|
|
|
|
|
|
|
1. Basis of Presentation and Significant Accounting Policies
Infinera Corporation ("Infinera" or the "Company") prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), consistent in all material respects with those applied in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
The Company has made estimates and judgments affecting the amounts reported in its condensed consolidated financial statements and the accompanying notes. The Company's actual results may differ materially from these estimates. The accounting estimates that require most significant, difficult, and subjective judgment include revenue recognition, stock-based compensation, inventory valuation, allowances for sales returns, allowances for doubtful accounts, accrued warranty, cash equivalents, fair value measurement of investments, other-than-temporary impairments, derivative instruments and accounting for income taxes.
The interim financial information is unaudited, but reflects all adjustments that are, in management's opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The Company reclassified certain amounts reported in previous periods to conform to the current presentation. This interim information should be read in conjunction with the consolidated financial statements in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
There have been no material changes in the Company's significant accounting policies for the three months ended March 31, 2012 as compared to those disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
|
2. Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)–Fair Value Measurement (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. The Company adopted the amended disclosure requirements beginning in its fiscal quarter ended March 31, 2012. The adoption of the amended disclosure requirements did not have an impact on the Company's financial position, results of operations or cash flow.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220)–Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12), to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. The Company adopted the guidance for ASU 2011-05 and ASU 2011-12 beginning in its fiscal quarter ended March 31, 2012. The adoption of the guidance resulted in a change in the format of certain presentation but did not have an impact on the Company's financial position, results of operations or cash flow.
|
3. Fair Value Measurements and Other-Than-Temporary Impairments
Fair Value Measurements
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's assumptions about market participant assumptions based on best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
Level 1 | – | Quoted prices in active markets for identical assets or liabilities. | ||
Level 2 | – | Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | ||
Level 3 | – | Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable. |
The Company measures its cash equivalents, derivative instruments and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy. The Company's money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.
The Company classifies its certificates of deposit, commercial paper, corporate bonds, U.S. agency notes and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:
Certificates of Deposit
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data, and result in the classification of these securities as Level 2 of the fair value hierarchy.
Commercial Paper
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par, and result in the classification of these securities as Level 2 of the fair value hierarchy.
Corporate Bonds
The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. Since sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end. As a result, the Company classifies its corporate bonds as Level 2 of the fair value hierarchy.
U.S. Agency Notes
The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data, and result in the classification of these securities as Level 2 of the fair value hierarchy.
Foreign Currency Exchange Forward Contracts
As discussed in Note 5, "Derivative Instruments," to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. As a result, the Company classifies its derivative instruments as Level 2 of the fair value hierarchy.
The Company classifies its auction rate securities ("ARS") within Level 3 of the fair value hierarchy.
The Company's ARS are classified within Level 3 because they are valued, in part, by using inputs that are unobservable in the market and are significant to the valuation. Uncertainties in the credit markets have affected all of the Company's ARS and auctions for these securities have failed to settle on their respective settlement dates. In light of these developments, to determine the fair value for the Company's ARS, the Company used a combination of the market approach and income approach. The market approach uses pricing based on transactions in an inactive secondary market for similar or comparable securities. In addition, the Company performed its own discounted cash flow analysis. Management determined that it was most appropriate to value the ARS using the market approach and income approach equally given the facts and circumstances as of March 31, 2012, and therefore incorporated both valuations in the Company's fair value measurement.
The significant unobservable inputs and assumptions used in the discounted cash flow model to determine the fair value of the Company's ARS, as of March 31, 2012, are as follows:
|
Contractual cash flow |
The model assumed that the principal amount or par value for these securities will be repaid at the end of the estimated workout period. In addition, future interest payments were estimated as described in each individual prospectus and based on the then-current U.S. Treasury Bill rate adjusted for a failed auction premium of 150 basis points ("bps") for A3 rated securities and 150 bps to 350 bps for AAA rated securities.
|
ARS discount rate |
The model incorporated a discount rate equal to an estimate of the LIBOR rates commensurate with the estimated workout period of the securities. As of the measurement date, these rates were then adjusted by a factor that ranged from 240 bps to 330 bps, representing an estimate of the market student loan spread and a discount factor to reflect the lack of liquidity and credit risk associated with these securities. As of March 31, 2012, the Company held $5.0 million (par value) of AAA rated securities and $3.1 million (par value) of A3 rated securities. The Company's ARS are mostly collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program. The discount rate does, however, include a discount factor to reflect the issuer's credit risk and its potential inability to perform its obligations under the terms of the ARS agreements. The Company's valuation analysis indicates that the estimated credit risk element included in the discount rate was 200 bps for A3 rated securities and 260 bps for AAA rated securities.
|
Estimated maturity |
The Company estimated the workout period of its ARS as the weighted-average life of the underlying trust loan portfolio where this information was available from servicing and other trust reports. In a small number of instances where this information was not available, the Company used the weighted-average life of the loan portfolio of a similar trust. The estimated time to maturity of the securities as of the measurement date was 9.5 years for A3 rated securities and 10.0 years for AAA securities.
The following tables represent the Company's fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):
As of March 31, 2012 | As of December 31, 2011 | |||||||||||||||||||||||||||||||
Fair Value Measured Using | Fair Value Measured Using | |||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Money market funds |
$ | 44,757 | $ | — | $ | — | $ | 44,757 | $ | 53,208 | $ | — | $ | — | $ | 53,208 | ||||||||||||||||
Certificates of deposit |
— | 12,684 | — | 12,684 | — | 16,778 | — | 16,778 | ||||||||||||||||||||||||
Commercial paper |
— | 6,396 | — | 6,396 | — | 5,888 | — | 5,888 | ||||||||||||||||||||||||
Corporate bonds |
— | 72,646 | — | 72,646 | — | 87,694 | — | 87,694 | ||||||||||||||||||||||||
U.S. agency notes |
— | 10,000 | — | 10,000 | — | 9,999 | — | 9,999 | ||||||||||||||||||||||||
U.S. treasuries |
30,560 | — | — | 30,560 | 27,577 | — | — | 27,577 | ||||||||||||||||||||||||
ARS |
— | — | 7,555 | 7,555 | — | — | 7,675 | 7,675 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total assets |
$ | 75,317 | $ | 101,726 | $ | 7,555 | $ | 184,598 | $ | 80,785 | $ | 120,359 | $ | 7,675 | $ | 208,819 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Liabilities |
||||||||||||||||||||||||||||||||
Foreign currency exchange forward contracts |
$ | — | $ | 63 | $ | — | $ | 63 | $ | — | $ | 82 | $ | — | $ | 82 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total liabilities |
$ | — | $ | 63 | $ | — | $ | 63 | $ | — | $ | 82 | $ | — | $ | 82 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2012, there were no transfers of assets or liabilities between Level 1 and Level 2 financial assets and there were no transfers into or out of Level 3 financial assets.
The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable (Level 3) inputs (in thousands):
Three Months Ended | ||||||||||||||||
December 31, 2011 |
Total Net Gains Included in Other Comprehensive Loss |
Calls | March 31, 2012 |
|||||||||||||
ARS – available-for-sale |
$ | 7,675 | $ | 16 | (1) | $ | (136 | )(2) | $ | 7,555 |
Three Months Ended | ||||||||||||||||
December 25, 2010 |
Total Net Gains Included in Other Comprehensive Loss |
Calls | March 26, 2011 |
|||||||||||||
ARS – available-for-sale |
$ | 7,790 | $ | 235 | (1) | $ | (128 | )(2) | $ | 7,897 |
(1) |
Amount represents the change in the non-credit loss related other-than-temporary impairments ("OTTI") recorded in Accumulated other comprehensive loss in the accompanying condensed consolidated balance sheets. |
(2) |
Amount represents the fair market value of the securities called. Realized gains on these calls for the three months ended March 31, 2012 and March 26, 2011 were not significant. |
Investments at fair value were as follows (in thousands):
March 31, 2012 | ||||||||||||||||
Adjusted Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Money market funds |
$ | 44,757 | $ | — | $ | — | $ | 44,757 | ||||||||
Certificates of deposit |
12,689 | 1 | (6 | ) | 12,684 | |||||||||||
Commercial paper |
6,398 | — | (2 | ) | 6,396 | |||||||||||
Corporate bonds |
72,637 | 53 | (44 | ) | 72,646 | |||||||||||
U.S. agency notes |
9,999 | 1 | — | 10,000 | ||||||||||||
U.S. treasuries |
30,569 | 2 | (11 | ) | 30,560 | |||||||||||
ARS |
7,236 | (1) | 319 | — | 7,555 | (2) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale investments |
$ | 184,285 | $ | 376 | $ | (63 | ) | $ | 184,598 | |||||||
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||
Adjusted Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
Money market funds |
$ | 53,208 | $ | — | $ | — | $ | 53,208 | ||||||||
Certificates of deposit |
16,797 | — | (19 | ) | 16,778 | |||||||||||
Commercial paper |
5,898 | — | (10 | ) | 5,888 | |||||||||||
Corporate bonds |
87,808 | 7 | (121 | ) | 87,694 | |||||||||||
U.S. agency notes |
9,998 | 2 | (1 | ) | 9,999 | |||||||||||
U.S. treasuries |
27,577 | 5 | (5 | ) | 27,577 | |||||||||||
ARS |
7,368 | 307 | — | 7,675 | (2) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale investments |
$ | 208,654 | $ | 321 | $ | (156 | ) | $ | 208,819 | |||||||
|
|
|
|
|
|
|
|
(1) |
Amount represents the par value less $0.9 million of credit-related OTTI recognized through earnings in prior years. |
(2 ) |
Amount reflects investments in a continuous loss position for twelve months or longer. |
As of March 31, 2012, the Company's available-for-sale investments in certificates of deposit, commercial paper, corporate bonds, U.S. agency notes and U.S. treasuries have a contractual maturity term of no more than 18 months, and ARS have contractual maturity terms of up to 34 years. Proceeds from sales, maturities and calls of available-for-sale investments were $37.2 million and $112.5 million in the three months ended March 31, 2012 and March 26, 2011, respectively. Gross realized gains (losses) on short-term and long-term investments were not significant for these periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
Other-Than-Temporary Impairments
As of March 31, 2012, the Company held $8.1 million (par value) of available-for-sale ARS with two issuers, $5.0 million of which was AAA rated and $3.1 million of which was A3 rated. During the second quarter of 2009, the Company determined that it did not intend to sell these securities and did not believe that it was more likely than not that it would be required to sell the securities before recovery of their par value. However, given that the present value of the expected cash flows for these securities was below their par value, as of June 27, 2009, an initial OTTI of $2.7 million, equal to the difference between the fair value and the amortized cost basis, had occurred. This OTTI write-down was separated into an amount representing credit loss, which was recognized as Other gain (loss), net in the Company's consolidated statements of operations, and an amount related to all other factors, which was recorded in Accumulated other comprehensive loss in the Company's consolidated balance sheets. In determining if a credit loss had occurred, the Company isolated the credit loss related portion of the discount rate used to derive the fair market value of the securities and applied this to the expected cash flows in order to determine the portion of the OTTI that was credit loss related. This credit loss related portion of the discount rate is based on the financial condition of the issuer, rating agency credit ratings for the security and credit related yield spreads on similar securities offered by the same issuer.
These ARS had an insignificant net increase in fair value for the three months ended March 31, 2012. This change was recognized in Accumulated other comprehensive loss in the Company's consolidated balance sheets. The Company did not recognize any additional OTTI credit loss on any of its securities during the three months ended March 31, 2012. During the three months ended March 31, 2012, $0.2 million of these ARS were called at par value.
A roll-forward of amortized cost, cumulative OTTI recognized in earnings and Accumulated other comprehensive loss is as follows (in thousands):
Amortized Cost |
Cumulative OTTI in Earnings |
Unrealized Gain |
OTTI Loss in Accumulated Other Comprehensive Loss |
Accumulated Other Comprehensive Income (Loss) |
||||||||||||||||||
Balance at December 31, 2011 |
$ | 7,368 | $ | (884 | ) | $ | 1,619 | $ | (1,312 | ) | $ | 307 | ||||||||||
Unrealized gain |
— | — | 16 | — | 16 | |||||||||||||||||
Call on investments |
(132 | ) | 19 | (23 | ) | 19 | (4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2012 |
$ | 7,236 | $ | (865 | ) | $ | 1,612 | $ | (1,293 | ) | $ | 319 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The Company believes that the credit risk associated with its available-for-sale ARS could change significantly in the future based on market conditions and continued uncertainties in the financial markets. The ARS student loan credit spread may be subject to significant volatility and it is difficult to predict future fluctuations. A 10% deterioration in the ARS student loan credit spread would result in an insignificant amount in the credit loss related portion of the OTTI for the first quarter of 2012.
|
4. Cost-method Investment
In May 2010, the Company invested $4.5 million in a privately-held company and in August 2011, the Company invested an additional $4.5 million. This investment is accounted for as a cost-basis investment, as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. The Company's investment is in an entity that is not publicly traded and, therefore, no established market for the securities exists. The Company's cost-method investment is carried at historical cost in its consolidated financial statements and measured at fair value on a nonrecurring basis. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company's policy is to record an impairment charge in Other income (expense), net in the accompanying condensed consolidated statements of operations to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. The Company regularly evaluates the carrying value of this cost-method investment for impairment. As of March 31, 2012, no event had occurred that would adversely affect the carrying value of this investment, therefore, the fair value of the cost-method investment is not estimated. The Company did not record any impairment charges for this cost-method investment during the three months ended March 31, 2012.
|
5. Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company enters into foreign currency exchange forward contracts to manage its exposure to fluctuations in foreign exchange rates that arise primarily from its Euro denominated receivables and Euro denominated restricted cash balance amounts that are pledged as collateral for certain stand-by and commercial letters of credit. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate changes on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk. The forward contracts are with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparty. The forward contracts entered into during the three months ended March 31, 2012 were denominated in Euros and typically had maturities of no more than 30 days. The contracts are settled for U.S. dollars at maturity at rates agreed to at inception of the contracts.
As of March 31, 2012, the Company did not designate foreign currency exchange forward contracts related to Euro denominated receivables and restricted cash as hedges for accounting purposes, and accordingly changes in the fair value of these instruments are included in Other gain (loss), net in the accompanying consolidated statements of operations. For the three months ended March 31, 2012 and March 26, 2011, the before-tax effect of foreign currency exchange forward contracts for Euro denominated receivables and restricted cash not designated as hedging instruments was a loss of $0.8 million and a loss of $1.5 million, respectively, included in Other gain (loss), net in the condensed consolidated statements of operations.
The fair value of derivative instruments not designated as hedging instruments in the Company's condensed consolidated balance sheets was as follows (in thousands):
As of March 31, 2012 | As of December 31, 2011 | |||||||||||||||
Gross Notional(1) |
Other Accrued Liabilities |
Gross Notional(1) |
Other Accrued Liabilities |
|||||||||||||
Foreign currency exchange forward contracts |
||||||||||||||||
Related to Euro denominated receivables |
$ | 13,852 | $ | 57 | $ | 9,437 | $ | 71 | ||||||||
Related to restricted cash |
$ | 1,508 | $ | 6 | $ | 1,455 | $ | 11 |
(1) |
Represents the face amounts of forward contracts that were outstanding as of the period noted. |
|
6. Balance Sheet Details
The following table provides details of selected balance sheet items (in thousands):
March 31, 2012 |
December 31, 2011 |
|||||||
Inventory |
||||||||
Raw materials |
$ | 15,325 | $ | 12,081 | ||||
Work in process |
41,552 | 37,007 | ||||||
Finished goods(1) |
44,735 | 39,908 | ||||||
|
|
|
|
|||||
Total inventory |
$ | 101,612 | $ | 88,996 | ||||
|
|
|
|
|||||
Property, plant and equipment, net: |
||||||||
Computer hardware |
$ | 8,657 | $ | 8,311 | ||||
Computer software |
7,886 | 7,584 | ||||||
Laboratory and manufacturing equipment |
104,635 | 101,228 | ||||||
Furniture and fixtures |
1,108 | 1,107 | ||||||
Leasehold improvements |
32,492 | 26,736 | ||||||
Construction in progress |
26,844 | 25,843 | ||||||
|
|
|
|
|||||
Subtotal |
$ | 181,622 | $ | 170,809 | ||||
Less accumulated depreciation and amortization |
(99,566 | ) | (94,056 | ) | ||||
|
|
|
|
|||||
Total property, plant and equipment, net |
$ | 82,056 | $ | 76,753 | ||||
|
|
|
|
|||||
Accrued expenses: |
||||||||
Loss contingency related to non-cancelable purchase commitments |
$ | 4,065 | $ | 5,705 | ||||
Taxes payable |
2,633 | 3,111 | ||||||
Royalties |
811 | 1,309 | ||||||
Accrued rebate and customer prepay liability |
3,573 | 4,078 | ||||||
Other accrued expenses |
8,024 | 8,218 | ||||||
|
|
|
|
|||||
Total accrued expenses |
$ | 19,106 | $ | 22,421 | ||||
|
|
|
|
(1) |
Included in finished goods inventory at March 31, 2012 and December 31, 2011 were $4.9 million and $8.9 million, respectively, of inventory at customer locations for which product acceptance had not occurred. |
The Company had $2.9 million of standby letters of credit outstanding as of March 31, 2012. These consisted of $1.5 million related to a value added tax license, $0.8 million related to property leases and $0.6 million related to a customer proposal guarantee. The Company had $2.7 million of standby letters of credit outstanding as of December 31, 2011. These consisted of $1.4 million related to a value added tax license, $0.8 million related to property leases and $0.5 million related to a customer proposal guarantee.
|
7. Comprehensive Loss
Total comprehensive loss consists of other comprehensive loss and net loss. Other comprehensive loss includes certain changes in equity that are excluded from net loss. Specifically, cumulative foreign currency translation adjustments and unrealized holding gains and losses on available-for-sale investments are included in Accumulated other comprehensive loss in the condensed consolidated balance sheets.
The components of Accumulated other comprehensive loss are as follows (in thousands):
March 31, 2012 |
December 31, 2011 |
|||||||
Accumulated net unrealized loss on foreign currency translation adjustment |
$ | (1,225 | ) | $ | (1,607 | ) | ||
Accumulated unrealized non-credit related other-than-temporary impairment loss on available-for-sale investments |
319 | 307 | ||||||
Accumulated unrealized holding loss on all other available-for-sale investments |
(6 | ) | (142 | ) | ||||
Accumulated tax effect on items related to available-for-sale investments |
(813 | ) | (753 | ) | ||||
|
|
|
|
|||||
Total accumulated other comprehensive loss |
$ | (1,725 | ) | $ | (2,195 | ) | ||
|
|
|
|
|
9. Stockholders' Equity
Stock-based Compensation Plans
The Company's stock-based compensation plans include stock options, RSUs, PSUs and employee stock purchases under the Company's ESPP. As of March 31, 2012, there were a total of 15.7 million shares available for grant under the Company's 2007 Equity Incentive Plan. The following tables summarize the Company's equity award activity and related information (in thousands, except per share data):
Number of Options |
Average Exercise Price Per Share |
Aggregate Intrinsic Value |
||||||||||
Outstanding at December 31, 2011 |
9,873 | $ | 7.03 | $ | 7,924 | |||||||
Options granted |
127 | $ | 7.18 | |||||||||
Options exercised |
(320 | ) | $ | 6.41 | $ | 539 | ||||||
Options canceled |
(195 | ) | $ | 8.49 | ||||||||
|
|
|||||||||||
Outstanding at March 31, 2012 |
9,485 | $ | 7.02 | $ | 14,015 | |||||||
|
|
|||||||||||
Vested and expected to vest at March 31, 2012 |
9,409 | $ | 13,994 | |||||||||
Exercisable at March 31, 2012 |
6,258 | $ | 6.44 | $ | 13,087 |
Number of Restricted Stock Units |
Weighted- Average Grant Date Fair Value Per Share |
Aggregate Intrinsic Value |
||||||||||
Outstanding at December 31, 2011 |
5,957 | $ | 8.77 | $ | 37,407 | |||||||
RSUs granted |
993 | $ | 7.72 | |||||||||
RSUs released |
(776 | ) | $ | 8.69 | $ | 6,741 | ||||||
RSUs canceled |
(113 | ) | $ | 8.17 | ||||||||
|
|
|||||||||||
Outstanding at March 31, 2012 |
6,061 | $ | 8.62 | $ | 49,209 | |||||||
|
|
|||||||||||
Expected to release at March 31, 2012 |
5,839 | $ | 47,414 |
Number of Performance Stock Units |
Weighted- Average Grant Date Fair Value Per Share |
Aggregate Intrinsic Value |
||||||||||
Outstanding at December 31, 2011 |
2,595 | $ | 10.51 | $ | 16,304 | |||||||
PSUs granted |
283 | $ | 7.96 | |||||||||
PSUs released |
(740 | ) | $ | 9.79 | $ | 7,250 | ||||||
PSUs canceled |
(821 | ) | $ | 9.97 | ||||||||
|
|
|||||||||||
Outstanding at March 31, 2012 |
1,317 | $ | 10.71 | $ | 10,696 | |||||||
|
|
|||||||||||
Expected to vest at March 31, 2012 |
1,302 | $ | 10,574 |
The aggregate intrinsic value of unexercised options, unreleased RSUs and unreleased PSUs is calculated as the difference between the closing price of the Company's common stock of $8.12 at March 30, 2012 and the exercise prices of the underlying equity awards. The aggregate intrinsic value of the options which have been exercised and RSUs released is calculated as the difference between the fair market value of the common stock at the date of exercise or release and the exercise price of the underlying equity awards.
The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company's equity compensation plans as of March 31, 2012. These costs are expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted-average period):
Unrecognized Compensation Expense, Net |
Weighted- Average Period (in years) |
|||||||
Stock options |
$ | 10,053 | 1.7 | |||||
RSUs |
$ | 34,659 | 2.0 | |||||
PSUs |
$ | 4,623 | 1.4 |
Employee Stock Options
In February 2012, the Compensation Committee of the Company's board of directors shortened the maximum term of future option grants under the 2007 Plan from 10 years to 7 years. During the three months ended March 31, 2012, the Company granted options to employees to purchase an aggregate of 0.1 million shares of common stock at a weighted-average exercise price of $7.18 per share. These options have exercise prices equal to the closing market prices of the Company's common stock on the dates these options were granted. The weighted-average remaining contractual term of options exercisable was 5.9 years as of March 31, 2012. Total fair value of stock options granted to employees and members of the board of directors that vested during the three months ended March 31, 2012 was approximately $1.5 million based on the grant date fair value.
The ranges of estimated values of stock options and performance-based stock options granted, as well as ranges of assumptions used in calculating these values were based on estimates as follows:
Three Months Ended | ||||
Employee and Director Stock Options |
March 31, 2012 |
March 26, 2011 | ||
Volatility |
65% - 68% | 58% - 60% | ||
Risk-free interest rate |
0.7% - 1.0% | 2.1% - 2.6% | ||
Expected life |
4.0 - 5.3 years | 4.9 - 5.5 years | ||
Estimated fair value |
$3.75 - $3.76 | $4.17 - $4.63 | ||
Stock-based compensation expense (in thousands) |
$2,401 | $3,192 |
Employee Stock Purchase Plan
The fair value of the ESPP shares was estimated at the date of grant using the following assumptions:
Three Months Ended | ||||
Employee Stock Purchase Plan |
March 31, 2012 |
March 26, 2011 | ||
Volatility |
57% | 66% | ||
Risk-free interest rate |
0.16% | 0.2% | ||
Expected life |
0.5 years | 0.5 years | ||
Estimated fair value |
$2.63 | $2.70 | ||
Stock-based compensation expense (in thousands) |
$896 | $930 |
Restricted Stock Units
During the three months ended March 31, 2012, the Company granted RSUs to employees to receive an aggregate of 1.0 million shares of the Company's common stock, at no cost. The Company accounted for the fair value of the RSUs using the closing market price of the Company's common stock on the date of grant. Amortization of stock-based compensation related to RSUs in the three months ended March 31, 2012 and March 26, 2011 was approximately $6.3 million and $6.1 million, respectively.
Performance Stock Units
During 2009, the Company granted PSUs primarily to members of the Company's board of directors and executive officers. The number of shares to be issued upon vesting of PSUs range from 0.5 to 2.0 times the number of PSUs granted depending on the relative performance of the Company's common stock price compared to the NASDAQ Composite Index over a three-year or four-year period. During the three months ended March 31, 2012, the Company released 0.7 million of PSUs based on a payout of 0.5 of the target number of PSUs. As of March 31, 2012, 1.0 million of the PSUs granted in 2009 remained outstanding and are scheduled to vest on January 1, 2013, subject to the performance criteria set forth above.
Pursuant to the Company's 2007 Equity Incentive Plan, during the three months ended March 31, 2012, the Company granted 0.3 million shares of PSUs to certain of the Company's executive officers. These PSUs will only vest upon the achievement of certain specific financial performance metrics and are subject to each named executive officer's continued service to the Company. If the financial performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.
Amortization of stock-based compensation related to PSUs in the three months ended March 31, 2012 and March 26, 2011 was approximately $0.5 million and $2.4 million, respectively.
Common Stock Warrants
As of March 31, 2012, there were warrants to purchase 92,592 shares of common stock outstanding with an exercise price of $5.40 per share and an expiration date of July 13, 2013.
Stock-Based Compensation
The following tables summarize the effects of stock-based compensation on the Company's condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):
March 31, 2012 |
December 31, 2011 |
|||||||
Stock-based compensation effects in inventory |
$ | 4,045 | $ | 3,479 | ||||
Stock-based compensation effects in deferred inventory cost |
$ | 144 | $ | 179 | ||||
Stock-based compensation effects in fixed assets |
$ | 70 | $ | 36 |
Three Months Ended | ||||||||
March 31, 2012 |
March 26, 2011 |
|||||||
Stock-based compensation effects in net loss |
||||||||
before income taxes |
||||||||
Cost of revenue |
$ | 606 | $ | 731 | ||||
Research and development |
3,320 | 3,826 | ||||||
Sales and marketing |
2,219 | 2,060 | ||||||
General and administration |
2,223 | 4,783 | ||||||
|
|
|
|
|||||
8,368 | 11,400 | |||||||
Cost of revenue – amortization from balance sheet(1) |
1,069 | 965 | ||||||
|
|
|
|
|||||
Total stock-based compensation expense |
$ | 9,437 | $ | 12,365 | ||||
|
|
|
|
(1) |
Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period. |
|
10. Income Taxes
Provision for income taxes for the three months ended March 31, 2012 was $0.6 million, or negative 2.9% on a pre-tax loss of $20.0 million, compared to a tax provision of $0.3 million, or negative 1.8%, on a pre-tax loss of $16.1 million for the three months ended March 26, 2011. The difference between the Company's effective tax rates and the federal statutory rate of 35% is primarily attributable to unbenefited U.S. losses, foreign taxes provided on the income of the Company's foreign subsidiaries, non-deductible stock-based compensation expense, and various discrete items. The higher effective tax rate in 2012 relates to higher foreign income and associated taxes, the expiration of the Indian tax holiday on March 31, 2011, and the release of $0.2 million of tax reserves in 2011 due to statute of limitations lapses.
The realization of tax benefits of deferred tax assets is dependent upon future levels of taxable income, of an appropriate character, in the periods the items are scheduled to be deductible or taxable. Based on the available objective evidence, management believes it is more likely than not that the domestic net deferred tax assets will not be realizable. Accordingly, the Company has provided a full valuation allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of March 31, 2012 and December 31, 2011. In determining future taxable income, the Company makes assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income and are consistent with the Company's forecasts used to manage its business. The Company intends to maintain the remaining valuation allowance until sufficient positive evidence exists to support a reversal of, or decrease, in the valuation allowance.
|
11. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision maker is the Company's chief executive officer. The Company's chief executive officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity, and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure.
Revenue by geographic region is based on the shipping address of the customer. The following tables set forth revenue and long-lived assets by geographic region (in thousands):
Revenue
Three Months Ended | ||||||||
March 31, 2012 |
March 26, 2011 |
|||||||
Americas: |
||||||||
United States |
$ | 70,898 | $ | 68,826 | ||||
Other Americas |
3,992 | 663 | ||||||
|
|
|
|
|||||
$ | 74,890 | $ | 69,489 | |||||
Europe, Middle East and Africa |
26,151 | 20,272 | ||||||
Asia Pacific |
3,660 | 3,129 | ||||||
|
|
|
|
|||||
Total revenue |
$ | 104,701 | $ | 92,890 | ||||
|
|
|
|
Property, plant and equipment, net
March 31, 2012 |
December 31, 2011 |
|||||||
United States |
$ | 79,688 | $ | 74,340 | ||||
Other Americas |
226 | 230 | ||||||
Asia Pacific |
2,142 | 2,183 | ||||||
|
|
|
|
|||||
Total property, plant and equipment, net |
$ | 82,056 | $ | 76,753 | ||||
|
|
|
|
|
12. Guarantees
Product Warranties
Upon delivery of products, the Company provides for the estimated cost to repair or replace products or the related components that may be returned under hardware warranties. In general, hardware warranty periods range from one to five years. Hardware warranties provide the purchaser with protection in the event that the product does not perform to product specifications. During the warranty period, the purchaser's sole and exclusive remedy in the event of such defect or failure to perform is limited to the correction of the defect or failure by repair, refurbishment or replacement, at the Company's sole option and expense. The Company estimates its hardware warranty obligations based on the Company's historical experience of known product failure rates, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific hardware warranty accruals may be made if unforeseen technical problems arise with specific products. Management periodically assesses the adequacy of the Company's recorded warranty liabilities and adjusts the amounts as necessary.
Activity related to product warranty was as follows (in thousands):
Three Months Ended | ||||||||
March 31, 2012 |
March 26, 2011 |
|||||||
Beginning balance |
$ | 12,865 | $ | 11,422 | ||||
Charges to operations |
2,721 | 1,470 | ||||||
Utilization |
(1,973 | ) | (1,763 | ) | ||||
Change in estimate(1) |
(627 | ) | (969 | ) | ||||
|
|
|
|
|||||
Balance at the end of the period |
$ | 12,986 | $ | 10,160 | ||||
|
|
|
|
(1) |
The Company records hardware warranty liabilities based on the latest quality and cost information available as of that date. The favorable changes in estimate shown here are due to continued improvements in overall actual failure rates and the impact of these improvements on the Company's estimate of expected future returns and changes in the estimated cost of replacing failed units using either repaired or new units. |
|
13. Litigation and Contingencies
Legal Matters
From time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on its consolidated financial position, results of operations, or cash flows. A complete description of the Company's legal proceedings can be found in "Item 3. Legal Proceedings" of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the SEC on March 6, 2012, which is incorporated herein by reference. Any updates to the information contained in the Company's Annual Report on Form 10-K are set forth below.
Cheetah Patent Infringement Litigation
On March 30, 2012, the Board of Patent Appeals and Interferences (the "BPAI") affirmed the U.S. Patent and Trademark Office's allowance of the claims in the reexamination of U.S. Patent No. 7,142,347 and U.S. Patent No. 6,795,605. The Company filed a request for reconsideration with the BPAI on April 30, 2012.
Based on the information available at this time, the Company concluded that the likelihood of a loss with respect to this suit is less than reasonably possible and therefore, a range of loss cannot be provided. As a result, the Company has made no provision for this lawsuit in its financial statements. Factors that the Company considered in the determination of the likelihood of a loss in respect to this matter included the merits of the case, the nature of the litigation (including the complex and technical nature of patent litigation), the length of time the matter has been pending, the status of the re-examination of the underlying patents at issue by the U.S. Patent and Trademark Office, the status of the plaintiff as a non-operating entity, and the lack of any specific amount (or range of amounts) for the alleged damages sought in the complaint.
Cambrian Science Patent Infringement Litigation
On March 7, 2012, the U.S. District Court for the Central District of California denied the Company's request to stay the case alleging infringement of U.S. Patent No. 6,775,312 with respect to each of the customer defendants.
Based on the information available at this time, the Company concluded that the likelihood of a loss with respect to this suit is less than reasonably possible and therefore, a range of loss cannot be provided. As a result, the Company has made no provision for this lawsuit in its financial statements. Factors that the Company considered in the determination of the likelihood of a loss in respect to this matter included the merits of the case, the nature of the litigation (including the complex and technical nature of patent litigation), the length of time the matter has been pending, and the status of the plaintiff as a non-operating entity.
Loss Contingencies
The Company is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. In preparation of its quarterly and annual financial statements, the Company considers the likelihood of loss or the incurrence of a liability, including whether it is probable, reasonably possible or remote that a liability has been incurred, as well as the Company's ability to reasonably estimate the amount of loss, in determining loss contingencies. In accordance with U.S. GAAP, an estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. As of March 31, 2012, the Company has not accrued or recorded any such material liabilities.