Oclaro, Inc.
OCLARO, INC. (Form: 10-Q, Received: 05/08/2017 17:22:51)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
  FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-30684
 
 
OCLAROIMAGEA02A01A09.JPG  
OCLARO, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
20-1303994
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
225 Charcot Avenue, San Jose, California 95131
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer
 
¨
Accelerated filer
x
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


Table of Contents

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes   ¨     No   x
167,284,390 shares of common stock outstanding as of May 1, 2017
 


Table of Contents


OCLARO, INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 


2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

OCLARO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
April 1, 2017
 
July 2, 2016
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
214,063

 
$
95,929

Restricted cash
716

 
715

Short-term investments
40,005

 

Accounts receivable, net of allowances for doubtful accounts of $1,550 and $1,674 as of April 1, 2017 and July 2, 2016, respectively
123,695

 
93,571

Inventories
88,676

 
76,369

Prepaid expenses and other current assets
38,396

 
23,591

Total current assets
505,551

 
290,175

Property and equipment, net
100,459

 
65,045

Other intangible assets, net
840

 
1,498

Other non-current assets
2,474

 
2,331

Total assets
$
609,324

 
$
359,049

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
92,346

 
$
71,201

Accrued expenses and other liabilities
44,031

 
34,818

Capital lease obligations, current
2,431

 
3,753

Total current liabilities
138,808

 
109,772

Deferred gain on sale-leaseback
5,844

 
6,809

Convertible notes payable

 
62,058

Capital lease obligations, non-current
1,516

 
2,105

Other non-current liabilities
10,956

 
11,694

Total liabilities
157,124

 
192,438

Commitments and contingencies (Note 7)

 

Stockholders’ equity:
 
 
 
Preferred stock: 1,000 shares authorized; none issued and outstanding

 

Common stock: $0.01 par value per share; 275,000 shares authorized; 167,281   shares issued and outstanding at April 1, 2017 and 112,207 shares issued and outstanding at July 2, 2016
1,673

 
1,122

Additional paid-in capital
1,685,961

 
1,471,280

Accumulated other comprehensive income
38,346

 
39,821

Accumulated deficit
(1,273,780
)
 
(1,345,612
)
Total stockholders’ equity
452,200

 
166,611

Total liabilities and stockholders’ equity
$
609,324

 
$
359,049


The accompanying notes form an integral part of these condensed consolidated financial statements.

3

Table of Contents


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands, except per share amounts)
Revenues
$
162,182

 
$
101,050

 
$
451,588

 
$
282,729

Cost of revenues
95,394

 
74,114

 
277,680

 
206,488

Gross profit
66,788

 
26,936

 
173,908

 
76,241

Operating expenses:
 
 
 
 
 
 
 
     Research and development
14,479

 
11,379

 
41,344

 
33,399

     Selling, general and administrative
14,736

 
13,055

 
42,883

 
39,054

     Amortization of other intangible assets
150

 
247

 
635

 
748

     Restructuring, acquisition and related (income)
expense, net
(301
)
 
(59
)
 
92

 
(21
)
     (Gain) loss on sale of property and equipment
(16
)
 
(145
)
 
(127
)
 
22

Total operating expenses
29,048

 
24,477

 
84,827

 
73,202

Operating income
37,740

 
2,459

 
89,081

 
3,039

Other income (expense):
 
 
 
 
 
 
 
     Interest income (expense), net
175

 
(1,203
)
 
(13,613
)
 
(3,726
)
     Gain (loss) on foreign currency transactions, net
687

 
(865
)
 
(3,155
)
 
(861
)
     Other income (expense), net
233

 
174

 
583

 
644

Total other income (expense)
1,095

 
(1,894
)
 
(16,185
)
 
(3,943
)
Income (loss) before income taxes
38,835

 
565

 
72,896

 
(904
)
Income tax provision
621

 
476

 
1,064

 
2,360

Net income (loss)
$
38,214

 
$
89

 
$
71,832

 
$
(3,264
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.23

 
$
0.00

 
$
0.46

 
$
(0.03
)
Diluted
$
0.22

 
$
0.00

 
$
0.44

 
$
(0.03
)
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
166,808

 
110,882

 
155,037

 
110,212

Diluted
169,841

 
113,699

 
163,237

 
110,212

The accompanying notes form an integral part of these condensed consolidated financial statements.


4

Table of Contents


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Net income (loss)
$
38,214

 
$
89

 
$
71,832

 
$
(3,264
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized loss on marketable securities
(10
)
 

 
(5
)
 

Currency translation adjustments
1,775

 
593

 
(1,470
)
 
(1,886
)
Pension adjustments

 

 

 
(10
)
Total comprehensive income (loss)
$
39,979

 
$
682

 
$
70,357

 
$
(5,160
)
The accompanying notes form an integral part of these condensed consolidated financial statements.


5

Table of Contents


OCLARO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
71,832

 
$
(3,264
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of deferred gain on sale-leaseback
(553
)
 
(648
)
Amortization of debt discount and issuance costs in connection with convertible notes payable
102

 
609

Depreciation and amortization
15,360

 
12,198

Interest make-whole charge and induced conversion expense related to convertible notes
8,463

 

Stock-based compensation expense
7,922

 
6,440

Other non-cash adjustments
(128
)
 
22

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(32,402
)
 
(12,969
)
Inventories
(16,068
)
 
(7,553
)
Prepaid expenses and other current assets
(16,579
)
 
502

Other non-current assets
(275
)
 
264

Accounts payable
14,090

 
1,433

Accrued expenses and other liabilities
11,746

 
5,959

Net cash provided by operating activities
63,510

 
2,993

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(41,846
)
 
(12,362
)
Purchases of short-term investments
(40,001
)
 

Transfer (to) from restricted cash
(1
)
 
2,453

Net cash used in investing activities
(81,848
)
 
(9,909
)
Cash flows from financing activities:
 
 
 
Proceeds from the exercise of stock options
4,531

 
179

Shares repurchased for tax withholdings on vesting of restricted stock units
(3,675
)
 
(1,504
)
Proceeds from the sale of common stock in connection with public offering, net of expenses
135,153

 

Payments on capital lease obligations
(1,897
)
 
(2,303
)
Net cash provided by (used in) financing activities
134,112

 
(3,628
)
Effect of exchange rate on cash and cash equivalents
2,360

 
4,785

Net increase (decrease) in cash and cash equivalents
118,134

 
(5,759
)
Cash and cash equivalents at beginning of period
95,929

 
111,840

Cash and cash equivalents at end of period
$
214,063

 
$
106,081

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest make-whole and induced conversion charges related to the exercise of convertible notes
$
4,700

 
$

Supplemental disclosures of non-cash transactions:
 
 
 
Issuance of common stock in exchange for the net carrying value of the liability component of convertible notes
$
62,125

 
$

Purchases of property and equipment funded by accounts payable
$
11,831

 
$
9,567

Capital lease obligations incurred for purchases of property and equipment
$
397

 
$
2,392

The accompanying notes form an integral part of these condensed consolidated financial statements.

6


OCLARO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PREPARATION
Basis of Presentation
Oclaro, Inc., a Delaware corporation, is sometimes referred to in this Quarterly Report on Form 10-Q as “Oclaro,” “we,” “us” or “our.”
The accompanying unaudited condensed consolidated financial statements of Oclaro as of April 1, 2017 and for the three and nine months ended April 1, 2017 and March 26, 2016 have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Article 10 of Securities and Exchange Commission ("SEC") Regulation S-X, and include the accounts of Oclaro and all of our subsidiaries. Accordingly, they do not include all of the information and footnotes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our consolidated financial position and results of operations have been included. The condensed consolidated results of operations for the three and nine months ended April 1, 2017 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending July 1, 2017 .
The condensed consolidated balance sheet as of July 2, 2016 has been derived from our audited financial statements as of such date, but does not include all disclosures required by U.S. GAAP. These unaudited condensed consolidated financial statements should be read in conjunction with our audited financial statements included in our Annual Report on Form 10-K for the year ended July 2, 2016 (" 2016 Form 10-K").
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Examples of significant estimates and assumptions made by management involve the fair value of other intangible assets and long-lived assets, valuation allowances for deferred tax assets, the fair value of stock-based compensation, the fair value of embedded derivatives related to convertible debt, the fair value of pension liabilities, estimates for allowances for doubtful accounts and valuation of excess and obsolete inventories. These judgments can be subjective and complex and consequently actual results could differ materially from those estimates and assumptions. Descriptions of the key estimates and assumptions are included in our 2016 Form 10-K.
Fiscal Years
We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal year ending July 1, 2017 will be a 52 week year, with the quarter ended April 1, 2017 being a 13 week quarterly period. Our fiscal year ended July 2, 2016 was a 53 week year, with the quarter ended March 26, 2016 being a 13 week quarterly period.
Reclassifications
For presentation purposes, we have reclassified certain prior period amounts to conform to the current period financial statement presentation. These reclassifications did not affect our consolidated revenues, net loss, cash flows, cash and cash equivalents or stockholders’ equity as previously reported.
Recent Developments
In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all of our 6.00% Notes were cancelled, and the indenture, by and between us and U.S. Bank National Association, pursuant to which the 6.00% Notes were issued, was satisfied and discharged. In connection with these privately negotiated agreements, we issued a total of 34,659,972 shares of our common stock and made total cash payments of $4.7 million . See Note 5, Credit Line and Notes , for additional information.
In September 2016, we entered into an underwriting agreement with Jefferies LLC, as representative of several underwriters, pursuant to which we sold 17,250,000 shares of our common stock in a public offering. The net proceeds to us after deducting underwriting discounts and commissions and offering expenses was approximately $135.2 million . See Note 3, Balance Sheet Details for additional information.
In November 2016, our stockholders approved an amendment to the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, adding 6.0 million shares of common stock to the share reserve. See Note 8, Employee Stock Plans , for additional information.

7



NOTE 2. RECENT ACCOUNTING STANDARDS
In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost , changing the presentation of net periodic benefit cost in the income statement. The guidance will be effective for us in the first quarter of fiscal 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business , providing guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The guidance will be effective for us in the first quarter of fiscal 2019. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash to standardize the presentation of transfers between cash and restricted cash in the cash flow statement. Amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be effective for us in the first quarter of fiscal 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory , to reduce the complexity related to the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance will be effective for us in the first quarter of fiscal 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments to reduce the diversity in practice related to the presentation and classification of various cash flow scenarios. This guidance will be effective for us in the first quarter of fiscal 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In May 2014 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients , respectively. These updates clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance permits two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. We currently plan on adopting this guidance on July 1, 2018, the start to our first quarter of fiscal 2019, using the modified retrospective method with a cumulative catch up adjustment and providing additional disclosures comparing results to previous rules. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation: Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. This guidance will be effective for us in the first quarter of fiscal 2018, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases , which requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance will be effective for us in the first quarter of fiscal 2020, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.


8


NOTE 3. BALANCE SHEET DETAILS
Cash, Cash Equivalents and Short-Term Investments
The following table provides details regarding our cash, cash equivalents and short-term investments at the dates indicated:
 
April 1, 2017
 
July 2, 2016
 
(Thousands)
Cash and cash equivalents:
 
 
 
     Cash-in-bank
$
67,803

 
$
70,925

     Money market funds
95,825

 
25,004

     Commercial paper
19,996

 

     Corporate bonds
22,449

 

     U.S. Treasury securities
3,995

 

     U.S. agency securities
3,995

 

 
$
214,063

 
$
95,929

 
 
 
 
Short-term investments:
 
 
 
Commercial paper
$
23,961

 
$

Corporate bonds
8,051

 

U.S. Treasury securities
3,998

 

U.S. agency securities
3,995

 

 
$
40,005

 
$

We classify short-term investments, which consist primarily of securities purchased with original maturities at date of purchase of more than three months and less than one year, as “available for sale securities”. These short-term investments are reported at market value, with the aggregate unrealized holding gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary and not involving credit losses are recorded in the consolidated statements of operations in the period they occur.
Restricted Cash
As of April 1, 2017 , we had restricted cash of $1.1 million , comprised of $0.7 million in current assets and $0.4 million in other non-current assets, representing collateral for the performance of our obligations under certain lease facility agreements, collateral to secure certain of our credit card accounts and deposits for value-added taxes in foreign jurisdictions.
Inventories
The following table provides details regarding our inventories at the dates indicated:
 
April 1, 2017
 
July 2, 2016
 
(Thousands)
Inventories:
 
Raw materials
$
25,067

 
$
23,751

Work-in-process
35,061

 
32,819

Finished goods
28,548

 
19,799

 
$
88,676

 
$
76,369


9


Property and Equipment, Net
The following table provides details regarding our property and equipment, net at the dates indicated:
 
April 1, 2017
 
July 2, 2016
 
(Thousands)
Property and equipment, net:
 
Buildings and improvements
$
9,691

 
$
10,389

Plant and machinery
83,367

 
59,696

Fixtures, fittings and equipment
2,875

 
3,005

Computer equipment
11,583

 
9,846

 
107,516

 
82,936

Less: Accumulated depreciation
(7,057
)
 
(17,891
)
 
$
100,459

 
$
65,045

Property and equipment includes assets under capital leases of $3.9 million and $5.9 million at April 1, 2017 and July 2, 2016 , respectively. Amortization associated with assets under capital leases is recorded in depreciation expense. During the nine months ended April 1, 2017, we disposed and/or sold approximately $13.0 million of fully depreciated property and equipment related to our high-bit products.
Other Intangible Assets, Net
The following table summarizes the activity related to our other intangible assets for the nine months ended April 1, 2017 :
 
Core and
Current
Technology
 
Development
and Supply
Agreements
 
Customer
Relationships
 
Patent
Portfolio
 
Other
Intangibles
 
Amortization
 
Total
 
(Thousands)
Balance at July 2, 2016
$
6,249

 
$
4,509

 
$
2,402

 
$
915

 
$
3,338

 
$
(15,915
)
 
$
1,498

Amortization

 

 

 

 

 
(635
)
 
(635
)
Translations and adjustments

 
(23
)
 

 

 

 

 
(23
)
Balance at April 1, 2017
$
6,249

 
$
4,486

 
$
2,402

 
$
915

 
$
3,338

 
$
(16,550
)
 
$
840

We expect the amortization of intangible assets to be $0.2 million for the remainder of fiscal year 2017 and $0.6 million for fiscal year 2018, based on the current level of our other intangible assets as of April 1, 2017 .
Accrued Expenses and Other Liabilities
The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:
 
April 1, 2017
 
July 2, 2016
 
(Thousands)
Accrued expenses and other liabilities:
 
Trade payables
$
11,208

 
$
6,429

Compensation and benefits related accruals
12,385

 
14,038

Warranty accrual
4,659

 
3,827

Accrued restructuring, current

 
204

Purchase commitments in excess of future demand, current
5,292

 
1,723

Other accruals
10,487

 
8,597

 
$
44,031

 
$
34,818

Common Stock
In August 2016, we issued a total of 34,659,972 shares of our common stock in connection with the cancellation of our 6.00% Notes. See Note 5, Credit Line and Notes , for additional information.
On September 21, 2016, we entered into an underwriting agreement (the “Underwriting Agreement”) with Jefferies LLC, as representative of the several underwriters (the “Underwriters”), relating to the offering, issuance and sale (the “Offering”) of 15.0

10


million shares of our common stock, par value $0.01 per share (the “Common Stock”). The price to the public in the Offering was $8.35 per share. Under the terms of the Underwriting Agreement, we granted the Underwriters a 30 -day option to purchase up to an additional 2,250,000 shares of Common Stock. The option was exercised in full by the Underwriters on September 23, 2016. All of the shares in the Offering were sold by us. The Offering closed on September 27, 2016, subject to customary closing conditions. The net proceeds to us after deducting underwriting discounts and commissions and offering expenses were approximately $135.2 million.
Accumulated Other Comprehensive Income
The following table presents the components of accumulated other comprehensive income at the dates indicated:
 
April 1, 2017
 
July 2, 2016
 
(Thousands)
Accumulated other comprehensive income:
 
Currency translation adjustments
$
38,714

 
$
40,184

Unrealized loss on marketable securities
(5
)
 

Japan defined benefit plan
(363
)
 
(363
)
 
$
38,346

 
$
39,821


NOTE 4. FAIR VALUE
We define fair value as the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the following fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values:
Level 1-
Quoted prices in active markets for identical assets or liabilities.
Level 2-
Inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices of identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3-
Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Our cash equivalents and short-term investment instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most money market and marketable securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include investment-grade corporate bonds and commercial paper. Such instruments are generally classified within Level 2 of the fair value hierarchy.

11


Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments at April 1, 2017 and July 2, 2016 :
 
Fair Value Measurement at April 1, 2017 Using
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents: (1)
 
 
 
 
 
 
 
Money market funds
$
95,825

 
$

 
$

 
$
95,825

     Commercial paper

 
19,996

 

 
19,996

     Corporate bonds

 
22,449

 

 
22,449

     U.S. Treasury securities

 
3,995

 

 
3,995

     U.S. agency securities

 
3,995

 

 
3,995

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
23,961

 

 
23,961

Corporate bonds

 
8,051

 

 
8,051

U.S. Treasury securities

 
3,998

 

 
3,998

U.S. agency securities

 
3,995

 

 
3,995

Restricted cash:
 
 
 
 
 
 
 
Money market funds
712

 

 

 
712

Total assets measured at fair value
$
96,537

 
$
90,440

 
$

 
$
186,977

 
(1)  
Excludes $67.8 million in cash held in our bank accounts at April 1, 2017 .

 
Fair Value Measurement at July 2, 2016 Using
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(Thousands)
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents: (1)
 
 
 
 
 
 
 
Money market funds
$
25,004

 
$

 
$

 
$
25,004

Restricted cash:
 
 
 
 
 
 
 
Money market funds
712

 

 

 
712

Total assets measured at fair value
$
25,716

 
$

 
$

 
$
25,716

(1)  
Excludes $70.9 million in cash held in our bank accounts at July 2, 2016 .

NOTE 5. CREDIT LINE AND NOTES
6.00% Convertible Senior Notes due 2020 (" 6.00% Notes")
On February 12, 2015, we entered into a Purchase Agreement (the “Purchase Agreement”), with Jefferies LLC (the “Initial Purchaser”), pursuant to which we agreed to issue and sell to the Initial Purchaser up to $65.0 million in aggregate principal Convertible Senior Notes due 2020 (the “ 6.00% Notes”). On February 19, 2015, we closed the private placement of $65.0 million aggregate principal amount of the 6.00% Notes. The 6.00% Notes were sold at 100 percent of par, resulting in net proceeds of approximately $61.6 million , after deducting the Initial Purchaser’s discounts of $3.4 million . We also incurred offering expenses of $0.6 million . The net proceeds of this offering are being used for general corporate purposes, including working capital for, among other things, investing in development of new products and technologies.

12


The Purchase Agreement contained customary representations and warranties of the parties and indemnification and contribution provisions under which we, on the one hand, and the Initial Purchaser, on the other, agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”).
Prior to February 15, 2018, in the event that the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within five trading days immediately prior to the date we would have received a notice of conversion had exceeded the conversion price in effect on each such trading day, we would have, in addition to delivering shares upon conversion by the holder of 6.00% Notes, together with cash in lieu of fractional shares, made an interest make-whole payment in cash equal to the sum of the remaining scheduled payments of interest on the 6.00% Notes to be converted through February 15, 2018.
The 6.00% Notes were scheduled to mature on February 15, 2020 and bore interest at a fixed rate of 6.00 percent per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2015. In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all of our 6.00% Notes were canceled, and the indenture, by and between us and U.S. Bank National Association, pursuant to which the 6.00% Notes were issued, was satisfied and discharged. In connection with these privately negotiated agreements, we issued a total of 34,659,972 shares of our common stock and made total cash payments of $4.7 million .
On August 8, 2016, we entered into a privately negotiated agreement pursuant to which we (i) issued 12,051,282 shares of our common stock, and (ii) made a cash payment equal to $4.7 million during August 2016 in exchange for approximately $23.5 million aggregate principal amount of our 6.00% Notes.
On August 9, 2016, we entered into privately negotiated agreements pursuant to which we agreed to issue (i) an aggregate of 20,564,101 shares of our common stock, plus (ii) a to be determined number of additional shares of our common stock based on certain formulaic consideration in exchange for $40.1 million aggregate principal amount of our 6.00% Notes. On August 12, 2016, including the additional shares of common stock, we issued an aggregate of 21,852,477 shares of our common stock.
On August 18, 2016, we entered into privately negotiated agreements, pursuant to which, on August 22, 2016, we issued an aggregate of 756,213 shares of our common stock, in exchange for $1.4 million aggregate principal amount of our 6.00% Notes.
Pursuant to the terms of the indenture governing the 6.00% Notes, we recorded an interest make-whole charge of $5.9 million in interest (income) expense, net, in the condensed consolidated statements of operations for the nine months ended April 1, 2017 , which was settled with a combination of common stock issuances and cash payments. We also recorded an induced conversion expense of $7.4 million , which we recorded in interest (income) expense, net, in the condensed consolidated statements of operations for the nine months ended April 1, 2017 .
Silicon Valley Bank Credit Facility
On March 28, 2014, we entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided us with a three -year revolving credit facility of up to $40.0 million . Under the Loan Agreement we are required to pay a minimum interest payment of $45,000 each fiscal quarter. The minimum interest payment is in lieu of a stand-by charge.
On March 28, 2017, the Loan Agreement expired, and was not renewed. There are no amounts outstanding under the Loan Agreement.

NOTE 6. POST-RETIREMENT BENEFITS
We maintain a defined contribution plan and a defined benefit plan that provide retirement benefits to our employees in Japan. We also contribute to a U.K. based defined contribution pension scheme for employees.
Japan Defined Contribution Plan
Under the defined contribution plan in Japan, contributions are provided based on grade level and totaled $0.1 million and $0.4 million for the three and nine months ended April 1, 2017 , respectively and $0.1 million and $0.3 million for the three and nine months ended March 26, 2016 , respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.

13


Japan Defined Benefit Plan
Under the defined benefit plan in Japan (the “Japan Plan”), we calculate benefits based on an employee’s individual grade level and years of service. Employees are entitled to a lump sum benefit upon retirement or upon certain instances of termination.
As of April 1, 2017 , there were no plan assets associated with the Japan Plan. As of April 1, 2017 , there was $0.2 million in accrued expenses and other liabilities and $6.6 million in other non-current liabilities in our condensed consolidated balance sheet to account for the projected benefit obligations under the Japan Plan. Net periodic pension costs for the Japan Plan included the following:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Service cost
$
172

 
$
132

 
$
480

 
$
376

Interest cost
1

 
11

 
3

 
32

Net periodic pension costs
$
173

 
$
143

 
$
483

 
$
408

We made minimal benefit payments under the Japan Plan during the three months ended April 1, 2017 and $0.2 million during the nine months ended April 1, 2017 . We made zero and $0.1 million in benefit payments during the three and nine months ended March 26, 2016 , respectively.
U.K. Defined Contribution Pension Scheme
Under the defined contribution pension scheme, contributions totaled $0.3 million and $0.8 million for the three and nine months ended April 1, 2017 , respectively, and $0.3 million and $0.9 million for the three and nine months ended March 26, 2016 , respectively.

NOTE 7. COMMITMENTS AND CONTINGENCIES
Loss Contingencies
We are involved in various lawsuits, claims, and proceedings that arise in the ordinary course of business. We record a loss provision when we believe it is both probable that a liability has been incurred and the amount can be reasonably estimated.
Guarantees
We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and executive officers. We have not recorded a liability associated with these indemnification arrangements, as we historically have not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that we maintain, however, such insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal course of business, such as indemnifications in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any material amounts related to these indemnifications; therefore, no accrual has been made for these indemnifications.
Warranty Accrual
We generally provide a warranty for our products for twelve months to thirty-six months from the date of sale, although warranties for certain of our products may be longer. We accrue for the estimated costs to provide warranty services at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs would increase, resulting in a decrease in gross profit.

14


The following table summarizes movements in the warranty accrual for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Warranty provision—beginning of period
$
4,560

 
$
3,097

 
$
3,827

 
$
2,932

Warranties issued
991

 
615

 
2,533

 
1,472

Warranties utilized or expired
(901
)
 
(553
)
 
(1,505
)
 
(1,241
)
Foreign currency translation and other adjustments
9

 
(32
)
 
(196
)
 
(36
)
Warranty provision—end of period
$
4,659

 
$
3,127

 
$
4,659

 
$
3,127

Capital Leases
In October 2015, we entered into a capital lease agreement for certain capital equipment. The lease term is for 5 years, after which time the ownership of the equipment will transfer from lessor to us. During the lease term, we will make twenty equal installments of principal and interest, payable quarterly. Interest on the capital lease will accrue at 1.15 percent per annum.
The following table shows the future minimum lease payments due under non-cancelable capital leases at April 1, 2017 :
 
Capital Leases
 
(Thousands)
Fiscal Year Ending:
 
2017 (remaining)
$
926

2018
1,748

2019
591

2020
629

2021
286

Thereafter
12

Total minimum lease payments
4,192

Less amount representing interest
(245
)
Present value of capitalized payments
3,947

Less: current portion
(2,431
)
Long-term portion
$
1,516

Purchase Commitments
We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with suppliers and contract manufacturers that either allow them to procure inventory based upon criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consist of firm, non-cancelable and unconditional commitments.
We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of April 1, 2017 and July 2, 2016 , the liability for these purchase commitments was $4.5 million and $1.7 million , respectively, and was included in accrued expenses and other liabilities in our condensed consolidated balance sheets.
Malaysian Goods and Services Tax (“GST”)
In February 2016, the Malaysian tax authorities preliminarily denied our Malaysia GST refund claims representing approximately $2.4 million . These claims were made in connection with the export of finished goods from our contract manufacturing partner’s Malaysian facilities. We are currently contesting the denial of these claims through an administrative appeal, and believe that additional appeal options may be available to us if we do not obtain a favorable resolution. Although we have taken action to minimize the impact of the GST with respect to our ongoing operations, we believe it is reasonably possible that, ultimately, we may not be able to recover some of these GST amounts. Of the $2.4 million in GST claims, we recorded $1.9 million net of

15


reserves, as a receivable classified in prepaid expenses and other current assets in our condensed consolidated balance sheet at April 1, 2017 .
Litigation
Overview
In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings is described below. This legal proceeding, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and a number of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceeding described below. While it is not possible to accurately predict or determine the eventual outcome of this item, an adverse determination in the item currently pending could have a material adverse effect on our results of operations, financial position or cash flows.
Kunst Worker Compensation Matter
On June 18, 2015, Gerald Kunst, or Kunst, filed a civil suit against us and Travelers Property Casualty Company of America, or Travelers, in Massachusetts Superior Court, Civil Action No. SUCV2015-01818F. Travelers is our general liability insurance carrier. The complaint filed by Kunst, an employee of a third party service provider, alleges that he was injured while performing air conditioning repair services on the premises of our Acton, Massachusetts facility and seeks judgment in an amount to be determined by the court or jury, together with interest and costs. On July 24, 2015, we filed an answer to the complaint, which included our affirmative defenses. A final pretrial conference is scheduled for June 14, 2017. We intend to vigorously defend against this litigation.

NOTE 8. EMPLOYEE STOCK PLANS

Stock Incentive Plans
On November 18, 2016, our stockholders approved an amendment to the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the "Plan"), adding 6.0 million shares of common stock to the share reserve under the Plan. As of April 1, 2017 , there were approximately 13.7 million shares of our common stock available for grant under the Plan.
We generally grant stock options that vest over a two to four year service period, and restricted stock awards and restricted stock unit ("RSU") awards that vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by our board of directors or the compensation committee of our board of directors.
Performance Stock Units
In August 2015, our board of directors approved a grant of 0.9 million performance-based restricted stock units ("PSUs") to certain executive officers with an aggregate estimated grant date fair value of $2.5 million . Subject to the achievement of positive free cash flow (defined as adjusted EBITDA less capital expenditures) in any fiscal quarter ending prior to June 30, 2018, vesting of these PSUs is contingent upon service conditions being met through August 10, 2018. On October 29, 2015, the compensation committee of our board of directors certified that this performance condition was achieved during the first quarter of fiscal year 2016. As a result, these PSUs cliff vested with respect to 33.4 percent of the underlying shares on August 10, 2016, and will vest with respect to 8.325 percent of the underlying shares each subsequent quarter over the following two years , subject to continuous service.

16


In August 2016, our board of directors approved a grant of 0.8 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $4.8 million . Subject to the achievement of an aggregate of $25.0 million or more of free cash flow (defined as adjusted EBITDA less capital expenditures delivered) over any consecutive four fiscal quarters ending on or before June 27, 2020, as determined by our board of directors, these PSUs will vest with respect to 25 percent of the shares subject to the PSUs on August 10, 2017, and with respect to 6.25 percent of the underlying shares each subsequent quarter over the following three years, subject to continuous service.
Restricted Stock Units
In July 2015, our board of directors approved a long term incentive grant of 0.9 million RSUs to certain executive officers and 1.5 million RSUs to other employees, which vest over three years.
In August 2016, our board of directors approved a long term incentive grant of 0.8 million RSUs to certain executive officers and 2.0 million RSUs to other employees, which vest over four years.
Stock Incentive Plan Activity
The following table summarizes the combined activity under all of our equity incentive plans for the nine months ended April 1, 2017 :
 
Shares
Available
For Grant
 
Stock
Options /
SARs
Outstanding
 
Weighted-
Average
Exercise Price
 
Time and Performance-based Restricted Stock
Awards / Units
Outstanding
 
Weighted-
Average Grant
Date Fair Value
 
(Thousands)
 
(Thousands)
 
 
 
(Thousands)
 
 
Balance at July 2, 2016
12,824

 
2,975

 
$
7.03

 
5,022

 
$
2.67

Increase in share reserve
6,000

 

 

 

 

Granted
(5,460
)
 

 

 
3,900

 
6.45

Exercised or released
140

 
(960
)
 
4.84

 
(2,873
)
 
2.54

Forfeited or expired
208

 
(69
)
 
16.30

 
(102
)
 
4.69

Balance at April 1, 2017
13,712

 
1,946

 
$
7.78

 
5,947

 
$
5.17

Supplemental disclosure information about our stock options and stock appreciation rights ("SARs") outstanding as of April 1, 2017 is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(Thousands)
 
 
 
(Years)
 
(Thousands)
Options and SARs exercisable
1,837

 
$
8.12

 
2.9
 
$
6,039

Options and SARs outstanding
1,946

 
$
7.78

 
3.1
 
$
6,891

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the closing price of our common stock of $9.82 on March 31, 2017, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 1.2 million shares of common stock subject to in-the-money options which were exercisable as of April 1, 2017 . We settle employee stock option exercises with newly issued shares of common stock.


17


NOTE 9. STOCK-BASED COMPENSATION
We recognize stock-based compensation expense in our condensed consolidated statement of operations related to all share-based awards, including grants of stock options, based on the grant date fair value of such share-based awards.
As there were no stock options granted during the three and nine months ended April 1, 2017 and March 26, 2016, the Black-Scholes assumptions used to value stock option grants is not applicable.
The amounts included in cost of revenues and operating expenses for stock-based compensation were as follows:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Stock-based compensation by category of expense:
Cost of revenues
$
630

 
$
523

 
$
1,381

 
$
1,451

Research and development
590

 
455

 
1,573

 
1,370

Selling, general and administrative
1,670

 
1,095

 
4,968

 
3,619

 
$
2,890

 
$
2,073

 
$
7,922

 
$
6,440

Stock-based compensation by type of award:
 
 
 
 
 
 
 
Stock options
$
32

 
$
52

 
$
102

 
$
167

Restricted stock awards
2,747

 
1,962

 
7,950

 
6,258

Inventory adjustment to cost of revenues
111

 
59

 
(130
)
 
15

 
$
2,890

 
$
2,073

 
$
7,922

 
$
6,440

As of April 1, 2017 and July 2, 2016 , we had capitalized approximately $0.5 million and $0.3 million , respectively, of stock-based compensation as inventory.
As of April 1, 2017 , we had capitalized approximately $0.2 million of stock-based compensation in connection with the development of internal use software.
As of April 1, 2017 , we had $0.1 million in unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, that will be recognized over a weighted-average period of 1.2 years , and $18.0 million in unrecognized stock-based compensation expense related to unvested time-based restricted stock awards and restricted stock units, net of estimated forfeitures, that will be recognized over a weighted-average period of 2.4 years .
The amount of stock-based compensation expense recognized in any one period related to PSUs can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the shares underlying the PSUs, and any previously recognized compensation expense related to those PSUs would be reversed. As of April 1, 2017 , we determined that the achievement of the performance conditions associated with the PSUs issued in August 2016 is probable at 100 percent of the target level.
During the three and nine months ended April 1, 2017 , we recorded $0.7 million and $1.9 million , respectively, in stock-based compensation in connection with the PSUs issued in August 2015 and August 2016. During the three and nine months ended March 26, 2016 , we recorded $0.2 million and $1.2 million , respectively in stock-based compensation expense in connection with the issuance of PSUs.

NOTE 10. INCOME TAXES
The income tax provision of $0.6 million and $1.1 million for the three and nine months ended April 1, 2017 , respectively, relates primarily to our foreign operations. The income tax provision of $0.5 million and $2.4 million for the three and nine months ended March 26, 2016 , respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of April 1, 2017 and July 2, 2016 was approximately $3.5 million and $3.8 million , respectively. As of April 1, 2017 , we had $2.9 million of unrecognized tax benefits that, if recognized, would affect our effective tax rate. While it is often difficult to predict the final outcome of any particular uncertain tax position, we believe that unrecognized tax benefits could decrease by approximately $1.3 million in the next twelve months.


18


NOTE 11. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted net income (loss) per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock units and awards, warrants and convertible notes during such period.
The following table presents the calculation of basic and diluted net income (loss) per share:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands, except per share amounts)
Net income (loss)
$
38,214

 
$
89

 
$
71,832

 
$
(3,264
)
 
 
 
 
 
 
 
 
Weighted-average shares - Basic
166,808

 
110,882

 
155,037

 
110,212

Effect of dilutive potential common shares from:
 
 
 
 
 
 
 
Stock options and stock appreciation rights
651

 
280

 
712

 

Restricted stock units and awards
2,382

 
2,537

 
2,484

 

Convertible notes

 

 
5,004

 

Weighted-average shares - Diluted
169,841

 
113,699

 
163,237

 
110,212

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.23

 
$
0.00

 
$
0.46

 
$
(0.03
)
Diluted net income (loss) per share
$
0.22

 
$
0.00

 
$
0.44

 
$
(0.03
)
For the three and nine months ended April 1, 2017 , we excluded 0.6 million and 0.8 million , respectively, of outstanding stock options, stock appreciation rights and unvested restricted stock awards from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive.
For the three and nine months ended March 26, 2016 , we excluded 35.5 million and 38.3 million , respectively, of outstanding stock options, stock appreciation rights, unvested restricted stock awards and shares issuable in connection with convertible notes from the calculation of diluted net income (loss) per share because their effect would have been anti-dilutive.


19


NOTE 12. GEOGRAPHIC INFORMATION, PRODUCT GROUPS AND CUSTOMER CONCENTRATION INFORMATION
Geographic Information
The following table shows revenues by geographic area based on the delivery locations of our products:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
Asia-Pacific:
 
 
 
 
 
 
 
China
$
57,882

 
$
43,935

 
$
180,551

 
$
112,170

Thailand
24,722

 
1,964

 
78,852

 
2,727

Malaysia
4,000

 
7,986

 
15,703

 
24,146

Other Asia-Pacific
6,329

 
1,378

 
12,693

 
3,294

Total Asia-Pacific
$
92,933

 
$
55,263

 
$
287,799

 
$
142,337

 
 
 
 
 
 
 
 
Americas:
 
 
 
 
 
 
 
United States
22,832

 
15,913

 
54,574

 
45,880

Mexico
8,930

 
10,015

 
26,290

 
36,549

Other Americas
14,115

 
2,338

 
22,327

 
5,312

Total Americas
$
45,877

 
$
28,266

 
$
103,191


$
87,741

 
 
 
 
 
 
 
 
EMEA:
 
 
 
 
 
 
 
Italy
7,577

 
6,353

 
23,601

 
20,242

Germany
5,116

 
5,686

 
11,493

 
14,638

Other EMEA
6,836

 
3,315

 
18,182

 
12,638

Total EMEA
$
19,529

 
$
15,354

 
$
53,276

 
$
47,518

 
 
 
 
 
 
 
 
Japan
$
3,843

 
$
2,167

 
$
7,322

 
$
5,133

 
 
 
 
 
 
 
 
Total revenues
$
162,182

 
$
101,050

 
$
451,588

 
$
282,729

Product Groups
The following table sets forth revenues by product group:
 
Three Months Ended
 
Nine Months Ended
 
April 1, 2017
 
March 26, 2016
 
April 1, 2017
 
March 26, 2016
 
(Thousands)
100 Gb/s transmission modules
$
125,818

 
$
58,569

 
$
337,424

 
$
148,951

40 Gb/s and lower transmission modules
36,364

 
42,481

 
114,164

 
133,778

 
$
162,182

 
$
101,050

 
$
451,588

 
$
282,729




20


Significant Customers and Concentration of Credit Risk
For the three months ended April 1, 2017 , four customers accounted for 10 percent or more of our revenues, representing approximately 18 percent , 17 percent , 12 percent and 12 percent of our revenues, respectively. For the nine months ended April 1, 2017 four customers accounted for 10 percent of more of our revenues, representing 19 percent , 18 percent , 16 percent and 11 percent of our revenues, respectively.
For the three months ended March 26, 2016 , four customers accounted for 10 percent or more of our revenues, representing approximately 20 percent , 14 percent , 12 percent and 11 percent of our revenues, respectively. For the nine months ended March 26, 2016 , three customers accounted for 10 percent or more of our revenues, representing approximately 19 percent , 14 percent and 10 percent of our revenues, respectively.
As of April 1, 2017 , three customers accounted for 10 percent or more of our accounts receivable, representing approximately 21 percent , 13 percent and 11 percent of our accounts receivable, respectively. As of July 2, 2016 , four customers accounted for 10 percent or more of our accounts receivable, representing approximately 23 percent , 16 percent , 13 percent and 10 percent of our accounts receivable, respectively.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our future expectations, plans or prospects and our business. You can identify these statements by the fact that they do not relate strictly to historical or current events, and contain words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “outlook,” “could,” “target,” “model,” "objective," and other words of similar meaning in connection with discussion of future operating or financial performance. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. There are a number of important factors that could cause our actual results or events to differ materially from those indicated by such forward-looking statements, including (i) our ability to timely develop, commercialize and ramp the production of new products to customer required volumes, (ii) the absence of long-term purchase commitments from many of our long-term customers, (iii) our dependence on a limited number of customers for a significant percentage of our revenues, (iv) competition and pricing pressure, (v) our ability to meet or exceed our gross margin expectations, (vi) the effects of fluctuations in foreign currency exchange rates, (vii) our manufacturing yields, (viii) the risks associated with delays, disruptions or quality control problems in manufacturing, (ix) our ability to conclude agreements with our customers on favorable terms, (x) our ability to obtain governmental licenses and approvals for international trading activities or technology transfers, including export licenses, (xi) our ability to respond to evolving technologies, customer requirements and demands, and product design challenges, (xii) the impact of financial market and general economic conditions in the industries in which we operate and any resulting reduction in demand for our products, (xiii) our ability to effectively manage our inventory, (xiv) our dependence on a limited number of suppliers and key contract manufacturers, (xv) our ability to have our manufacturing lines qualified by our customers, (xvi) our ability to protect our intellectual property rights, (xvii) the outcome of tax audits or similar proceedings, (xviii) the risks associated with our international operations, (xix) the outcome of pending litigation against us, and (xx) other factors described in our most recent annual report on Form 10-K and other documents we periodically file with the SEC. We cannot guarantee any future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in forward-looking statements are identified in the sections captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and "Risk Factors" in this Quarterly Report on Form 10-Q and the documents incorporated herein by reference.
As used herein, “Oclaro,” “we,” “our,” and similar terms include Oclaro, Inc. and its subsidiaries, unless the context indicates otherwise.


21

Table of Contents


OVERVIEW
We are one of the leading providers of optical components, modules and subsystems for the core optical transport, service provider, enterprise and data center markets. Leveraging over three decades of laser technology innovation, photonic integration and subsystem design, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
We have research and development ("R&D") and fabrication facilities in China, Italy, Japan, United Kingdom and the United States. We also have contract manufacturing sites in China, Japan, Malaysia, Taiwan and Thailand, with design, sales and service organizations in most of the major regions around the world.
Our customers include: ADVA Optical Networking; Ciena Corporation; Cisco Systems, Inc.; Coriant GmbH; Huawei Technologies Co. Ltd; InnoLight Technology Corporation; Juniper Networks, Inc.; Kaiam Corp.; Nokia/Alcatel-Lucent and ZTE Corporation.

RECENT DEVELOPMENTS
6.00% Convertible Senior Notes
In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all $65.0 million of our 6.00% Convertible Senior Notes Due 2020 ("6.00% Notes") were canceled, and the indenture, dated as of February 19, 2015, by and between us and U.S. Bank National Association, pursuant to which the 6.00% Notes were issued, was satisfied and discharged.
On August 8, 2016, we entered into a privately negotiated agreement pursuant to which we (i) issued 12,051,282 shares of our common stock, par value $0.01 per share, and (ii) made a cash payment equal to $4.7 million during August 2016 in exchange for approximately $23.5 million aggregate principal amount of our 6.00% Notes.
On August 9, 2016, we entered into privately negotiated agreements pursuant to which we agreed to issue (i) an aggregate of 20,564,101 shares of our common stock, plus (ii) a to be determined number of additional shares of our common stock based on certain formulaic consideration in exchange for $40.1 million aggregate principal amount of our 6.00% Notes. On August 12, 2016, including the additional shares of common stock, we issued an aggregate of 21,852,477 shares of our common stock.
On August 18, 2016, we entered into privately negotiated agreements, pursuant to which, on August 22, 2016, we issued an aggregate of 756,213 shares of our common stock, in exchange for $1.4 million aggregate principal amount of our 6.00% Notes.
Common Stock Offering
On September 21, 2016, we entered into an underwriting agreement (the “Underwriting Agreement”) with Jefferies LLC, as representative of the several underwriters (the “Underwriters”), relating to the offering, issuance and sale (the “Offering”) of 15,000,000 shares of our common stock, par value $0.01 per share (the “Common Stock”). The price to the public in the Offering was $8.35 per share. Under the terms of the Underwriting Agreement, we granted the Underwriters a 30-day option to purchase up to an additional 2,250,000 shares of Common Stock. The option was exercised in full by the Underwriters on September 23, 2016. All of the shares in the Offering were sold by us. The Offering closed on September 27, 2016, subject to customary closing conditions. The net proceeds to us after deducting underwriting discounts and commissions and offering expenses was approximately $135.2 million.
Stock Incentive Plans
On November 18, 2016, our stockholders approved an amendment to the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the "Plan"), adding 6.0 million shares of common stock to the share reserve under the Plan.


22

Table of Contents


RESULTS OF OPERATIONS

The following tables set forth our condensed consolidated results of operations for the periods indicated, along with amounts expressed as a percentage of revenues, and comparative information regarding the absolute and percentage changes in these amounts:
 
Three Months Ended
 
 
 
Increase
 
 
April 1, 2017
 
March 26, 2016
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
162,182

 
100.0

 
$
101,050

 
100.0

 
$
61,132

 
60.5

 
Cost of revenues
95,394

 
58.8

 
74,114

 
73.3

 
21,280

 
28.7

 
Gross profit
66,788

 
41.2

 
26,936

 
26.7

 
39,852

 
148.0

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
14,479

 
8.9

 
11,379

 
11.3

 
3,100

 
27.2

 
Selling, general and administrative
14,736

 
9.1

 
13,055

 
12.9

 
1,681

 
12.9

 
Amortization of other intangible assets
150

 
0.1

 
247

 
0.2

 
(97
)
 
(39.3
)
 
Restructuring, acquisition and related (income) expense, net
(301
)
 
(0.2
)
 
(59
)
 
(0.1
)
 
(242
)
 
410.2

 
Gain on sale of property and equipment
(16
)
 

 
(145
)
 
(0.1
)
 
129

 
(89.0
)
 
Total operating expenses
29,048

 
17.9

 
24,477

 
24.2

 
4,571

 
18.7

  
Operating income
37,740

 
23.3

 
2,459

 
2.4

 
35,281

 
1,434.8

 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
175

 
0.1

 
(1,203
)
 
(1.2
)
 
1,378

 
n/m

(1)  
Gain (loss) on foreign currency transactions, net
687

 
0.4

 
(865
)
 
(0.9
)
 
1,552

 
n/m

(1)  
Other income (expense), net
233

 
0.1

 
174

 
0.2

 
59

 
33.9

 
Total other income (expense)
1,095

 
0.7

 
(1,894
)
 
(1.9
)
 
2,989

 
n/m

(1)  
Income before income taxes
38,835

 
23.9

 
565

 
0.6

 
38,270

 
6,773.5

 
Income tax provision
621

 
0.4

 
476

 
0.5

 
145

 
30.5

 
Net income
$
38,214

 
23.6

 
$
89

 
0.1

 
$
38,125

 
42,837.1

 
(1)
Not meaningful.


23

Table of Contents


 
Nine Months Ended
 
 
 
Increase
 
 
April 1, 2017
 
March 26, 2016
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
451,588

 
100.0

 
$
282,729

 
100.0

 
$
168,859

 
59.7

 
Cost of revenues
277,680

 
61.5

 
206,488

 
73.0

 
71,192

 
34.5

 
Gross profit
173,908

 
38.5

 
76,241

 
27.0

 
97,667

 
128.1

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
41,344

 
9.2

 
33,399

 
11.8

 
7,945

 
23.8

 
Selling, general and administrative
42,883

 
9.5

 
39,054

 
13.8

 
3,829

 
9.8

 
Amortization of other intangible assets
635

 
0.1

 
748

 
0.3

 
(113
)
 
(15.1
)
 
Restructuring, acquisition and related (income) expense, net
92

 

 
(21
)
 

 
113

 
n/m

(1)  
(Gain) loss on sale of property and equipment
(127
)
 

 
22

 

 
(149
)
 
n/m

(1)  
Total operating expenses
84,827

 
18.8

 
73,202

 
25.9

 
11,625

 
15.9

  
Operating income
89,081

 
19.7

 
3,039

 
1.1

 
86,042

 
2,831.3

 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(13,613
)
 
(3.0
)
 
(3,726
)
 
(1.3
)
 
(9,887
)
 
265.4

 
Loss on foreign currency transactions, net
(3,155
)
 
(0.7
)
 
(861
)
 
(0.3
)
 
(2,294
)
 
266.4

 
Other income (expense), net
583

 
0.1

 
644

 
0.2

 
(61
)
 
(9.5
)
 
Total other income (expense)
(16,185
)
 
(3.6
)
 
(3,943
)
 
(1.4
)
 
(12,242
)
 
310.5

 
Income (loss) before income taxes
72,896

 
16.1

 
(904
)
 
(0.3
)
 
73,800

 
n/m

(1)  
Income tax provision
1,064

 
0.2

 
2,360

 
0.8

 
(1,296
)
 
(54.9
)
 
Net income (loss)
$
71,832

 
15.9

 
$
(3,264
)
 
(1.2
)
 
$
75,096

 
n/m

(1)  
(1)
Not meaningful.

Revenues
Revenues for the three months ended April 1, 2017 increased by $61.1 million , or 60 percent , compared to the three months ended March 26, 2016 . Compared to the three months ended March 26, 2016 , revenues from sales of our 100 Gb/s transmission modules increased by $67.2 million , or 115 percent , primarily due to growth in our 100 Gb/s line side modules and components and our client side transceivers; and revenues from sales of our 40 Gb/s and lower transmission modules decreased by $6.1 million , or 14 percent , primarily due to certain legacy 40 Gb/s and 10 Gb/s products being gradually replaced by our newer higher speed products. This product mix shift reflects our continued focus on the market for higher speed products that are smaller in size and have lower power consumption.
For the three months ended April 1, 2017 , four customers accounted for 10 percent or more of our revenues, representing approximately 18 percent , 17 percent , 12 percent and 12 percent of our revenues, respectively. For the three months ended March 26, 2016 , four customers accounted for 10 percent or more of our revenues, representing approximately 20 percent , 14 percent , 12 percent and 11 percent of our revenues, respectively.
Revenues for the nine months ended April 1, 2017 increased by $168.9 million , or 60 percent , compared to the nine months ended March 26, 2016 . Compared to the nine months ended March 26, 2016 , revenues from sales of our 100 Gb/s transmission modules increased by $188.5 million , or 127 percent , primarily due to growth in our 100 Gb/s line side modules and components and our client side transceivers; and revenues from sales of our 40 Gb/s and lower transmission modules decreased by $19.6 million , or 15 percent , primarily due to certain legacy 40 Gb/s and 10 Gb/s products being gradually replaced by our newer higher speed products. This product mix shift reflects our continued focus on the market for higher speed products that are smaller in size and have lower power consumption.

24

Table of Contents


For the nine months ended April 1, 2017 , four customers accounted for 10 percent or more of our revenues, representing approximately 19 percent , 18 percent , 16 percent and 11 percent of our revenues, respectively. For the nine months ended March 26, 2016 , three customers accounted for 10 percent or more of our revenues, representing approximately 19 percent , 14 percent and 10 percent of our revenues, respectively.

Gross Profit
Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross profit reflected as a percentage of revenues.
Our gross margin rate increased to approximately 41 percent for the three months ended April 1, 2017 , compared to 27 percent for the three months ended March 26, 2016 . The improvement in the gross margin rate was primarily related to the product mix of our sales, with a higher mix of higher margin 100 Gb/s products contributing approximately 7 percentage points of improvement; and economies of scale related to manufacturing overhead and inventory management that contributed approximately 7 percentage points of improvement.
Our gross margin rate increased to approximately 39 percent for the nine months ended April 1, 2017 , compared to 27 percent for the nine months ended March 26, 2016 . The improvement in the gross margin rate was primarily related to the product mix of our sales, with a higher mix of higher margin 100 Gb/s products contributing approximately 7 percentage points of improvement; and economies of scale related to manufacturing overhead and inventory management that contributed approximately 4 percentage points of improvement.
Our cost of revenues consists of the costs associated with manufacturing our products, and includes the purchase of raw materials, labor costs and related overhead, including stock-based compensation charges and the costs charged by our contract manufacturers for the products they manufacture for us. Charges for excess and obsolete inventory are also included in cost of revenues. Costs and expenses related to our manufacturing resources incurred in connection with the development of new products are included in research and development expenses.

Research and Development Expenses
Research and development expenses increased to $14.5 million for the three months ended April 1, 2017 , from $11.4 million for the three months ended March 26, 2016 . The increase was primarily related to an investment of $1.9 million in research and development resources, primarily personnel-related; and an increase of $1.9 million in non-recurring engineering and material expenses; partially offset by a decrease of $0.6 million related to the impact of the British pound, Euro and other currencies weakening relative to the U.S. dollar.
Research and development expenses increased to $41.3 million for the nine months ended April 1, 2017 , from $33.4 million for the nine months ended March 26, 2016 . The increase was primarily related to an investment of $4.8 million in research and development resources, primarily personnel-related; and an increase of $2.9 million in non-recurring engineering and material expenses; partially offset by a decrease of $0.4 million related to the impact of the British pound, Euro and other currencies weakening relative to the U.S. dollar.
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 facilities costs for certain research and development focused sites.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $14.7 million for the three months ended April 1, 2017 , from $13.1 million for the three months ended March 26, 2016 . The increase was primarily related to an increase of $1.4 million in personnel-related costs and an increase of $0.6 million in outside professional fees; partially offset by a decrease of $0.2 million related to the impact of the British pound, Euro and other currencies weakening relative to the U.S. dollar.
Selling, general and administrative expenses increased to $42.9 million for the nine months ended April 1, 2017 , from $39.1 million for the nine months ended March 26, 2016 . The increase was primarily related to an increase of $3.5 million in personnel-related costs, which included an increase in stock compensation related charges of $1.4 million , and an increase of $0.6 million in outside professional fees; partially offset by a decrease of $0.4 million related to the impact of the British pound, Euro and other currencies weakening relative to the U.S. dollar.
Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation charges related to employees engaged in sales, general and administrative functions, legal and professional fees, facilities expenses, insurance expenses and certain information technology costs.


25

Table of Contents


Amortization of Other Intangible Assets
Amortization of other intangible assets remained relatively flat during the three and nine months ended April 1, 2017 as compared to the three and nine months ended March 26, 2016 . We expect the amortization of other intangible assets to be $0.2 million for the remainder of fiscal year 2017 and $0.6 million for fiscal year 2018, based on the current level of our other intangible assets as of April 1, 2017 .

Restructuring, Acquisition and Related (Income) Expense, Net
During the three and nine months ended April 1, 2017, we incurred $0.3 million in restructuring and related income and $0.1 million in restructuring and related expense primarily related to the consolidation and closure of a facility for an end-of-life product.
During the three and nine months ended March 26, 2016, we incurred minimal restructuring, acquisition and related charges.

Other Income (Expense), Net
Other income (expense) was $1.1 million in income for the three months ended April 1, 2017 as compared to $1.9 million in expense for the three months ended March 26, 2016 . This change in other income (expense) primarily related to a $1.6 million increase in foreign currency transaction gains during the three months ended April 1, 2017 , as compared to the three months ended March 26, 2016 , related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries, and from a decrease in interest expense of $1.4 million as a result of the conversion of $65.0 million of our 6.00% Notes during the first quarter of fiscal year 2017.
Other income (expense) was $16.2 million in expense for the nine months ended April 1, 2017 as compared to $3.9 million in expense for the three months ended March 26, 2016 . This change in other income (expense) primarily related to the conversion of $65.0 million of our 6.00% Notes during the first quarter of fiscal year 2017, resulting in an induced conversion expense of $7.4 million and an interest make-whole charge of $5.9 million , which were both recorded in interest (income) expense, net. We also recorded a $2.3 million increase in foreign currency transaction losses during the nine months ended April 1, 2017 , as compared to the nine months ended March 26, 2016 , related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries.

Income Tax Provision
The income tax provision of $0.6 million and $1.1 million for the three and nine months ended April 1, 2017 , respectively, and the income tax provision of $0.5 million and $2.4 million for the three and nine months ended March 26, 2016 , respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of April 1, 2017 and July 2, 2016 was approximately $3.5 million and $3.8 million , respectively. As of April 1, 2017 , we had $2.9 million of unrecognized tax benefits that, if recognized, would affect our effective tax rate. While it is often difficult to predict the final outcome of any particular uncertain tax position, we believe that unrecognized tax benefits could decrease by $1.3 million in the next twelve months.

RECENT ACCOUNTING STANDARDS
See Note 2, Recent Accounting Standards , to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding the effect of new accounting pronouncements on our condensed consolidated financial statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from those based on our estimates and judgments or could be materially different if we used different assumptions, estimates or conditions. In addition, our financial condition and results of operations could vary due to a change in the application of a particular accounting policy.
We identified our critical accounting policies in our Annual Report on Form 10-K for the year ended July 2, 2016 ("2016 Form 10-K") related to revenue recognition and sales returns, inventory valuation, business combinations, impairment of other intangible assets, accounting for stock-based compensation and income taxes. It is important that the discussion of our operating results be read in conjunction with the critical accounting policies discussed in our 2016 Form 10-K.

26

Table of Contents