 2022 | | March 27, 2021 | | | | |
Revenue: | | | | | | | |
Product | $ | 267,453 | | | $ | 254,161 | | | | | |
Services | 71,421 | | | 76,746 | | | | | |
Total revenue | 338,874 | | | 330,907 | | | | | |
Cost of revenue: | | | | | | | |
Cost of product | 182,887 | | | 165,485 | | | | | |
Cost of services | 37,959 | | | 43,260 | | | | | |
Amortization of intangible assets | 6,231 | | | 4,616 | | | | | |
| | | | | | | |
Restructuring and other related costs | 150 | | | 514 | | | | | |
Total cost of revenue | 227,227 | | | 213,875 | | | | | |
Gross profit | 111,647 | | | 117,032 | | | | | |
Operating expenses: | | | | | | | |
Research and development | 73,411 | | | 73,529 | | | | | |
Sales and marketing | 35,824 | | | 32,772 | | | | | |
General and administrative | 27,890 | | | 26,506 | | | | | |
Amortization of intangible assets | 3,746 | | | 4,405 | | | | | |
Acquisition and integration costs | — | | | 614 | | | | | |
Restructuring and other related costs | 7,270 | | | 2,319 | | | | | |
Total operating expenses | 148,141 | | | 140,145 | | | | | |
Loss from operations | (36,494) | | | (23,113) | | | | | |
Other income (expense), net: | | | | | | | |
Interest income | 53 | | | 40 | | | | | |
Interest expense | (4,992) | | | (11,843) | | | | | |
Other gain (loss), net | 6,020 | | | (12,395) | | | | | |
Total other income (expense), net | 1,081 | | | (24,198) | | | | | |
Loss before income taxes | (35,413) | | | (47,311) | | | | | |
Provision for income taxes | 6,437 | | | 1,011 | | | | | |
Net loss | $ | (41,850) | | | $ | (48,322) | | | | | |
Net loss per common share: | | | | | | | |
Basic | $ | (0.20) | | | $ | (0.24) | | | | | |
Diluted | $ | (0.20) | | | $ | (0.24) | | | | | |
Weighted average shares used in computing net loss per common share: | | | | | | | |
Basic | 212,182 | | | 202,638 | | | | | |
Diluted | 212,182 | | | 202,638 | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 26, 2022 | | March 27, 2021 | | | | |
Net loss | $ | (41,850) | | | $ | (48,322) | | | | | |
Other comprehensive income (loss), net of tax: | | | | | | | |
| | | | | | | |
Foreign currency translation adjustment | (11,201) | | | (3,833) | | | | | |
| | | | | | | |
Amortization of actuarial loss | 87 | | | 861 | | | | | |
Net change in accumulated other comprehensive income (loss) | (11,114) | | | (2,972) | | | | | |
Comprehensive loss | $ | (52,964) | | | $ | (51,294) | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 26, 2022 |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 25, 2021 | | 211,381 | | | $ | 211 | | | $ | 2,026,098 | | | $ | (4,496) | | | $ | (1,698,042) | | | $ | 323,771 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cumulative-effect adjustment from adoption of ASU 2020-06 | | — | | | — | | | (196,493) | | | — | | | 74,492 | | | $ | (122,001) | |
ESPP shares issued | | 1,234 | | | 1 | | | 8,880 | | | — | | | — | | | 8,881 | |
Restricted stock units released | | 675 | | | 1 | | | — | | | — | | | — | | | 1 | |
Shares withheld for tax obligations | | (59) | | | — | | | (524) | | | — | | | — | | | (524) | |
Stock-based compensation | | — | | | — | | | 13,041 | | | — | | | — | | | 13,041 | |
Other comprehensive loss | | — | | | — | | | — | | | (11,114) | | | — | | | (11,114) | |
Net loss | | — | | | — | | | — | | | — | | | (41,850) | | | (41,850) | |
Balance at March 26, 2022 | | 213,231 | | | $ | 213 | | | $ | 1,851,002 | | | $ | (15,610) | | | $ | (1,665,400) | | | $ | 170,205 | |
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| | Three Months Ended March 27, 2021 |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (loss) | | Accumulated Deficit | | Total Stockholders' Equity |
| | Shares | | Amount | |
Balance at December 26, 2020 | | 201,397 | | | $ | 201 | | | $ | 1,965,245 | | | $ | (11,898) | | | $ | (1,527,264) | | | $ | 426,284 | |
Shares of common stock sold in at-the-market equity offering, net of issuance costs | | 46 | | | — | | | 332 | | | — | | | — | | | 332 | |
ESPP shared issued | | 1,294 | | | 2 | | | 9,011 | | | — | | | — | | | 9,013 | |
Restricted stock units released | | 2,269 | | | 2 | | | — | | | — | | | — | | | 2 | |
Shares withheld for tax obligations | | (194) | | | — | | | (1,938) | | | — | | | — | | | (1,938) | |
Stock-based compensation | | — | | | — | | | 10,949 | | | — | | | — | | | 10,949 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other comprehensive income | | — | | | — | | | — | | | (2,972) | | | — | | | (2,972) | |
Net loss | | — | | | — | | | — | | | — | | | (48,322) | | | (48,322) | |
Balance at March 27, 2021 | | 204,812 | | | $ | 205 | | | $ | 1,983,599 | | | $ | (14,870) | | | $ | (1,575,586) | | | $ | 393,348 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) | | | | | | | | | | | |
| Three Months Ended |
| March 26, 2022 | | March 27, 2021 |
Cash Flows from Operating Activities: | | | |
Net loss | $ | (41,850) | | | $ | (48,322) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 21,572 | | | 20,546 | |
Non-cash restructuring charges and other related costs | 5,390 | | | 1,410 | |
Amortization of debt discount and issuance costs | 1,060 | | | 7,822 | |
Operating lease expense | 2,702 | | | 5,228 | |
Stock-based compensation expense | 12,939 | | | 10,974 | |
Other, net | 789 | | | 2,065 | |
Changes in assets and liabilities: | | | |
Accounts receivable | 81,816 | | | 38,671 | |
Inventory | (1,979) | | | 4,059 | |
Prepaid expenses and other current assets | (23,481) | | | 20,669 | |
Accounts payable | (19,829) | | | (23,584) | |
Accrued liabilities and other current liabilities | (14,351) | | | (11,964) | |
Deferred revenue | (8,990) | | | (8,944) | |
Net cash provided by operating activities | 15,788 | | | 18,630 | |
Cash Flows from Investing Activities: | | | |
| | | |
| | | |
| | | |
| | | |
Purchase of property and equipment, net | (16,059) | | | (11,721) | |
Net cash used in investing activities | (16,059) | | | (11,721) | |
Cash Flows from Financing Activities: | | | |
| | | |
| | | |
| | | |
Repayment of revolving line of credit | — | | | (77,000) | |
| | | |
| | | |
Repayment of mortgage payable | (121) | | | (22) | |
Payment of term license obligation | (1,418) | | | (2,544) | |
Principal payments on finance lease obligations | (400) | | | (309) | |
Proceeds from issuance of common stock | 8,875 | | | 9,344 | |
Tax withholding paid on behalf of employees for net share settlement | (524) | | | (1,938) | |
Net cash provided by (used in) financing activities | 6,412 | | | (72,469) | |
Effect of exchange rate changes on cash | (4,634) | | | (278) | |
Net change in cash | 1,507 | | | (65,838) | |
Cash and restricted cash at beginning of period | 202,521 | | | 315,383 | |
Cash and restricted cash at end of period(1) | $ | 204,028 | | | $ | 249,545 | |
| | | |
| | | |
| | | |
| | | |
Supplemental disclosures of cash flow information: | | | |
Cash paid for income taxes, net | $ | 1,967 | | | $ | 4,355 | |
Cash paid for interest | $ | 7,137 | | | $ | 7,654 | |
Supplemental schedule of non-cash investing and financing activities: | | | |
| | | |
Property and equipment included in accounts payable and accrued liabilities | $ | 1,477 | | | $ | 255 | |
Transfer of inventory to fixed assets | $ | 2,037 | | | $ | 1,041 | |
Unpaid term licenses (included in accounts payable, accrued liabilities and other long-term liabilities) | $ | 9,290 | | | $ | 10,533 | |
(1) Reconciliation of cash and restricted cash to the condensed consolidated balance sheets:
| | | | | | | | | | | |
| March 26, 2022 | | March 27, 2021 |
| | | |
Cash | $ | 191,937 | | | $ | 234,029 | |
Short-term restricted cash | 6,528 | | | 3,288 | |
Long-term restricted cash | 5,563 | | | 12,228 | |
Total cash and restricted cash | $ | 204,028 | | | $ | 249,545 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INFINERA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021, other than the adoption of an accounting pronouncement as described in Note 2, "Recent Accounting Pronouncements".
The Company has made certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, employee benefit and pension plans, inventory valuation, accrued warranty, operating and finance lease liabilities, restructuring and other related costs, loss contingencies, and accounting for income taxes. Other less significant estimates, assumptions and judgments made by management include allowances for sales returns, allowances for credit losses, useful life of intangible assets, and property, plant and equipment. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. The Company expects uncertainties around its key accounting estimates to continue to evolve depending on the duration and degree of impact associated with the outbreak of novel strains of the coronavirus (“COVID-19”). These estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in the Company's condensed consolidated financial statements.
The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.
This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.
For the three-months ended March 26, 2022, no customer accounted for 10% or more of the Company's total revenue. For the three-months ended March 27, 2021, one customer accounted for 10% of the Company's total revenue.
There have been no material changes in the Company’s significant accounting policies for the three-months ended March 26, 2022 compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.
2.Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity" ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. On December 26, 2021, the Company adopted ASU 2020-06 using the modified retrospective method. Applying the transition guidance, the Company was required to apply the guidance to all impacted financial instruments that were outstanding as of December 26, 2021 with the cumulative effect recognized as an adjustment to the opening balance of accumulated deficit.
The adoption of ASU 2020-06 required the Company to record a $196.5 million reduction of additional paid in capital, on December 26, 2021, due to the recombination of the equity conversion component of convertible debt remaining outstanding, which was initially separated and recorded in equity. The $122.0 million increase in debt represented the removal of the remaining debt discounts recorded for this previous separation. The Company recognized a $74.5 million cumulative effect decrease of initially applying ASU 2020-06 as an adjustment to the December 26, 2021 opening balance of accumulated deficit. Interest expense recognized in future periods will be reduced as a result of accounting for the convertible senior notes as a liability instrument. Since the Company had a net loss for the three-months ended March 26, 2022, the convertible senior notes were determined to be anti-dilutive and therefore had no impact to basic or diluted net loss per share for the periods as a result of adopting ASU 2020-06. The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.
Accounting Pronouncements Not Yet Effective
In March 2020, the FASB issued ASU 2020-04 (Topic 848), "Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides temporary optional expedients and exceptions to the existing guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. The update was effective upon issuance and may generally be applied through December 31, 2022 to any new or amended contracts, hedging relationships, and other transactions that reference LIBOR. The Company will apply the amendments when its relevant contracts are modified upon transition to alternative reference rates.
3. Leases
The Company has operating leases for real estate (facilities) and automobiles. For the three-months ended March 26, 2022 and March 27, 2021, operating lease expense was $9.3 million and $7.3 million, respectively. Included in operating lease expense were rent expense and impairment charges due to restructuring resulting in abandonment of certain lease facilities, amounting to $5.6 million and $2.0 million, for the three-months ended March 26, 2022 and March 27, 2021, respectively. Variable lease cost, short-term lease cost and sublease income were immaterial during the three-months ended March 26, 2022 and March 27, 2021.
The following table presents operating lease liabilities in both current and long-term (in thousands):
| | | | | | | | | | | | | | |
| | March 26, 2022 | | December 25, 2021 |
Accrued expenses and other current liabilities | | $ | 14,846 | | | $ | 16,542 | |
Other long-term liabilities | | 50,404 | | | 54,326 | |
Total operating lease liability | | $ | 65,250 | | | $ | 70,868 | |
The Company also has finance leases. The lease term for these arrangements range from three to five years with option to purchase at the end of the term. As of March 26, 2022 and December 25, 2021, finance leases included in property, plant, and equipment, net in the condensed consolidated balance sheets were $5.4 million and $5.5 million, respectively.
The following table presents finance lease expense comprising of amortization of right of use asset and interest expense (in thousands):
| | | | | | | | | | | |
| Three Months Ended |
| March 26, 2022 | | March 27, 2021 |
Amortization of right of use asset | $ | 240 | | | $ | 226 | |
Interest expense | 32 | | | 51 | |
Total finance lease expense | $ | 272 | | | $ | 277 | |
The following table presents balance sheet detail of finance lease liability (in thousands):
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
Accrued expenses and other current liabilities | $ | 1,075 | | | $ | 1,291 | |
Other long-term liabilities | 735 | | | 954 | |
Total finance lease liability | $ | 1,810 | | | $ | 2,245 | |
The following table presents maturity of lease liabilities under the Company's non-cancelable leases as of March 26, 2022 (in thousands):
| | | | | | | | | | | | | | |
| | Operating Lease | | Finance Lease |
Total lease payments | | $ | 83,479 | | | $ | 1,910 | |
Less: interest(1) | | 18,229 | | | 100 | |
Present value of lease liabilities | | $ | 65,250 | | | $ | 1,810 | |
(1) Calculated using the interest rate for each lease.
The following table presents supplemental information for the Company's non-cancelable leases for the three-months ended March 26, 2022 (in thousands, except for weighted average and percentage data):
| | | | | | | | | | | | | | |
| | Operating Lease | | Finance Lease |
Weighted average remaining lease term | | 5.85 years | | 1.52 years |
Weighted average discount rate | | 9.20 | % | | 7.01 | % |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 7,900 | | | $ | 400 | |
Leased assets obtained in exchange for new lease liabilities | | $ | 883 | | | $ | — | |
4. Revenue Recognition
Capitalization of Costs to Obtain a Contract
The ending balances of the Company's capitalized costs to obtain a contract as of March 26, 2022 and December 25, 2021 were not material.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by geography, based on the shipping address of the customer (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 26, 2022 | | March 27, 2021 | | | | |
United States | $ | 170,185 | | | $ | 157,649 | | | | | |
Other Americas | 20,911 | | | 19,531 | | | | | |
Europe, Middle East and Africa | 108,611 | | | 114,908 | | | | | |
Asia Pacific | 39,167 | | | 38,819 | | | | | |
Total revenue | $ | 338,874 | | | $ | 330,907 | | | | | |
The Company sells its products directly to customers who are predominantly service providers and to channel partners that sell on its behalf.
The following table presents the Company's revenue disaggregated by sales channel (in thousands):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 26, 2022 | | March 27, 2021 | | | | |
Direct | $ | 260,892 | | | $ | 271,301 | | | | | |
Indirect | 77,982 | | | 59,606 | | | | | |
Total revenue | $ | 338,874 | | | $ | 330,907 | | | | | |
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
Assets (Liabilities) | | | |
Accounts receivable, net | $ | 276,056 | | | $ | 358,954 | |
Contract assets | $ | 58,612 | | | $ | 49,052 | |
Deferred revenue | $ | (159,703) | | | $ | (168,909) | |
Revenue recognized for the three-months ended March 26, 2022 that was included in the deferred revenue balance at the beginning of the reporting period was $44.9 million. Revenue recognized for the three-months ended March 27, 2021 that was included in the deferred revenue balance at the beginning of the reporting period was $31.3 million. Changes in the contract asset and liability balances during the three-month periods ended March 26, 2022 and March 27, 2021 were not materially impacted by other factors.
Transaction Price Allocated to the Remaining Performance Obligation
The Company’s remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially satisfied, consisting of deferred revenue and backlog. The Company’s backlog represents purchase orders received from customers for future product shipments and services. The Company’s backlog is subject to future events that could cause the amount or timing of the related revenue to change, and, in certain cases, may be canceled without penalty. Orders in backlog may be fulfilled several quarters following receipt or may relate to multi-year support service obligations.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) pursuant to contracts that are not subject to cancellation without penalty at the end of the reporting period (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
Revenue expected to be recognized in the future as of March 26, 2022 | $ | 661,174 | | | $ | 119,111 | | | $ | 26,998 | | | $ | 7,052 | | | $ | 3,673 | | | $ | 3,522 | | | $ | 821,530 | |
5. Fair Value Measurements
The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 26, 2022 | | As of December 25, 2021 |
| Fair Value Measured Using | | Fair Value Measured Using |
| Level 1 | | Level 2 | | | | Total | | Level 1 | | Level 2 | | | | Total |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Assets (Liabilities) | | | | | | | | | | | | | | | |
Foreign currency exchange forward contracts | $ | — | | | $ | (2) | | | | | $ | (2) | | | $ | — | | | $ | (221) | | | | | $ | (221) | |
Disclosure of Fair Values
Financial instruments that are not re-measured at fair value include accounts receivable, accounts payable, accrued liabilities, and debt. The carrying values of these financial instruments other than the Company's 2024 Notes and 2027 Notes (collectively referred to as "convertible senior notes" below) approximate their fair values. The fair value of convertible senior notes were determined based on the quoted bid price of the convertible senior notes in an over-the-counter market on March 25, 2022 (the last trading day of the quarter).
The following table presents the estimated fair values of the convertible senior notes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 26, 2022 | | As of December 25, 2021 |
| Fair Value Measured Using | | Fair Value Measured Using |
| Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
Convertible Senior Notes | $ | — | | | $ | 720,392 | | | $ | 720,392 | | | $ | — | | | $ | 765,412 | | | $ | 765,412 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
During the three-months ended March 26, 2022, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of each of March 26, 2022 and December 25, 2021, none of the Company’s existing assets or liabilities were classified as Level 3.
The Company measures goodwill and intangible assets at fair value on a nonrecurring basis when there are identifiable events or changes in circumstances that may have a significant adverse impact on the fair value of these assets. The Company performed an analysis of impairment indicators of these assets and noted no adverse impact to their fair values as of March 26, 2022.
Facilities-related Charges
The Company classifies certain facilities-related charges within Level 3 of the fair value hierarchy and applies fair value accounting on a nonrecurring basis when impairment indicators exist or upon the existence of observable fair values.
In connection with its restructuring plans (as discussed in Note 9, “Restructuring and Other Related Costs” to the Notes to Condensed Consolidated Financial Statements), the Company incurred facilities related charges of $5.6 million and $2.0 million for the three-months ended March 26, 2022 and March 27, 2021, respectively. These charges primarily consisted of impairment charges incurred for operating lease right-of-use assets and were calculated at fair value based on estimated future sublease rental receipts that the Company could reasonably obtain over the remaining lease term at the discount rate. Facilities-related charges are classified as Level 3 measurement due to the significance of these unobservable inputs. See Note 9, "Restructuring and Other Related Costs" to the Notes to Condensed Consolidated Financial Statements for more information.
Cash
As of March 26, 2022, the Company had $204.0 million of cash and restricted cash, including $75.3 million of cash held by its foreign subsidiaries.
As of December 25, 2021, the Company had $202.5 million of cash and restricted cash, including $77.6 million of cash held by its foreign subsidiaries. The Company's cash held by its foreign subsidiaries is used for operating and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States.
6. Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company transacts business in various foreign currencies, has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated account balances, 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, which are primarily short term in nature.
Historically, the Company entered 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 account balances. Gains and losses on these contracts were intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated account balances, and therefore did not subject the Company to material balance sheet risk.
As of March 26, 2022 and December 25, 2021, the Company posted collateral of $0.9 million for both periods, on its derivative instruments to cover potential credit risk exposure. This amount is classified as other long-term restricted cash on the accompanying condensed consolidated balance sheets.
For both the three-months ended March 26, 2022 and March 27, 2021, the before-tax effect of the foreign currency exchange forward contracts was a net gain of $0.3 million, included in other gain (loss), net in the condensed consolidated statements of operations. In each of these periods, the impact of the gross gains and losses was offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of March 26, 2022, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes. Accordingly, changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. These contracts were entered into with one institution with high credit quality and the Company consistently monitors the creditworthiness of the counterparties.
The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 26, 2022 | | As of December 25, 2021 |
| Gross Notional(1) | | | | | Accrued expenses and other current liabilities | | Gross Notional(1) | | | | Accrued expenses and other current liabilities |
Foreign currency exchange forward contracts | | | | | | | | | | | | |
Related to Euro denominated monetary balances | $ | — | | | | | | $ | — | | | $ | 21,981 | | | | | $ | (139) | |
Related to British Pound denominated monetary balances | 7,383 | | | | | | (2) | | | 7,566 | | | | | (82) | |
| $ | 7,383 | | | | | | $ | (2) | | | $ | 29,547 | | | | | $ | (221) | |
(1)Represents the face amounts of forward contracts that were outstanding as of the end of the period noted.
Accounts Receivable Factoring
The Company sells certain designated trade account receivables based on factoring arrangements with well-established factoring companies. Pursuant to the terms of the arrangements, the Company accounts for these transactions in accordance with ASC Topic 860, "Transfers and Servicing". The Company's factor purchases trade accounts receivables on a non-recourse basis and without any further obligations. Trade accounts receivables balances sold are removed from the condensed consolidated balance sheets and cash received is reflected as cash provided by operating activities in the condensed consolidated statements of cash flows. The difference between the fair value of the Company's trade receivables and the proceeds received is recorded as interest expense in the Company's condensed consolidated statements of operations. For the three-months ended March 26, 2022 and March 27, 2021, the Company's recognized factoring related interest expense was approximately $0.1 million. For the three-months ended March 26, 2022 and March 27, 2021, the Company's gross amount of trade accounts receivables sold were approximately $24.0 million and $31.0 million, respectively.
7. Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.
The following table presents details of the Company’s goodwill during the three-months ended March 26, 2022 (in thousands):
| | | | | |
Balance as of December 25, 2021 | $ | 255,788 | |
Foreign currency translation adjustments | (6,254) | |
Balance as of March 26, 2022 | $ | 249,534 | |
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. To date, the Company has not recognized any impairment losses on goodwill.
Intangible Assets
The following tables present details of the Company’s intangible assets as of March 26, 2022 and December 25, 2021 (in thousands, except for weighted average data):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 26, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Useful Life (In Years) |
Intangible assets with finite lives: | | | | | | | |
| | | | | | | |
Customer relationships and backlog | 155,863 | | | (107,139) | | | 48,724 | | | 4.0 |
Developed technology | 179,497 | | | (151,955) | | | 27,542 | | | 1.3 |
Total intangible assets with finite lives | $ | 335,360 | | | $ | (259,094) | | | $ | 76,266 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 25, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted Average Remaining Useful Life (In Years) |
Intangible assets with finite lives: | | | | | | | |
| | | | | | | |
Customer relationships and backlog | 157,495 | | | (104,701) | | | 52,794 | | | 4.2 |
Developed technology | 182,844 | | | (149,064) | | | 33,780 | | | 1.5 |
Total intangible assets with finite lives | $ | 340,339 | | | $ | (253,765) | | | $ | 86,574 | | | |
| | | | | | | |
| | | | | | | |
The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a portion of these assets are denominated in foreign currency. Amortization expenses were $10.0 million and $9.0 million for the three-month periods ended March 26, 2022 and March 27, 2021, respectively.
Intangible assets are carried at cost less accumulated amortization and impairment, if any. Amortization expenses are recorded to the appropriate cost and expense categories.
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of March 26, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years |
| Total | | Remainder of 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
Total future amortization expense | $ | 76,266 | | | $ | 28,118 | | | $ | 23,329 | | | $ | 9,025 | | | $ | 9,025 | | | $ | 6,769 | | | $ | — | |
8. Balance Sheet Details
Restricted Cash
The Company’s restricted cash balance is held in deposit accounts at various banks globally. These amounts primarily collateralize the Company’s issuances of standby letters of credit and bank guarantees.
Allowance for Credit Losses
The following table provides a rollforward of the allowance for credit losses for accounts receivable for the three-months ended March 26, 2022 (in thousands):
| | | | | |
Balance as of December 25, 2021 | $ | 1,304 | |
Additions(1) | 755 | |
Write offs(2) | (182) | |
| |
Other(3) | (23) | |
Balance as of March 26, 2022 | $ | 1,854 | |
(1)The new additions during the three-months ended March 26, 2022 are primarily due to specific reserves.
(2)The write offs during the three-months ended March 26, 2022 are primarily amounts fully reserved previously.
(3)Primarily represents foreign currency translation adjustments.
Selected Balance Sheet Items
The following table provides details of selected balance sheet items (in thousands):
| | | | | | | | | | | |
| March 26, 2022 | | December 25, 2021 |
Inventory | | | |
Raw materials | $ | 41,225 | | | $ | 39,379 | |
Work in process | 55,356 | | | 53,924 | |
Finished goods | 195,109 | | | 198,064 | |
Total inventory | $ | 291,690 | | | $ | 291,367 | |
Property, plant and equipment, net | | | |
Computer hardware | $ | 46,233 | | | $ | 45,824 | |
Computer software(1) | 52,962 | | | 56,820 | |
Laboratory and manufacturing equipment | 283,357 | | | 287,875 | |
Land and building | 12,369 | | | 12,369 | |
Furniture and fixtures | 2,603 | | | 2,164 | |
Leasehold and building improvements | 51,053 | | | 51,471 | |
Construction in progress | 30,097 | | | 18,807 | |
Subtotal | 478,674 | | | 475,330 | |
Less accumulated depreciation and amortization(2) | (320,277) | | | (315,112) | |
Total property, plant and equipment, net | $ | 158,397 | | | $ | 160,218 | |
Accrued expenses and other current liabilities | | | |
Loss contingency related to non-cancelable purchase commitments | $ | 30,555 | | | $ | 26,481 | |
| | | |
Taxes payable | 48,498 | | | 43,308 | |
| | | |
Short-term operating and finance lease liability | 15,921 | | | 17,792 | |
| | | |
Restructuring accrual | 6,776 | | | 8,610 | |
Other accrued expenses and other current liabilities | 41,153 | | | 50,838 | |
Total accrued expenses | $ | 142,903 | | | $ | 147,029 | |
(1)Included in computer software at March 26, 2022 and December 25, 2021 were $26.3 million and $25.9 million, respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at March 26, 2022 and December 25, 2021 were $8.2 million and $8.9 million, respectively. Also included in computer software at March 26, 2022 and December 25, 2021 was $18.1 million and $20.9 million, respectively, related to term licenses. The unamortized term license costs at March 26, 2022 and December 25, 2021 was $8.8 million and $9.2 million, respectively.
(2)Depreciation expense was $11.6 million and $11.5 million (which includes depreciation of capitalized ERP cost of $0.8 million and $0.6 million, respectively) for the three-months ended March 26, 2022 and March 27, 2021, respectively. Also included in depreciation expense for three-months ended March 26, 2022 and March 27, 2021 was $1.7 million and $1.6 million, respectively, related to term licenses.
9. Restructuring and Other Related Costs
In December 2018, the Company implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a comprehensive review of the Company's operations and ongoing integration activities in order to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018 Restructuring Plan, the Company made several changes to improve its research and development efficiency by consolidating its manufacturing and development sites, including closure of its Berlin, Germany site, reducing headcount at its Munich, Germany site, and processing changes to leverage the Company's engineering and product line development resources across regions and prioritizing research and development initiatives. The Berlin and Munich initiatives were substantially completed in 2020. In 2021 and in the three-months ended March 26, 2022, the Company incurred lease-related impairment charges from consolidation of its Munich site resulting in partial abandonment of the leased facility. In connection with the acquisition of Telecom Holding Parent LLC (“Coriant”, the Acquisition), the Company assumed restructuring liabilities associated with Coriant's previous restructuring and reorganization plans consisting of termination benefits primarily comprised of severance payments. These costs are recorded at estimated fair value.
During 2020, the Company implemented a new restructuring initiative (the "2020 Restructuring Plan") that was primarily intended to reduce costs and consolidate its operations. The identified cost reduction initiatives under the 2020 Restructuring Plan were completed in fiscal year 2021.
In 2021, the Company announced a plan to restructure certain international research & development operations (the "2021 Restructuring Plan"). The Company estimates it will incur total costs related to the restructuring ranging from $15.0 million to $17.0 million, of which $5.5 million was recorded in the three-months ended March 26, 2022. The 2021 Restructuring Plan is expected to be substantially completed with the associated payments made in 2022. Additional restructuring activities may occur in the future in connection with the Company’s ongoing transformation initiatives.
The following table presents restructuring and other related costs included in cost of revenue and operating expenses in the accompanying condensed consolidated statements of operations under the 2021 Restructuring Plan (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 26, 2022 | | March 27, 2021 |
| Cost of Revenue | | Operating Expenses | | Cost of Revenue | | Operating Expenses |
Severance and other related expenses | $ | 140 | | | $ | 1,461 | | | $ | 514 | | | $ | 272 | |
Lease related impairment charges | — | | | 5,592 | | | — | | | 1,950 | |
Asset impairment | — | | | 84 | | | — | | | 51 | |
Others | 10 | | | 133 | | | — | | | 46 | |
Total | $ | 150 | | | $ | 7,270 | | | $ | 514 | | | $ | 2,319 | |
Restructuring liabilities are reported within accrued expenses, operating lease liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Severance and other related expenses | | Lease related impairment charges | | Asset impairment | | Others | | Total |
Balance at December 25, 2021 | $ | 7,536 | | | $ | — | | | $ | — | | | $ | 1,346 | | | $ | 8,882 | |
Charges | 1,601 | | | 5,592 | | | 84 | | | 143 | | | 7,420 | |
Cash Payments | (3,558) | | | (459) | | | — | | | — | | | (4,017) | |
Non-Cash Settlements and Other | (159) | | | (5,133) | | | (84) | | | (14) | | | (5,390) | |
| | | | | | | | | |
Balance at March 26, 2022 | $ | 5,420 | | | $ | — | | | $ | — | | | $ | 1,475 | | | $ | 6,895 | |
As of March 26, 2022, the Company's restructuring liability was primarily comprised of $6.0 million related to the 2021 Restructuring Plan and $0.9 million related to assumed restructuring liabilities associated with Coriant's previous restructuring and reorganization plans, which was substantially completed in previous years. The liability related to the 2021 Restructuring Plan is expected to be paid by end of 2022.
10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive loss by component for the three-months ended March 26, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation | | Actuarial Gain (Loss) on Pension | | Accumulated Tax Effect | | Total |
Balance at December 25, 2021 | | $ | (7,829) | | | $ | 4,297 | | | $ | (964) | | |