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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operation
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Management’s discussion and analysis of financial condition and results of operation, or MD&A, is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The MD&A is organized as follows:
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•
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Forward-looking statements.
This section discusses how forward-looking statements made by us in the MD&A and elsewhere in this report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.
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•
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Business Overview.
This section provides an introductory overview and context for the discussion and analysis that follows in MD&A.
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•
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Critical Accounting Estimates.
This section discusses those accounting estimates that are both considered to have significant impact on our financial condition and operating results and require significant judgment on the part of management regarding matters that are inherently uncertain.
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•
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Results of Operations.
This section provides analysis of the Company’s results of operations for the three fiscal years period ended
April 28, 2019
. A brief description is provided of transactions and events that impact comparability of the results being analyzed.
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•
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Financial Condition and Liquidity.
This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.
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Forward Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A. Risk Factors.” The following discussion should be read together with our consolidated financial statements and related notes thereto included elsewhere in this report.
Business Overview
We are a global technology leader in optical communications, providing components and subsystems to networking equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies. We design products that meet the increasing demands for network bandwidth, data storage and 3D sensing subsystems. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in these networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 400 Gbps, over distances of less than 10 meters to more than 2,000 kilometers, using a wide range of network protocols and physical configurations.
We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as a reconfigurable optical add/drop multiplexers, or ROADM.
We have also entered the 3D Sensing market. 3D Sensing enables features such as facial recognition, gaming and virtual reality, as well as automotive market applications such as LiDAR and in-cabin recognition. VCSELs (Vertical Cavity Surface Emitting Lasers) are core to 3D Sensing. We leverage our experience in laser technology in our 3D Sensing products.
Our line of optical components also includes packaged lasers and photodetectors for data communication and telecommunication applications.
Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, tablet computers, and other mobile devices.
Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products, including lasers, photodetectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.
We sell our products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Broadcom, Ciena, Cisco Systems, Dell EMC, Ericsson, FiberHome, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Juniper, Nokia, QLogic (now subsidiary of Marvell Technology), and ZTE, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.
Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, inventory adjustments for obsolete and excess inventory and the amortization of acquired developed technology associated with acquisitions that we have made. As a result of building a vertically integrated business model, our manufacturing cost structure has become more fixed. While this can be beneficial during periods when demand is strong, it can be more difficult to reduce costs during periods when demand for our products is weak, product mix is unfavorable or selling prices are generally lower. While we have undertaken measures to reduce our operating costs, there can be no assurance that we will be able to reduce our cost of revenues sufficiently to achieve or sustain profitability.
Since October 2000, we have completed the acquisition of two publicly-held companies. We have also completed the acquisition of 13 privately-held companies and certain businesses and assets from seven other companies in order to broaden our product offerings and provide new sources of revenue, production capabilities and access to advanced technologies that we believe will enable us to reduce our product costs and develop innovative and more highly integrated product platforms while accelerating the timeframe required to develop such products.
Merger Agreement
On November 8, 2018, the Company, II-VI Incorporated, a Pennsylvania corporation ("Parent" or "II-VI") and Mutation Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Subsidiary"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, Merger Subsidiary will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the time the Merger becomes effective (the "Effective Time"), each issued and outstanding share of common stock, par value $0.001 per share, of the Company ("Company Stock") (other than shares of Company Stock owned by Parent or Merger Subsidiary or any direct or indirect wholly owned subsidiary of Parent, which will be cancelled without consideration, and holders of Company Stock, if any, who properly exercise their appraisal rights under the General Corporation Law of the State of Delaware) outstanding immediately prior to the Merger will be automatically cancelled and converted into the right to receive, for each share of Company Stock, at the stockholder’s election and subject to proration in the event the cash consideration or Parent Common Stock (as defined below) consideration is oversubscribed, either (i) $26.00 in cash (the "Cash Election Consideration"), (ii) 0.5546 of a share of common stock, no par value, of Parent ("Parent Common Stock") (the "Stock Election Consideration"), or (iii) a combination of (A) 0.2218 of a share of Parent Common Stock (the "Exchange Ratio") and (B) $15.60 in cash, without interest (the "Mixed Election Consideration"). On an average basis across all shares of Company Stock (including the Options (as defined below) and Performance RSUs (as defined below)), at the closing of the Merger, 60% of the aggregate amount of the outstanding shares of Company Stock (including the Options and Performance RSUs) will be converted into the right to receive the Cash Election Consideration, with the remaining 40% converted into the right to receive the Stock Election Consideration.
Pursuant to the Merger Agreement, at the Effective Time, each outstanding and unexercised option to purchase Company Stock (whether vested or unvested) (an "Option") shall automatically be cancelled and terminated and converted into the right to receive an amount of Mixed Election Consideration equal to the product of (i) the excess, if any, of the Cash Election Consideration over the exercise price per share of such Option multiplied by (ii) the number of shares of Company Stock subject to such Option, payable no later than the Company’s next payroll date after the closing of the Merger. Further, as of the Effective Time, each award of restricted stock units of the Company that is outstanding immediately prior to the Effective Time
and is subject to a performance-based vesting condition (a "Performance RSU") that relates solely to the value of Company Stock will vest as to a number of shares determined under the terms of the award and will be cancelled and extinguished and converted into the right to receive the Cash Election Consideration, the Stock Election Consideration or the Mixed Election Consideration in accordance with the election made by the holder of such Performance RSU. At the Effective Time, each other award of restricted stock units of the Company that is outstanding and unvested will be assumed by Parent and continue to be subject to substantially the same terms and conditions (including vesting requirements) as in effect immediately prior to the Effective Time, except that the number of shares of Parent Common Stock subject to such assumed restricted stock unit awards will be equal to the product of (i) the number of shares of Company Stock underlying such unvested restricted stock unit award as of immediately prior to the Effective Time multiplied by (ii) the sum of the (A) Exchange Ratio plus (B) the quotient obtained by dividing $15.60 by the Equity Award Measurement Price. The "Equity Award Measurement Price" means the volume weighted average price per share of Parent Common Stock on NASDAQ for the ten (10) consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time.
The Merger Agreement also provides, among other things, that the board of directors of Parent (the "Parent Board") will appoint, at the Effective Time, three members, each of whom are (i) members of the board of directors of the Company (the "Board") as of the date of the Merger Agreement, (ii) mutually agreed to by the Company and Parent, acting in good faith, and (iii) reasonably approved by the Corporate Governance and Nominating Committee of the Parent Board.
The closing of the Merger is subject to, among other things, the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Stock (the "Company Stockholder Approval"), which was obtained on March 26, 2019, and the affirmative vote of at least a majority of the votes cast for the proposal on the issuance of the Parent Common Stock and any restricted units of Parent issuable in connection with the Merger (the "Parent Stockholder Approval"), which was obtained on March 26, 2019. The closing of the Merger is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; receipt of other specified regulatory approvals; the absence of any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction enjoining or otherwise prohibiting the consummation of the Merger; the SEC having declared effective a Form S-4 with respect to, and the approval of the listing on NASDAQ of, the shares of Parent Common Stock issuable in connection with the Merger; the accuracy of the representations and warranties contained in the Merger Agreement (generally subject to a material adverse effect qualification); compliance with the covenants and agreements in the Merger Agreement in all material respects; and no material adverse effect on either the Company or Parent. The closing of the Merger is also subject to Parent, the Company and Wells Fargo Bank, National Association (the "Trustee"), entering into a supplemental indenture in connection with that certain (i) indenture, dated as of December 16, 2013 (the "2033 Notes Indenture"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2033 (the "2033 Notes"), which was cancelled and discharged on May 1, 2019 in connection with the redemption of all of the remaining outstanding 2033 Notes, and (ii) indenture, dated as of December 21, 2016 (the "2036 Notes Indenture" and, together with the 2033 Notes Indentures, the "Indentures"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2036 (the "2036 Notes" and, together with the 2033 Notes, the "Notes") providing, among other items, (a) at and after the Effective Time, pursuant, and subject to, the terms and conditions of the applicable Indenture, for the change in right to convert each $1,000 principal amount of the 2033 Notes and the 2036 Notes, as applicable, into the amount of shares of Parent Common Stock and cash, or the combination thereof, that a holder of a number of shares of Company Stock equal to the conversion rate of the 2033 Notes and the 2036 Notes immediately prior to the Effective Time would have owned or been entitled to receive upon the Effective Time, and (b) Parent’s full and unconditional guarantee, on a senior unsecured basis, of the 2033 Notes and the 2036 Notes. Though not a condition to Closing, Parent and Merger Subsidiary are also obligated to use its reasonable best efforts to obtain debt financing that, together with the other financial resources of Parent, will be sufficient to satisfy all of Parent’s and Merger Subsidiary’s payment obligations under the Merger Agreement.
Pursuant, and subject, to the terms and conditions of the Indentures, each holder of Notes will have the right, at such holder’s option, to require the Company to repurchase any or all of such holder’s Notes, on the date specified by the Company that is not less than 20 business days and not more than 35 business days after the date of the Company’s notice to holders of the occurrence of the Merger, such notice to be delivered within 20 business days of the Effective Time, at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the repurchase date ("Merger Repurchase Date"). Further pursuant, and subject, to the terms and conditions of the Indentures, all or any portion of a holder’s Notes may be surrendered for conversion at any time from or after the date that is 25 scheduled trading days prior to the anticipated Effective Time (or, if later, the business day after the Company gives holders notice of the Merger) until the Merger Repurchase Date.
The Company has made customary representations and warranties in the Merger Agreement. The Company is also subject to customary covenants, including, among others, covenants (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by Parent, (iii) to convene and hold a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to Parent the recommendation of the Board that the Company’s stockholders adopt the Merger Agreement.
Parent has made customary representations and warranties in the Merger Agreement. Parent is also subject to customary covenants, including, among others, (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by the Company, (iii) to convene and hold a meeting of its shareholders for the purpose of obtaining the Parent Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to the Company the recommendation of the Parent Board that Parent’s shareholders vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger.
The Merger Agreement contains certain termination rights, including the right of the Company to terminate the Merger Agreement under specified circumstances to accept an unsolicited superior proposal from a third party. The Merger Agreement provides that, upon termination of the Merger Agreement by the Company or Parent under specified circumstances (including termination by the Company to accept a superior proposal), a termination fee of $105,200,000 will be payable by the Company to Parent. The Company termination fee is also payable under certain other specified circumstances set forth in the Merger Agreement. Further, the Company has the right to terminate the Merger Agreement if the Parent Board fails to recommend that the shareholders of Parent vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger or if the Parent withdraws, amends or modifies such recommendation. If the Company timely exercises its right to terminate the Merger Agreement after it obtains actual knowledge of such failure to recommend, or withdrawal, amendment or modification of such recommendation, a termination fee of $105,200,000 will be payable by Parent to the Company. The Merger Agreement also provides that each party to the Merger Agreement may compel the other party or parties thereto to specifically perform its or their obligations under the Merger Agreement.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K on November 9, 2018 and is incorporated herein by reference.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures require that we make estimates, assumptions and judgments that can have a significant impact on our revenue and operating results, as well as on the value of certain assets and contingent liabilities on our balance sheet. The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.
Refer to "Part II, Item 8, Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies." for further information on our critical accounting policies, and estimates, which are as follows:
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Inventories - estimation of future demand for inventory on hand;
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•
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Property, equipment and improvements - the useful life determination;
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•
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Long-lived assets - estimation of projected cash flows associated with impaired long-lived assets;
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•
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Income taxes - the identification and measurement of deferred tax assets and liabilities and the provisional estimates associated with the Tax Cuts and Jobs Act.
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Recent Accounting Pronouncements
For a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Part II, Item 8, Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies."
Results of Operations
Comparison of Fiscal Years Ended
April 28, 2019
and
April 29, 2018
Revenues
The following table sets forth the changes in revenues by market application:
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Fiscal Years Ended
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|
|
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(in thousands, except percentages)
|
April 28, 2019
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|
April 29, 2018
|
|
Change
|
|
% Change
|
Datacom revenue
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$
|
926,786
|
|
|
$
|
1,029,037
|
|
|
$
|
(102,251
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)
|
|
(10
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)%
|
Telecom revenue
|
353,694
|
|
|
287,446
|
|
|
66,248
|
|
|
23
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%
|
Total revenues
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$
|
1,280,480
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|
|
$
|
1,316,483
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|
|
$
|
(36,003
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)
|
|
(3
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)%
|
During fiscal 2019, we recognized revenue based on ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)", but during fiscal 2018, we recognized revenue based on Topic 605. Therefore, the periods are not directly comparable. For additional information regarding the impact of the new accounting standard on our revenue, please refer to "Part II, Item 8, Financial Statements - Note 2. Summary of Significant Accounting Policies."
Datacom revenue for the year ended
April 28, 2019
decreased approximately $102.3 million compared to the year ended
April 29, 2018
. During the period, 40 Gbps datacom transceiver revenue decreased approximately $59.4 million primarily due to our customers switching their technology infrastructure to higher speed transceivers. Also during the period, 100 Gbps datacom transceiver revenue decreased approximately $53.3 million primarily due to a decrease in the average selling prices for our products.
Telecom revenue for the year ended
April 28, 2019
increased approximately $66.2 million compared to the year ended
April 29, 2018
primarily due to an increase in WSS products revenue.
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Amortization of Acquired Developed Technology
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Fiscal Years Ended
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(in thousands, except percentage)
|
April 28, 2019
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|
April 29, 2018
|
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Change
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% Change
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Amortization of acquired developed technology
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$
|
1,958
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|
|
$
|
2,436
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|
|
$
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(478
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)
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|
(20
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)%
|
Amortization of acquired developed technology for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.
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Impairment of Long-lived Assets
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|
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Fiscal Years Ended
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|
|
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|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
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% Change
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Impairment of long-lived assets
|
$
|
4,459
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|
|
$
|
2,233
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|
|
$
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2,226
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|
|
100
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%
|
During fiscal 2019 and 2018, we recorded charges of $4.5 million and $2.2 million, respectively, for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions.
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Gross Profit
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|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentages)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
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|
% Change
|
Gross profit
|
$
|
348,093
|
|
|
$
|
362,166
|
|
|
$
|
(14,073
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)
|
|
(4
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)%
|
As a percentage of revenues
|
27
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%
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|
28
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%
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|
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|
Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. The gross profit decline for the year ended
April 28, 2019
compared to the year ended
April 29, 2018
was attributable to the combination of overall lower revenue and the decline in gross margin.
Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross margin for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
mostly due to decreases in the average selling prices for our products.
Our industry is characterized by products with average selling prices that decrease over time and we expect this trend to continue. Future decreases in average selling prices may have an unfavorable impact on our future gross profit, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold, increasing the number of units sold and/or increasing the sales of products with higher gross margins. Future decreases in average selling prices also may have an unfavorable impact on our future gross margin, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold and/or increasing the sales of products with higher gross margins.
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Research and Development Expenses
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|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
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% Change
|
Research and development expenses
|
$
|
217,877
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|
|
$
|
239,008
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|
|
$
|
(21,131
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)
|
|
(9
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)%
|
Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer hardware, costs related to prototyping, and allocated facilities and IT support costs. Research and development expenses for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
primarily due to a decrease in employee compensation related expenses as a result of restructuring activities undertaken during the first quarter of fiscal 2019, partially offset by employee severance compensation and other expenses related to restructuring activities undertaken during the first quarter of fiscal 2019.
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Sales and Marketing Expenses
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|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Sales and marketing expenses
|
$
|
49,077
|
|
|
$
|
49,024
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|
|
$
|
53
|
|
|
—
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%
|
Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs.
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|
General and Administrative Expenses
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|
|
|
|
|
|
|
|
Fiscal Years Ended
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|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
General and administrative expenses
|
$
|
54,844
|
|
|
$
|
59,518
|
|
|
$
|
(4,674
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)
|
|
(8
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)%
|
General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
primarily due to approximately $7.5 million of stock-based compensation expense recorded during the third quarter of fiscal 2018 related to the modification of equity awards for our former Chief Executive Officer upon his retirement during the third quarter of fiscal 2018, partially offset by approximately $4.5 million of transaction expenses during fiscal 2019 related to the Merger.
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|
Start-Up Costs
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|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
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|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Start-up costs
|
$
|
54,517
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|
|
$
|
3,535
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|
|
$
|
50,982
|
|
|
1,442
|
%
|
Start-up costs consist of operating expenses, including employee compensation, facility maintenance and other expenses, related to our recently purchased 700,000 square foot manufacturing facility in Sherman, Texas during the period while it is being brought to its intended use.
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|
|
Interest Income
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Interest income
|
$
|
21,201
|
|
|
$
|
16,084
|
|
|
$
|
5,117
|
|
|
32
|
%
|
Interest income for the year ended
April 28, 2019
increased compared to the year ended
April 29, 2018
due to an increase in interest rates.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Interest expense
|
$
|
33,492
|
|
|
$
|
36,656
|
|
|
$
|
(3,164
|
)
|
|
(9
|
)%
|
Interest expense for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
primarily due to the redemption of our 0.50% Convertible Senior Notes due 2033 during the third quarter of fiscal 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Other income (expense), net
|
$
|
(718
|
)
|
|
$
|
(945
|
)
|
|
$
|
227
|
|
|
(24
|
)%
|
Other expense, net for the year ended
April 28, 2019
decreased as compared to the year ended
April 29, 2018
primarily due to a $2.3 million impairment of one of our minority investments, recognized during fiscal 2018, due to this investee's prolonged negative results of operations and cash flows, partially offset by fluctuations of foreign currency exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 28, 2019
|
|
April 29, 2018
|
|
Change
|
|
% Change
|
Provision for income taxes
|
$
|
9,667
|
|
|
$
|
33,283
|
|
|
$
|
(23,616
|
)
|
|
(71
|
)%
|
The provision for income taxes for the year ended
April 28, 2019
decreased compared to the year ended
April 29, 2018
primarily due to approximately $49.4 million of the deferred tax expense recorded in fiscal 2018 associated with the revaluation of our net deferred tax assets and the inclusion of the one-time deemed repatriation of accumulated foreign earnings, both as the result of the TCJA, compared to approximately $19.2 million of current tax expense recorded in fiscal 2019 associated with certain international tax provisions of TCJA.
Comparison of Fiscal Years Ended
April 29, 2018
and
April 30, 2017
Revenues
The following table sets forth the changes in revenues by market application:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentages)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Datacom revenue
|
$
|
1,029,037
|
|
|
$
|
1,041,854
|
|
|
$
|
(12,817
|
)
|
|
(1
|
)%
|
Telecom revenue
|
287,446
|
|
|
407,449
|
|
|
(120,003
|
)
|
|
(29
|
)%
|
Total revenues
|
$
|
1,316,483
|
|
|
$
|
1,449,303
|
|
|
$
|
(132,820
|
)
|
|
(9
|
)%
|
Datacom revenue for the year ended April 29, 2018 decreased approximately $12.8 million compared to the year ended April 30, 2017. During the period, 100 Gbps datacom transceiver revenue increased approximately $100.0 million offset by an approximately $103.1 million decline in 10 and 40 Gbps datacom transceiver revenue. Decline in datacom revenue during fiscal 2018 was primarily due to lower demand for our datacom products from our Chinese OEM customers.
Telecom revenue for the year ended April 29, 2018 decreased approximately $120.0 million compared to the year ended April 30, 2017. During the period, 10 Gbps telecom transceiver revenue declined approximately $24.3 million, 100 Gbps telecom transceiver revenue declined approximately $46.0 million, and ROADM line card revenue declined approximately $21.5 million. Decline in telecom revenue during fiscal 2018 was primarily due to lower demand for our telecom products from our Chinese OEM customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of Acquired Developed Technology
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Amortization of acquired developed technology
|
$
|
2,436
|
|
|
$
|
4,492
|
|
|
$
|
(2,056
|
)
|
|
(46
|
)%
|
Amortization of acquired developed technology for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 primarily due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentages)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Gross profit
|
$
|
362,166
|
|
|
$
|
503,647
|
|
|
$
|
(141,481
|
)
|
|
(28
|
)%
|
As a percentage of revenues
|
28
|
%
|
|
35
|
%
|
|
|
|
|
Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. The gross profit decline for the year ended April 29, 2018 compared to the year ended April 30, 2017 was attributable to the combination of overall lower revenue and the decline in gross margin.
Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross margin for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 mostly due to decreases in the average selling prices for our products. In addition, gross margin percentage declined approximately 500 basis points due to the negative impact of fixed manufacturing costs relative to lower revenue in the current year and approximately 200 basis points due to increased charges for excess and obsolete inventory.
Our industry is characterized by products with average selling prices that decrease over time and we expect this trend to continue. Future decreases in average selling prices may have an unfavorable impact on our future gross profit, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold, increasing the number of units sold and/or increasing the sales of products with higher gross margins. Future decreases in average selling prices also may have an unfavorable impact on our future gross margin, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold and/or increasing the sales of products with higher gross margins.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and Development Expenses
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Research and development expenses
|
$
|
239,008
|
|
|
$
|
217,914
|
|
|
$
|
21,094
|
|
|
10
|
%
|
Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer hardware, costs related to prototyping, and allocated facilities and IT support costs. Research and development expenses for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to an increase in employee compensation related expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expenses
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Sales and marketing expenses
|
$
|
49,024
|
|
|
$
|
50,644
|
|
|
$
|
(1,620
|
)
|
|
(3
|
)%
|
Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs. Sales and marketing expenses for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 due to a decrease in commissions for our external sales representatives resulting from lower revenue levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
General and administrative expenses
|
$
|
59,518
|
|
|
$
|
55,442
|
|
|
$
|
4,076
|
|
|
7
|
%
|
General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 primarily due to approximately $7.5 million of stock based compensation expense related to the modification of equity awards for our former Chief Executive Officer upon his retirement during the third quarter of fiscal 2018 partially offset by lower legal service fees related to on-going litigation in fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Start-Up Costs
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Start-up costs
|
$
|
3,535
|
|
|
$
|
—
|
|
|
$
|
3,535
|
|
|
100
|
%
|
Start-up costs consist of operating expenses, including employee compensation, facility maintenance and other expenses, related to our recently purchased 700,000 square foot manufacturing facility in Sherman, Texas during the period while it is being brought to its intended use.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of Long-lived Assets
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Impairment of long-lived assets
|
$
|
2,233
|
|
|
$
|
—
|
|
|
$
|
2,233
|
|
|
100
|
%
|
During fiscal 2018, we recorded a $2.2 million charge for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Interest income
|
$
|
16,084
|
|
|
$
|
6,763
|
|
|
$
|
9,321
|
|
|
138
|
%
|
Interest income for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to higher balances of cash and short-term investments primarily as a result of issuance of $575.0 million in aggregate principal amount of our 0.50% Convertible Senior Notes due 2036 in December 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Interest expense
|
$
|
36,656
|
|
|
$
|
20,363
|
|
|
$
|
16,293
|
|
|
80
|
%
|
Interest expense for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to the amortization of the debt discount on our 0.50% Convertible Senior Notes due 2036 issued in December 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Other income (expense), net
|
$
|
(945
|
)
|
|
$
|
(91
|
)
|
|
$
|
(854
|
)
|
|
938
|
%
|
The change in other income (expense), net for the year ended April 29, 2018 as compared to the year ended April 30, 2017 was due to a $2.3 million impairment of one of our minority investments, recognized during fiscal 2018 as a result of this investee's negative results of operations and cash flows, partially offset by fluctuations of foreign currency exchange rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for (Benefit from) Income Taxes
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
|
(in thousands, except percentage)
|
April 29, 2018
|
|
April 30, 2017
|
|
Change
|
|
% Change
|
Provision for (benefit from) income taxes
|
$
|
33,283
|
|
|
$
|
(86,152
|
)
|
|
$
|
119,435
|
|
|
(139
|
)%
|
The provision for income taxes for the year ended April 29, 2018 increased compared to the benefit from income taxes for the year ended April 30, 2017 primarily due to approximately $49.4 million of the deferred tax expense associated with the revaluation of our net deferred tax assets and the inclusion of the one-time deemed repatriation of accumulated foreign earnings, both as the result of the TCJA, enacted on December 22, 2017, and an approximately $103.3 million release of valuation allowance related to a majority of our U.S. deferred tax assets during the fourth quarter of fiscal 2017, based on sufficient positive objective evidence that we would generate sufficient taxable income in the U.S. to realize the deferred tax assets. The positive evidence as of April 30, 2017 included fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Realization of our deferred tax assets is primarily dependent upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Net cash provided by operating activities
|
$172,163
|
|
$171,637
|
|
$227,832
|
Net cash provided by (used in) investing activities
|
$579,119
|
|
$(121,107)
|
|
$(852,783)
|
Net cash (used in) provided by financing activities
|
$(249,354)
|
|
$1,499
|
|
$585,958
|
Cash Flows - Operating Activities
Net cash provided by operating activities in fiscal 2019 primarily consisted of our net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling $184.5 million.
Net cash provided by operating activities in fiscal 2018 primarily consisted of our net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling $221.6 million.
Net cash provided by operating activities in fiscal 2017 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $62.2 million, offset by a $83.7 million increase in working capital primarily related to increases in inventory. Inventory increased by $73.6 million due to increased purchases to support the increase in sales level.
Cash Flows - Investing Activities
Net cash provided by investing activities in fiscal 2019 primarily consisted of $1,719.3 million of proceeds from maturities of short-term marketable securities offset by $930.3 million related to purchases of short-term marketable securities and expenditures of $209.9 million for long-lived assets (property, equipment and improvements).
Net cash used in investing activities in fiscal 2018 primarily consisted of expenditures of $221.5 million for long-lived assets (property, equipment and improvements), and $1,765.7 million related to purchases of short-term marketable securities offset by $1,866.1 million of proceeds from maturities of short-term marketable securities.
Net cash used in investing activities in fiscal 2017 primarily consisted of expenditures of $140.1 million for long-lived assets (property, equipment and improvements), and $1,032.5 million related to purchases of short-term marketable securities offset by $321.2 million of proceeds from maturities of short-term marketable securities.
Cash Flows - Financing Activities
Net cash used in financing activities in fiscal 2019 primarily consisted of the redemption of our 0.50% Convertible Senior Notes due 2033 during the third quarter of fiscal 2019.
Net cash provided by financing activities in fiscal 2018 primarily consisted of proceeds from the issuance of shares under our employee stock option and stock purchase plans, offset by share repurchases for tax withholdings on vesting of restricted stock units.
Net cash provided by financing activities in fiscal 2017 primarily consisted of $569.3 million of proceeds, net of issuance costs, from the issuance of the 2036 Convertible Senior Notes.
Contractual Obligations and Commercial Commitments
Our contractual obligations at
April 28, 2019
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
After
|
Contractual Obligations
|
Total
|
|
1 year
|
|
1-3 Years
|
|
4-5 Years
|
|
5 Years
|
0.5% Convertible Senior Notes due 2033 (a)
|
$
|
1,054
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,054
|
|
|
$
|
—
|
|
0.5% Convertible Senior Notes due 2036
|
575,000
|
|
|
—
|
|
|
575,000
|
|
|
—
|
|
|
—
|
|
Interest on 2036 Notes (b)
|
7,547
|
|
|
2,875
|
|
|
4,672
|
|
|
—
|
|
|
—
|
|
Operating leases (c)
|
37,572
|
|
|
9,990
|
|
|
15,310
|
|
|
8,357
|
|
|
3,915
|
|
Capital purchase obligations
|
45,463
|
|
|
45,463
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other purchase obligations
|
130,123
|
|
|
130,123
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total contractual obligations
|
$
|
796,759
|
|
|
$
|
188,451
|
|
|
$
|
594,982
|
|
|
$
|
9,411
|
|
|
$
|
3,915
|
|
_________________
|
|
(a)
|
Does not include interest on our 0.50% Convertible Senior Notes due 2033 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2018.
|
|
|
(b)
|
Includes interest on our 0.50% Convertible Senior Notes due 2036 through December 2021 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2021.
|
|
|
(c)
|
Includes operating lease obligations that have been accrued as restructuring charges.
|
Pursuant to the terms of the 2033 Notes and the 2033 Notes Indenture, holders of the 2033 Notes had an option to require the Company to repurchase on December 15, 2018 (the "Repurchase Date") all or a portion of such holders’ 2033 Notes (the
"Put Option") at a price equal to 100% of the principal amount of such 2033 Notes, plus accrued and unpaid interest to, but excluding, the Repurchase Date. As of the close of business on December 14, 2018, the Company had received valid Put Option exercise notices from holders that required the Company to repurchase approximately $257.7 million aggregate principal amount of 2033 Notes. The Company settled the Put Option on December 17, 2018 and paid an aggregate of approximately $258.3 million to repurchase all of the 2033 Notes for which Put Option exercises notices were validly delivered and not validly withdrawn. Immediately following the settlement of the Put Option, the repurchased 2033 Notes were canceled and approximately $1.1 million principal amount of 2033 Notes remained outstanding as of April 28, 2019. On May 1, 2019, the Company redeemed all of the remaining $1.1 million of the principal amount of the 2033 Notes, and all of the 2033 Notes were cancelled.
The 2036 Notes are convertible into shares of our common stock at specified conversion prices by the holders at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of our 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 applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("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 our common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 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 whether any of the foregoing circumstances have occurred. The 2036 Notes are also subject to redemption by the holders in December 2021, 2026 and 2031. These notes are redeemable by us, in whole or in part, at any time on or after December 22, 2021.
Operating lease obligations consist primarily of base rents for facilities we occupy at various locations.
Capital purchase obligations represent commitments for the construction or purchase of property, equipment and improvements. These capital purchase obligations were not recorded as liabilities on our consolidated balance sheets as of
April 28, 2019
, as we had not yet received the related goods or taken title to the property.
Other purchase obligations represent all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
Sources of Liquidity and Capital Resource Requirements
At
April 28, 2019
, our principal sources of liquidity consisted of approximately
$914 million
of cash and cash equivalents and short-term investments, of which approximately $161 million was held by our foreign subsidiaries.
We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire all of our 2036 Notes, in the aggregate principal amount of $575.0 million, which are subject to redemption by the holders in December 2021, 2026 and 2031. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.
Off-Balance-Sheet Arrangements
At
April 28, 2019
and
April 29, 2018
, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
FINISAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Finisar Corporation
Sunnyvale, CA
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Finisar Corporation (the “Company”) as of April 28, 2019 and April 29, 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended April 28, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 28, 2019 and April 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of April 28, 2019, based on criteria established in
Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated June 14, 2019 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for recognizing revenue from contracts with customers in fiscal year 2019 due to the adoption of new revenue standard.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
San Jose, California
June 14, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
Sunnyvale, California
Opinion on Internal Control over Financial Reporting
We have audited Finisar Corporation’s (the “Company’s”) internal control over financial reporting as of April 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 28, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of April 28, 2019 and April 29, 2018, the related consolidated statements of operations, comprehensive income (loss), stockholder’s equity, and cash flows for the each of the three years in the period ended April 28, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated June 14, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Jose, California
June 14, 2019
FINISAR CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
April 28, 2019
|
|
April 29, 2018
|
|
(In thousands, except per share data)
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
814,185
|
|
|
$
|
312,257
|
|
Short-term investments
|
100,000
|
|
|
884,838
|
|
Accounts receivable, net of allowance for doubtful accounts of $216 at April 28, 2019 and $269 at April 29, 2018
|
263,394
|
|
|
233,529
|
|
Inventories
|
299,028
|
|
|
348,527
|
|
Other current assets
|
44,224
|
|
|
56,001
|
|
Total current assets
|
1,520,831
|
|
|
1,835,152
|
|
Property, equipment and improvements, net
|
622,979
|
|
|
520,849
|
|
Purchased intangible assets, net
|
4,182
|
|
|
7,878
|
|
Goodwill
|
106,736
|
|
|
106,736
|
|
Other assets
|
15,462
|
|
|
31,720
|
|
Deferred tax assets
|
81,977
|
|
|
80,850
|
|
Total assets
|
$
|
2,352,167
|
|
|
$
|
2,583,185
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
132,440
|
|
|
$
|
132,161
|
|
Accrued compensation
|
31,804
|
|
|
32,525
|
|
Other current liabilities
|
49,495
|
|
|
32,824
|
|
Deferred revenue
|
—
|
|
|
9,535
|
|
Current portion of convertible debt
|
—
|
|
|
251,278
|
|
Total current liabilities
|
213,739
|
|
|
458,323
|
|
Long-term liabilities:
|
|
|
|
Convertible debt, net of current portion
|
512,105
|
|
|
488,877
|
|
Other non-current liabilities
|
12,162
|
|
|
12,368
|
|
Total liabilities
|
738,006
|
|
|
959,568
|
|
Commitments and contingencies
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding at April 28, 2019 and April 29, 2018
|
—
|
|
|
—
|
|
Common stock, $0.001 par value, 750,000 shares authorized, 118,006 shares issued and outstanding at April 28, 2019 and 114,813 shares issued and outstanding at April 29, 2018
|
118
|
|
|
115
|
|
Additional paid-in capital
|
2,919,305
|
|
|
2,850,195
|
|
Accumulated other comprehensive loss
|
(48,568
|
)
|
|
(14,660
|
)
|
Accumulated deficit
|
(1,256,694
|
)
|
|
(1,212,033
|
)
|
Total stockholders' equity
|
1,614,161
|
|
|
1,623,617
|
|
Total liabilities and stockholders’ equity
|
$
|
2,352,167
|
|
|
$
|
2,583,185
|
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
|
(In thousands, except per share data)
|
Revenues
|
$
|
1,280,480
|
|
|
$
|
1,316,483
|
|
|
$
|
1,449,303
|
|
Cost of revenues
|
926,550
|
|
|
951,510
|
|
|
941,164
|
|
Amortization of acquired developed technology
|
1,958
|
|
|
2,436
|
|
|
4,492
|
|
Impairment of long-lived assets
|
3,879
|
|
|
371
|
|
|
—
|
|
Gross profit
|
348,093
|
|
|
362,166
|
|
|
503,647
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
217,877
|
|
|
239,008
|
|
|
217,914
|
|
Sales and marketing
|
49,077
|
|
|
49,024
|
|
|
50,644
|
|
General and administrative
|
54,844
|
|
|
59,518
|
|
|
55,442
|
|
Start-up costs
|
54,517
|
|
|
3,535
|
|
|
—
|
|
Amortization of purchased intangibles
|
1,738
|
|
|
2,705
|
|
|
2,762
|
|
Impairment of long-lived assets
|
580
|
|
|
1,862
|
|
|
—
|
|
Total operating expenses
|
378,633
|
|
|
355,652
|
|
|
326,762
|
|
Income (loss) from operations
|
(30,540
|
)
|
|
6,514
|
|
|
176,885
|
|
Interest income
|
21,201
|
|
|
16,084
|
|
|
6,763
|
|
Interest expense
|
(33,492
|
)
|
|
(36,656
|
)
|
|
(20,363
|
)
|
Other income (expense), net
|
(718
|
)
|
|
(945
|
)
|
|
(91
|
)
|
Income (loss) before income taxes
|
(43,549
|
)
|
|
(15,003
|
)
|
|
163,194
|
|
Provision for (benefit from) income taxes
|
9,667
|
|
|
33,283
|
|
|
(86,152
|
)
|
Net income (loss)
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
(0.45
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
2.26
|
|
Diluted
|
$
|
(0.45
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
2.19
|
|
Shares used in computing net income (loss) per share:
|
|
|
|
|
|
Basic
|
117,178
|
|
|
113,864
|
|
|
110,405
|
|
Diluted
|
117,178
|
|
|
113,864
|
|
|
114,097
|
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
|
|
(In thousands)
|
Net income (loss)
|
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Change in cumulative foreign currency translation adjustment
|
|
(33,908
|
)
|
|
43,204
|
|
|
(32,676
|
)
|
Total other comprehensive income (loss), net of tax
|
|
(33,908
|
)
|
|
43,204
|
|
|
(32,676
|
)
|
Total comprehensive income (loss)
|
|
$
|
(87,124
|
)
|
|
$
|
(5,082
|
)
|
|
$
|
216,670
|
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Accumulated
Deficit
|
|
Total
Finisar
Stockholders’
Equity
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at May 1, 2016
|
107,696,314
|
|
|
$
|
108
|
|
|
$
|
2,605,859
|
|
|
$
|
(25,188
|
)
|
|
$
|
(1,413,093
|
)
|
|
$
|
1,167,686
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
249,346
|
|
|
249,346
|
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(32,676
|
)
|
|
—
|
|
|
(32,676
|
)
|
Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings
|
3,737,832
|
|
|
4
|
|
|
16,886
|
|
|
—
|
|
|
—
|
|
|
16,890
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
49,879
|
|
|
—
|
|
|
—
|
|
|
49,879
|
|
Employer contribution to defined contribution retirement plan
|
85,040
|
|
|
—
|
|
|
2,782
|
|
|
—
|
|
|
—
|
|
|
2,782
|
|
Equity component of senior convertible notes, net of allocated issuance costs
|
—
|
|
|
—
|
|
|
108,798
|
|
|
—
|
|
|
—
|
|
|
108,798
|
|
Balance at April 30, 2017
|
111,519,186
|
|
|
112
|
|
|
2,784,204
|
|
|
(57,864
|
)
|
|
(1,163,747
|
)
|
|
1,562,705
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(48,286
|
)
|
|
(48,286
|
)
|
Other comprehensive income, net
|
—
|
|
|
—
|
|
|
—
|
|
|
43,204
|
|
|
—
|
|
|
43,204
|
|
Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings
|
3,146,591
|
|
|
3
|
|
|
1,496
|
|
|
—
|
|
|
—
|
|
|
1,499
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
61,164
|
|
|
—
|
|
|
—
|
|
|
61,164
|
|
Employer contribution to defined contribution retirement plan
|
146,944
|
|
|
—
|
|
|
3,331
|
|
|
—
|
|
|
—
|
|
|
3,331
|
|
Balance at April 29, 2018
|
114,812,721
|
|
|
115
|
|
|
2,850,195
|
|
|
(14,660
|
)
|
|
(1,212,033
|
)
|
|
1,623,617
|
|
Cumulative effect of change in accounting principle
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,555
|
|
|
8,555
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(53,216
|
)
|
|
(53,216
|
)
|
Other comprehensive loss, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,908
|
)
|
|
—
|
|
|
(33,908
|
)
|
Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings
|
3,061,894
|
|
|
3
|
|
|
8,339
|
|
|
—
|
|
|
—
|
|
|
8,342
|
|
Share-based compensation expense
|
—
|
|
|
—
|
|
|
57,991
|
|
|
—
|
|
|
—
|
|
|
57,991
|
|
Employer contribution to defined contribution retirement plan
|
131,162
|
|
|
—
|
|
|
2,780
|
|
|
—
|
|
|
—
|
|
|
2,780
|
|
Balance at April 28, 2019
|
118,005,777
|
|
|
$
|
118
|
|
|
$
|
2,919,305
|
|
|
$
|
(48,568
|
)
|
|
$
|
(1,256,694
|
)
|
|
$
|
1,614,161
|
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
|
(In thousands)
|
Operating activities
|
|
|
|
|
|
Net income (loss)
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation
|
95,434
|
|
|
98,769
|
|
|
87,016
|
|
Amortization
|
5,005
|
|
|
6,680
|
|
|
8,203
|
|
Stock-based compensation expense
|
61,292
|
|
|
63,120
|
|
|
52,598
|
|
Amortization of discount on held-to-maturity investments
|
(8,115
|
)
|
|
(8,135
|
)
|
|
(2,045
|
)
|
Equity in losses of equity method investment
|
—
|
|
|
—
|
|
|
250
|
|
Loss on sale or retirement of assets and asset disposal groups
|
190
|
|
|
103
|
|
|
149
|
|
Impairment of long-lived assets
|
4,459
|
|
|
2,233
|
|
|
—
|
|
Impairment of minority investments
|
399
|
|
|
2,347
|
|
|
643
|
|
Amortization of discount on convertible debt
|
28,341
|
|
|
30,834
|
|
|
16,935
|
|
Deferred tax expense (benefit)
|
(2,544
|
)
|
|
25,614
|
|
|
(101,534
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(26,703
|
)
|
|
38,848
|
|
|
(23,120
|
)
|
Inventories
|
33,547
|
|
|
839
|
|
|
(73,582
|
)
|
Other assets
|
14,775
|
|
|
(910
|
)
|
|
(8,365
|
)
|
Accounts payable
|
3,034
|
|
|
1,156
|
|
|
(1,023
|
)
|
Accrued compensation
|
(721
|
)
|
|
(21,995
|
)
|
|
18,436
|
|
Deferred revenue
|
—
|
|
|
(3,480
|
)
|
|
(514
|
)
|
Other liabilities
|
16,986
|
|
|
(16,100
|
)
|
|
4,439
|
|
Net cash provided by operating activities
|
172,163
|
|
|
171,637
|
|
|
227,832
|
|
Investing activities
|
|
|
|
|
|
Additions to property, equipment and improvements
|
(209,879
|
)
|
|
(221,482
|
)
|
|
(140,106
|
)
|
Proceeds from sale of property and equipment and asset disposal groups
|
—
|
|
|
—
|
|
|
504
|
|
Purchases of short-term investments
|
(930,277
|
)
|
|
(1,765,687
|
)
|
|
(1,032,474
|
)
|
Maturities of short-term investments
|
1,719,275
|
|
|
1,866,062
|
|
|
321,178
|
|
Purchase of intangible assets
|
—
|
|
|
—
|
|
|
(1,885
|
)
|
Net cash provided by (used in) investing activities
|
579,119
|
|
|
(121,107
|
)
|
|
(852,783
|
)
|
Financing activities
|
|
|
|
|
|
Repayments of term loans
|
—
|
|
|
—
|
|
|
(234
|
)
|
Repayment of 2033 Notes
|
(257,696
|
)
|
|
—
|
|
|
—
|
|
Proceeds from issuance of 0.50% Convertible Senior Notes due 2036, net of issuance costs
|
—
|
|
|
—
|
|
|
569,302
|
|
Proceeds from issuance of shares under equity plans and employee stock purchase plan
|
11,145
|
|
|
11,680
|
|
|
20,773
|
|
Shares repurchased for tax withholdings on vesting of restricted stock units
|
(2,803
|
)
|
|
(10,181
|
)
|
|
(3,883
|
)
|
Net cash (used in) provided by financing activities
|
(249,354
|
)
|
|
1,499
|
|
|
585,958
|
|
Net increase (decrease) in cash and cash equivalents
|
501,928
|
|
|
52,029
|
|
|
(38,993
|
)
|
Cash and cash equivalents at beginning of year
|
312,257
|
|
|
260,228
|
|
|
299,221
|
|
Cash and cash equivalents at end of year
|
$
|
814,185
|
|
|
$
|
312,257
|
|
|
$
|
260,228
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
Cash paid for interest
|
$
|
4,170
|
|
|
$
|
4,170
|
|
|
$
|
1,298
|
|
Cash paid for taxes
|
$
|
7,520
|
|
|
$
|
11,594
|
|
|
$
|
11,108
|
|
See accompanying notes
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a 52- or 53-week fiscal year ending on the Sunday closest to the last day of April in each calendar year. Each of fiscal 2019, 2018 and 2017 had 52 weeks, and fiscal 2020 will have 53 weeks. The consolidated financial statements include the accounts of Finisar Corporation and its controlled subsidiaries (collectively “Finisar” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Merger Agreement
On November 8, 2018, the Company, II-VI Incorporated, a Pennsylvania corporation (“Parent”) and Mutation Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. The closing of the Merger is subject to various customary conditions.
|
|
2.
|
Summary of Significant Accounting Policies
|
Revenue Recognition
Substantially all of the Company's revenues are derived from sales of products to customers. The Company recognizes revenue when it satisfies performance obligations as evidenced by the transfer of control of its products to customers at the time of product shipment from the Company's facility or delivery to the customer location, as determined by the agreed upon shipping and delivery terms. Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the same accounting period). Prior to fiscal 2019, revenue and costs relating to sales to certain distributors that were made under agreements providing distributor price adjustments and rights of return under certain circumstances were deferred until products were sold by the distributors to end customers.
The Company measures revenue based on the amount of consideration it expects to be entitled to in exchange for products, reduced by amount of consideration related to products expected to be returned. Any variable consideration is recognized as a reduction of revenue at the time of revenue recognition. The Company determines variable consideration, which primarily consists of distributor sales price reductions resulting from price protection agreements, by estimating the impact of such reductions based on historical analysis of such activity. The Company’s contracts with customers do not typically include extended payment terms and payment terms generally range from
30
to
90 days
. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenues. The Company's standard warranty period usually covers
twelve months
from the date of sale, although it can be for longer periods for certain products. The Company is recognizing the incremental costs of obtaining a contract, specifically commission expenses that have a period of benefit of less than twelve months, as an expense when incurred. The Company recognizes shipping costs that occur after control transfers to the customer as a fulfillment activity.
Segment Reporting
The Financial Accounting Standards Board's (FASB) authoritative guidance regarding segment reporting establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates in
one
reportable segment comprising optical subsystems and components. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for data communication and telecommunication applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in telecommunication applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers for data communication and telecommunication applications.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of credit risk include cash and cash equivalents, short-term investment and accounts receivable. The Company invests only in high-quality credit instruments and maintains its cash, cash equivalents and short-term investments with several high-quality credit financial institutions. Deposits held with banks, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits.
Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have not been material. The Company’s ten largest customers represented
64%
and
62%
of total accounts receivable as of
April 28, 2019
and
April 29, 2018
, respectively. Three customers, Huawei, Flextronics, and Jabil, represented
13%
,
12%
, and
11%
, respectively, of total accounts receivable as of
April 28, 2019
. Two customers, Google and Flextronics, represented
15%
and
11%
respectively, of total accounts receivable as of
April 29, 2018
.
Sales to the Company’s ten largest customers represented
58%
,
59%
and
56%
of total revenues during fiscal
2019
,
2018
and
2017
, respectively. Two customers, Cisco Systems and Huawei, represented
11%
and
10%
, respectively, of total revenues during fiscal 2019. Two customers, Cisco Systems and Google, represented
14%
and
11%
, respectively, of total revenues during fiscal 2018. Two customers, Cisco Systems and Huawei, represented
12%
and
11%
, respectively, of total revenues during fiscal 2017.
The Company relies on single and limited suppliers for a number of key components. The Company relies primarily on a limited number of significant independent contract manufacturers for the production of certain key components and subassemblies, including lasers, modulators, and printed circuit boards.
Included in the Company’s consolidated balance sheet at
April 28, 2019
are the net assets of the Company’s operations located at its overseas facilities totaling approximately
$617.8 million
.
Foreign Currency Translation and Transactions
The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in the determination of net income (loss). Included in the determination of net income (loss) for fiscal
2019
,
2018
and
2017
were
$(849,000)
,
$1.0 million
and
$539,000
, respectively, of gains (losses) on foreign currency transactions.
Research and Development
Research and development expenditures are charged to operations as incurred.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of sales for all periods presented.
Cash and Cash Equivalents
The Company’s cash equivalents consist of money market funds. The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents.
Minority Investments
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which the Company does have the ability to exercise significant influence, the Company uses the equity method. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and the Company's proportionate share of earnings or losses and distributions. Such proportionate share of earnings or losses is included in other income (expense), net in the consolidated statement of operations. In determining if and when a decline in the market value of these investments below their carrying value is other-than-temporary, the Company evaluates the market conditions, offering prices,
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
trends of earnings and cash flows, price multiples, prospects for liquidity and other key measures of performance. The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists. Factors considered in this assessment include (a) the completion of a new equity financing that may indicate a new value for the investment, (b) the failure to complete a new equity financing arrangement after seeking to raise additional funds or (c) the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders. The Company’s minority investments in private companies are generally made in exchange for preferred stock with a liquidation preference that is intended to help protect the underlying value of its investment.
Fair Value Accounting
The FASB authoritative guidance regarding fair valuation defines fair value and establishes a framework for measuring fair value and expands the related disclosure requirements. The guidance requires or permits fair value measurements with certain exclusions. It provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under this guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. It describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
Level 3 inputs are unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities have carrying amounts which approximate fair value due to the short-term maturity of these instruments. See Note 10 for additional details regarding the fair value of the Company’s financial instruments.
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where, subsequent to delivery, the Company becomes aware of a customer’s potential inability to meet its obligations, it records a specific allowance for the doubtful account to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an estimated allowance for doubtful accounts based on the length of time the receivables are past due and historical actual bad debt history. A material adverse change in a major customer’s ability to meet its financial obligations to the Company could result in a material reduction in the estimated amount of accounts receivable that can ultimately be collected and an increase in the Company’s general and administrative expenses for the shortfall. Accounts receivable are charged against the allowance for doubtful accounts when identified as fully uncollectable.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
The Company permanently writes down the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage and is determined using management’s best estimate of future demand, based upon information then available to the Company. The Company also considers: (1) parts and subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are unlikely to be engineered out of the Company’s products, and (3) known design changes which would reduce the Company’s ability to use the inventory as planned. Inventory on hand that is identified and considered to be excess or obsolete is written down to its estimated net realizable value.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally
three
to
ten
years, except for buildings which are depreciated over
30 years
. Land is carried at acquisition cost and not depreciated. Leased land is depreciated over the life of the lease. Management judgment is required in determining the estimated economic useful lives of our property, plant and equipment, which can materially impact the Company's depreciation expense. Accordingly, the Company evaluates the period over which it expects to recover the economic value of these assets. During the fourth quarter of fiscal 2018, based on considerations including asset replacement cycle, the Company revisited the useful life estimates of certain computer equipment, software, and building and leasehold fixtures. As a result, the Company determined that the useful lives of computer equipment be extended from
three
to
five
years, the useful lives of certain software be extended from
five
to
ten
years, the useful lives of leasehold improvements be extended from
seven
to
ten
years, and the useful lives of certain building fixtures be extended from
15
to
30
years. These assets are depreciated through cost of revenues and operating expenses. The Company accounted for this as a change in estimate that was applied prospectively, effective as of January 29, 2018. This change in depreciable lives did not have a material impact for the quarter or the year ended April 29, 2018, resulted in a reduction of
$4.6 million
in depreciation expense during fiscal 2019, and will result in a reduction of
$2.6 million
in depreciation expense during fiscal 2020.
Goodwill and Other Intangible Assets
Goodwill, purchased technology and other intangible assets resulting from acquisitions are accounted for under the acquisition method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been recorded on a straight-line basis over periods ranging from
three
to
15
years.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred to long-lived assets that would require revision of the remaining estimated useful life of the property, improvements and finite-lived intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. Goodwill is assessed for impairment annually or more frequently when an event occurs or circumstances change between annual impairment tests that would more likely than not reduce the fair value of the reporting unit holding the goodwill below its carrying value.
During fiscal 2019 and 2018, the Company recorded charges of
$4.5 million
and
$2.2 million
, respectively, for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions. In accordance with the guidance for the impairment of long-lived assets, these assets were written down to their estimated fair value of zero.
Stock-Based Compensation Expense
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including restricted stock units, stock options, and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. The Company uses the grant-date fair value of its common stock to determine the fair value of restricted stock units. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase rights. The Company uses the Monte Carlo simulation model to determine the fair value of market-based performance restricted stock units. The fair value of the awards is recognized as expense in the consolidated statements of operations under the single-option approach on a straight-line basis over the requisite service periods, which is generally the vesting period. Forfeitures are accounted for as they occur rather than estimating the number of awards that are expected to ultimately vest.
Income Taxes
The Company computes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. The Company measures deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company periodically assesses the likelihood that it will be
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
able to recover its deferred tax assets. If recovery is not likely, the Company must increase its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimates will not ultimately be recoverable. The Company recognizes tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. The Company's assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, the Company's interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. The Company has established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although the Company believes that its assumptions, judgments and estimates are reasonable, changes in tax laws or interpretation of tax laws and the resolution of any future tax audits could significantly impact the amounts provided for income taxes in the Company's consolidated financial statements. The Company's assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, causing the Company's actual income tax obligations to differ from its estimates, thus materially impacting the Company's financial position and results of operations.
In fiscal 2018, the Company has recorded provisional estimates associated with the December 22, 2017 enactment of the U.S. Tax Cuts and Jobs Act ("TCJA"). During fiscal 2019, the Company completed its accounting for the impact of TCJA on its consolidated financial statements. For more information about TCJA impacts, see "Note 13. Income Taxes."
Recent and Pending Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (the "FASB"), jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted this standard on April 30, 2018, applying it to all contracts, using a modified retrospective approach. The Company's assessment has identified a change in revenue recognition timing on sales made to distributors. Upon adopting this standard, the Company now recognizes revenue upon delivery of products to the distributor (in accordance with agreed upon shipping and delivery terms) rather than deferring recognition until the distributor sells the product to the end customer. On April 30, 2018, the Company removed the deferred revenue (and corresponding deferred cost of sales) on sales to distributors through a cumulative adjustment to accumulated deficit. This resulted in an approximately net
$8.6 million
reduction of accumulated deficit with a corresponding approximately
$9.5 million
reduction of deferred revenue, an approximately
$535,000
reduction of other non-current liabilities, an approximately
$760,000
increase in other current assets, and an approximately
$2.3 million
reduction of deferred tax assets. Based on the Company's assessment, only minimal changes were required to the Company's existing policies, processes, and controls to support the standard's measurement and disclosure requirements. During fiscal 2018, the Company and certain licensees agreed to modify specific terms of some of the Company's out-licensing agreements by granting licensees cancellation rights to cease future payments in the event that licensees cease using the licensed technology. These licensing agreements provided for a settlement and release of any prior claims and licensing of the Company’s technology over a future period. Prior to the modification, there were no cancellation rights. In accordance with the new accounting standard, the Company utilized one of the practical expedients for adoption that allowed the Company to reflect the aggregate effect of all modifications that have occurred before the beginning of the earliest period presented in accordance with this new accounting standard. Absent these modifications, the Company would have recognized, in addition to the amounts described above, approximately
$24.4 million
of cumulative effect of adoption of the new accounting standard in the earliest period presented in accordance with this new accounting standard. The Company may provide similar cancellation rights in comparable licensing agreements that may be executed in the future. Because all of the Company’s performance obligations relate to contracts with a duration of less than one year, the Company elected to apply the optional exemption practical expedient provided in this new accounting standard and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the impacts of adopting the new revenue recognition standard on the Company's condensed consolidated financial statements for the year ended
April 28, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 28, 2019
|
(in thousands)
|
As reported
|
|
Adjustments
|
|
Without new revenue standard
|
Revenues
|
$
|
1,280,480
|
|
|
$
|
(7,869
|
)
|
|
$
|
1,272,611
|
|
Cost of revenues
|
926,550
|
|
|
(4,356
|
)
|
|
922,194
|
|
Gross profit
|
348,093
|
|
|
(3,513
|
)
|
|
344,580
|
|
Net loss
|
$
|
(53,216
|
)
|
|
$
|
(3,513
|
)
|
|
$
|
(56,729
|
)
|
|
|
|
|
|
|
|
As of April 28, 2019
|
(in thousands)
|
As reported
|
|
Adjustments
|
|
Without new revenue standard
|
Other current assets
|
$
|
44,224
|
|
|
$
|
(420
|
)
|
|
$
|
43,804
|
|
Deferred tax assets
|
$
|
81,977
|
|
|
$
|
2,259
|
|
|
$
|
84,236
|
|
Deferred revenue
|
$
|
—
|
|
|
$
|
13,652
|
|
|
$
|
13,652
|
|
Other non-current liabilities
|
$
|
12,162
|
|
|
$
|
256
|
|
|
$
|
12,418
|
|
Accumulated deficit
|
$
|
(1,256,694
|
)
|
|
$
|
(12,069
|
)
|
|
$
|
(1,268,763
|
)
|
The following table presents the Company's revenues disaggregated by geography, based on the location of the entity purchasing the Company’s products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
United States
|
$
|
409,195
|
|
|
$
|
482,601
|
|
|
$
|
476,763
|
|
China
|
300,116
|
|
|
270,040
|
|
|
358,561
|
|
Mexico
|
169,189
|
|
|
126,664
|
|
|
125,556
|
|
Rest of the world
|
401,980
|
|
|
437,178
|
|
|
488,423
|
|
Totals
|
$
|
1,280,480
|
|
|
$
|
1,316,483
|
|
|
$
|
1,449,303
|
|
The following table presents the Company's revenues disaggregated by market application:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Datacom
|
$
|
926,786
|
|
|
$
|
1,029,037
|
|
|
$
|
1,041,854
|
|
Telecom
|
353,694
|
|
|
287,446
|
|
|
407,449
|
|
Totals
|
$
|
1,280,480
|
|
|
$
|
1,316,483
|
|
|
$
|
1,449,303
|
|
In February 2016, the FASB issued an accounting standards update which replaces the current lease accounting standard. The update will require lessees, among other items, to recognize a right-of-use asset and a lease liability for most leases. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain optional practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented, but provides an optional application at the adoption date. The Company expects to adopt this standard in the first quarter of its fiscal 2020 and apply it at the beginning of the period of adoption. Although the Company is currently completing its evaluation of potential effects on its consolidated financial position, results of operations and cash flows from the adoption of this standard, the Company expects that most of its operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption of this standard.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed above, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Earnings Per Share
Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options and restricted stock units (under the treasury stock method),
0.50%
Convertible Senior Notes due 2033 (under the treasury stock method), and
0.50%
Convertible Senior Notes due 2036 (under the treasury stock method) outstanding during the period.
The following table presents the calculation of basic and diluted net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands, except per share amounts)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Numerator:
|
|
|
|
|
|
Net income (loss)
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
Numerator for basic income (loss) per share
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
Numerator for diluted income (loss) per share
|
$
|
(53,216
|
)
|
|
$
|
(48,286
|
)
|
|
$
|
249,346
|
|
Denominator:
|
|
|
|
|
|
Denominator for basic income (loss) per share
|
117,178
|
|
|
113,864
|
|
|
110,405
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options and restricted stock units
|
—
|
|
|
—
|
|
|
3,692
|
|
Dilutive potential common shares
|
—
|
|
|
—
|
|
|
3,692
|
|
Denominator for diluted income (loss) per share
|
117,178
|
|
|
113,864
|
|
|
114,097
|
|
Net income (loss) per share:
|
|
|
|
|
|
Basic
|
$
|
(0.45
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
2.26
|
|
Diluted
|
$
|
(0.45
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
2.19
|
|
The following table presents common shares related to potentially dilutive securities excluded from the calculation of diluted net income (loss) per share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Stock options and restricted stock units
|
3,187
|
|
|
4,545
|
|
|
207
|
|
0.50%
Convertible Senior Notes due 2033 and
0.50%
Convertible Senior Notes due 2036 are excluded from the calculation of diluted earnings per share under the treasury stock method for the periods when the conversion price exceeded the average market price for the Company's common stock.
4. Intangible Assets
The following tables reflect intangible assets as of
April 28, 2019
and
April 29, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28, 2019
|
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
Purchased technology
|
$
|
107,759
|
|
|
$
|
(105,759
|
)
|
|
$
|
2,000
|
|
Purchased trade name
|
1,172
|
|
|
(1,172
|
)
|
|
—
|
|
Purchased customer relationships
|
21,344
|
|
|
(21,063
|
)
|
|
281
|
|
Purchased internal use software and backlog
|
2,816
|
|
|
(2,816
|
)
|
|
—
|
|
Purchased patents
|
4,505
|
|
|
(2,602
|
)
|
|
1,903
|
|
Total
|
$
|
137,596
|
|
|
$
|
(133,412
|
)
|
|
$
|
4,184
|
|
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2018
|
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
Purchased technology
|
$
|
107,759
|
|
|
$
|
(103,803
|
)
|
|
$
|
3,956
|
|
Purchased trade name
|
1,172
|
|
|
(1,172
|
)
|
|
—
|
|
Purchased customer relationships
|
21,344
|
|
|
(19,798
|
)
|
|
1,546
|
|
Purchased internal use software and backlog
|
2,816
|
|
|
(2,816
|
)
|
|
—
|
|
Purchased patents
|
4,505
|
|
|
(2,129
|
)
|
|
2,376
|
|
Total
|
$
|
137,596
|
|
|
$
|
(129,718
|
)
|
|
$
|
7,878
|
|
Estimated amortization expense for each of the next five fiscal years and thereafter as of
April 28, 2019
is as follows:
|
|
|
|
|
Year
|
Amount (in thousands)
|
2020
|
$
|
2,224
|
|
2021
|
704
|
|
2022
|
306
|
|
2023
|
306
|
|
2024
|
306
|
|
Beyond 2024
|
338
|
|
Total
|
$
|
4,184
|
|
5. Investments
Fixed Income Securities
The Company's portfolio of fixed income securities consists of commercial paper notes and term bank certificates of deposit. All of the Company's investments in fixed income securities have original maturity (maturity at the purchase date) of less than
12 months
and are reported as short-term investments in the consolidated balance sheets as of
April 28, 2019
and
April 29, 2018
. All of the Company's investments in fixed income securities are classified as held-to-maturity, since the Company has the positive intent and ability to hold these investments until maturity, and are carried at amortized cost.
The Company's investments in fixed income securities as of
April 28, 2019
and
April 29, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28, 2019
|
|
April 29, 2018
|
|
|
Gross Unrealized
|
|
|
|
Gross Unrealized
|
|
(in thousands)
|
Amortized Cost
|
Gains
|
Losses
|
Fair Value
|
|
Amortized Cost
|
Gains
|
Losses
|
Fair Value
|
Commercial paper
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
548,010
|
|
$
|
—
|
|
$
|
—
|
|
$
|
548,010
|
|
Certificates of deposit
|
100,000
|
|
—
|
|
—
|
|
100,000
|
|
|
336,828
|
|
—
|
|
—
|
|
336,828
|
|
Total
|
$
|
100,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
100,000
|
|
|
$
|
884,838
|
|
$
|
—
|
|
$
|
—
|
|
$
|
884,838
|
|
The Company monitors its investment portfolio for impairment on a periodic basis. In order to determine whether a decline in fair value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the Company's financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in its industry; the Company's relative competitive position within the industry; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A decline in the fair value of the security below amortized cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the affected securities. During fiscal 2019, 2018 and 2017, there were
no
realized gains or losses, and the Company did not recognize any other-than-temporary impairments.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Inventories
|
|
|
|
|
|
|
|
|
Inventories consist of the following (in thousands):
|
As of
|
|
April 28, 2019
|
|
April 29, 2018
|
Raw materials
|
$
|
63,749
|
|
|
$
|
84,441
|
|
Work-in-process
|
191,479
|
|
|
186,160
|
|
Finished goods
|
43,800
|
|
|
77,926
|
|
Total inventories
|
$
|
299,028
|
|
|
$
|
348,527
|
|
Including: inventory consigned to others
|
$
|
29,784
|
|
|
$
|
38,366
|
|
7. Property, Equipment and Improvements, Net
|
|
|
|
|
|
|
|
|
Property, equipment and improvements consist of the following (in thousands):
|
As of
|
|
April 28, 2019
|
|
April 29, 2018
|
Land and buildings
|
$
|
112,346
|
|
|
$
|
113,390
|
|
Computer equipment
|
78,655
|
|
|
77,235
|
|
Office equipment, furniture and fixtures
|
5,933
|
|
|
6,604
|
|
Machinery and equipment
|
728,061
|
|
|
700,421
|
|
Leasehold property and improvements
|
48,328
|
|
|
52,135
|
|
Construction-in-progress (not being depreciated)
|
250,619
|
|
|
108,091
|
|
|
1,223,942
|
|
|
1,057,876
|
|
Less: Accumulated depreciation and amortization
|
(600,963
|
)
|
|
(537,027
|
)
|
Property, equipment and improvements, net
|
$
|
622,979
|
|
|
$
|
520,849
|
|
8. Debt
0.50%
Convertible Senior Notes Due 2036
In December 2016, the Company issued and sold
$575.0 million
in aggregate principal amount of
0.50%
Convertible Senior Notes due 2036 (the "2036 Notes") at par. The terms of the 2036 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2036 Notes will mature on December 15, 2036, unless earlier repurchased, redeemed or converted. The 2036 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2036 Notes bear interest at a rate of
0.5%
per year, payable semi-annually in arrears on June 15 and December 15 each year.
Holders of the 2036 Notes may convert their 2036 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of the Company's 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 applicable conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period ("measurement period"), in which the trading price per
$1,000
principal amount of the 2036 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 applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2036 Notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal
22.6388
shares of common stock per
$1,000
principal amount of the 2036 Notes (which is equivalent to an initial conversion price of approximately
$44.17
per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2036 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2021, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2036 Notes ("make-whole feature").
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the event of a fundamental change, holders will have the option to require the Company to redeem for cash any 2036 Notes held by them at a purchase price equal to
100%
of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2036 Notes held by them on December 15, 2021, December 15, 2026 and December 15, 2031 at a redemption price equal to
100%
of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2036 Notes in whole or in part at any time on or after December 22, 2021 at
100%
of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2036 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Because of its option to settle conversion of the 2036 Notes in cash, the Company separated the liability and equity components of the 2036 Notes. The carrying amount of the liability component at issuance date of
$465.1 million
was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2036 Notes of
$109.9 million
was allocated to the equity component. The resulting debt discount is amortized as interest expense. As of
April 28, 2019
, the remaining debt discount amortization period was
32 months
.
The 2036 Notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
Liability component:
|
|
|
|
Principal
|
$
|
575,000
|
|
|
$
|
575,000
|
|
Unamortized debt discount
|
(61,511
|
)
|
|
(82,765
|
)
|
Unamortized debt issuance costs
|
(2,438
|
)
|
|
(3,358
|
)
|
Net carrying amount of the liability component
|
$
|
511,051
|
|
|
$
|
488,877
|
|
Carrying amount of the equity component
|
$
|
109,881
|
|
|
$
|
109,881
|
|
The Company incurred approximately
$5.7 million
in transaction costs in connection with the issuance of the 2036 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs of
$4.6 million
, allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of
$1.1 million
, allocated to the equity component, were recognized as a reduction of additional paid-in capital.
The following table sets forth interest expense information related to the 2036 Notes:
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands, except percentages)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Contractual interest expense
|
$
|
2,875
|
|
|
$
|
2,875
|
|
|
$1,001
|
Amortization of the debt discount
|
21,253
|
|
|
20,257
|
|
|
6,859
|
Amortization of issuance costs
|
923
|
|
|
923
|
|
|
334
|
Total interest cost
|
$
|
25,051
|
|
|
$
|
24,055
|
|
|
$8,194
|
Effective interest rate on the liability component
|
4.85
|
%
|
|
4.85
|
%
|
|
4.85%
|
The Company applies the treasury stock method to determine the potential dilutive effect of the 2036 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2036 Notes in cash.
0.50%
Convertible Senior Notes Due 2033
In December 2013, the Company issued and sold
$258.8 million
in aggregate principal amount of
0.50%
Convertible Senior Notes due 2033 (the "2033 Notes") at par. The terms of the 2033 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2033 Notes will mature on December 15, 2033, unless earlier repurchased, redeemed or converted. The 2033 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2033 Notes bear interest at a rate of
0.5%
per year, payable semi-annually in arrears on June 15 and December 15 each year.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Holders of the 2033 Notes may convert their 2033 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2033 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 26, 2014 (and only during such fiscal quarter), if the last reported sale price of the Company's 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 applicable conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period ("measurement period"), in which the trading price per
$1,000
principal amount of the 2033 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 applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2033 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2033 Notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal
33.1301
shares of common stock per
$1,000
principal amount of the 2033 Notes (which is equivalent to an initial conversion price of approximately
$30.18
per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2033 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2018, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2033 Notes ("make-whole feature").
Holders will have the option to require the Company to redeem for cash any 2033 Notes held by them in the event of a fundamental change, e.g., a merger or an acquisition, at a purchase price equal to
100%
of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2033 Notes held by them on December 15, 2023 and December 15, 2028 at a redemption price equal to
100%
of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2033 Notes in whole or in part at any time on or after December 22, 2018 at
100%
of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2033 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Because of its option to settle conversion of the 2033 Notes in cash, the Company separated the liability and equity components of the 2033 Notes. The carrying amount of the liability component at issuance date of
$209.1 million
was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2033 Notes of
$49.6 million
was allocated to the equity component. The resulting debt discount was amortized as interest expense and was fully amortized as of
April 28, 2019
.
In December 2018, the holders of the 2033 Notes representing approximately
$257.7 million
of the principal amount of the 2033 Notes exercised their rights to redeem their 2033 Notes at a redemption price equal to
100%
of the principal amount of the notes. All redemptions were in accordance with the original terms of the 2033 Notes and no gain or loss was recognized as a result of the redemption.
The 2033 Notes consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
Liability component:
|
|
|
|
Principal
|
$
|
1,054
|
|
|
$
|
258,750
|
|
Unamortized debt discount
|
—
|
|
|
(7,086
|
)
|
Unamortized debt issuance costs
|
—
|
|
|
(386
|
)
|
Net carrying amount of the liability component
|
$
|
1,054
|
|
|
$
|
251,278
|
|
Carrying amount of the equity component
|
$
|
49,648
|
|
|
$
|
49,648
|
|
On May 1, 2019, the Company redeemed all remaining
$1.1 million
of the principal amount of the 2033 Notes at a redemption price equal to
100%
of the principal amount of the notes. This redemption was in accordance with the original terms of the 2033 Notes and no gain or loss was recognized as a result of the redemption.
The Company incurred approximately
$3.8 million
in transaction costs in connection with the issuance of the 2033 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of
$3.1 million
, allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of
$725,000
, allocated to the equity component, were recognized as a reduction of additional paid-in capital.
The following table sets forth interest expense information related to the 2033 Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands, except percentages)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Contractual interest expense
|
$
|
832
|
|
|
$
|
1,294
|
|
|
$
|
1,294
|
|
Amortization of the debt discount
|
7,086
|
|
|
10,577
|
|
|
10,076
|
|
Amortization of issuance costs
|
386
|
|
|
616
|
|
|
616
|
|
Total interest cost
|
$
|
8,304
|
|
|
$
|
12,487
|
|
|
$
|
11,986
|
|
Effective interest rate on the liability component
|
4.87
|
%
|
|
4.87
|
%
|
|
4.87
|
%
|
The Company applies the treasury stock method to determine the potential dilutive effect of the 2033 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2033 Notes in cash.
As explained above, the terms of the 2033 Notes include a provision that allows the holders to require the Company to redeem any of their notes on December 15, 2018. Accordingly, all
$251.3 million
of the net carrying amount of the liability component of the 2033 Notes outstanding as of
April 29, 2018
was classified as a current liability as of that date.
9. Commitments
The Company’s future commitments at
April 28, 2019
included minimum payments under non-cancelable operating lease agreements, including operating lease obligations that have been accrued as restructuring charges, as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Total
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
4-5 Years
|
|
After 5 Years
|
Operating leases
|
$
|
37,572
|
|
|
$
|
9,990
|
|
|
$
|
15,310
|
|
|
$
|
8,357
|
|
|
$
|
3,915
|
|
Rent expense under the non-cancelable operating leases was approximately
$9.3 million
,
$9.9 million
and
$9.0 million
for the years ended
April 28, 2019
,
April 29, 2018
and
April 30, 2017
, respectively. The Company subleases a portion of its facilities that it considers to be in excess of its requirements. Sublease income was
$345,000
,
$292,000
and
$373,000
for the years ended
April 28, 2019
,
April 29, 2018
and
April 30, 2017
, respectively. Certain leases have scheduled rent increases which have been included in the above table and recorded as rent expense on a straight-line basis. Other leases contain provisions to adjust rental rates for inflation during their terms, most of which are based on to-be-published indices. Rents subject to these adjustments are included in the above table based on current rates.
10. Fair Value of Financial Instruments
The Company's financial instruments not measured at fair value on a recurring basis as of
April 28, 2019
and
April 29, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 28, 2019
|
|
April 29, 2018
|
|
Carrying
|
|
Fair Value
|
|
Carrying
|
|
Fair Value
|
(in thousands)
|
Amount
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Amount
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Commercial paper
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
548,010
|
|
|
$
|
—
|
|
$
|
548,010
|
|
$
|
—
|
|
$
|
548,010
|
|
Certificates of deposit
|
$
|
100,000
|
|
|
$
|
—
|
|
$
|
100,000
|
|
$
|
—
|
|
$
|
100,000
|
|
|
$
|
336,828
|
|
|
$
|
—
|
|
$
|
336,828
|
|
$
|
—
|
|
$
|
336,828
|
|
2033 Notes
|
$
|
1,054
|
|
|
$
|
1,063
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,063
|
|
|
$
|
251,278
|
|
|
$
|
256,001
|
|
$
|
—
|
|
$
|
—
|
|
$
|
256,001
|
|
2036 Notes
|
$
|
511,051
|
|
|
$
|
564,302
|
|
$
|
—
|
|
$
|
—
|
|
$
|
564,302
|
|
|
$
|
488,877
|
|
|
$
|
520,016
|
|
$
|
—
|
|
$
|
—
|
|
$
|
520,016
|
|
The fair values of the Company's investments in commercial papers and certificates of deposit are based on quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data. The fair values of the 2033 Notes and the 2036 Notes are based on the price in the open market as of or close to the respective balance sheet dates. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion as of each respective balance sheet date.
11. Stockholders’ Equity
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Income
Cumulative foreign currency translation adjustment was the only component of the accumulated other comprehensive income as of
April 28, 2019
and
April 29, 2018
.
Common Stock and Preferred Stock
As of
April 28, 2019
, Finisar is authorized to issue
750,000,000
shares of
$0.001
par value common stock and
5,000,000
shares of
$0.001
par value preferred stock. The holder of each share of common stock has the right to
one
vote and is entitled to receive dividends when and as declared by the Company’s Board of Directors. The Company has never declared or paid dividends on its common stock. The Company has authority to issue up to
5,000,000
shares of preferred stock,
$0.001
par value. The preferred stock may be issued in one or more series having such rights, preferences and privileges as may be designated by the Company’s board of directors.
Common stock subject to future issuance as of
April 28, 2019
is as follows:
|
|
|
|
Exercise of outstanding stock options
|
822,747
|
|
Vesting of restricted stock awards
|
7,202,014
|
|
Available for grant under employee stock incentive plan
|
2,865,242
|
|
Available for grant under employee stock purchase plan
|
1,815,599
|
|
Total
|
12,705,602
|
|
Employee Stock Purchase Plan
In September 2009, the Company’s board of directors adopted the 2009 Employee Stock Purchase Plan (the "ESPP"), which was approved by the stockholders in November 2009. An amended and restated version of ESPP was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated ESPP,
7,000,000
shares of the Company’s common stock have been reserved for issuance, and the term of the ESPP is scheduled to expire on September 1, 2024. The ESPP permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed
20%
of the employee’s total compensation. Stock may be purchased under the plan at a price equal to
85%
of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower. In connection with the Merger, the ESPP was suspended on December 14, 2018.
Employee Stock Plans
In September 1999, Finisar’s 1999 Stock Option Plan was adopted by the board of directors and approved by the stockholders. An amendment and restatement of the 1999 Stock Option Plan, including renaming it the 2005 Stock Incentive Plan (the “2005 Plan”), was approved by the board of directors in September 2005 and by the stockholders in October 2005. An amended and restated version of the 2005 Plan was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated 2005 Plan, a total of
22,500,000
shares of common stock have been reserved for issuance, and the term of the 2005 Plan is scheduled to expire on September 1, 2024. The types of stock-based awards available under the 2005 Plan includes stock options, stock appreciation rights, restricted stock units (“RSUs”) and other stock-based awards which vest upon the attainment of designated performance goals or the satisfaction of specified service requirements or, in the case of certain RSUs or other stock-based awards, become payable upon the expiration of a designated time period following such vesting events. Options generally vest over
four
or
five
years and have a maximum term of
10
years. RSUs generally vest over
four
years. As of
April 28, 2019
and
April 29, 2018
, no shares were subject to repurchase.
Stock Options
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Exercise Price
|
Stock options outstanding as of April 29, 2018
|
1,097,091
|
|
|
$17.08
|
Stock options exercised
|
(267,902
|
)
|
|
$5.17
|
Stock options canceled
|
(6,442
|
)
|
|
$23.96
|
Stock options outstanding as of April 28, 2019
|
822,747
|
|
|
$20.90
|
Stock options outstanding and exercisable as of April 28, 2019
|
273,033
|
|
|
$18.19
|
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average grant-date fair value of options granted during fiscal 2018 was
$9.89
. The total intrinsic value of stock options exercised during fiscal 2019, 2018 and 2017 was
$3.7 million
,
$1.7 million
and
$9.9 million
, respectively. The aggregate intrinsic value of stock options outstanding as of
April 28, 2019
was
$2.4 million
. The aggregate intrinsic value of stock options outstanding and exercisable as of
April 28, 2019
was
$1.6 million
. The weighted-average remaining contractual life of stock options outstanding as of
April 28, 2019
was
7.9 years
. The weighted-average remaining contractual life of stock options outstanding and exercisable as of
April 28, 2019
was
6.3 years
. As of
April 28, 2019
, the Company had
$5.2 million
of unrecognized compensation expense related to stock option grants. These expenses are expected to be recognized over a weighted-average period of approximately
3.1 years
.
Restricted Stock Units
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
RSUs unvested as of April 29, 2018
|
5,954,755
|
|
|
$21.96
|
RSUs granted
|
4,436,933
|
|
|
$17.45
|
RSUs vested
|
(2,347,430
|
)
|
|
$21.12
|
RSUs forfeited
|
(842,244
|
)
|
|
$21.25
|
RSUs unvested as of April 28, 2019
|
7,202,014
|
|
|
$19.54
|
Number of RSUs granted during fiscal 2019 in the table above includes
654,382
RSUs with both market and service vesting conditions. The number of common stock shares to be received at vesting of these RSUs is based on the market price for the Company's common stock reaching certain pre-determined levels. The weighted-average grant-date fair value of these RSUs was
$18.08
. The weighted-average grant-date fair value of RSUs granted during fiscal 2018 and 2017 was
$25.65
and
$19.77
, respectively. The aggregate intrinsic value of RSUs outstanding as of
April 28, 2019
was
$172.0 million
. The total grant-date fair value of RSUs vested during fiscal 2019, 2018 and 2017 was
$49.6 million
,
$56.0 million
and
$42.0 million
, respectively. As of
April 28, 2019
, the Company had
$98.0 million
of unrecognized compensation expense related to RSUs grants. These expenses are expected to be recognized over a weighted-average period of approximately
2.2 years
.
Share-Based Compensation Cost
The following table sets forth the detailed allocation of the share-based compensation expense for the fiscal years ended
April 28, 2019
,
April 29, 2018
and
April 30, 2017
which was reflected in the Company’s operating results:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Share-based compensation expense by caption:
|
|
|
|
|
|
Cost of revenues
|
$14,472
|
|
$12,943
|
|
$11,409
|
Research and development
|
21,945
|
|
|
22,767
|
|
|
20,425
|
|
Sales and marketing
|
7,937
|
|
|
7,619
|
|
|
7,170
|
|
General and administrative
|
13,645
|
|
|
17,835
|
|
|
10,875
|
|
Total
|
$57,999
|
|
$61,164
|
|
$49,879
|
|
|
|
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
RSUs
|
$53,574
|
|
$56,965
|
|
$46,577
|
Stock options
|
1,652
|
|
|
490
|
|
|
—
|
|
Employee stock purchase rights under ESPP
|
2,773
|
|
|
3,709
|
|
|
3,302
|
|
Total
|
$57,999
|
|
$61,164
|
|
$49,879
|
Total share-based compensation cost capitalized as part of inventory was
$3.4 million
and
$3.9 million
as of
April 28, 2019
and
April 29, 2018
, respectively.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of stock options and employee stock purchase rights under the ESPP granted in fiscal 2019, 2018 and 2017 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Stock Purchase Rights:
|
|
|
|
|
|
|
Expected term (in years)
|
|
n/a
|
|
|
0.75
|
|
|
0.75
|
|
Volatility
|
|
n/a
|
|
|
56% - 57%
|
|
|
40% - 43%
|
|
Risk-free interest rate
|
|
n/a
|
|
|
1.48 - 1.70%
|
|
|
0.36 - 0.89%
|
|
Dividend yield
|
|
n/a
|
|
|
—
|
%
|
|
—
|
%
|
Stock Options:
|
|
|
|
|
|
|
Expected term (in years)
|
|
n/a
|
|
|
5.2
|
|
|
n/a
|
|
Volatility
|
|
n/a
|
|
|
47
|
%
|
|
n/a
|
|
Risk-free interest rate
|
|
n/a
|
|
|
2.3
|
%
|
|
n/a
|
|
Dividend yield
|
|
n/a
|
|
|
—
|
%
|
|
n/a
|
|
Market-based Performance Restricted Stock Units
|
|
|
|
|
|
|
Expected term (in years)
|
|
3.9
|
|
|
n/a
|
|
|
n/a
|
|
Volatility
|
|
46
|
%
|
|
n/a
|
|
|
n/a
|
|
Risk-free interest rate
|
|
2.7
|
%
|
|
n/a
|
|
|
n/a
|
|
The expected term of employee stock purchase rights is the average of the remaining purchase periods under each offering period. The expected term of stock options is the average term from the Company's historical stock option exercise experience. The expected term of market-based performance restricted stock units is explicit service period based on service vesting conditions of these units. The Company calculated the volatility factor based on the Company’s historical stock prices. The Company bases the risk-free interest rate used in the Black-Scholes option-pricing and Monte Carlo simulation models on constant maturity bonds from the Federal Reserve in which the maturity approximates the expected terms. The Black-Scholes option-pricing model calls for a single expected dividend yield as an input. The Company has not issued and does not expect to issue any dividends.
The weighted-average estimated per share fair value of purchase rights granted under the ESPP in fiscal 2018 and 2017 was
$4.43
and
$5.34
, respectively.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected life of the stock-based award and the stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted above.
During the third quarter of fiscal 2018, Jerry S. Rawls resigned as the Company's Chief Executive Officer and as Chairman of the Company's Board of Directors (the “Board”). Mr. Rawls remains a member of the Board. In connection with Mr. Rawls’ resignation, and in accordance with the terms of the related separation and release agreement between Mr. Rawls and the Company, Mr. Rawls received a lump sum cash severance payment of
$300,000
, and the vesting of each of Mr. Rawls’ outstanding and unvested awards of restricted stock units granted by the Company was accelerated
100%
. Accordingly, during the third quarter of fiscal 2018, the Company recorded approximately
$7.5 million
of compensation expense related to this acceleration.
12. Employee Benefit Plan
The Company maintains a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code which covers all eligible employees. Employees are eligible to participate in the plan on the first day of the calendar year quarter immediately following completion of eligibility requirements as required by the plan.
Under the plan, each participant may contribute up to
20%
of his or her pre-tax gross compensation up to a statutory limit, which is
$19,000
for calendar year 2019,
$18,500
for calendar year 2018 and
$18,000
for calendar year 2017. All amounts contributed by participants and earnings on participant contributions are fully vested at all times. The Company may contribute an amount equal to
one-half
of the first
6%
of each participant’s contribution. The Company may make the matching
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contribution in shares of Finisar common stock in lieu of cash. Contributions made in shares will be allocated to each participant’s account using the share price on the date the Company matching contribution is made to the plan.
The Company made a discretionary matching contribution of
131,162
shares for a total contribution of
$2.8 million
during the year ended
April 28, 2019
. The Company’s expenses related to this plan were
$2.8 million
,
$3.3 million
and
$2.8 million
for the fiscal years ended
April 28, 2019
,
April 29, 2018
and
April 30, 2017
, respectively.
13. Income Taxes
On December 22, 2017, the TCJA was enacted, containing significant changes to the U.S. tax law, including lowering the U.S. corporate income tax rate, implementing a territorial tax system, and imposing a one-time tax on deemed repatriation of earnings of foreign subsidiaries.
The TCJA reduced the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of this rate reduction, the Company revalued its net deferred tax asset as of December 22, 2017, and recorded a reduction in its deferred tax assets and a corresponding deferred tax expense of approximately
$30.3 million
. For fiscal 2018, the Company's blended corporate income tax rate was
30.4%
, which was based on the applicable tax rates before and after the TCJA enactment and the number of days in each period.
The TCJA allows 100% expensing of cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The bonus depreciation percentage is phased down from 100% beginning in 2023 through 2026. The Company elected to claim the 100% bonus depreciation for the assets placed into service after September 27, 2017. The net impact of this provision was not material to the Company's consolidated financial position, results of operations and cash flows.
The TCJA also implements a territorial tax system. In general, under the territorial tax system, the Company’s foreign earnings will no longer be subject to tax in the U.S. As part of transitioning to the territorial tax system, the TCJA includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. As of December 31, 2017, the Company had approximately
$123.0 million
of undistributed earnings for certain non-U.S. subsidiaries that have been indefinitely reinvested outside the U.S. The mandatory deemed repatriation of these undistributed earnings resulted in a one-time deferred tax expense of approximately
$19.1 million
.
The Company has historically asserted its intent to reinvest these earnings in foreign operations indefinitely and continues to do so. The Company does not intend to repatriate these earnings to fund its U.S. operations and, accordingly, it does not provide for the U.S. state income and foreign withholding tax on these earnings.
While the TCJA provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base erosion provisions - the global intangible low-taxed income ("GILTI") provision and the base-erosion and anti-abuse tax ("BEAT") provision. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provision eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax if greater than regular tax. The Company expects that the BEAT provision may result in significant U.S. tax in future periods. In addition, the Company intends to account for the GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the fiscal 2018 and 2019.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 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 TCJA. The Company has recognized the provisional tax impact related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities to the extent needed and included these amounts in its consolidated financial statements for fiscal 2018. During fiscal 2019, the Company completed its accounting for the impact of TCJA on its consolidated financial statements and recorded an additional one-time deferred tax expense of approximately
$6.4 million
related to the re-measurement of deferred taxes.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of income tax expense (benefit) consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
5,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
244
|
|
|
189
|
|
|
532
|
|
Foreign
|
6,887
|
|
|
7,480
|
|
|
14,850
|
|
|
12,211
|
|
|
7,669
|
|
|
15,382
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(3,172
|
)
|
|
29,532
|
|
|
(102,305
|
)
|
State
|
(670
|
)
|
|
(999
|
)
|
|
(1,008
|
)
|
Foreign
|
1,298
|
|
|
(2,919
|
)
|
|
1,779
|
|
|
(2,544
|
)
|
|
25,614
|
|
|
(101,534
|
)
|
Provision for (benefit from) income taxes
|
$
|
9,667
|
|
|
$
|
33,283
|
|
|
$
|
(86,152
|
)
|
Income (loss) before income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
U.S.
|
$
|
(95,168
|
)
|
|
$
|
(72,730
|
)
|
|
$
|
96,648
|
|
Foreign
|
51,619
|
|
|
57,727
|
|
|
66,546
|
|
|
$
|
(43,549
|
)
|
|
$
|
(15,003
|
)
|
|
$
|
163,194
|
|
A reconciliation of the income tax provision at the federal statutory rate and the effective rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
Expected income tax provision (benefit) at U.S. federal statutory rate
|
21.0
|
%
|
|
30.4
|
%
|
|
35.0
|
%
|
Foreign rate differential
|
14.1
|
|
|
100.6
|
|
|
(5.0
|
)
|
Share-based compensation expense
|
(8.9
|
)
|
|
(5.3
|
)
|
|
0.7
|
|
Valuation allowance
|
(2.2
|
)
|
|
(31.7
|
)
|
|
(83.0
|
)
|
Non-deductible transaction costs
|
(6.4
|
)
|
|
—
|
|
|
—
|
|
Other permanent adjustments
|
(6.1
|
)
|
|
(32.4
|
)
|
|
0.7
|
|
Research and development credits
|
10.5
|
|
|
43.2
|
|
|
(2.3
|
)
|
Impact of TCJA - GILTI
|
(16.9
|
)
|
|
—
|
|
|
—
|
|
Impact of TCJA - BEAT
|
(11.7
|
)
|
|
—
|
|
|
—
|
|
Impact of TCJA - rate reduction
|
—
|
|
|
(201.8
|
)
|
|
—
|
|
Impact of TCJA - transition tax
|
(15.6
|
)
|
|
(127.1
|
)
|
|
—
|
|
Other
|
—
|
|
|
2.4
|
|
|
1.0
|
|
|
(22.2
|
)%
|
|
(221.7
|
)%
|
|
(52.9
|
)%
|
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of deferred taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 28, 2019
|
|
April 29, 2018
|
Deferred tax assets:
|
|
|
|
Inventory adjustments
|
$
|
12,633
|
|
|
$
|
9,870
|
|
Accruals and reserves
|
9,101
|
|
|
4,827
|
|
Tax credits
|
56,486
|
|
|
49,657
|
|
Net operating loss carryforwards
|
38,676
|
|
|
55,926
|
|
Gain/loss on investments under equity or cost method
|
234
|
|
|
364
|
|
Depreciation and amortization
|
18,062
|
|
|
16,524
|
|
Purchase accounting for intangible assets
|
800
|
|
|
1,284
|
|
Capital loss carryforward
|
310
|
|
|
2,246
|
|
Acquired intangibles
|
374
|
|
|
1,497
|
|
Stock compensation
|
6,229
|
|
|
5,432
|
|
Total deferred tax assets
|
142,905
|
|
|
147,627
|
|
Valuation allowance
|
(32,692
|
)
|
|
(30,213
|
)
|
Net deferred tax assets
|
110,213
|
|
|
117,414
|
|
Deferred tax liabilities:
|
|
|
|
Acquired intangibles
|
(683
|
)
|
|
(1,493
|
)
|
Debt discount
|
(13,426
|
)
|
|
(20,006
|
)
|
Depreciation and amortization
|
(15,448
|
)
|
|
(15,590
|
)
|
Total deferred tax liabilities
|
(29,557
|
)
|
|
(37,089
|
)
|
Total net deferred tax assets (liabilities)
|
$
|
80,656
|
|
|
$
|
80,325
|
|
|
|
|
|
Reported as:
|
|
|
|
Deferred tax assets
|
$
|
81,977
|
|
|
$
|
80,850
|
|
Deferred tax liabilities
|
(1,321
|
)
|
|
(525
|
)
|
Total net deferred tax assets (liabilities)
|
$
|
80,656
|
|
|
$
|
80,325
|
|
Realization of deferred tax assets is dependent upon future taxable earnings in related tax jurisdictions. In the past, due to U.S. operating losses in previous years and continuing U.S. earnings volatility which did not allow sustainable profitability, management had established and maintained a full valuation allowance for the U.S. deferred tax assets. During the fourth quarter of fiscal 2017, the Company assessed that it is more likely than not that it will realize the majority of the U.S. deferred tax assets, except for deferred tax assets related to California research and development credits and capital losses. The positive evidence, which existed at that time, that outweighed the negative evidence to release the valuation allowance included the fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Accordingly, during the fourth quarter of fiscal 2017, the Company released
$103.3 million
of valuation allowance on these deferred tax assets. As of
April 28, 2019
, the valuation allowance comprises approximately
23%
of total deferred tax assets and relates to deferred tax assets, for which management believes it is not more likely than not to be realized in future periods. The Company's valuation allowance increased (decreased) from the prior year by approximately
$2.5 million
,
$(0.6) million
and
$(132.1) million
in fiscal
2019
,
2018
and
2017
, respectively.
As of
April 28, 2019
, the Company had federal, state and foreign net operating loss carryforwards of approximately
$152.8 million
,
$13.5 million
and
$22.5 million
, respectively, and federal and state tax credit carryforwards of approximately
$43.8 million
and
$34.8 million
, respectively. With the exception of California R&D credit, which can be carried forward indefinitely, the net operating loss and tax credit carryforwards will expire at various dates beginning in fiscal
2020
through
2039
, if not utilized. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's manufacturing operations in Malaysia operate under a tax holiday which will expire at the beginning of the second quarter of fiscal
2022
. In fiscal
2019
, the aggregate dollar and per share effect of the tax holiday was
$6.5 million
and
$0.06
per share, respectively.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
April 28, 2019
|
|
April 29, 2018
|
|
April 30, 2017
|
|
|
|
|
|
|
Beginning balance
|
$
|
20,578
|
|
|
$
|
21,458
|
|
|
$
|
16,411
|
|
Additions for tax positions related to current year
|
1,298
|
|
|
1,803
|
|
|
1,675
|
|
Additions for tax positions related to prior years
|
427
|
|
|
94
|
|
|
3,372
|
|
Reductions for tax positions related to prior years (lapse of statute of limitations)
|
—
|
|
|
(2,777
|
)
|
|
—
|
|
Ending balance
|
$
|
22,303
|
|
|
$
|
20,578
|
|
|
$
|
21,458
|
|
Excluding the effects of recorded valuation allowances for deferred tax assets,
$19.3 million
of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur within 12 months from
April 28, 2019
. The Company records interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of
April 28, 2019
and
April 29, 2018
, the Company had accrued
$860,000
and
$652,000
, respectively, for interest and penalties related to uncertain tax positions.
The Company and its subsidiaries are subject to taxation in various state jurisdictions as well as the U.S. The Company's U.S. federal and state income tax returns are generally not subject to examination by the tax authorities for tax years before fiscal
2009
. For all federal and state net operating loss and credit carryovers, the statute of limitations does not begin until the carryover items are utilized. The taxing authorities can examine the validity of the carryover items and if necessary, adjustments may be made to the carryover items. The Company's
Malaysia
,
Singapore
,
China
,
Australia
,
Israel
, and
Sweden
income tax returns are generally not subject to examination by the tax authorities for tax years before
2011
,
2012
,
2011
,
2011
,
2005
and
2010
, respectively. The Company's Australia subsidiary is under audit for tax year 2011 and after. The Company's India subsidiary is under audit for tax year ended March 31, 2016. The Company's Malaysia subsidiary is under audit for tax years 2015 to 2017. Tax audits of the Company's Germany and Sweden subsidiaries were concluded during fiscal 2019 with no impact on the Company's consolidated financial statements.
14. Segments
and Geography Information
The Company has
one
reportable segment consisting of optical subsystems and components. Optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic equipment used in building communication networks, including the switches, routers and servers used in wireline networks as well as the antennas and base stations for wireless networks. Optical components consist primarily of packaged lasers, receivers and photodetectors for data communication and telecommunication applications and passive optical components used in telecommunication applications.
The following is a summary of long-lived assets within geographic areas based on the location of the assets:
|
|
|
|
|
|
|
|
|
|
As of
|
(in thousands)
|
April 28, 2019
|
|
April 29, 2018
|
United States
|
$
|
328,085
|
|
|
$
|
213,745
|
|
China
|
231,955
|
|
|
252,179
|
|
Malaysia
|
39,776
|
|
|
52,417
|
|
Rest of the world
|
42,808
|
|
|
45,850
|
|
|
$
|
642,624
|
|
|
$
|
564,191
|
|
The increase in long-lived assets was primarily due to the additions of property, improvements and manufacturing equipment to the Company's manufacturing facility in Sherman, Texas.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, it is subject to claims alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Class Action and Shareholder Derivative Litigation
Several securities class action lawsuits related to the Company's March 8, 2011 earnings announcement alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 have been filed in the United States District Court for the Northern District of California on behalf of a purported class of persons who purchased stock between December 2, 2010 through March 8, 2011. The named defendants are the Company and Jerry Rawls, its former Chief Executive Officer and former Chairman of the Board, and Eitan Gertel, its former Chief Executive Officer. To date, no specific amount of damages has been alleged. The cases were consolidated, a lead plaintiff was appointed and a consolidated complaint was filed. The Company filed a motion to dismiss the case. On January 16, 2013, the District Court granted the Company's motion to dismiss and granted the lead plaintiffs leave to amend the consolidated complaint. An amended consolidated complaint was filed on February 6, 2013. Thereafter, the Company filed a renewed motion to dismiss the case. On September 30, 2013, the District Court granted the Company's motion and dismissed the case with prejudice, and plaintiff appealed. On January 8, 2016, the Ninth Circuit Court of Appeals reversed the judgment in part for further proceedings in the District Court. On July 15, 2016, lead plaintiff filed a Second Amended Complaint in the District Court. On August 19, 2016, the Company moved to dismiss. On May 1, 2017, the District Court denied the motion and a case scheduling order has been issued. On December 5, 2017, the District Court issued an order denying class certification. On February 1, 2018, the plaintiff filed a petition with the Ninth Circuit Court of Appeals for permission to appeal the denial of class certification and, on July 13, 2018, the Ninth Circuit Court of Appeals denied the petition for permission to appeal. On October 10, 2018, the plaintiff filed a new motion for class certification, which the Company opposed. On May 24, 2019, the District Court denied plaintiffs motion for class certification and granted judgement on the pleadings in favor of the Company and the other defendants.
In addition,
two
purported shareholder derivative lawsuits related to the Company's March 8, 2011 earnings announcement have been filed in the California Superior Court for the County of Santa Clara, and a third derivative lawsuit has been filed in the United States District Court for the Northern District of California. The complaints assert claims for alleged breach of fiduciary duty, unjust enrichment, and waste on behalf of the Company. Named as defendants are the members of the Company's board of directors at the time of the claim and certain officers, including Jerry Rawls, the Company's former Chief Executive Officer and former Chairman of the Board, Eitan Gertel, the Company’s former Chief Executive Officer, and Kurt Adzema, the Company’s Chief Financial Officer.
No
specific amount of damages has been alleged and, by the derivative nature of the lawsuits,
no
damages will be alleged against the Company. The state court cases were consolidated, a lead plaintiff was appointed to file a consolidated complaint, and the cases were stayed by the agreement of the parties. On August 7, 2017, the plaintiff in the federal case filed an amended complaint. On September 5, 2018, the court granted the motion to dismiss with leave to amend. The parties agreed to settle the federal case and, on February 20, 2019, plaintiff filed an unopposed motion for preliminary approval of the settlement, under which the Company has agreed to implement a series of enhancements to its corporate governance policies and procedures. On April 18, 2019, the court granted the motion for preliminary approval, and a hearing with respect to final approval is scheduled to be held on June 27, 2019.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation relating to the Merger
In January, 2019,
eight
lawsuits have been filed by alleged Finisar stockholders challenging the Merger: (i)
Hein, et al. v. Finisar Corporation, et al.
, 19CV340510, in the Superior Court of California, County of Santa Clara; (ii)
Tenvold, et al. v. Finisar Corporation, et al.
, 1:19-cv-00050, in the United States District Court for the District of Delaware; (iii)
Klein, et al. v. Finisar Corporation, et al.
, 5:19-cv-00155, in the United States District Court for the Northern District of California; (iv)
Wheby Jr., et al. v. Finisar Corporation, et al.
, 1:19-cv-00064, in the United States District Court for the District of Delaware; (v)
Sharma v. Finisar Corporation, et al.
, 5:19-cv-00220, in the United States District Court for the Northern District of California; (vi)
Davis, et al. v. Finisar Corporation, et al.
, 3:19-cv-00271, in the United States District Court for the Northern District of California; (vii)
Bushansky, et al. v. Finisar Corporation, et al.
, 5:19-cv-00446, in the United States District Court for the Northern District of California; and (viii)
Pappey, et al. v. Finisar Corporation, et al.
, 1:19-cv-00167, in the United States District Court for the District of Delaware (collectively, the “Actions”).
Plaintiffs in the Actions named as defendants Finisar and each member of the Finisar Board. In addition, plaintiffs in the
Hein
,
Tenvold
, and
Klein
actions named II-VI and Merger Subsidiary as defendants. Further, plaintiffs in the
Hein
,
Tenvold
,
Klein
,
Wheby, Jr.
,
Davis
,
Bushansky
, and
Pappey
actions sought to recover on behalf of a putative class consisting of all similarly situated Finisar stockholders.
Plaintiff in the
Hein
action alleged that the Finisar Board breached its fiduciary duties to Finisar stockholders by, among other things, purportedly engaging in an insufficient sales process, obtaining inadequate merger consideration, and filing a materially misleading preliminary proxy statement. The
Hein
plaintiff further asserted that II-VI and the Merger Subsidiary knowingly aided and abetted the Finisar Board in breaching their fiduciary duties to Finisar stockholders by entering into the Merger. The
Hein
plaintiff sought a preliminary and permanent injunction of the proposed transaction unless the proxy statement was amended, rescission and unspecified damages if the Merger was consummated, and attorneys’ fees and expert fees and costs.
Plaintiffs in the
Tenvold
,
Klein
,
Wheby Jr.
,
Sharma
,
Davis
,
Bushansky
, and
Pappey
actions purported to state claims for violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 and, in the case of the
Davis
complaint, Regulation G promulgated thereunder. Plaintiffs in these actions generally alleged that the preliminary proxy statement omits material information with respect to the Merger, and sought, among other things, an order enjoining the defendants from proceeding with closing the Merger; unspecified damages, attorneys’ fees and expert fees, and expenses and costs; and in the event the Merger was consummated before entry of final judgment, rescission of the Merger or rescissory damages. Defendants believe that the complaints are without merit.
Following the filing of the Actions, counsel for Finisar and for the Plaintiffs engaged in arms-length negotiations concerning claims raised in the Actions and took certain actions that resulted in Finisar filing a Schedule DEFA14A on March 11, 2019, with the U.S. Securities and Exchange Commission that contained supplemental disclosures relating to the Merger. On March 12, 2019, Plaintiffs voluntarily dismissed the Actions with prejudice as to the Plaintiffs’ individual claims and without prejudice to claims asserted on behalf of a purported putative class of Finisar stockholders.
Other
In the ordinary course of business, the Company is a party to litigation, claims and assessments in addition to those described above. Based on information currently available, management does not believe the impact of these other matters will have a material adverse effect on its business, financial condition, results of operations or cash flows of the Company.
16. Guarantees and Indemnifications
Upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The Company may terminate the indemnification agreements with its officers and directors upon
90
days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid.
The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s activities or the use of the Company’s products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of
April 28, 2019
. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.
17. Financial Information by Quarter (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 28, 2019
|
|
January 27, 2019
|
|
October 28, 2018
|
|
July 29, 2018
|
|
April 29, 2018
|
|
January 28, 2018 (1)
|
|
October 29, 2017
|
|
July 30, 2017
|
|
(In thousands, except per share data)
|
Revenues
|
$310,085
|
|
$327,636
|
|
$325,423
|
|
$317,336
|
|
$310,069
|
|
$332,403
|
|
$332,205
|
|
$341,806
|
Gross profit
|
$87,303
|
|
$94,423
|
|
$85,683
|
|
$80,684
|
|
$62,594
|
|
$88,068
|
|
$96,205
|
|
$115,299
|
Income (loss) from operations
|
$(11,277)
|
|
$533
|
|
$(4,105)
|
|
$(15,691)
|
|
$(26,736)
|
|
$(6,129)
|
|
$9,467
|
|
$29,912
|
Net income (loss)
|
$(14,154)
|
|
$(15,301)
|
|
$(5,272)
|
|
$(18,489)
|
|
$(18,343)
|
|
$(55,659)
|
|
$5,857
|
|
$19,859
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$(0.12)
|
|
$(0.13)
|
|
$(0.04)
|
|
$(0.16)
|
|
$(0.16)
|
|
$(0.49)
|
|
$0.05
|
|
$0.18
|
Diluted
|
$(0.12)
|
|
$(0.13)
|
|
$(0.04)
|
|
$(0.16)
|
|
$(0.16)
|
|
$(0.49)
|
|
$0.05
|
|
$0.17
|
Shares used in computing net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
117,953
|
|
|
117,608
|
|
|
117,284
|
|
|
115,867
|
|
|
114,742
|
|
|
114,209
|
|
|
113,960
|
|
|
112,544
|
|
Diluted
|
117,953
|
|
|
117,608
|
|
|
117,284
|
|
|
115,867
|
|
|
114,742
|
|
|
114,209
|
|
|
115,443
|
|
|
115,698
|
|
(1) Net loss in the third quarter of fiscal 2018 includes a
$49.4 million
deferred income tax expense as a result of the TCJA.