Oclaro, Inc.
OCLARO, INC. (Form: 10-Q, Received: 02/06/2017 16:58:22)
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 December 31, 2016
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
 
 
OCLAROIMAGEA02A01A08.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
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes   ¨     No   x
166,590,393 shares of common stock outstanding as of February 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)
 
December 31, 2016
 
July 2, 2016
 
(Thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
222,796

 
$
95,929

Restricted cash
715

 
715

Short-term investments
19,948

 

Accounts receivable, net of allowances for doubtful accounts of $1,641 and $1,674 as of December 31, 2016 and July 2, 2016, respectively
107,513

 
93,571

Inventories
82,313

 
76,369

Prepaid expenses and other current assets
33,183

 
23,591

Total current assets
466,468

 
290,175

Property and equipment, net
81,402

 
65,045

Other intangible assets, net
986

 
1,498

Other non-current assets
2,364

 
2,331

Total assets
$
551,220

 
$
359,049

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
82,167

 
$
71,201

Accrued expenses and other liabilities
40,358

 
34,818

Capital lease obligations, current
2,425

 
3,753

Total current liabilities
124,950

 
109,772

Deferred gain on sale-leaseback
5,938

 
6,809

Convertible notes payable

 
62,058

Capital lease obligations, non-current
1,579

 
2,105

Other non-current liabilities
10,502

 
11,694

Total liabilities
142,969

 
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; 166,485   shares issued and outstanding at December 31, 2016 and 112,207 shares issued and outstanding at July 2, 2016
1,665

 
1,122

Additional paid-in capital
1,681,999

 
1,471,280

Accumulated other comprehensive income
36,581

 
39,821

Accumulated deficit
(1,311,994
)
 
(1,345,612
)
Total stockholders’ equity
408,251

 
166,611

Total liabilities and stockholders’ equity
$
551,220

 
$
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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands, except per share amounts)
Revenues
$
153,914

 
$
94,129

 
$
289,406

 
$
181,679

Cost of revenues
93,150

 
67,521

 
182,286

 
132,374

Gross profit
60,764

 
26,608

 
107,120

 
49,305

Operating expenses:
 
 
 
 
 
 
 
     Research and development
13,758

 
11,075

 
26,865

 
22,020

     Selling, general and administrative
13,355

 
12,791

 
28,147

 
25,999

     Amortization of other intangible assets
241

 
250

 
485

 
501

     Restructuring, acquisition and related (income)
expense, net
82

 
6

 
393

 
38

     (Gain) loss on sale of property and equipment
(74
)
 
(46
)
 
(111
)
 
167

Total operating expenses
27,362

 
24,076

 
55,779

 
48,725

Operating income
33,402

 
2,532

 
51,341

 
580

Other income (expense):
 
 
 
 
 
 
 
     Interest income (expense), net
70

 
(1,247
)
 
(13,788
)
 
(2,523
)
     Gain (loss) on foreign currency transactions, net
(3,324
)
 
(500
)
 
(3,842
)
 
4

     Other income (expense), net
156

 
357

 
350

 
470

Total other income (expense)
(3,098
)
 
(1,390
)
 
(17,280
)
 
(2,049
)
Income (loss) before income taxes
30,304

 
1,142

 
34,061

 
(1,469
)
Income tax provision
37

 
985

 
443

 
1,884

Net income (loss)
$
30,267

 
$
157

 
$
33,618

 
$
(3,353
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.18

 
$
0.00

 
$
0.23

 
$
(0.03
)
Diluted
$
0.18

 
$
0.00

 
0.21

 
(0.03
)
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
165,822

 
110,296

 
149,151

 
109,877

Diluted
168,856

 
112,394

 
159,801

 
109,877

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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Net income (loss)
$
30,267

 
$
157

 
$
33,618

 
$
(3,353
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on marketable securities
5

 

 
5

 

Currency translation adjustments
(3,799
)
 
(596
)
 
(3,245
)
 
(2,479
)
Pension adjustments

 

 

 
(10
)
Total comprehensive income (loss)
$
26,473

 
$
(439
)
 
$
30,378

 
$
(5,842
)
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)
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
33,618

 
$
(3,353
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Amortization of deferred gain on sale-leaseback
(370
)
 
(441
)
Amortization of debt discount and issuance costs in connection with convertible notes payable
102

 
406

Depreciation and amortization
10,168

 
8,040

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

 

Stock-based compensation expense
5,032

 
4,367

Other non-cash adjustments
(112
)
 
167

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(17,067
)
 
(4,268
)
Inventories
(11,517
)
 
(6,355
)
Prepaid expenses and other current assets
(12,042
)
 
1,734

Other non-current assets
(207
)
 
296

Accounts payable
8,489

 
1,930

Accrued expenses and other liabilities
8,585

 
5,479

Net cash provided by operating activities
33,142

 
8,002

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(23,030
)
 
(6,632
)
Purchases of short-term investments
(19,953
)
 

Transfer from restricted cash

 
1,555

Net cash used in investing activities
(42,983
)
 
(5,077
)
Cash flows from financing activities:
 
 
 
Proceeds from the exercise of stock options
2,587

 
133

Shares repurchased for tax withholdings on vesting of restricted stock units
(2,518
)
 
(554
)
Proceeds from the sale of common stock in connection with public offering, net of expenses
135,153

 

Payments on capital lease obligations
(1,493
)
 
(1,468
)
Net cash provided by (used in) financing activities
133,729

 
(1,889
)
Effect of exchange rate on cash and cash equivalents
2,979

 
1,182

Net increase in cash and cash equivalents
126,867

 
2,218

Cash and cash equivalents at beginning of period
95,929

 
111,840

Cash and cash equivalents at end of period
$
222,796

 
$
114,058

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
$
9,359

 
$
6,099

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 December 31, 2016 and for the three and six months ended December 31, 2016 and December 26, 2015 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 six months ended December 31, 2016 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 December 31, 2016 being a 13 week quarterly period. Our fiscal year ended July 2, 2016 was a 53 week year, with the quarter ended December 26, 2015 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 November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 impact that 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 impact that 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 impact that 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. This guidance will be effective for us in the first quarter of fiscal 2019, with early adoption permitted for periods beginning after December 15, 2016. We are currently evaluating the impact that 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 impact that 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 impact that the implementation of this standard will have on our financial statements and footnote disclosures.

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:
 
December 31, 2016
 
July 2, 2016
 
(Thousands)
Cash and cash equivalents:
 
 
 
     Cash-in-bank
$
49,806

 
$
70,925

     Money market funds
157,627

 
25,004

     Commercial paper
11,489

 

     Corporate bonds
3,874

 

 
$
222,796

 
$
95,929

 
 
 
 
Short-term investments:
 
 
 
Commercial paper
$
15,947

 
$

Corporate bonds
4,001

 

 
$
19,948

 
$


8


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 December 31, 2016 , 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:
 
December 31, 2016
 
July 2, 2016
 
(Thousands)
Inventories:
 
Raw materials
$
26,649

 
$
23,751

Work-in-process
32,458

 
32,819

Finished goods
23,206

 
19,799

 
$
82,313

 
$
76,369

Property and Equipment, Net
The following table provides details regarding our property and equipment, net at the dates indicated:
 
December 31, 2016
 
July 2, 2016
 
(Thousands)
Property and equipment, net:
 
Buildings and improvements
$
9,787

 
$
10,389

Plant and machinery
73,064

 
59,696

Fixtures, fittings and equipment
2,904

 
3,005

Computer equipment
9,016

 
9,846

 
94,771

 
82,936

Less: Accumulated depreciation
(13,369
)
 
(17,891
)
 
$
81,402

 
$
65,045

Property and equipment includes assets under capital leases of $4.0 million at December 31, 2016 and $5.9 million at July 2, 2016 , respectively. Amortization associated with assets under capital leases is recorded in depreciation expense.
Other Intangible Assets, Net
The following table summarizes the activity related to our other intangible assets for the six months ended December 31, 2016 :
 
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

 

 

 

 

 
(485
)
 
(485
)
Translations and adjustments

 
(27
)
 

 

 

 

 
(27
)
Balance at December 31, 2016
$
6,249

 
$
4,482

 
$
2,402

 
$
915

 
$
3,338

 
$
(16,400
)
 
$
986

We expect the amortization of intangible assets to be $0.3 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 December 31, 2016 .

9


Accrued Expenses and Other Liabilities
The following table presents details regarding our accrued expenses and other liabilities at the dates indicated:
 
December 31, 2016
 
July 2, 2016
 
(Thousands)
Accrued expenses and other liabilities:
 
Trade payables
$
8,831

 
$
6,429

Compensation and benefits related accruals
15,260

 
14,038

Warranty accrual
4,560

 
3,827

Accrued restructuring, current

 
204

Purchase commitments in excess of future demand, current
2,625

 
1,723

Other accruals
9,094

 
8,597

 
$
40,370

 
$
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 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 are approximately $135.2 million.
Accumulated Other Comprehensive Income
The following table presents the components of accumulated other comprehensive income at the dates indicated:
 
December 31, 2016
 
July 2, 2016
 
(Thousands)
Accumulated other comprehensive income:
 
Currency translation adjustments
$
36,939

 
$
40,184

Unrealized gain on marketable securities
5

 

Japan defined benefit plan
(363
)
 
(363
)
 
$
36,581

 
$
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.

10


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.
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 December 31, 2016 and July 2, 2016 :
 
Fair Value Measurement at December 31, 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
$
157,627

 
$

 
$

 
$
157,627

     Commercial paper

 
11,489

 

 
11,489

     Corporate bonds

 
3,873

 

 
3,873

Short-term investments:
 
 
 
 
 
 
 
Commercial paper

 
15,947

 

 
15,947

Corporate bonds

 
4,001

 

 
4,001

Restricted cash:
 
 
 
 
 
 
 
Money market funds
712

 

 

 
712

Total assets measured at fair value
$
158,339

 
$
35,310

 
$

 
$
193,649

 
(1)  
Excludes $49.8 million in cash held in our bank accounts at December 31, 2016 .

 
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 .


11


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.
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 receive a notice of conversion exceeds the conversion price in effect on each such trading day, we will, in addition to delivering shares upon conversion by the holder of 6.00% Notes, together with cash in lieu of fractional shares, make 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 bear 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 six months ended December 31, 2016 , 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 six months ended December 31, 2016 .
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, advances are available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement. The Loan Agreement has a $10.0 million sub-facility for letters of credit, foreign exchange contracts and cash management services.
Borrowings made under the Loan Agreement bear interest at a rate based on either the London Interbank Offered Rate plus 2.25 percent or Wall Street Journal’s prime rate plus 1.00 percent . If the sum of (a) our unrestricted cash and cash equivalents that are subject to the Bank’s liens less (b) the amount outstanding to the Bank under the Loan Agreement (such sum being “Net Cash”) is less than $15.0 million , then the interest rates are increased by 0.75 percent until Net Cash exceeds $15.0 million for a calendar month. If interest paid under the Loan Agreement is less than $45,000 in any fiscal quarter, we are required to pay the Bank an additional amount equal to the difference between $45,000 and the actual interest paid during such fiscal quarter. The minimum interest payment is in lieu of a stand-by charge.

12


If the Loan Agreement terminates prior to its maturity date, we will pay a termination fee equal to 1.00 percent of the total credit facility if such termination occurs in the first year after closing, 0.75 percent of the total credit facility if such termination occurs in the second year after closing and 0.50 percent of the total credit facility if such termination occurs in the third year after closing. The maturity date of the Loan Agreement is March 28, 2017.
At December 31, 2016 and July 2, 2016 , there were 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 $0.3 million for the three and six months ended December 31, 2016 , respectively and $0.1 million and $0.2 million for the three and six months ended December 26, 2015 , respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.
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 December 31, 2016 , there were no plan assets associated with the Japan Plan. As of December 31, 2016 , there was $0.1 million in accrued expenses and other liabilities and $6.2 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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Service cost
$
152

 
$
122

 
$
324

 
$
244

Interest cost
1

 
11

 
2

 
21

Net periodic pension costs
$
153

 
$
133

 
$
326

 
$
265

We made benefit payments under the Japan Plan of $0.1 million and $0.2 million during the three and six months ended December 31, 2016 , respectively, and zero and $0.1 million during the three and six months ended December 26, 2015 , respectively.
U.K. Defined Contribution Pension Scheme
Under the defined contribution pension scheme, contributions totaled $0.3 million and $0.5 million for the three and six months ended December 31, 2016 , respectively, and $0.3 million and $0.6 million for the three and six months ended December 26, 2015 , 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.

13


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.
The following table summarizes movements in the warranty accrual for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Warranty provision—beginning of period
$
4,600

 
$
3,168

 
$
3,827

 
$
2,932

Warranties issued
437

 
353

 
1,542

 
857

Warranties utilized or expired
(371
)
 
(435
)
 
(655
)
 
(688
)
Currency translation and other adjustments
(106
)
 
11

 
(154
)
 
(4
)
Warranty provision—end of period
$
4,560

 
$
3,097

 
$
4,560

 
$
3,097

Capital Leases
In connection with our acquisition of Opnext, Inc. in 2012, we assumed certain capital leases for certain equipment. The terms of the leases generally range from one to five years and the equipment can be purchased at the residual value upon expiration. We can terminate the leases at our discretion in return for a penalty payment as stated in the lease contracts.
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 December 31, 2016 :
 
Capital Leases
 
(Thousands)
Fiscal Year Ending:
 
2017 (remaining)
$
1,641

2018
1,172

2019
569

2020
604

2021
276

Thereafter
13

Total minimum lease payments
4,275

Less amount representing interest
(271
)
Present value of capitalized payments
4,004

Less: current portion
(2,425
)
Long-term portion
$
1,579

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

14


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 December 31, 2016 and July 2, 2016 , the liability for these purchase commitments was $2.6 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, 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 these GST amounts. We have accounted for the $2.4 million GST claims as a receivable classified in prepaid expenses and other current assets in our condensed consolidated balance sheet at December 31, 2016 .
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 are described below. These legal proceedings, 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 pretrial conference is scheduled for April 12, 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 December 31, 2016 , there were approximately 13.9 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

15


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.
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 six months ended December 31, 2016 :
 
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
(5,221
)
 

 

 
3,729

 
6.33

Exercised or released

 
(504
)
 
5.10

 
(2,388
)
 
2.45

Forfeited or expired
287

 
(62
)
 
15.50

 
(80
)
 
4.63

Balance at December 31, 2016
13,890

 
2,409

 
$
7.19

 
6,283

 
$
4.90

Supplemental disclosure information about our stock options and stock appreciation rights ("SARs") outstanding as of December 31, 2016 is as follows:
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value
 
(Thousands)
 
 
 
(Years)
 
(Thousands)
Options and SARs exercisable
2,269

 
$
7.49

 
3.2
 
$
6,848

Options and SARs outstanding
2,409

 
$
7.19

 
3.4
 
$
7,768

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 $8.95 on December 30, 2016, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 1.6 million shares of common stock subject to in-the-money options which were exercisable as of December 31, 2016 . We settle employee stock option exercises with newly issued shares of common stock.


16


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 six months ended December 31, 2016 and December 26, 2015, 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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Stock-based compensation by category of expense:
Cost of revenues
$
462

 
$
472

 
$
751

 
$
928

Research and development
526

 
491

 
983

 
915

Selling, general and administrative
1,601

 
1,580

 
3,298

 
2,524

 
$
2,589

 
$
2,543

 
$
5,032

 
$
4,367

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

 
$
53

 
$
70

 
$
115

Restricted stock awards
2,612

 
2,535

 
5,203

 
4,296

Inventory adjustment to cost of revenues
(55
)
 
(45
)
 
(241
)
 
(44
)
 
$
2,589

 
$
2,543

 
$
5,032

 
$
4,367

As of December 31, 2016 and July 2, 2016 , we had capitalized approximately $0.6 million and $0.3 million , respectively, of stock-based compensation as inventory.
As of December 31, 2016 , we had capitalized approximately $0.1 million of stock-based compensation in connection with the development of internal use software.
As of December 31, 2016 , we had $0.2 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 1.5 years , and $18.5 million in unrecognized stock-based compensation expense related to unvested time-based restricted stock awards, net of estimated forfeitures, that will be recognized over a weighted-average period of 2.5 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 December 31, 2016 , 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 six months ended December 31, 2016 , we recorded $0.6 million and $1.2 million , respectively, in stock-based compensation in connection with the PSUs issued in August 2015 and August 2016. During the three and six months ended December 26, 2015 , we recorded $0.8 million and $1.0 million , respectively in stock-based compensation expense in connection with the issuance of PSUs.

NOTE 10. INCOME TAXES
The income tax provision of $37,000 and $0.4 million for the three and six months ended December 31, 2016 , respectively, relates primarily to our foreign operations, which included a $0.5 million release of a reserve in Italy due to the expiration of the applicable statute of limitations. The income tax provision of $1.0 million and $1.9 million for the three and six months ended December 26, 2015 , respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of December 31, 2016 and July 2, 2016 were approximately $3.5 million and $3.8 million , respectively. As of December 31, 2016 , 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 $0.6 million in the next twelve months.


17


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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands, except per share amounts)
Net income (loss)
$
30,267

 
$
157

 
$
33,618

 
$
(3,353
)
 
 
 
 
 
 
 
 
Weighted-average shares - Basic
165,822

 
110,296

 
149,151

 
109,877

Effect of dilutive potential common shares from:
 
 
 
 
 
 
 
Stock options and stock appreciation rights
752

 
82

 
724

 

Restricted stock units and awards
2,282

 
2,016

 
2,420

 

Convertible notes

 

 
7,506

 

Weighted-average shares - Diluted
168,856

 
112,394

 
159,801

 
109,877

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.18

 
$

 
$
0.23

 
$
(0.03
)
Diluted net income (loss) per share
$
0.18

 
$

 
$
0.21

 
$
(0.03
)
For the three and six months ended December 31, 2016 , we excluded 0.8 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 six months ended December 26, 2015 , we excluded 36.2 million and 39.9 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.


18


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
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
Asia-Pacific:
 
 
 
 
 
 
 
China
$
63,927

 
$
35,179

 
$
122,669

 
$
68,235

Thailand
32,184

 
403

 
54,130

 
763

Malaysia
5,377

 
8,307

 
11,704

 
16,160

Other Asia-Pacific
3,028

 
903

 
6,364

 
1,915

Total Asia-Pacific
$
104,516

 
$
44,792

 
$
194,867

 
$
87,073

 
 
 
 
 
 
 
 
Americas:
 
 
 
 
 
 
 
United States
17,281

 
16,916

 
31,742

 
29,967

Mexico
8,068

 
14,196

 
17,359

 
26,534

Other Americas
6,211

 
1,821

 
8,213

 
2,975

Total Americas
$
31,560

 
$
32,933

 
$
57,314


$
59,476

 
 
 
 
 
 
 
 
EMEA:
 
 
 
 
 
 
 
Italy
6,718

 
6,818

 
16,024

 
13,889

Germany
3,088

 
4,010

 
6,377

 
8,952

Other EMEA
6,084

 
4,232

 
11,346

 
9,323

Total EMEA
$
15,890

 
$
15,060

 
33,747

 
32,164

 
 
 
 
 
 
 
 
Japan
$
1,948

 
$
1,344

 
3,478

 
2,966

 
 
 
 
 
 
 
 
Total revenues
$
153,914

 
$
94,129

 
$
289,406

 
$
181,679

Product Groups
The following table sets forth revenues by product group:
 
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 26, 2015
 
December 31, 2016
 
December 26, 2015
 
(Thousands)
100 Gb/s transmission modules
$
113,835

 
$
49,554

 
$
211,606

 
$
90,382

40 Gb/s and lower transmission modules
40,079

 
44,575

 
77,800

 
91,297

 
$
153,914

 
$
94,129

 
$
289,406

 
$
181,679




19


Significant Customers and Concentration of Credit Risk
For the three months ended December 31, 2016 , four customers accounted for 10 percent or more of our revenues, representing approximately 22 percent , 20 percent , 16 percent and 10 percent of our revenues, respectively. For the six months ended December 31, 2016 four customers accounted for 10 percent of more of our revenues, representing 20 percent , 19 percent , 18 percent and 11 percent of our revenues, respectively.
For the three months ended December 26, 2015 , three customers accounted for 10 percent or more of our revenues, representing approximately 21 percent , 16 percent and 10 percent of our revenues, respectively. For the six months ended December 26, 2015, three customers accounted for 10 percent or more of our revenues, representing approximately 19 percent , 16 percent and 10 percent of our revenues, respectively.
As of December 31, 2016 , three customers accounted for 10 percent or more of our accounts receivable, representing approximately 23 percent , 18 percent and 16 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) our dependence on a limited number of customers for a significant percentage of our revenues, (iii) our ability to obtain governmental licenses and approvals for international trading activities or technology transfers, including export licenses, (iv) our ability to meet or exceed our gross margin expectations, (v) the effects of fluctuations in foreign currency exchange rates, (vi) our manufacturing yields, (vii) the risks associated with delays, disruptions or quality control problems in manufacturing, (viii) competition and pricing pressure, (ix) our ability to respond to evolving technologies, customer requirements and demands, and product design challenges, (x) our ability to effectively manage our inventory, (xi) our dependence on a limited number of suppliers and key contract manufacturers, (xii) our ability to have our manufacturing lines qualified by our customers, (xiii) 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, (xiv) the absence of long-term purchase commitments from many of our long-term customers, (xv) our ability to conclude agreements with our customers on favorable terms, (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.


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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; Fiberhome Technologies Group; Huawei Technologies Co. Ltd; InnoLight Technology Corporation; Juniper Networks, Inc.; 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.


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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
 
 
December 31, 2016
 
December 26, 2015
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
153,914

 
100.0

 
$
94,129

 
100.0

 
$
59,785

 
63.5

 
Cost of revenues
93,150

 
60.5

 
67,521

 
71.7

 
25,629

 
38.0

 
Gross profit
60,764

 
39.5

 
26,608

 
28.3

 
34,156

 
128.4

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
13,758

 
8.9

 
11,075

 
11.8

 
2,683

 
24.2

 
Selling, general and administrative
13,355

 
8.7

 
12,791

 
13.6

 
564

 
4.4

 
Amortization of other intangible assets
241

 
0.2

 
250

 
0.3

 
(9
)
 
(3.6
)
 
Restructuring, acquisition and related (income) expense, net
82

 
0.1

 
6

 

 
76

 
1,266.7

 
Gain on sale of property and equipment
(74
)
 
(0.1
)
 
(46
)
 

 
(28
)
 
60.9

 
Total operating expenses
27,362

 
17.8

 
24,076

 
25.6

 
3,286

 
13.6

  
Operating income
33,402

 
21.7

 
2,532

 
2.7

 
30,870

 
1,219.2

 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
70

 
0.1

 
(1,247
)
 
(1.3
)
 
1,317

 
n/m

(1)  
Gain (loss) on foreign currency transactions, net
(3,324
)
 
(2.2
)
 
(500
)
 
(0.5
)
 
(2,824
)
 
564.8

 
Other income (expense), net
156

 
0.1

 
357

 
0.4

 
(201
)
 
(56.3
)
 
Total other income (expense)
(3,098
)
 
(2.0
)
 
(1,390
)
 
(1.5
)
 
(1,708
)
 
122.9

 
Income before income taxes
30,304

 
19.7

 
1,142

 
1.2

 
29,162

 
2,553.6

 
Income tax provision
37

 

 
985

 
1.0

 
(948
)
 
(96.2
)
 
Net income
$
30,267

 
19.7

 
$
157

 
0.2

 
$
30,110

 
19,178.3

 
(1)
Not meaningful.


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Six Months Ended
 
 
 
Increase
 
 
December 31, 2016
 
December 26, 2015
 
Change
 
(Decrease)
 
 
(Thousands)
 
%
 
(Thousands)
 
%
 
(Thousands)
 
%
 
Revenues
$
289,406

 
100.0

 
$
181,679

 
100.0

 
$
107,727

 
59.3

 
Cost of revenues
182,286

 
63.0

 
132,374

 
72.9

 
49,912

 
37.7

 
Gross profit
107,120

 
37.0

 
49,305

 
27.1

 
57,815

 
117.3

  
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Research and development
26,865

 
9.3

 
22,020

 
12.1

 
4,845

 
22.0

 
Selling, general and administrative
28,147

 
9.7

 
25,999

 
14.3

 
2,148

 
8.3

 
Amortization of other intangible assets
485

 
0.2

 
501

 
0.3

 
(16
)
 
(3.2
)
 
Restructuring, acquisition and related (income) expense, net
393

 
0.1

 
38

 

 
355

 
934.2

 
(Gain) loss on sale of property and equipment
(111
)
 

 
167

 
0.1

 
(278
)
 
n/m

(1)  
Total operating expenses
55,779

 
19.3

 
48,725

 
26.8

 
7,054

 
14.5

  
Operating income
51,341

 
17.7

 
580

 
0.3

 
50,761

 
8,751.9

 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
Interest income (expense), net
(13,788
)
 
(4.7
)
 
(2,523
)
 
(1.4
)
 
(11,265
)
 
446.5

 
Gain (loss) on foreign currency transactions, net
(3,842
)
 
(1.3
)
 
4

 

 
(3,846
)
 
n/m

(1)  
Other income (expense), net
350

 
0.1

 
470

 
0.3

 
(120
)
 
(25.5
)
 
Total other income (expense)
(17,280
)
 
(5.9
)
 
(2,049
)
 
(1.1
)
 
(15,231
)
 
743.3

 
Income (loss) before income taxes
34,061

 
11.8

 
(1,469
)
 
(0.8
)
 
35,530

 
n/m

(1)  
Income tax provision
443

 
0.2

 
1,884

 
1.0

 
(1,441
)
 
(76.5
)
 
Net income (loss)
$
33,618

 
11.6

 
$
(3,353
)
 
(1.8
)
 
$
36,971

 
n/m

(1)  
(1)
Not meaningful.

Revenues
Revenues for the three months ended December 31, 2016 increased by $59.8 million , or 64 percent , compared to the three months ended December 26, 2015 . Compared to the three months ended December 26, 2015 , revenues from sales of our 100 Gb/s transmission modules increased by $64.3 million , or 130 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 $4.5 million , or 10 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 December 31, 2016 , four customers accounted for 10 percent or more of our revenues, representing approximately 22 percent , 20 percent , 16 percent and 10 percent of our revenues, respectively. For the three months ended December 26, 2015 , three customers accounted for 10 percent or more of our revenues, representing approximately 21 percent, 16 percent and 10 percent of our revenues, respectively.
Revenues for the six months ended December 31, 2016 increased by $107.7 million , or 59 percent , compared to the six months ended December 26, 2015 . Compared to the six months ended December 26, 2015 , revenues from sales of our 100 Gb/s transmission modules increased by $121.2 million , or 134.1 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 $13.5 million , or 14.8 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.

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For the six months ended December 31, 2016 , four customers accounted for 10 percent or more of our revenues, representing approximately 20 percent , 19 percent , 18 percent and 11 percent of our revenues, respectively. For the six months ended December 26, 2015 , three customers accounted for 10 percent or more of our revenues, representing approximately 19 percent, 16 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 39 percent for the three months ended December 31, 2016 , compared to 28 percent for the three months ended December 26, 2015 . 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 gross margin rate increased to approximately 37 percent for the six months ended December 31, 2016 , compared to 27 percent for the six months ended December 26, 2015 . 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 5 percentage points of improvement; and economies of scale related to manufacturing overhead and inventory management that contributed approximately 5 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 $13.8 million for the three months ended December 31, 2016 , from $11.1 million for the three months ended December 26, 2015 . The increase was primarily related to an investment of $1.6 million in research and development resources, primarily personnel-related; and an increase of $0.8 million in non-recurring engineering and material expenses.
Research and development expenses increased to $26.9 million for the six months ended December 31, 2016 , from $22.0 million for the six months ended December 26, 2015 . The increase was primarily related to an investment of $3.2 million in research and development resources, primarily personnel-related; and an increase of $1.2 million in non-recurring engineering and material expenses.
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 $13.4 million for the three months ended December 31, 2016 , from $12.8 million for the three months ended December 26, 2015 . The increase was primarily related to an increase of $0.8 million in personnel-related costs.
Selling, general and administrative expenses increased to $28.1 million for the six months ended December 31, 2016 , from $26.0 million for the six months ended December 26, 2015 . The increase was primarily related to an increase of $2.1 million in personnel-related costs, which included an increase in stock compensation related charges of $0.8 million .
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.

Amortization of Other Intangible Assets
Amortization of other intangible assets remained flat during the three and six months ended December 31, 2016 as compared to the three and six months ended December 26, 2015 . We expect the amortization of other intangible assets to be $0.3 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 December 31, 2016 .


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Restructuring, Acquisition and Related (Income) Expense, Net
During the first half of fiscal year 2017, we incurred $0.4 million in restructuring, acquisition and related charges primarily related to the consolidation and closure of a facility for an end-of-life product.
During the first half of fiscal year 2016, we incurred minimal restructuring, acquisition and related charges.

Other Income (Expense)
Other income (expense) was $3.1 million in expense for the three months ended December 31, 2016 as compared to $1.4 million in expense for the three months ended December 26, 2015 . This change in other income (expense) primarily related to a $2.8 million increase in foreign currency transaction losses during the three months ended December 31, 2016 , as compared to the three months ended December 26, 2015 , related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries, partially offset by a decrease in interest expense of $1.3 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 $17.3 million in expense for the six months ended December 31, 2016 as compared to $2.0 million in expense for the three months ended December 26, 2015 . 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 $3.8 million increase in foreign currency transaction losses during the six months ended December 31, 2016 , as compared to the six months ended December 26, 2015 , related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries.

Income Tax (Benefit) Provision
The income tax provision of $37,000 and $0.4 million for the three and six months ended December 31, 2016 , respectively, and the income tax provision of $1.0 million and $1.9 million for the three and six months ended December 26, 2015 , respectively, relates primarily to our foreign operations.
The total amount of our unrecognized tax benefits as of December 31, 2016 and July 2, 2016 were approximately $3.5 million and $3.8 million , respectively. As of December 31, 2016 , 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 $0.6 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.


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Net cash provided by operating activities for the six months ended December 31, 2016 was $33.1 million , primarily resulting from net income adjusted for non-cash items of $56.9 million , partially offset by $23.8 million decrease in cash due to changes in operating assets and liabilities. The adjustment to net income for non-cash items consisted of $10.2 million in depreciation and amortization, an $8.5 million charge related to the issuance of common stock to settle a portion of the interest make-whole and induced conversion liabilities in connection with the 6.00% Notes, $5.0 million of expense related to stock-based compensation and $0.1 million from the amortization of the debt discount and issuance costs in connection with the convertible notes, partially offset by $0.4 million from the amortization of a deferred gain from a sales-leaseback transaction in Caswell, U.K. The $23.8 million decrease in cash due to changes in operating assets and liabilities was comprised of a $17.1 million increase in accounts receivable attributable to timing of collections, a $12.0 million increase in prepaid expenses and other current assets primarily due to an increase in our non-trade receivables related to the increased volume of business going through our contract manufacturers, a $11.5 million increase in inventories resulting from the receipt of inventory intended for sale in future quarters, partially offset by an $8.6 million increase in accrued expenses and other liabilities, and an $8.5 million increase in accounts payable largely attributable to the timing of purchases and payments to vendors.

Net cash provided by operating activities for the six months ended December 26, 2015 was $8.0 million, primarily resulting from non-cash adjustments of $12.5 million, partially offset by a net loss of $3.4 million and a $1.2 million decrease in cash due to changes in operating assets and liabilities. The $12.5 million increase in cash resulting from non-cash adjustments primarily consisted of $8.0 million in depreciation and amortization, $4.4 million of expense related to stock-based compensation and $0.4 million from the amortization of the debt discount and issuance costs in connection with the convertible notes payable, partially offset by $0.4 million from the amortization of a deferred gain from a sales-leaseback transaction in Caswell, U.K. The $1.2 million decrease in cash due to changes in operating assets and liabilities was comprised of a $6.4 million increase in inventories resulting from the receipt of inventory intended for sale in future quarters, and a $4.3 million increase in accounts receivable attributable to an increase in revenues and timing of collections, partially offset by a $5.5 million increase in accrued expenses and other liabilities, a $1.9 million increase in accounts payable largely attributable to the timing of purchases and payments to vendors, and a $1.7 million decrease in prepaid expenses and other current assets.

Cash Flows from Investing Activities
Net cash used in investing activities for the six months ended December 31, 2016 was $43.0 million , consisting of $23.0 million of capital expenditures and $20.0 million of purchases of available-for-sale short-term investments.

Net cash used in investing activities for the six months ended December 26, 2015 was $5.1 million, consisting of $6.6 million used in capital expenditures, partially offset by a $1.6 million reduction in restricted cash.

Cash Flows from Financing Activities
Net cash provided by financing activities for the six months ended December 31, 2016 was $133.7 million , primarily consisting of $135.2 million in proceeds relating to the offering, issuance and sale of 17,250,000 shares of our common stock and $2.6 million in proceeds from the exercise of stock options, partially offset by $2.5 million related to shares repurchased for tax withholdings on vesting of restricted stock units and $1.5 million in payments on capital lease obligations.

Net cash used in financing activities for the six months ended December 26, 2015 was $1.9 million, primarily consisting of $1.5 million in payments on capital lease obligations and $0.6 million related to shares repurchased for tax withholdings on vesting of restricted stock units.

Credit Line and Notes
On February 19, 2015, we closed the private placement of our 6.00% Notes, representing $65.0 million in aggregate principal. The sale of the 6.00% Notes resulted in proceeds of approximately $61.6 million, after deducting the initial purchaser's discount of $3.4 million. We also incurred offering costs of $0.6 million in connection with the 6.00% Notes. In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all of our 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. We issued in aggregate 34,659,972 shares of our common stock and made cash payments totaling $4.7 million in exchange for $65.0 million aggregate principal amount of our 6.00% Notes. These agreements are more fully discussed in Note 5, Credit Line and Notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report.

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As of December 31, 2016 , we had a $40.0 million revolving credit facility with Silicon Valley Bank. As of December 31, 2016 , there were no amounts outstanding under this credit facility. See Note 5, Credit Line and Notes , for additional information regarding this credit facility.

Future Cash Requirements
As of December 31, 2016 , we held $243.5 million in cash, cash equivalents, short-term investments and restricted cash, comprised of $222.8 million in cash and cash equivalents, $19.9 million in short-term investments and $0.7 million in restricted cash (excluding $0.4 million of restricted cash in other non-current assets); and we had working capital of $341.5 million .
Based on our current cash and cash equivalent balances, together with our existing credit facility, we believe that we have sufficient funds to support our operations through the next 12 months, including approximately $40.0 million to $50.0 million of capital expenditures that we expect to incur through the remainder of the current fiscal year.
In the event we need additional liquidity beyond our current expectations, such as to fund future growth or strengthen our balance sheet, we may find it necessary to undertake additional cost cutting measures. We will continue to explore other sources of additional liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.
For additional information on the risks we face related to future cash requirements, see Item 1A. Risk Factors under “— Risks Related to Our Business — We have a history of large operating losses and we may not be able to sustain profitability in the future and maintain sufficient levels of liquidity,” included elsewhere in this Quarterly Report on Form 10-Q.
As of December 31, 2016 , $42.2 million of the $243.5 million of our cash, cash equivalents and restricted cash was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we could be required to accrue and pay foreign withholding taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S., except for specific entities in China, Germany and Japan where we decided to exit certain businesses in fiscal year 2015.

Off-Balance Sheet Arrangements
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 indemnification 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures about market risk affecting us, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended July 2, 2016 , which is incorporated herein by reference. Our exposure to market risk has not changed materially since July 2, 2016 .
INTEREST RATES
We finance our operations through a mixture of issuances of equity and debt securities, capital leases, working capital and by drawing on our credit agreement. We have exposure to interest rate fluctuations on our cash deposits and for amounts borrowed under our credit agreement and through our capital leases. At December 31, 2016 , there were no amounts outstanding under our credit facility and $4.0 million outstanding under capital leases. An increase in our average interest rate by 1.0 percent would increase our annual interest expense by less than $0.1 million .
We monitor our interest rate risk on cash balances primarily through cash flow forecasting. We believe our current interest rate risk is immaterial.
FOREIGN CURRENCY
As our business is multinational in scope, we are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. We expect that a majority of our revenues will continue to be denominated in U.S. dollars, while a significant portion of our expenses will continue to be denominated in U.K. pounds sterling and the Japanese yen. Fluctuations in the exchange rate between the U.S. dollar, the U.K. pound sterling, the Japanese yen and, to a lesser extent, other currencies in which we collect revenues and pay expenses could affect our operating results. This includes the Chinese yuan and the Euro in which we pay expenses in connection with operating our facilities in Shenzhen and Shanghai, China; and San Donato, Italy. To the extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more significantly than experienced to date, our exposure would increase.
As of December 31, 2016 , our U.K. subsidiary had $117.7 million , net, in U.S. dollar denominated operating intercompany payables, $36.8 million in U.S. dollar denominated accounts receivable, net of accounts payable, related to sales to external customers and purchases from suppliers, and $19.6 million in U.S. dollar denominated cash accounts. It is estimated that a 10 percent fluctuation in the U.S. dollar relative to the U.K. pound sterling would lead to a profit of $6.1 million (U.S. dollar weakening), or loss of $6.1 million (U.S. dollar strengthening) on the translation of these balances, which would be recorded as gain (loss) on foreign currency transactions, net, in our condensed consolidated statement of operations.
As of December 31, 2016 , our Japan subsidiary had