Infinera
Annual Report 2011

Plain-text annual report

Infinera Corporation 2012 Proxy Statement and 2011 Annual Report on Form 10-K Infinera Corporation 140 Caspian Court Sunnyvale, CA 94089 NOTICE OF 2012 ANNUAL MEETING OF STOCKHOLDERS To Be Held on May 16, 2012 10:00 a.m., Pacific Time Dear Stockholder: You are cordially invited to attend the 2012 Annual Meeting of Stockholders (the “Annual Meeting”) of Infinera Corporation, a Delaware corporation (“Infinera”). Notice is hereby given that the meeting will be held on May 16, 2012, at 140 Caspian Court, Sunnyvale, CA 94089 at 10:00 a.m., Pacific Time, for the following purposes: 1. To elect to the Board of Directors (the “Board”) the three nominees for Class II directors named in the Proxy Statement; 2. To ratify the appointment of Ernst & Young LLP as Infinera’s independent registered public accounting firm for the fiscal year ending December 29, 2012; 3. To approve, on an advisory basis, Infinera’s executive compensation, as described in the Proxy P R O X Y Statement; and 4. To transact such other business as may properly come before the meeting or any postponement or adjournment thereof. These items of business are more fully described in the Proxy Statement accompanying this Notice. The record date for the Annual Meeting is March 21, 2012. Only stockholders of record at the close of business on that date may vote at the Annual Meeting or any postponement or adjournment thereof. A list of our stockholders will be maintained and open for examination by any of our stockholders, for any purpose germane to the Annual Meeting, during regular business hours at the address listed above for ten days prior to the meeting. We are pleased to inform you that Infinera will again be utilizing the U.S. Securities and Exchange Commission rules that allow issuers to furnish proxy materials to their stockholders via the Internet. We believe that these rules allow us to provide our stockholders with the information they need more quickly and conveniently, while lowering the cost of delivery and reducing the environmental impact of our Annual Meeting. As a stockholder of Infinera, your vote is important. Whether or not you expect to attend the Annual Meeting in person, it is important that you vote as soon as possible so that your shares are represented. On behalf of our Board, thank you for your participation in this important annual process. By Order of the Board, /S/ MICHAEL O. MCCARTHY III Michael O. McCarthy III Chief Legal and Administrative Officer and Corporate Secretary Sunnyvale, California March 30, 2012 Table of Contents Questions And Answers About The Proxy Materials And Voting Procedural Matters . . . . . . Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proposal 1—Election Of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Regarding Nominees and Continuing Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance And The Board Of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independence of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Communications with our Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board Oversight of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Code of Business Conduct and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Ownership Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Regarding the Board and its Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director Equity Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 Summary of Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Information With Respect To Director Equity Awards . . . . . . . . . . . . . . . . . . . . . . . . Proposal 2—Ratification Of Appointment Of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Registered Public Accounting Firm’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pre-Approval Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report Of The Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership Of Certain Beneficial Owners And Management . . . . . . . . . . . . . . . . . . . . Risk Assessment Of Compensation Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Of Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Philosophy and Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation-Setting Process, Participants and Comparative Framework . . . . . . . . . . . . . . . Principal Elements of Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Option Granting Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revision of Financial Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax and Accounting Treatment of Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Report Executive Compensation Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary Compensation Table for Fiscal 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grants of Plan Based Awards in Fiscal 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding Equity Awards at Fiscal Year-End 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option Exercises and Stock Vested for Fiscal 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Payments and Benefits Upon Termination, Change of Control or Death/Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proposal 3—Advisory Approval Of Our Executive Compensation . . . . . . . . . . . . . . . . . . . . . . Certain Relationships And Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 16(a) Beneficial Ownership Reporting Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Compensation Plan Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholder Proposals For 2013 Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delivery Of Documents To Stockholders Sharing The Same Last Name And Address . . . . . Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i Page 1 1 2 3 5 6 6 6 6 12 12 12 12 13 13 13 14 14 19 20 20 20 21 21 22 22 23 24 25 27 28 28 28 30 37 44 45 45 45 46 47 47 48 50 53 53 57 59 59 60 60 61 62 P R O X Y [THIS PAGE INTENTIONALLY LEFT BLANK] INFINERA CORPORATION PROXY STATEMENT 2012 ANNUAL MEETING OF STOCKHOLDERS QUESTIONS AND ANSWERS ABOUT THE PROXY MATERIALS AND VOTING PROCEDURAL MATTERS Annual Meeting Q: Why am I being provided access to these proxy materials? A: The Board of Directors (the “Board”) of Infinera Corporation (“Infinera”) is providing you access to these proxy materials in connection with the solicitation of proxies for use at the 2012 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on Wednesday, May 16, 2012 at 10:00 a.m., Pacific Time, and at any adjournment or postponement thereof, for the purpose of considering and acting upon the matters described herein. These materials were first sent or given to stockholders on or about March 30, 2012. Q: What is the Notice of Internet Availability of Proxy Materials? A: In accordance with rules and regulations adopted by the U.S. Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of Infinera’s proxy materials to all stockholders entitled to vote at the Annual Meeting, Infinera is furnishing the proxy materials to its stockholders via the Internet. If you received a Notice of Internet Availability of Proxy Materials (the “Notice”) by mail, you will not receive a printed copy of the proxy materials. Instead, the Notice will instruct you as to how you may access and review the proxy materials and submit your vote via the Internet. If you received a Notice by mail and would like to receive a printed copy of the proxy materials, please follow the instructions for requesting such materials included in the Notice. P R O X Y Choosing to receive your future proxy materials by email will save us the cost of printing and mailing the documents to you and will reduce the impact of our Annual Meeting on the environment. If you choose to receive future proxy materials by email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site. Your election to receive proxy materials by email will remain in effect until you terminate it. On the date of mailing of the Notice, all stockholders and beneficial owners will have the ability to access all of Infinera’s proxy materials on a website referred to in the Notice. These proxy materials will be available free of charge. Q: Where is the Annual Meeting? A: The Annual Meeting will be held at Infinera’s principal executive offices, located at 140 Caspian Court, Sunnyvale, California 94089. Q: Can I attend the Annual Meeting? A: You are invited to attend the Annual Meeting if you were a stockholder of record or a beneficial owner as of the close of business on March 21, 2012 (the “Record Date”). You should bring photo identification for entrance into the Annual Meeting. The Annual Meeting will begin promptly at 10:00 a.m., Pacific Time. 1 Q: What proposals will be voted on at the Annual Meeting? A: At the Annual Meeting, stockholders will be asked to vote on: - - - The election of three Class II directors to serve until the 2015 Annual Meeting of Stockholders or until successors have been duly elected and qualified; The ratification of the appointment of Ernst & Young LLP as Infinera’s independent registered public accounting firm for the fiscal year ending December 29, 2012; and The advisory approval of Infinera’s executive compensation, as described in the Proxy Statement. We are not currently aware of any other business to be acted upon at the Annual Meeting. If any other matters are properly submitted for consideration at the Annual Meeting, including any proposal to adjourn the Annual Meeting, the persons named as proxies will vote the shares represented thereby in their discretion. Adjournments of the Annual Meeting may be made for the purpose of, among other things, soliciting additional proxies. Any adjournment may be made from time to time by approval of the holders of common stock representing a majority of the votes present in person or by proxy at the Annual Meeting, whether or not a quorum exists, without further notice other than by an announcement at the Annual Meeting. Y X O R P Q: What is the voting requirement to approve each of the proposals and how does the Board recommend that I vote? A: Proposal 1—Directors are elected by a plurality vote, which means that the three directors who receive the most “FOR” votes cast by the shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting will be elected. Abstentions and broker non-votes will not affect the outcome of the election. Stockholders may not cumulate votes in the election of directors. The Board unanimously recommends that you vote your shares “FOR” the nominees listed in Proposal 1. Proposal 2—Ratification of the appointment of Ernst & Young LLP as Infinera’s independent registered public accounting firm for the fiscal year ending December 29, 2012, requires the affirmative vote of a majority of the total votes cast by holders of shares present in person, or represented by proxy, and entitled to vote on this proposal at the Annual Meeting. You may vote “FOR,” “AGAINST” or “ABSTAIN” on this proposal. Abstentions are deemed to be votes cast and have the same effect as a vote “AGAINST” this proposal. Broker non-votes are not deemed to be votes cast and, therefore, are not included in the tabulation of the voting results on this proposal and will not affect the outcome of the vote. The Board unanimously recommends that you vote your shares “FOR” Proposal 2. Proposal 3—The advisory approval of Infinera’s executive compensation requires the affirmative vote of a majority of the total votes cast by holders of shares present in person, or represented by proxy, and entitled to vote on this proposal at the Annual Meeting. You may vote “FOR,” “AGAINST” or “ABSTAIN” on this proposal. Abstentions are deemed to be votes cast and have the same effect as a vote “AGAINST” this proposal. Broker non-votes are not deemed to be votes cast and, therefore, are not included in the tabulation of the voting results on this proposal and will not affect the outcome of the vote. The Board unanimously recommends that you vote your shares “FOR” Proposal 3. Stock Ownership Q: What is the difference between holding shares as a stockholder of record and as a beneficial owner? A: Stockholders of Record—If your shares are registered directly in your name with our transfer agent, Computershare Shareowner Services LLC, you are considered the “stockholder of record” 2 with respect to those shares, and, with the exception of certain stockholders who have been solicited by mail, the Notice has been sent directly to you by Infinera. Beneficial Owners—Many stockholders hold their shares through a broker, trustee or other nominee, rather than directly in their own name. If your shares are held in a brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in “street name.” The Notice has been forwarded to you by your broker, trustee or other nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker, trustee or other nominee on how to vote your shares. For directions on how to vote shares beneficially held in street name, refer to the voting instruction card provided by your broker, trustee or other nominee. Because a beneficial owner is not the stockholder of record, you may not vote these shares in person at the Annual Meeting unless you obtain a “legal proxy” from the broker, trustee or other nominee that holds your shares, giving you the right to vote the shares at the Annual Meeting. Quorum and Voting Q: Who is entitled to vote at the Annual Meeting? A: Stockholders of record of Infinera’s common stock at the close of business on the Record Date are entitled to receive notice of and to vote their shares at the Annual Meeting. Such stockholders are entitled to cast one vote for each share of common stock held as of the Record Date. As of the close of business on the Record Date, there were 109,467,315 shares of common stock outstanding and entitled to vote at the Annual Meeting. P R O X Y Q: How many shares must be present or represented to conduct business at the Annual Meeting? A: The presence of the holders of a majority of the shares of Infinera’s common stock entitled to vote at the Annual Meeting is necessary to constitute a quorum at the Annual Meeting. Such stockholders are counted as present at the meeting if they (1) are present in person at the Annual Meeting or (2) have properly submitted a proxy. Under the General Corporation Law of the State of Delaware, as amended, abstentions and broker “non-votes” are counted as present and entitled to vote and are included for purposes of determining whether a quorum is present at the Annual Meeting. Q: What is a broker “non-vote” and how are they counted at the Annual Meeting? A: A broker “non-vote” occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have or did not exercise discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Broker “non-votes” will be counted towards the presence of a quorum, but will not be counted towards the vote total for any proposal. The ratification of Ernst & Young LLP as our independent registered public accounting firm (Proposal 2) is considered to be a “routine” matter for which such discretionary voting power should exist and your nominee will be able to vote on that item even if your nominee does not receive instructions from you, so long as your nominee holds your shares in their name. The election of directors (Proposal 1) and the advisory approval of Infinera’s executive compensation (Proposal 3) are “non-routine” matters for which such discretionary voting power does not exist. If you do not instruct your nominee how to vote with respect to these proposals, your nominee may not vote with respect to such proposals and those votes will be counted as broker “non-votes” for Proposals 1 and 3. 3 Y X O R P Q: How can I vote my shares in person at the Annual Meeting? A: Stockholders of Record—Shares held in your name as the stockholder of record may be voted in person at the Annual Meeting, even if previously voted by another method. Beneficial Owners—Shares held beneficially in street name may be voted in person at the Annual Meeting only if you obtain a legal proxy from the broker, trustee or other nominee that holds your shares giving you the right to vote the shares. Even if you plan to attend the Annual Meeting, we recommend that you submit your vote as described in the Notice and below, so that your vote will be counted if you later decide not to attend the Annual Meeting. Q: How can I vote my shares without attending the Annual Meeting? A: Whether you hold shares directly as the stockholder of record or beneficially in street name, you may direct how your shares are voted without attending the Annual Meeting. If you are a stockholder of record, you may vote by submitting a proxy (please refer to the voting instructions in the Notice or below). If you hold shares beneficially in street name, you may vote by submitting voting instructions to your broker, trustee or other nominee (please refer to the voting instructions provided to you by your broker, trustee or other nominee). Internet—Stockholders of record with Internet access may submit proxies by following the instructions on the Notice. Most of Infinera’s stockholders who hold shares beneficially in street name may vote by accessing the website specified in the voting instructions provided by their brokers, trustees or other nominees. A large number of banks and brokerage firms are participating in Broadridge Financial Solutions, Inc.’s online program. This program provides eligible stockholders the opportunity to vote over the Internet or by telephone. Voting forms will provide instructions for stockholders whose bank or brokerage firm is participating in Broadridge’s program. Telephone—Depending on how your shares are held, you may be able to vote by telephone. If this option is available to you, you will receive information explaining this procedure. Mail—If you have not already received one, you may request a proxy card from Infinera, and indicate your vote by completing, signing and dating the card where indicated and returning it in the prepaid envelope that will be included with the proxy card. Q: How will my shares be voted if I submit a proxy via the Internet, by telephone or by mail and do not make specific choices? A: If you are a stockholder of record or have obtained a legal proxy from your broker, trustee or other nominee that holds your shares giving you the right to vote the shares, and you submit a proxy via the Internet, by telephone or by mail and do not make voting selections, the shares represented by that proxy will be voted “FOR” the nominees listed in Proposal 1 and “FOR” Proposals 2 and 3. If you are a beneficial owner of shares and your broker, trustee or other nominee does not receive instructions from you about how your shares are to be voted, the shares represented by that proxy will not be voted with respect to Proposals 1 or 3 and will be counted as broker non-votes, and will be voted with respect to Proposal 2 at the discretion of your broker, trustee or other nominee. Q: Can I change or revoke my vote? A: Subject to any rules your broker, trustee or other nominee may have, you may change your proxy instructions at any time before your proxy is voted at the Annual Meeting. 4 Stockholders of Record—If you are a stockholder of record, you may change your vote by (1) filing with Infinera’s Chief Legal and Administrative Officer, prior to your shares being voted at the Annual Meeting, a written notice of revocation or a duly executed proxy card, in either case dated later than the prior proxy relating to the same shares or (2) by attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not, by itself, revoke a proxy). Any written notice of revocation or subsequent proxy card must be received by Infinera’s Chief Legal and Administrative Officer prior to the taking of the vote at the Annual Meeting. Such written notice of revocation or subsequent proxy card should be hand delivered to Infinera’s Chief Legal and Administrative Officer or should be sent to Infinera’s principal executive offices, Attn: Chief Legal and Administrative Officer. Beneficial Owners—If you are a beneficial owner of shares held in street name, you may change your vote (1) by submitting new voting instructions to your broker, trustee or other nominee or (2) if you have obtained a legal proxy from the broker, trustee or other nominee that holds your shares giving you the right to vote the shares, by attending the Annual Meeting and voting in person. A stockholder of record that has voted via the Internet or by telephone may also change his or her vote by making a timely and valid Internet or telephone vote at a later time but prior to 11:59 p.m., Eastern Time, on the day prior to the Annual Meeting. Q: Who will bear the cost of soliciting votes for the Annual Meeting? A: Infinera will bear all expenses of soliciting proxies for the Annual Meeting. Infinera may reimburse brokerage firms, custodians, nominees, fiduciaries and other persons representing beneficial owners of common stock for their reasonable expenses in forwarding solicitation materials to such beneficial owners. Directors, officers and employees of Infinera may also solicit proxies in person or by other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for reasonable out-of-pocket expenses in connection with such solicitation. Infinera may engage the services of a professional proxy solicitation firm to aid in the solicitation of proxies from certain brokers, bank nominees and other institutional owners. Infinera’s costs for such services, if retained, will not be significant. P R O X Y Q: Where can I find the voting results of the Annual Meeting? A: Infinera intends to announce preliminary voting results at the Annual Meeting and will publish final results on a Current Report on Form 8-K filed with the SEC within four business days after the Annual Meeting. Additional Information Q: What should I do if I receive more than one Notice or set of proxy materials? A: If you receive more than one Notice or set of proxy materials, your shares are likely registered in more than one name or brokerage account. Please follow the voting instructions on each Notice or voting instruction card that you receive to ensure that all of your shares are voted. Q: Can I access Infinera’s proxy materials and Annual Report on Form 10-K via the Internet? A: Infinera’s proxy materials will be available on its website at http://www.infinera.com/ annual_meeting, and all stockholders of record and beneficial owners will have the ability to vote free of charge online with their control number referred to in the Notice at http:// www.proxyvote.com. Infinera’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Annual Report”) is also available on the Internet as indicated in the Notice. In addition, you can access this Proxy Statement and the 2011 Annual Report by going to Infinera’s website at http://www.infinera.com/annual_meeting. The 2011 Annual Report is not incorporated into this Proxy Statement and is not considered proxy soliciting material. 5 Y X O R P PROPOSAL 1 ELECTION OF DIRECTORS General Our Board currently consists of nine directors and is divided into three classes, each consisting of three directors. Each class of our Board serves a staggered three-year term. Our Class II directors, whose terms expire at the Annual Meeting, are Dan Maydan, Ph.D., David F. Welch, Ph.D. and Paul J. Milbury. At the Annual Meeting, three directors will be elected to fill positions as Class II directors. Drs. Maydan and Welch and Mr. Milbury are each a Class II director and are the nominees for election at the Annual Meeting. The nomination of these directors to stand for election at the Annual Meeting has been recommended by the Nominating and Governance Committee and has been approved by the Board. Each of the nominees for our Class II directors, if elected, will serve for a three-year term expiring at the 2015 Annual Meeting of Stockholders, or until his successor is elected and qualified, or until his earlier death, resignation or removal from the Board. Director Qualifications The Nominating and Governance Committee reviews candidates for service on the Board and recommends nominees for election to fill vacancies on the Board, including nomination for re-election of directors whose terms are due to expire. In discharging its responsibilities to nominate candidates for election to the Board, the Nominating and Governance Committee endeavors to identify, recruit and nominate candidates characterized by wisdom, maturity, sound judgment, excellent business skills and high integrity. The Nominating and Governance Committee generally recommends that any new director be appointed to the class of directors that is up for re-election at the next annual meeting of stockholders, while maintaining the quality of distribution of the three classes of directors that comprise the Board. The Nominating and Governance Committee seeks to assure that the Board is composed of individuals of diverse backgrounds who have a variety of complementary experience, training and relationships relevant to Infinera’s business. This diversity of background and experience includes ensuring that the Board includes individuals with experience or skills sufficient to meet the requirements of the various rules and regulations of The NASDAQ Stock Market (“NASDAQ”) and the SEC, such as the requirements to have a majority of independent directors and an Audit Committee Financial Expert. In nominating candidates to fill vacancies created by the expiration of the term of a director, the Nominating and Governance Committee determines whether the incumbent director is willing to stand for re-election. The Nominating and Governance Committee evaluates each director’s performance to determine suitability for re-election, taking into consideration, among other things, each director’s willingness to fully participate and contribute to the Board and its committees, ability to work constructively with the rest of the members of the Board, personal and professional integrity and familiarity with Infinera’s business, operations and markets. Each of the nominees to fill positions as Class II directors has consented to serve if elected. However, if any of the persons nominated by the Board subsequently declines to accept election, or is otherwise unavailable for election prior to our Annual Meeting, proxies solicited by our Board will be voted by the proxy holders for the election of any other person or persons as the Board may recommend, or our Board, at its option, may further reduce the number of directors that constitute the entire Board. Information Regarding Nominees and Continuing Directors Set forth below is information regarding each person nominated for election as a Class II director at the Annual Meeting, as well as for each director continuing service on the Board, including their 6 ages as of March 30, 2012, the periods during which they have served as a director, certain information as to their principal occupations, directorships they hold in corporations whose shares are publicly registered and qualifications for serving as a member of our Board, including the skills, qualities, attributes and experiences that led the Board to determine it is appropriate to nominate these directors. Nominees for Election as Class II Directors whose Terms Expire at the 2015 Annual Meeting of Stockholders Dan Maydan, Ph.D. Director since 2001 Age 76 David F. Welch, Ph.D. Director since 2010 Age 51 P R O X Y Dan Maydan, Ph.D. has been a member of our Board since September 2001. From December 1993 to April 2003, Dr. Maydan served as President of Applied Materials Inc., a semiconductor equipment manufacturing company, and was appointed President Emeritus of Applied Materials in April 2003. Dr. Maydan was a member of the board of directors of Applied Materials from June 1992 until March 2006. Dr. Maydan serves on the board of directors of Electronics for Imaging, Inc., a digital imaging and print management solutions company, or EFI. Dr. Maydan brings to the Board a significant institutional knowledge of Infinera through his long-standing service on the Board and service on our Compensation and Nominating and Governance Committees. The Board also benefits from Dr. Maydan’s executive management, technical and industry experience from his time at Applied Materials, as well as his experience as a public company director at Applied Materials and EFI. David F. Welch, Ph.D. co-founded Infinera and has served as our Executive Vice President, Chief Strategy Officer, since January 2004 and as a member of our Board since October 2010. From January 2005 to January 2009, Dr. Welch served as our Chief Marketing Officer. From May 2001 to January 2005, Dr. Welch served as our Chief Development Officer/Chief Technology Officer. From May 2001 to November 2006, Dr. Welch also served as a member of our Board. Prior to founding Infinera, Dr. Welch was Chief Technology Officer of the Transmission Products Group of JDS Uniphase Corporation, an optical component company. From January 1985 to February 2001, Dr. Welch served in various executive roles, including Chief Technology Officer and Vice President of Corporate Development for SDL Inc., an optical component company. As co-founder and Executive Vice President, Chief Strategy Officer of Infinera, Dr. Welch has strong institutional knowledge of Infinera, coupled with a deep technical understanding of the optical networking industry. The Board believes that Dr. Welch’s leadership skills, industry experience and comprehensive technical knowledge provide the Board with an important perspective into Infinera’s product development, marketing and selling strategies. The Board also benefits from Dr. Welch’s service on our Technology and Acquisition Committee. 7 Paul J. Milbury Director since 2010 Age 63 Y X O R P Paul J. Milbury has been a member of our Board since July 2010. Mr. Milbury served as Vice President of Operations and Chief Financial Officer of Starent Networks, Corp., a provider of mobile network solutions, from January 2007 until its acquisition by Cisco Systems, Inc., a networking and telecommunications company, in December 2009. From December 2009 to July 2010, Mr. Milbury played a key role in integrating Starent Networks into Cisco Systems to create the Mobile Internet Technology Group. From December 2000 to March 2007, Mr. Milbury served as Vice President and Chief Financial Officer of Avid Technology, Inc., a digital media creation, management and distribution solutions company. As Chairman of our Audit Committee and as an Audit Committee Financial Expert, Mr. Milbury provides the Board with a strong understanding and high level of experience in the areas of finance, accounting and operations. The Board also benefits from Mr. Milbury’s service on our Compensation Committee, his executive management experience at Starent Networks, Cisco Systems and Avid Technology, and his experience as a director at Crossbeam Systems and Accedian Networks. Incumbent Class I Directors whose Terms Expire at the 2014 Annual Meeting of Stockholders Thomas J. Fallon Director since 2009 Age 50 Thomas J. Fallon has served as our President and Chief Executive Officer since January 2010 and as a member of our Board since July 2009. Mr. Fallon served as our Chief Operating Officer from October 2006 to December 2009 and as our Vice President of Engineering and Operations from April 2004 to September 2006. From August 2003 to March 2004, Mr. Fallon was Vice President, Corporate Quality and Development Operations of Cisco Systems. From May 2001 to August 2003, Mr. Fallon served as General Manager of Cisco Systems’ Optical Transport Business Unit. As the President and Chief Executive Officer of Infinera, the Board believes that Mr. Fallon provides significant institutional knowledge of Infinera and industry knowledge, as well as key insight and advice in the Board’s consideration and oversight of corporate strategy and management development. The Board believes that Mr. Fallon’s leadership skills and executive management experience, along with his operational management experience and technical expertise, enable Mr. Fallon to make significant contributions to the Board. 8 Kambiz Y. Hooshmand Director since 2009 Age 50 Philip J. Koen Director since 2010 Age 60 Kambiz Y. Hooshmand has been a member of our Board since December 2009 and has served as Chairman of our Board since October 2010. From March 2005 to May 2009, Mr. Hooshmand served as President and Chief Executive Officer of Applied Micro Circuits Corporation, a communications solutions company, or AMCC. From March 2000 to February 2002, Mr. Hooshmand served as Vice President and Division General Manager of the DSL Business Unit at Cisco Systems. From February 2002 to March 2005, Mr. Hooshmand served as Group Vice President and General Manager of Cisco Systems. From June 1997 to February 2000, Mr. Hooshmand served as Cisco System’s Vice President of Engineering. From January 1992 to June 1997, Mr. Hooshmand served as Director of Engineering of StrataCom, Inc., a networking solutions company, which was acquired by Cisco Systems. As the Chairman of the Board of Infinera, Mr. Hooshmand brings his leadership skills, industry experience and comprehensive knowledge of Infinera’s business, financial position and operations to the Board deliberations. Mr. Hooshmand brings significant executive management and technical experience in the networking industry as a result of his executive positions at AMCC, Cisco Systems and StrataCom. The Board also benefits from Mr. Hooshmand’s service on our Nominating and Governance and Technology and Acquisition Committees. Philip J. Koen has been a member of our Board since February 2010. Mr. Koen has been the Chairman of the board of directors and Chief Executive Officer of Intermedia.net, Inc., a cloud-based provider of hosted Microsoft Exchange, collaboration and content management services, since June 2011. From February 2010 to May 2011, Mr. Koen served as Chief Executive Officer of Montero Partners, an advisory services company. From March 2006 to January 2010, Mr. Koen served as Chief Executive Officer and Director of SAVVIS, Inc., a cloud infrastructure and hosted IT solutions provider. From July 1999 until February 2006, Mr. Koen was employed by Equinix, Inc., a provider of network neutral data centers and Internet exchange services, as President and Chief Operating Officer and as Chief Financial Officer. The Board believes that Mr. Koen’s leadership skills, executive management experience and industry experience provides the Board with a high level of expertise and experience in the operations of a global, technology company. In addition, the Board benefits from Mr. Koen’s prior experience as a public company director at SAVVIS, significant experience in the areas of finance, accounting and audit oversight, and service on our Audit and Technology and Acquisition Committees. P R O X Y 9 Incumbent Class III Directors whose Terms Expire at the 2013 Annual Meeting of Stockholders Kenneth A. Goldman Director since 2005 Age 62 Y X O R P Carl Redfield Director since 2006 Age 65 Kenneth A. Goldman has been a member of our Board since February 2005. Mr. Goldman has been the Senior Vice President, Finance and Administration, and Chief Financial Officer of Fortinet Inc., a provider of unified threat management solutions, since September 2007. From November 2006 to August 2007, Mr. Goldman served as Executive Vice President and Chief Financial Officer of Dexterra, Inc. From August 2000 until March 2006, Mr. Goldman served as Senior Vice President, Finance and Administration, and Chief Financial Officer of Siebel Systems, Inc., a supplier of customer software solutions and services. From December 1999 to December 2003, Mr. Goldman served as an advisory council member of the Financial Accounting Standards Board Advisory Council. Mr. Goldman serves on the board of directors of NXP Semiconductors N.V., a mixed signal and standards product semiconductor company. As a member of our Audit Committee and as an Audit Committee Financial Expert, the Board believes that Mr. Goldman provides a high level of expertise and significant leadership experience in the areas of finance, accounting and audit oversight. The Board also benefits from Mr. Goldman’s service as Chairman of our Compensation Committee, extensive executive experience and service as a member of the Financial Accounting Standards Board Advisory Council. Carl Redfield has been a member of our Board since August 2006. From September 2004 to his retirement in May 2008, Mr. Redfield served as Senior Vice President, New England executive sponsor, of Cisco Systems. From February 1997 through September 2004, Mr. Redfield served as Cisco Systems’ Senior Vice President, Manufacturing and Logistics. The Board believes that Mr. Redfield’s executive management experience, along with his significant manufacturing and logistics experience, enable Mr. Redfield to make significant contributions to the Board. In addition, the Board benefits from Mr. Redfield’s institutional knowledge of Infinera and his service as a member of our Compensation Committee and as Chairman of our Nominating and Governance Committee. 10 Mark A. Wegleitner Director since 2011 Age 61 Mark A. Wegleitner has been a member of our Board since May 2011. From September 2007 until his retirement in July 2010, Mr. Wegleitner served as the Senior Vice President, Technology, for Verizon Communications Inc., a telecommunications company, where his responsibilities included technology assessment, network architecture, platform development and laboratory testing for wireline and wireless communications networks. From July 2000 to September 2007, he served as Chief Technology Officer for Verizon, with responsibility for wireline communications technologies. Prior to the creation of Verizon, Mr. Wegleitner held various positions in the Network Services division of Bell Atlantic, a telecommunications company, including Chief Technology Officer from January 1999 to July 2000. Prior to joining Bell Atlantic, he worked at Bell Laboratories and AT&T General Departments. The Board believes that Mr. Wegleitner’s extensive experience in the telecommunications industry provides the Board with a high level of expertise and experience. The Board also benefits from Mr. Wegleitner’s service as a member of our Nominating and Governance Committee and Chairman of our Technology and Acquisition Committee. P R O X Y Vote Required Directors are elected by a plurality vote, which means that the three directors who receive the most “FOR” votes cast by the shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting will be elected. Abstentions and broker non-votes will not affect the outcome of the election. Stockholders may not cumulate votes in the election of directors. Proposal 1—Recommendation of the Board Our Board unanimously recommends a vote “FOR” the election to the Board of the three Class II nominees listed above. 11 CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS Infinera has adopted a number of policies and practices, some of which are described below, that highlight its commitment to sound corporate governance principles. Infinera also maintains a Corporate Governance section on the Investor Relations’ page on its website, which can be found at http:// www.infinera.com. Independence of the Board In accordance with the current listing standards of NASDAQ, the Board, on an annual basis, affirmatively determines the independence of each director or nominee for election as a director. The Board has determined that, with the exception of Mr. Fallon and Dr. Welch, both of whom are employees of Infinera, all of its members are “independent directors,” using the definition of that term in the listing standards of NASDAQ. Also, all members of the Audit Committee, Compensation Committee, and Nominating and Governance Committee, as more fully described below, are independent directors. Y X O R P Stockholder Communications with our Board Stockholders may communicate with our Board by writing to the following address: Board of Directors c/o Chief Legal and Administrative Officer Infinera Corporation 140 Caspian Court Sunnyvale, CA 94089 Communications are distributed to the Board or to any individual director, as appropriate, depending on the facts and circumstances outlined in the communication. Communications that are unduly hostile, threatening, illegal or similarly unsuitable will be excluded with the provision that any communication that is filtered out will be made available to any independent or non-employee director upon request. Board Leadership Structure In January 2010, we separated the positions of Chairman of the Board and Chief Executive Officer (“CEO”). Separating these positions allows our CEO to focus on our day-to-day business, while allowing the Chairman of the Board to lead the Board in its fundamental role of providing advice to and independent oversight of management. While our Bylaws do not require that our Chairman of the Board and CEO positions be separate, the Board believes that having separate positions is the appropriate leadership structure for Infinera at this time and demonstrates our commitment to good corporate governance practices. The Board has assigned the Chairman of the Board with responsibility for presiding over meetings of the Board, developing meeting agendas, facilitating communication between management and the Board, representing director views to management and improving meeting effectiveness, among other things. The Board believes that its leadership structure is appropriate. The Board also believes that the combination of an independent chairman, three of our four committees comprised entirely of independent directors and the regular use of executive sessions of the independent directors enables the Board to maintain independent oversight of our strategies and activities. 12 Board Oversight of Risk Risk is inherent with every business and the Board is responsible for overseeing our risk management function. Members of our senior management team are responsible for implementation of our day-to-day risk management processes, while the Board, as a whole and through its committees, has responsibility for the oversight of overall risk management. In connection with the Board’s annual strategic plan review, senior management makes a multidisciplinary presentation to the Board that includes any significant strategic, operational, financial, legal and compliance risks facing Infinera, our general risk management strategy and actions taken by senior management in compliance with this strategy. At other meetings of the Board, senior management provides updates to the Board on any specific risk-related issues. In its risk oversight role, the Board has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed. In addition, each of the committees of our Board considers any risks that may be within its area of responsibilities and Board members or Board committee members periodically engage in discussions with members of our senior management team as appropriate. Specifically, the Audit Committee assists the Board in fulfilling its oversight responsibilities with respect to risk management in the areas of financial reporting, internal controls and compliance with legal and regulatory requirements. The Audit Committee also discusses policies with respect to risk assessment and risk management and reports are regularly provided by management to the Audit Committee. The Compensation Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs. The Nominating and Governance Committee assists the Board in fulfilling its oversight responsibilities with respect to the management of risks associated with Board organization, membership and structure, succession planning for our directors and executive officers, and corporate governance. The Technology and Acquisition Committee assists the Board in fulfilling its oversight responsibilities with respect to managing the risks associated with Infinera’s strategy, technology development, and acquisitions and investments. Code of Business Conduct and Ethics Infinera has adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers (including our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions) and our directors. The Code of Business Conduct and Ethics reflects Infinera’s policy of dealing with all persons, including our customers, employees, investors and suppliers, with honesty and integrity. All employees are required to complete training on our Code of Business Conduct and Ethics. A copy of our Code of Business Conduct and Ethics is posted on our website at http:// www.infinera.com in the Corporate Governance section on the Investor Relations’ page. You may also obtain a copy of our Code of Business Conduct and Ethics without charge by writing to: Infinera Corporation, 140 Caspian Court, Sunnyvale, CA 94089, Attn: Corporate Secretary. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and our directors on our website identified above or on a Form 8-K if required by the applicable listing standards. Corporate Governance Guidelines Our Board has adopted Corporate Governance Guidelines which govern, among other things, member criteria, responsibilities, compensation and education, committee composition and charters, communication activities and management succession. You can access these Corporate Governance Guidelines, along with other materials such as Board committee charters, on our website at http:// www.infinera.com in the Corporate Governance section on the Investor Relations’ page. 13 P R O X Y Stock Ownership Guidelines Our Board believes that it is important to link the interests of our directors and management to those of our stockholders. Accordingly, the Compensation Committee adopted Stock Ownership Guidelines for our directors and executive officers who are designated as reporting officers under Section 16 of the Securities Exchange Act of 1934, as amended (“Section 16 Officers”). The Stock Ownership Guidelines require our directors and Section 16 Officers to accumulate and hold a minimum number of shares of Infinera common stock within three years of the later of the effective date of the guidelines, the date of appointment or promotion of the Section 16 Officer or the election of the director. The following bullet points list the specific Infinera stock ownership requirements as a multiple of each Section 16 Officers’ base salary or directors’ annual cash retainer: • CEO: • CFO: • Other Section 16 Officers: • Directors: 4x base salary 2x base salary 1x base salary 2x annual cash retainer For purposes of calculating the stock ownership of each Section 16 Officer and director, we aggregated all Infinera common stock owned or beneficially owned by each Section 16 Officer or director, together with all vested, but unexercised in-the-money stock options. As of the Record Date, each of our Section 16 Officers and directors has either satisfied these ownership guidelines or had time remaining to do so. Y X O R P Information Regarding the Board and its Committees The Board met eight times during fiscal 2011 and acted by unanimous written consent once. During fiscal 2011, each director then in office attended 75% or more of the meetings of the Board and the committees on which he served during the period for which he was a director, committee chairman or committee member, as applicable. Our independent directors meet in executive sessions, without management present, during most regular meetings of the Board. Directors are encouraged, but not required, to attend our annual meetings of stockholders. Two members of our Board attended our 2011 Annual Meeting of Stockholders. The Board has four standing committees: an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and a Technology and Acquisition Committee. Mr. Fallon does not serve on any committees of the Board. The following table provides membership and meeting information for the Board and each of the committees of the Board as of the end of fiscal 2011: Name Board Audit Compensation Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenneth A. Goldman(2) Kambiz Y. Hooshmand(3) . . . . . . . . . . . . . . . Philip J. Koen(4) . . . . . . . . . . . . . . . . . . . . . . Dan Maydan, Ph.D. . . . . . . . . . . . . . . . . . . . Paul J. Milbury(5) . . . . . . . . . . . . . . . . . . . . . . Carl Redfield(6) . . . . . . . . . . . . . . . . . . . . . . . Mark A. Wegleitner(7) . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D.(8) . . . . . . . . . . . . . . . Total meetings in fiscal 2011 . . . . . . . . . . . . M M C M M M M M M 8 — M — M — C — — — 10 — C — — M M M — — 6 Nominating and Governance Technology and Acquisition(1) — — M — M — C M — 4 — — M M — — — C M 2 C = Chairman M = Member 14 (1) The Acquisition Committee was reconstituted in October 2011 as the Technology and Acquisition Committee. In September 2011, Mr. Goldman replaced Mr. Redfield as Chairman of the Compensation Committee, (2) resigned as Chairman of the Audit Committee, but remained a member of that committee, and resigned as a member of the Technology and Acquisition Committee. (3) Mr. Hooshmand resigned as a member of the Compensation Committee and Acquisition Committee in September 2011 and was appointed as a member of the Technology and Acquisition Committee in December 2011. (4) Mr. Koen resigned as a member of the Acquisition Committee in September 2011 and was appointed as a member of the Technology and Acquisition Committee in December 2011. (5) Mr. Milbury replaced Mr. Goldman as Chairman of the Audit Committee in September 2011. (6) In September 2011, Mr. Redfield resigned from his position as Chairman of the Compensation Committee, but remained a member of that committee. In May 2011, Mr. Wegleitner was appointed as a member of our Board and as a member of the Nominating and Governance Committee. In October 2011, he was appointed Chairman of the Technology and Acquisition Committee. (7) (8) Dr. Welch was appointed as a member of the Technology and Acquisition Committee in October 2011. Below is a description of each standing committee of the Board. The Board has determined that each member of the Audit, Compensation, and Nominating and Governance Committees meets the applicable rules and regulations regarding “independence” and that each such member is free of any relationship that would interfere with his individual exercise of independent judgment with regard to Infinera. Each committee of the Board has a written charter approved by the Board. Copies of each charter are posted on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. P R O X Y Audit Committee The Audit Committee reviews and monitors our financial statements and reporting and our external audits, including, among other things, our internal controls and audit functions, the results and scope of the annual audit and other services provided by our independent registered public accounting firm and our compliance with legal matters that have a significant impact on our financial statements. Our Audit Committee also consults with our management and our independent registered public accounting firm prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. Our Audit Committee is responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and for the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. In addition, our Audit Committee is directly responsible for the appointment, retention, compensation and oversight of the work of our independent registered public accounting firm, including approving services and fee arrangements. All related party transactions are subject to approval by our Audit Committee. A more detailed description of the Audit Committee’s functions can be found in our Audit Committee charter. A copy of the Audit Committee charter is available on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. The current members of the Audit Committee are Messrs. Goldman, Koen and Milbury. Mr. Milbury chairs the Audit Committee. The Audit Committee met ten times during fiscal 2011. The Audit Committee did not act by written consent during fiscal 2011. Each member of our Audit Committee is independent for Audit Committee purposes under the rules and regulations of the SEC and the listing standards of NASDAQ. In addition to qualifying as independent under the NASDAQ rules, each member of our Audit Committee can read and understand fundamental financial statements in accordance with NASDAQ Audit Committee requirements. The Board has determined that Messrs. Goldman and Milbury are each an “Audit Committee Financial Expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, including the relevant independence requirements. The 15 Y X O R P designation does not impose on Messrs. Goldman and Milbury any duties, obligations or liabilities that are greater than are generally imposed on them as members of the Audit Committee and the Board. Compensation Committee The Compensation Committee has the responsibility, authority and oversight relating to the development of our overall compensation strategy and compensation programs. The Compensation Committee establishes our compensation philosophy and policies, as well as administers all of our compensation plans for executive officers. The Compensation Committee seeks to assure that our compensation practices promote stockholder interests and support our compensation objectives and philosophy. Our compensation program for executive officers focuses on addressing the following principal objectives: • Attract and retain talented personnel by offering competitive compensation packages; • Motivate employees to achieve strategic and tactical objectives and the profitable growth of Infinera; • Reward employees for individual and corporate performance; and • Align executive compensation with stockholder interests. In making compensation decisions, the Compensation Committee also seeks to promote teamwork among and high morale within our executive team. The Compensation Committee evaluates the performance of our CEO against objectives set by the Board and may seek assistance in such evaluation from the Chairman of the Board and its compensation consultant. Our CEO is asked by the Compensation Committee to provide his assessment of the performance of the other executive officers, but he does not participate in the determination of his own compensation. He is assisted by our Vice President of Human Resources and our Chief Legal and Administrative Officer in making the assessments of the performance of the executive officers. No other executive officers participate in the determination of the amount or form of the compensation of executive officers. The Compensation Committee also oversees, reviews and administers all of our material employee benefit plans, including our 401(k) plan, and reviews and approves various other compensation policies and matters. The Compensation Committee may form and delegate authority to one or more subcommittees as appropriate. A more detailed description of the Compensation Committee’s functions can be found in our Compensation Committee charter. A copy of the Compensation Committee charter is available on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. The Compensation Committee currently consists of Messrs. Goldman, Milbury and Redfield and Dr. Maydan. Mr. Goldman chairs the Compensation Committee. The Compensation Committee met six times during fiscal 2011. The Compensation Committee did not act by written consent during fiscal 2011. Each member of our Compensation Committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code and satisfies the NASDAQ independence requirements. During fiscal 2011, the Compensation Committee engaged the services of Compensia, Inc. (“Compensia”) to advise the Compensation Committee with respect to executive compensation philosophy, cash incentive design, the amount of cash and equity compensation awarded to executive officers, and to gather market data and compensation information, including data about the compensation paid by a peer group of companies and other companies that may compete with us for 16 executives, and to develop recommendations for structuring Infinera’s compensation programs. The Compensation Committee selected Compensia, who reports directly to the Compensation Committee and interacts with management at the direction of the Compensation Committee. Compensia has not performed work for Infinera other than pursuant to the engagement by the Compensation Committee. The Compensation Committee regularly, but not less than annually, considers the independence of Compensia and determines whether any related conflicts of interest requires disclosure. Non-Executive Equity Award Subcommittee The levels for new hire, promotion and annual retention equity awards for executive officers are reviewed and approved by the Compensation Committee on an annual basis. The Compensation Committee has delegated to the Non-Executive Equity Award Subcommittee, consisting of the CEO, Chief Legal and Administrative Officer and Vice President of Human Resources, the authority to formally approve new hire, promotional and annual retention equity awards to certain employees pursuant to guidelines pre-approved by the Compensation Committee. The delegation does not include the authority to make equity awards to new employees who are executive officers of Infinera. The Non-Executive Equity Award Subcommittee generally meets on the first Monday of each month (unless it is a holiday, in which case the Non-Executive Equity Award Subcommittee meets on the first business day thereafter) to approve new hire and promotional grants that are within the pre-approved guidelines. The delegation of authority to the Non-Executive Equity Award Subcommittee is not exclusive and the Board and Compensation Committee have retained the right to approve any equity awards. The Non-Executive Equity Award Subcommittee met 14 times during fiscal 2011. P R O X Y Nominating and Governance Committee The Nominating and Governance Committee reviews and implements corporate governance policies and practices and recommends the compensation for the non-employee directors of the Board. In addition, the Nominating and Governance Committee is responsible for identifying, evaluating and making recommendations of nominees to the Board and evaluating the performance of the Board and individual directors, including those eligible for re-election at the annual meeting of stockholders. The Nominating and Governance Committee is also responsible for reviewing developments in corporate governance practices, evaluating and making recommendations to the Board concerning corporate governance matters and overseeing the evaluation of management. A more detailed description of the Nominating and Governance Committee’s functions can be found in our Nominating and Governance Committee charter. A copy of our Nominating and Governance Committee charter is available on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. The current members of our Nominating and Governance Committee are Messrs. Hooshmand, Redfield and Wegleitner and Dr. Maydan, each of whom is independent under the listing standards of NASDAQ. Mr. Redfield chairs the Nominating and Governance Committee. The Nominating and Governance Committee met four times during fiscal 2011. The Nominating and Governance Committee did not act by written consent during fiscal 2011. Board Nominees and Diversity The Nominating and Governance Committee reviews and reports to our Board on a periodic basis with regard to matters of corporate governance, and reviews, assesses and makes recommendations on the effectiveness of our corporate governance policies. In addition, our Nominating and Governance Committee reviews and makes recommendations to our Board regarding the size and composition of our Board and the appropriate qualities and skills required of our directors in the context of the then- current composition of our Board. This includes an assessment of each candidate’s independence, 17 Y X O R P personal and professional integrity, financial literacy or other professional or business experience relevant to an understanding of our business, ability to think and act independently and with sound judgment, and ability to serve our stockholders’ long-term interests. While we do not have a formal written policy on director diversity, the Board and the Nominating and Governance Committee consider diversity when reviewing the overall composition of the Board and considering the slate of nominees for annual election to the Board and the appointment of individual directors to the Board. Diversity, in this context, includes factors such as experience, specialized expertise, geographic location, cultural background, gender and ethnicity. These factors, and others considered useful by our Nominating and Governance Committee, are reviewed in the context of an assessment of the perceived needs of our Board at a particular point in time. As a result, the priorities and emphasis of our Nominating and Governance Committee and of our Board may change from time to time to take into account changes in business and other trends, as well as the portfolio of skills and experience of current and prospective directors. Our Nominating and Governance Committee leads the search for, selects and recommends candidates for election to our Board. Consideration of new director candidates typically involves a series of committee discussions, review of information concerning candidates and interviews with selected candidates. Candidates for nomination to our Board typically have been suggested by other members of our Board or by our executive officers. From time to time, our Nominating and Governance Committee may engage the services of a third-party search firm to identify director candidates. Our Nominating and Governance Committee will also consider candidates proposed in writing by stockholders, provided such proposal meets the eligibility requirements for submitting stockholder proposals for inclusion in our next proxy statement and is accompanied by the required information about the candidate specified in Section 2.4 of our Bylaws. Candidates proposed by stockholders are evaluated by our Nominating and Governance Committee using the same criteria as for all other candidates. If a stockholder wishes to recommend a director candidate for consideration by the Nominating and Governance Committee, pursuant to Infinera’s Corporate Governance Guidelines, the stockholder must have held at least 1,000 shares of our common stock for at least six months and must notify the Nominating and Governance Committee by writing to our Chief Legal and Administrative Officer at our principal executive offices, and must include: • To the extent reasonably available, information relating to such director candidate that would be required to be disclosed in a proxy statement pursuant to Regulation 14A under the Exchange Act, in which such individual is a nominee for election to the Board; • The director candidate’s written consent to (a) if selected, be named in our proxy statement and proxy and (b) if elected, to serve on the Board; • The other information set forth in the applicable sections of Section 2.4 of our Bylaws; and • Any other information that such stockholder believes is relevant in considering the director candidate. Technology and Acquisition Committee The Technology and Acquisition Committee reviews with management, makes recommendations to the Board on and, when expressly authorized by the Board, approves acquisitions, investments, joint ventures and other strategic transactions in which we engage from time to time as part of our business strategy. The Technology and Acquisition Committee also evaluates the execution, financial results and integration of any such potential transactions. In addition, the Technology and Acquisition Committee provides advice and counsel on matters relating to technology and innovation, as well as enhancing the Board’s understanding to allow for better input and direction regarding our strategy, 18 progress and risks. A more detailed description of the Technology and Acquisition Committee’s functions can be found in our Technology and Acquisition Committee charter. A copy of the Technology and Acquisition Committee charter is available on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. The current members of the Technology and Acquisition Committee are Messrs. Hooshmand, Koen and Wegleitner and Dr. Welch. Mr. Wegleitner chairs the Technology and Acquisition Committee. The Technology and Acquisition Committee met twice during fiscal 2011 and acted once by written consent. Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board currently consists of Messrs. Goldman, Milbury and Redfield and Dr. Maydan. None of these individuals was at any time during fiscal 2011, or at any other time, an executive officer or employee of Infinera. No member of our Compensation Committee had any relationship with us during fiscal 2011 requiring disclosure under Item 404 of Regulation S-K under the Exchange Act. None of our executive officers has ever served as a member of the board or compensation committee of any other entity that has or has had one or more executive officers serving as a member of our Board or our Compensation Committee. P R O X Y 19 COMPENSATION OF DIRECTORS Our director compensation program is designed to attract and retain highly qualified, independent directors to represent stockholders on the Board and to act in their best interest. The Nominating and Governance Committee, which consists solely of independent directors, has the primary responsibility for reviewing and recommending any changes to our director compensation program, with compensation changes approved or ratified by the full Board. The Nominating and Governance Committee has engaged an outside advisor to provide relevant market data regarding director compensation programs. The Nominating and Governance Committee and Board determined that a mix of cash compensation and equity awards should be utilized in our director compensation program for independent directors. Directors who are also employees of Infinera do not participate in our director compensation program nor do they receive any additional compensation for their service as directors. Director Fees Y X O R P During fiscal 2011, our cash compensation program for non-employee directors was as follows: Position Annual Retainer Fee Non-Employee Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Audit Committee Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation Committee Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominating and Governance Committee Chair . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nominating and Governance Committee Member $40,000 $40,000 $30,000 $12,500 $16,000 $ 8,000 $10,000 $ 5,000 During fiscal 2011, we did not pay any fees to members of the Technology and Acquisition Committee. Each non-employee member of our Board also received fees of $2,000 per meeting of the Board attended in person and $1,000 per meeting attended telephonically. We do not pay any meeting fees for any of the committees of the Board. We pay the retainer fees set forth above in quarterly installments. Retainer fees, together with meeting attendance fees, are generally paid in arrears at the first Board meeting of each new fiscal quarter. In addition, we have a policy of reimbursing our directors for reasonable travel, lodging and other expenses incurred in connection with their attendance at Board and committee meetings. Director Equity Awards In May 2011, we granted stock options in the amount of 17,600 shares and 9,100 restricted stock units (“RSUs”) to each non-employee member of the Board then in office. Both the stock options and RSUs vest in full on May 18, 2012, subject to each non-employee director’s continued service to Infinera. The Nominating and Governance Committee considered a range of factors in determining the May 2011 director equity awards, including factors such as the amount of the Board’s cash compensation and number of Board and committee meetings required each year. In May 2011, in connection with his election to the Board and consistent with our practice for awards to new Board members, Mr. Wegleitner was granted an award of stock options in the amount of 100,000 shares, which vest over a two-year period with 50% of the shares vesting on the one-year anniversary of the date of grant and the remainder vesting ratably each month thereafter over the next year, subject to Mr. Wegleitner’s continued service to Infinera. Our policy has been to provide future non-employee directors with an initial equity award upon such director’s election to the Board. The form, amount and vesting schedule of such initial equity 20 award will depend on our then-current practice regarding the form of equity awards granted to members of our Board and on our future common stock price and the associated Black Scholes valuation of such initial equity award. 2011 Summary of Director Compensation The following table sets forth all of the compensation awarded to, earned by, or paid to the non-employee members of our Board in fiscal 2011. Name Fees Earned or Paid in Cash ($)(1) Stock Awards ($)(2) Option Awards ($)(2) Total ($) Kenneth A. Goldman . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kambiz Y. Hooshmand . . . . . . . . . . . . . . . . . . . . . . . . . . Philip J. Koen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dan Maydan, Ph.D. Paul J. Milbury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carl Redfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mark A. Wegleitner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,625 104,000 65,500 66,000 77,875 77,000 35,692 65,975 65,975 65,975 65,975 65,975 65,975 65,264 212,864 65,264 235,239 65,264 196,739 65,264 197,239 65,264 209,114 65,264 208,239 — 363,160 398,852 (1) The amounts in this column represent cash compensation paid to each non-employee director for services as a director during fiscal 2011. (2) The amounts in these columns represent the aggregate grant date fair value of the equity awards granted in fiscal 2011 computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, “Compensation – Stock Compensation” (“ASC 718”). These amounts reflect Infinera’s accounting expense for these awards and do not correspond to the actual value that will be recognized by the directors with respect to these awards. A supplemental table following these footnotes sets forth: (i) the aggregate number of equity awards outstanding at fiscal year-end; (ii) the aggregate number of equity awards granted during fiscal 2011; and (iii) the grant date fair value of the equity awards granted by Infinera during fiscal 2011 to each of our directors who was not a named executive officer. P R O X Y Additional Information With Respect to Director Equity Awards Name Stock Awards Outstanding at Fiscal Year-End (#)(1) Option Awards Outstanding at Fiscal Year-End (#)(2) Stock Awards Granted During Fiscal 2011 (#)(3) Option Awards Granted During Fiscal 2011 (#) Grant Date Fair Value of Stock and Option Awards Granted in Fiscal 2011 ($)(4) Kenneth A. Goldman . . . . . . . Kambiz Y. Hooshmand . . . . . . Philip J. Koen . . . . . . . . . . . . . Dan Maydan, Ph.D. . . . . . . . . . Paul J. Milbury . . . . . . . . . . . . . Carl Redfield . . . . . . . . . . . . . . Mark A. Wegleitner . . . . . . . . . 24,100 9,100 9,100 24,100 9,100 24,100 — 175,069 132,100 132,100 94,600 117,600 157,100 100,000 9,100 9,100 9,100 9,100 9,100 9,100 — 17,600 17,600 17,600 17,600 17,600 17,600 100,000 131,239 131,239 131,239 131,239 131,239 131,239 363,160 (1) (2) (3) Includes unvested RSUs and performance-based restricted stock units (“PSUs”). Includes both vested and unvested stock options to purchase our common stock. Includes unvested RSUs. (4) Represents the fair value of stock options, RSUs and PSUs, calculated in accordance with ASC 718. For stock option awards, that number is calculated by multiplying the Black-Scholes value by the number of stock options awarded. For RSUs and PSUs, that number is calculated by multiplying (x) the fair market value of our common stock on the date of grant less the per share purchase price by (y) the number of units awarded. 21 Y X O R P PROPOSAL 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Audit Committee of the Board has selected Ernst & Young LLP, independent registered public accounting firm, as our independent auditors for the fiscal year ending December 29, 2012 and has further directed that management submit the appointment of independent auditors for ratification by the stockholders at the Annual Meeting. Ernst & Young LLP has audited our financial statements since fiscal 2001. Representatives of Ernst & Young LLP are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. Neither our Bylaws nor our other governing documents or law require stockholder ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm. However, the Board is submitting the appointment of Ernst & Young LLP to the stockholders for ratification as a matter of good corporate practice. If the stockholders fail to ratify the appointment, the Audit Committee will reconsider whether or not to retain that firm. Even if the appointment is ratified, the Audit Committee in its discretion may direct the appointment of different independent auditors at any time during the year if it determines that such change would be in the best interests of Infinera and its stockholders. The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the Annual Meeting will be required to ratify the appointment of Ernst & Young LLP. Abstentions will be counted toward the tabulation of votes cast on this proposal and will have the same effect as negative votes. Broker non-votes are counted towards a quorum, but are not counted for any purpose in determining whether this matter has been approved. Independent Registered Public Accounting Firm’s Fees The following table sets forth the aggregate fees for audit and other services provided by Ernst & Young LLP for the fiscal years ended December 31, 2011 and December 25, 2010. All of the services described in the following table were approved in conformity with the Audit Committee’s pre-approval processes and procedures. Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,256,000 32,000 2,000 $1,335,000 36,000 5,000 Total Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,290,000 $1,376,000 2011 2010 Audit Fees This category of the table above includes fees for the integrated audit of our annual consolidated financial statements and review of the consolidated financial statements included in our quarterly reports on Form 10-Q, and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings or engagements. The preparation of Infinera’s audited consolidated financial statements includes compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and the preparation by Ernst & Young LLP of a report expressing its opinion regarding the effectiveness of our internal control over financial reporting. 22 Tax Fees This category of the table above includes fees for tax compliance, tax advice and tax planning. All Other Fees This category of the table above principally includes support and advisory services provided by Ernst & Young LLP that are not included in the service categories reported above. Pre-Approval Policies and Procedures The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services rendered by Ernst & Young LLP, our independent registered public accounting firm. The Audit Committee can pre-approve specified services in defined categories of audit services, audit-related services and tax services up to specified amounts, as part of the Audit Committee’s approval of the scope of the engagement of Ernst & Young LLP or on an individual case-by-case basis before Ernst & Young LLP is engaged to provide a service. The Audit Committee has determined that the rendering of the services other than audit services by Ernst & Young LLP is compatible with maintaining the principal accountant’s independence. Vote Required Approval of Proposal 2 requires the affirmative vote of a majority of the votes cast on this proposal. Abstentions will have the same effect as an “Against” vote. Broker non-votes are not deemed to be votes cast and, therefore, are not included in the tabulation of the voting results on this proposal and will not affect the outcome of the vote. Proposal 2 – Recommendation of the Board The Board unanimously recommends a vote “FOR” the ratification of the appointment of Ernst & Young LLP as Infinera’s independent registered public accounting firm for its fiscal year ending December 29, 2012. P R O X Y 23 Y X O R P REPORT OF THE AUDIT COMMITTEE The Audit Committee of the Board currently consists of the three non-employee directors named below. The Board annually reviews the NASDAQ listing standards’ definition of independence for Audit Committee members and has determined that each member of the Audit Committee meets that standard. The Board has also determined that Messrs. Goldman and Milbury are each an Audit Committee Financial Expert as described in applicable rules and regulations of the SEC. The principal purpose of the Audit Committee is to assist the Board in its general oversight of Infinera’s accounting practices, system of internal controls, audit processes and financial reporting processes. The Audit Committee is responsible for appointing and retaining our independent auditor and approving the audit and non-audit services to be provided by the independent auditor. The Audit Committee’s function is more fully described in its charter, which the Board has adopted and which the Audit Committee reviews on an annual basis. Infinera’s management is responsible for preparing our financial statements and ensuring they are complete and accurate and prepared in accordance with generally accepted accounting principles. Ernst & Young LLP, our independent registered public accounting firm, is responsible for performing an independent audit of our consolidated financial statements and expressing an opinion on the conformity of those financial statements with generally accepted accounting principles. The Audit Committee has reviewed and discussed with our management the audited financial statements of Infinera included in our 2011 Annual Report. The Audit Committee has also reviewed and discussed with Ernst & Young LLP our audited financial statements in the 2011 Annual Report. In addition, the Audit Committee has discussed with Ernst & Young LLP those matters required to be discussed by the Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T. Additionally, Ernst & Young LLP has provided and the Audit Committee has received the written disclosures and the letter required by applicable requirements of the Public Company Accounting Oversight Board regarding Ernst & Young LLP’s communications with the Audit Committee concerning independence. The Audit Committee has also discussed with Ernst & Young LLP its independence from Infinera. Based upon the review and discussions described above, the Audit Committee recommended to the Board that the audited financial statements referred to above be included in Infinera’s 2011 Annual Report for filing with the SEC. Submitted by the following members of the Audit Committee: Paul J. Milbury, Chairman Kenneth A. Goldman Philip J. Koen 24 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of the Record Date by: • Each person known by us to be the beneficial owner of more than 5% of any class of our voting securities; • Our named executive officers; • Each of our directors; and • All executive officers and directors as a group. The information provided in this table is based on Infinera’s records, information filed with the SEC and information provided to Infinera, except where otherwise noted. Unless otherwise indicated, to our knowledge, each stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly with such person’s spouse. The table below is based upon information supplied by our named executive officers, directors and principal stockholders and Schedules 13G and 13G/A filed with the SEC. Our named executive officers include the CEO, the Chief Financial Officer (“CFO”) and the three other most highly compensated executive officers at the end of fiscal 2011. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting power and/or investment power with respect to the securities held. Shares of common stock subject to stock options currently exercisable or exercisable within 60 days of the Record Date are deemed outstanding and beneficially owned by the person holding such stock options for purposes of computing the number of shares and percentage beneficially owned by such person, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons or entities named have sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by them. Percentage beneficially owned is based on 109,467,315 shares of common stock outstanding on the Record Date. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Infinera Corporation, 140 Caspian Court, Sunnyvale, CA 94089. P R O X Y Name of Beneficial Owner 5% or More Stockholders Common Shares Currently Held Common Shares That May Be Acquired Within 60 Days of the Record Date(1) Total Beneficial Ownership Percent Beneficially Owned(2) FMR LLC(3) Platinum Investment Management . . . . . . . . . . . . . . . . . . . . . . 15,098,708 Limited(4) . . . . . . . . . . . . . . . . . . . . . . . 8,795,399 . . . . . . . . . . . . . . . . . 5,738,873 BlackRock, Inc.(5) Named Executive Officers and Directors 696,269 Thomas J. Fallon(6) . . . . . . . . . . . . . . . . 67,212 Ita M. Brennan . . . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D.(7) . . . . . . . . . . . . 2,347,489 43,532 Michael O. McCarthy III . . . . . . . . . . . . 14,971 Ronald D. Martin . . . . . . . . . . . . . . . . . . 44,273 Kenneth A. Goldman(8) . . . . . . . . . . . . . 5,500 Kambiz Y. Hooshmand . . . . . . . . . . . . . 6,083 Philip J. Koen(9) . . . . . . . . . . . . . . . . . . . Dan Maydan, Ph.D.(10) 68,400 . . . . . . . . . . . . . Paul J. Milbury . . . . . . . . . . . . . . . . . . . . Carl Redfield(11) . . . . . . . . . . . . . . . . . . . Mark A. Wegleitner . . . . . . . . . . . . . . . . 175,934 — — — 15,098,708 13.8% — — 838,361 182,988 677,111 271,421 53,228 184,169 141,200 141,200 103,700 118,366 166,200 — 8,795,399 5,738,873 1,534,630 250,200 3,024,600 314,953 68,199 228,442 146,700 147,283 172,100 118,366 342,134 — 8.0% 5.2% 1.4% * 2.7% * * * * * * * * * All current named executive officers and directors as a group (12 persons) . . . . . . 3,469,663 2,877,944 6,347,607 5.7% 25 Y X O R P * Less than 1% of the outstanding shares of common stock. (1) Includes shares represented by vested, unexercised stock options as of the Record Date and stock options and RSUs that are expected to vest within 60 days thereof. These shares are deemed to be outstanding for the purpose of computing the percentage ownership of the person holding the stock options or RSUs, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Based on 109,467,315 shares issued and outstanding on the Record Date. (3) According to a Schedule 13G/A filed with the SEC on February 14, 2012 by FMR LLC (“FMR”) and Edward C. Johnson III, all such shares are beneficially owned by Fidelity Management & Research Company (“Fidelity”), a registered investment advisor to various investment companies (“Fidelity Funds”) and a wholly-owned subsidiary of FMR, and Pyramis Global Advisors Trust Company (“PGATC”), an indirect wholly-owned subsidiary of FMR. Fidelity is the beneficial owner of 15,098,708 shares and has sole voting power with respect to 900 shares and sole dispositive power with respect to all reported shares. Mr. Johnson, Chairman of FMR, FMR (through its control of Fidelity) and the funds each has sole dispositive power with respect to 15,095,308 shares. Neither Mr. Johnson nor FMR has the sole power to vote or direct the voting of the shares beneficially owned by Fidelity Funds, which power resides with the Board of Trustees of such funds. PGATC is the beneficial owner of 3,400 shares. Mr. Johnson and FMR (through its control of PGATC) each has sole dispositive power over 3,400 shares and sole voting power with respect to none of the shares beneficially owned by PGATC. The address of Fidelity, FMR and Mr. Johnson is 82 Devonshire Street, Boston, Massachusetts 02109. The address of PGATC is 900 Salem Street, Smithfield, Rhode Island 02917. (4) According to a Schedule 13G filed with the SEC on February 15, 2012 by Platinum Investment Management Limited (“Platinum”). Platinum is the beneficial owner of 8,795,399 shares and has sole voting power with respect to 7,469,150 shares and sole dispositive power with respect to all voting shares. The address of Platinum is Level 8, 7 Macquarie Place, Sydney, Australia NSW 2000. (5) According to a Schedule 13G filed with the SEC on February 9, 2012 by BlackRock, Inc. (“BlackRock”). BlackRock is the beneficial owner of 5,738,873 and has sole voting power with respect to 5,738,873 shares and sole dispositive power with respect to all voting shares. The address of BlackRock is 40 East 52nd Street, New York, New York 10022. (6) Consists of (i) 175,699 shares held by the Fallon Family Revocable Trust dated 9/7/94; (ii) 250,000 shares held by the Thomas J. Fallon 2011 Annuity Trust A dated 8/1/11; (iii) 250,000 shares held by the Shannon F. Fallon 2011 Annuity Trust A dated 8/1/11 and (iv) 20,570 shares held by Mr. Fallon as trustee for his minor children. Mr. Fallon disclaims beneficial ownership of the shares held in trust for his minor children. (7) Consists of (i) 17,132 shares held by Dr. Welch; (ii) 174,614 shares held by the Welch Family Trust dated 4/3/96; (iii) 1,099,493 shares held by LRFA, LLC, a limited liability company of which Dr. Welch is the sole managing member; (iv) 500,000 shares held by Welch Group, L.P., a limited partnership of which Dr. Welch is the general partner; (v) 553,750 shares held by SEI Private Trust Company, Trustee of the Welch Family Heritage Trust I u/l dated 9/24/01 and (vi) 2,500 shares held by Dr. Welch as trustee for his minor children. Dr. Welch disclaims beneficial ownership of the shares held in trust for his minor children. (8) Consists of (i) 7,500 shares held by Mr. Goldman; (ii) 3,051 shares held by the Goldman-Valeriote Family Trust u/a/d 11/15/95 and (iii) 33,722 shares held by G.V. Partners, L.P. (9) Consists of (i) 583 shares held by Mr. Koen and (ii) 5,500 shares held by the Koen Family Trust dated 11/3/10. (10) Consists of (i) 54,597 shares held by Dan Maydan, TTEE, Maydan Marital Share One UAD 5/6/00 and (ii) 13,803 shares held by Dan Maydan, TTEE, Dan Maydan 1981 Trust Marital Share 1 U/A DTD 3/26/81. (11) Consists of (i) 89,562 shares held by Mr. Redfield and (ii) 86,372 shares held by the Carl Redfield Trust 2000 dated 10/18/00. 26 RISK ASSESSMENT OF COMPENSATION PRACTICES During fiscal 2011, at the request of the Board, Infinera undertook a review of the risks associated with our compensation policies and practices. This review was conducted by Compensia with input from our legal, finance and human resources departments. This assessment included: • A review of the policies and practices relating to the components of our compensation programs and arrangements; • A review of incentive-based equity and cash compensation features; • The identification of compensation design features that could potentially encourage excessive or imprudent risk taking, and identification of business risks that these features could potentially encourage; and • Consideration of the presence or absence of controls, oversight or other factors that mitigate potential risks. Although all compensation programs were considered, particular attention was paid to incentive- based programs involving variable payouts, where an employee might be able to influence payout factors and compensation programs involving our executive team. In substantially all cases, compensation programs are centrally designed and administered and, excluding sales incentive compensation, are substantially identical across function and geography. Incentive compensation was found to be based on a blend of financial and operational goals, which allows us to avoid an over- emphasis on shorter-term financial goals. P R O X Y In addition, the assessment considered the controls and other mitigating factors that serve to offset elements of our compensation policies and practices that may introduce risk, including: • Oversight of major incentive compensation programs and decision-making by the Compensation Committee, which, in most cases, retains the ability to adjust elements of incentive compensation in its discretion; • Internal controls over financial reporting and compensation practices regularly reviewed and/ or tested by internal auditors and subject to testing as part of the annual independent integrated audit by our external auditors; • Audit Committee oversight and review of financial results and non-GAAP adjustments used in certain components of incentive compensation; • The existence of, and training relating to, corporate standards of business conduct and ethics; • Substantial alignment of compensation of and benefits for executive and non-executive, salaried employees; and • Stock ownership guidelines applicable to executive officers to align their interests with those of our stockholders. Based on the assessment and factors described above, Compensia determined that the risks associated with our compensation policies and practices are not reasonably likely to result in a material adverse effect. Compensia’s risk assessment was reviewed by the Board, Audit Committee and Compensation Committee. 27 Compensation Discussion and Analysis COMPENSATION OF EXECUTIVE OFFICERS This section of our Proxy Statement provides a description and analysis of our executive compensation program, the various components of our executive compensation program, and the compensation-related decisions for fiscal 2011 with respect to our “named executive officers.” As discussed throughout this section, the individuals who served as Infinera’s CEO and CFO during fiscal 2011 and our three other most highly compensated executive officers at the end of fiscal 2011 are as set forth below: • Thomas J. Fallon, President and CEO; • Ita M. Brennan, CFO; • David F. Welch, Ph.D., Executive Vice President, Chief Strategy Officer; • Michael O. McCarthy III, Chief Legal and Administrative Officer; and • Ronald D. Martin, Senior Vice President, Worldwide Sales. Y X O R P These employees are referred to in this Proxy Statement as our “named executive officers.” We have provided detailed compensation information related to these individuals in the “Summary Compensation Table for Fiscal 2011” on page 47. All of the named executive officers are or were officers designated as Section 16 Officers in fiscal 2011. Compensation Philosophy and Objectives Our executive compensation program is designed to attract and retain our executives and to motivate them to pursue our corporate objectives, while encouraging the creation of long-term value for our stockholders. In designing these programs, we are guided by the following principles: • Maintaining a clear link between the achievement of business goals and compensation payout. Executive compensation programs can be an effective means of driving the behavior needed to accomplish our objectives, but only if each executive clearly understands how achievement of predetermined business goals influences his or her compensation. • Selecting the right performance measures. Equally important is the selection of performance measures. Such measures should be measurable and linked to business success and increased stockholder value. • Sharing information and encouraging feedback. We also believe that focused and clear program design supports transparency for our stockholders. It is important for stockholders to understand the basis for our executives’ compensation, as this provides stockholders insight into our goals and direction and the manner in which Infinera’s resources are being used to increase stockholder value. With these principles in mind, we created a compensation program that has a mix of short- and long-term components, cash and equity elements, and fixed and contingent payments. We provide such elements of compensation because we believe each is necessary to attract, retain and motivate our named executive officers, on whom our success largely depends. The main elements of compensation for our executive officers include base salary, annual performance-based incentive cash bonuses, and long-term incentives in the form of equity awards, including a mix of stock options, performance-based stock options, RSUs and PSUs. 28 Fiscal 2011 Executive Compensation In setting executive compensation for fiscal 2011, the Compensation Committee sought to balance the need to recognize individual performance with Infinera’s focus on revenue growth and achieving profitability on an adjusted (non-GAAP) basis in fiscal 2011. In particular, the Compensation Committee sought to mitigate any risk that its compensation decision-making and design, including any resulting compensation awards or payouts, could adversely affect our results of operations. In furtherance of both of these goals, and in seeking to ensure a close alignment of the short- and long- term interests of the named executive officers with those of our stockholders, the Compensation Committee took the following key actions relating to executive compensation for fiscal 2011: • Reassessed and modified the composition of the peer group used by the Compensation Committee for executive compensation comparison purposes; • Continued to target less than median base cash compensation and above median equity compensation to more closely align compensation with the interests of our stockholders; • Maintained below median levels of total target cash compensation as compared to our peer group for nearly all executives in recognition that fiscal 2011 would be a transition year while Infinera continued to develop its next-generation product; • Structured the performance-based bonus plan to ensure that no award would be earned by the executive officers (including the named executive officers) if Infinera failed to grow revenue and if Infinera reported an adjusted operating loss for fiscal 2011; P R O X Y • Transitioned the base for the total target cash compensation of our Senior Vice President, Worldwide Sales, from sales incentive based compensation to company-wide performance based compensation. In particular, we increased the allocation for the Senior Vice President, Worldwide Sales from 50% company-wide performance based to 75% in 2011. We believe that this creates better uniformity among the named executive officers with regard to cash incentive arrangements; and • Granted a mix of equity awards to our named executive officers including stock options, RSUs and performance-based stock options with vesting criteria tied to the attainment of long-term strategic objectives related to Infinera’s next-generation product. Governance of Executive Compensation The Compensation Committee’s approach to Infinera’s fiscal 2011 compensation program reflects our core executive compensation governance principles and practices, including: • Executive compensation is reviewed and established annually by the Compensation Committee, which consists solely of independent directors; • The Compensation Committee relies upon input from an independent compensation consultant that is retained directly by the Compensation Committee and does not perform additional consulting or other services for Infinera or its management; • Infinera’s executive officers have no employment agreements or other arrangements providing for tax “gross-ups” of any compensation elements; • Elements of performance-based, equity and cash incentive compensation are largely aligned with financial and operational objectives established in Infinera’s Board-approved annual operating plan; • Infinera’s executive officers are generally eligible for the same benefits and perquisites as our other salaried employees, consisting of our 2007 Employee Stock Purchase Plan (the “2007 Plan”) and 401(k) plan; 29 • • Infinera’s change of control agreements are “double trigger” arrangements that require a termination (or a constructive termination) of employment following a change in control of Infinera before severance benefits are triggered; Infinera’s executive officers are subject to stock ownership requirements (as discussed in “Corporate Governance and the Board of Directors”); and • The Compensation Committee annually conducts a compensation risk assessment to determine whether its compensation arrangements, or components thereof, create risks that are reasonably likely to have a material adverse effect on Infinera (see “Risk Assessment of Compensation Practices” above). Recent “Say on Pay” Vote. In addition to the governance considerations above, we provide stockholders with the opportunity to cast an annual advisory vote on our executive compensation. See “Proposal 3” below to review this year’s “say-on-pay” proposal. Last year, over 95% of the stockholder votes cast on this proposal were voted in favor of our executive compensation proposal. The Compensation Committee believes that this substantial majority of votes cast affirms stockholders’ support for our approach to executive compensation. Last year’s stockholder vote on executive compensation occurred in May 2011, while the Compensation Committee’s consideration of executive compensation occurred earlier in 2011, with compensation for most elements established by February 2011. As a result of both of these factors, the Compensation Committee did not set or change fiscal 2011 executive compensation directly as a result of last year’s stockholder vote. The Compensation Committee will continue to consider input from stockholders and the outcome of our annual say-on-pay votes when making future executive compensation decisions. Y X O R P Compensation-Setting Process, Participants and Comparative Framework Participants in Compensation-Setting Process Role of Compensation Committee. The Compensation Committee has oversight of Infinera’s compensation plans, policies and programs. The Compensation Committee has the responsibility of approving the total compensation for each of our named executive officers on an annual basis. In addition, the Compensation Committee also reviews, approves and administers our material compensation, equity and employee benefit plans and programs, which are generally available to our employees, including the named executive officers. Role of Independent Compensation Consultant. The Compensation Committee has the authority to engage its own advisors to assist it in carrying out its responsibilities. During fiscal 2011, the Compensation Committee engaged the services of Compensia to advise the Compensation Committee with respect to executive compensation philosophy, cash incentive design and the amount of cash and equity compensation awarded to the named executive officers. Compensia also provided analysis and data to the Compensation Committee regarding our named executive officer compensation relative to external market benchmarks, compensation trends, compensation strategies, the structure of incentive compensation plans, market data, and recommendations for structuring our compensation programs. The Compensation Committee selected Compensia and they reported directly to the Compensation Committee. Compensia interacted with management at the direction of the Compensation Committee, but did not perform work for Infinera other than pursuant to their engagement by the Compensation Committee. Compensia’s fees were paid by Infinera. Role of Executive Officers. The CEO, Chief Legal and Administrative Officer and Vice President of Human Resources typically attend all meetings of the Compensation Committee. In connection with his close working relationship with each of the named executive officers, our CEO is asked by the Compensation Committee to provide his assessment of the performance of the other named executive officers. Our CEO is assisted by our Vice President of Human Resources in making these 30 assessments. Our CEO also takes an active role in the discussions of the Compensation Committee at which compensation of the other named executive officers is discussed; however, all decisions regarding the CEO’s compensation are made by the Compensation Committee or by the Board in an executive session that excludes the CEO. The Compensation Committee considers, but is in no way bound by, the recommendations made by the CEO in determining compensation for the other named executive officers. None of the named executive officers makes any recommendations regarding his or her own compensation. Our compensation consultant and our Vice President of Human Resources provide recommendations for the Compensation Committee to consider in relation to our CEO’s compensation. As part of this process, the Compensation Committee considers input from the Board and feedback from the CEO. Similarly, the Compensation Committee considers, but is in no way bound by, the recommendations of its compensation consultant. Comparative Framework, Mix and Positioning of Compensation Determining the Proper Mix of Pay Elements. For fiscal 2011, the principal components of our executive compensation programs included: • Base salary; • Annual performance-based incentive cash bonuses; and • Long-term incentives in the form of equity awards, including a mix of stock options, performance-based stock options and RSUs. P R O X Y In determining how we allocate an executive’s total compensation package among these various components, we emphasize compensation elements that reward performance against measures that we believe correlate closely with increases in stockholder value, which underscores our pay-for-performance philosophy. Accordingly, a significant portion of our executive compensation is at-risk, including the annual performance-based incentive cash bonuses and equity awards. We generally have targeted below median total cash compensation and above median equity compensation for our named executive officers for the reasons stated above, and, as a result, each of the named executive officers has a higher percentage of at-risk compensation (and thus greater upside potential and downside risk) relative to Infinera’s other employees. Equity awards, which for fiscal 2011 consisted of stock options, performance-based stock options, and RSUs, represent a large component of total compensation in order to encourage sustained long-term performance and ensure alignment of our named executive officers with Infinera’s stockholders. We believe this mix of pay elements is appropriate because our named executive officers have the greatest influence on Infinera’s performance. Accordingly, approximately 63% of our CEO’s compensation is considered “at-risk.” The following shows the mix of pay elements as a percentage of overall compensation for fiscal 2011 for our named executive officers. FY11 Mix of Pay: Named Executive Officers (Average) Base Salary 19% Target Bonus 16% Equity 65% 31 Consideration of Qualitative Factors. In any given year, and for any particular named executive officer, the Compensation Committee may consider a range of subjective or qualitative factors when making compensation decisions, including: • The role the executive plays and the importance of such individual to Infinera’s business strategy and objectives; • Differences in each executive’s tenure, skills and experience; • The responsibilities and particular nature of the functions performed or managed by the executive; • Our CEO’s recommendations and his assessment of the executive’s performance; • The value of prior unvested equity grants for each named executive officer; and • Competitive labor market pressures and the likely cost and difficulty that would be encountered in recruiting a replacement and the risk that such individual would leave Infinera if not appropriately compensated and motivated. The Compensation Committee’s consideration of any particular factor may range from inapplicable to significant, depending upon the individual and period under consideration. The Compensation Committee does not assign relative weights or rankings to such factors. Rather, the Compensation Committee relies upon its members’ knowledge and judgment in assessing the various qualitative and quantitative inputs it receives as to each individual and makes compensation decisions accordingly. Y X O R P With respect to determining fiscal 2011 executive compensation, in addition to any specific factors or assessment of peer group and market data (as described below) in determining each element of compensation for the named executive officers, the Compensation Committee broadly considered the following qualitative factors in making its compensation decisions for each named executive officer: • Mr. Fallon has served as our CEO since January 2010 and as a member of our Board since July 2009. The Compensation Committee believed that Mr. Fallon has demonstrated considerable leadership and strategic direction in managing Infinera and our executive team during his time as CEO. In addition, the Compensation Committee felt that Mr. Fallon provided Infinera with significant institutional and industry knowledge, as well as key oversight of corporate strategy and management development. The Compensation Committee also considered that elements of Mr. Fallon’s compensation, including his base salary, were significantly below the market benchmark for chief executive officers in the peer group. • Ms. Brennan assumed the role of CFO in June 2010. The Compensation Committee believed that Ms. Brennan demonstrated strong performance during her tenure as CFO. In addition to her significant responsibilities in interacting with the financial community, our Board and our Audit Committee, the Compensation Committee determined that Ms. Brennan effectively supervised and managed a number of functions, including the financial, accounting, and internal audit organizations. • Dr. Welch is a co-founder of Infinera, has served as our Executive Vice President, Chief Strategy Officer, since January 2007, and has served as a member of our Board since October 2010. In addition, Dr. Welch assumed the position of Chief Technology Officer in January 2012. The Compensation Committee believed that Dr. Welch added significant value in supervising and managing our product marketing, corporate marketing, business development, network strategy, product line management, product architecture and network systems analysis organizations. In particular, his experience, industry knowledge and deep technical understanding of the optical network industry enabled Dr. Welch, among other things, to successfully align our product development initiatives with our marketing and selling strategies. 32 • Mr. McCarthy joined Infinera in May 2003 and has served as our Chief Legal and Administrative Officer since March 2010. The Compensation Committee determined that Mr. McCarthy had continued to utilize his more than ten years’ experience as a general counsel to continue his strong interaction with the Board and the executive management team and his leadership of Infinera’s legal organization. In addition, Mr. McCarthy successfully integrated the human resources, information technology and facilities teams into his organization and continued to work closely with our CEO on cross-functional priorities for Infinera. The Compensation Committee believed that he demonstrated outstanding performance in assuming his new role and in sponsoring Infinera’s enterprise risk management project. • Mr. Martin has continued his effective performance in leading Infinera’s global sales organization since he joined Infinera as our Senior Vice President, Worldwide Sales, in August 2009. Mr. Martin has over 30 years’ experience in the telecommunications industry and long-term relationships with many Tier 1 telecommunications service providers. The Compensation Committee believed that Mr. Martin demonstrated his leadership during a period of intense competition within our industry sector and focused his team on driving a strong flow of sales orders that enabled Infinera to grow its revenues during such period. Internal Equity Considerations. The Compensation Committee seeks to promote teamwork among, and high morale within, our executive team. While the Compensation Committee does not use any quantitative formula or multiple for comparing or establishing compensation among the named executive officers, it is mindful of internal pay equity considerations, and assesses the relationship of the compensation of each named executive officer to other members of the executive team. The Compensation Committee also considers each fiscal year, on a relative basis, the aggregate portion of equity awards, in terms of economic value and allocation of shares, made to the executive team, in comparison to other eligible senior employees. P R O X Y Determination of Peer Group and Considerations of Peer Group and Market Data. In making compensation decisions for our named executive officers, the Compensation Committee compares a number of elements of total compensation against a peer group of companies for analyzing, benchmarking and setting compensation. This list of peer group companies is periodically reviewed and updated by the Compensation Committee to take into account changes in both Infinera’s business and the businesses of the peer group companies and was most recently reviewed and updated in the middle of fiscal 2010 for evaluating fiscal 2011 compensation. In developing the peer group, the Compensation Committee focused on those that had annual revenues between $200 million and $2 billion, positive revenue growth in the last four quarters and a current market capitalization greater than $400 million. The Compensation Committee then further limited this data to focus on companies in the systems level communications equipment market. The Compensation Committee selected peer group companies that it believes reflect those companies that it considers to be similar to, and competitive with, Infinera in terms of size, product market and revenue opportunity in which Infinera may compete for executive talent. As part of its review, six companies (Bookham, Inc., Data Domain, Inc., NetApp, Inc., Starent Networks, Corp., Tellabs, Inc., and Wind River, Inc.) were removed from the peer group (Bookham, Inc., Starent Networks, Corp. and Wind River, Inc. were acquired in 2009 and the remaining companies were removed as they no longer fit the peer group criteria as set forth above), and seven companies (Arris Group, Inc., Aruba Networks, Inc., Finisar Corporation, Netgear, Inc., Oclaro, Inc., Tekelec, and ViaSat, Inc.) were added to the fiscal 2011 peer group for the reasons discussed above. 33 For fiscal 2011, the peer group consisted of the following companies: ADC Telecommunications, Inc. Arris Group, Inc. Aruba Networks, Inc. Blue Coat Systems, Inc. Brocade Communications Systems, Inc. Ciena Corporation F5 Networks, Inc. Finisar Corporation Harmonic Inc. JDS Uniphase Corporation Juniper Networks, Inc. Netgear, Inc. Oclaro, Inc. Polycom, Inc. Riverbed Technology, Inc. Sonus Networks, Inc. Tekelec ViaSat, Inc. Y X O R P The data on the compensation practices of the peer group was gathered by Compensia’s search of publicly available information. In considering peer group compensation data, the Compensation Committee recognizes that executives at different companies can play significantly different roles, with different responsibilities and scopes of work, even though they may hold similar titles or positions. Moreover, from the available information about peer group compensation, it is not always possible to determine the respective qualitative factors that may influence compensation, such as scope of each named executive officer’s responsibilities, their performance during the period under consideration or their perceived importance to their company’s business, strategy and objectives. Accordingly, the Compensation Committee looked to information about the peer group as one of a number of considerations in establishing named executive officer compensation levels. In addition to the peer group data, the Compensation Committee also considered Radford’s Global Technology Survey for companies with revenue between $200 million and $1 billion. In this discussion, where we refer to “market” levels of pay and the “market group,” we are referring to the combined peer group and survey data described above. The following chart summarizes the principal elements of compensation that Infinera utilizes, the Compensation Committee’s market reference point for each element, and the reasons the Compensation Committee emphasizes each form of compensation. Compensation Component Market Reference Point Reason Base Salary Below Market Level (50th Percentile) In an effort to align executive officer’s compensation with the interests of our stockholders, we have historically targeted lower levels of base cash compensation and total cash compensation. We believe this mix of cash and total cash compensation represents the competitive baseline that must be paid in order to attract and retain these executives. Individual compensation may vary from the reference point based on the qualitative factors described above. 34 Compensation Component Market Reference Point Reason Total Cash Compensation, Including Annual Performance-Based Incentive Cash Awards Below Market Level (50th Percentile) In an effort to align executive officer’s compensation with the interests of our stockholders, we have historically targeted lower levels of base cash compensation and total cash compensation. We have chosen to target total annual cash compensation, which includes base salary and performance-based incentive cash awards, at slightly below median market levels because it allows us to offer compensation opportunities to our executives that more significantly link pay to the achievement of annual individual and company performance goals. Actual payments will vary based on performance compared to goals. The target amount of the performance- based incentive cash bonus may change to align the mix of compensation (targeted amount of “at- risk” pay) as deemed appropriate by the Compensation Committee based on the qualitative factors described above. P R O X Y 35 Compensation Component Market Reference Point Reason Long-Term Incentive Compensation (Equity Awards) Above Average Market Level (75th Percentile) Y X O R P Health and Welfare Benefits Competitive We have also chosen to target equity awards above average market levels because it allows us to offer attractive long-term compensation opportunities while linking pay to the achievement of both personal and company performance goals and maintaining modest levels of cash compensation. In addition, this provides an attractive opportunity to earn above-market long- term compensation in a manner that is highly aligned with stockholder interests. Actual compensation will vary based upon stock price performance and achievement relative to the incentive plan targets. The target amount of the long-term incentives may change to align the mix of compensation (targeted amount of “at-risk” pay) based on the qualitative factors described above. A portion of the equity awards to our named executive officers is performance based and will only be paid if Infinera achieves certain pre- determined milestones. We believe that allocating a portion of the equity awards to performance-based equity more closely aligns the named executive officers with the interests of our stockholders. Programs for the named executive officers are substantially the same as for all other eligible employees. Benefits under the plans are set to what is reasonable with respect to the intent of the program and what is competitive with comparator group practices. 36 Compensation Component Market Reference Point Reason Separation and Change of Control Benefits Competitive Program benefits provide minimum security to executives and are set to what is reasonable with respect to the intent of the program and what is competitive with comparator group practices. Benefits for separation from service take into account the role of the executive, expected length of time until subsequent employment is secured, expense management, and the ability to attract qualified candidates into senior roles. Change of control benefits are structured to support decisions that are in the best interests of stockholders, neutralizing personal concerns and managing related expenses. Principal Elements of Executive Compensation 2011 Cash Compensation 2011 Base Salaries For fiscal 2011, the Compensation Committee reviewed each named executive officer’s experience, skills, knowledge and responsibilities and analyzed such base salaries in comparison to the market group. In determining our compensation positioning for our named executive officers, the Compensation Committee used available information from the market group to position base salaries below median market levels. The Compensation Committee also considered internal equity of executive officer compensation between their various roles, as well as potential retention concerns based on the competitiveness of our current compensation levels. The Compensation Committee determined it was best to increase Mr. McCarthy’s and Ms. Brennan’s base salaries to $300,000 to align them more closely with our named executive officer group, while maintaining our below market median target for base salary compensation. In addition, the Compensation Committee determined an adjustment was not necessary to the base salaries for Messrs. Fallon and Martin and Dr. Welch, as their base salaries were already set at appropriate levels as compared to our market group. For fiscal 2011, the base salary as compared to the market group was set at less than the 25th percentile for Mr. Fallon, the 25th percentile for Ms. Brennan, the 39th percentile for Dr. Welch, the 25th percentile for Mr. McCarthy and the 72nd percentile for Mr. Martin. 37 P R O X Y Y X O R P The following table shows the base salary for each of our named executive officers for fiscal 2010 and 2011: Name and Principal Position Fiscal 2010 Base Salary Fiscal 2011 Base Salary Thomas J. Fallon, President and CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ita M. Brennan, CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D., Executive Vice President, Chief Strategy Officer . . . . . . . . . . . . . Michael O. McCarthy III, Chief Legal and Administrative Officer Ronald D. Martin, Senior Vice President, Worldwide Sales . . . . . . . . . . . . . . $300,000 $270,000 $300,000 $270,000 $350,000 $300,000 $300,000 $300,000 $300,000 $350,000 2011 Bonus Plan In February 2011, the Compensation Committee approved the fiscal 2011 bonus plan (the “2011 Bonus Plan”) and set the payout criteria for all eligible employees, including the named executive officers. Any payout under the 2011 Bonus Plan for our named executive officers was solely based on Infinera’s achievement against a mix of financial goals, which consisted of revenue and operating income performance metrics and were subject to minimum thresholds with respect to these financial goals. To drive increased focus on results and align our executives’ interests with those of our stockholders, the Compensation Committee determined that revenue and operating income metrics were the appropriate financial metrics to utilize under the 2011 Bonus Plan. The Compensation Committee believes that revenue growth is an essential component of long-term success and viability of Infinera. In addition, the Compensation Committee determined that a focus on operating income could serve to make generating a return for investors a priority, while allowing Infinera to re-invest in research and development and people for future success. The following table shows the performance metrics and weighting as established by the Compensation Committee for the 2011 Bonus Plan, as well as the actual performance of each of the performance metrics: Performance Metrics Weighting Target Actual Performance Financial Metrics (100%) Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income (Loss)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . 50% $525 million 50% $ 20 million $ 404.9 million $(30.6) million (1) Operating income is non-GAAP and excludes non-cash stock-based compensation expenses and non-recurring restructuring and other related costs. We believe these adjustments are appropriate to enhance an overall understanding of our underlying financial performance and also our prospects for the future and are considered by management for the purpose of making operational decisions. At the time that the performance goals for the 2011 Bonus Plan were set, the Compensation Committee believed that the targets were set to be challenging but attainable if our financial performance for fiscal 2011 was strong. 2011 Bonus Plan Targets For fiscal 2011, the Compensation Committee targeted slightly below, but closer to, median market levels for the 2011 Bonus Plan targets for each of our named executive officers. As part of its review, the Compensation Committee reviewed Mr. Fallon’s high-level responsibilities as CEO, the critical role he plays in leading Infinera, his relatively low base salary as compared to the peer group and the amount of cash compensation the Compensation Committee determined should be “at-risk” to 38 align with our pay-for-performance compensation philosophy. As a result, Mr. Fallon’s 2011 Bonus Plan target remained at 125% of his base salary. The Compensation Committee increased Ms. Brennan’s 2011 Bonus Plan target to 65% of her base salary to better align Ms. Brennan with the named executive officer group as a whole and the market group. In addition, the Compensation Committee increased Dr. Welch’s 2011 Bonus Plan target to 80% of his base salary due to Dr. Welch’s high level of responsibility and lengthy tenure at Infinera. The Compensation Committee determined an adjustment was not necessary to the 2011 Bonus Plan targets for Mr. McCarthy of 65% of his base salary, as such target was already set at appropriate levels. To better align Mr. Martin with our other named executive officers, the Compensation Committee determined that Mr. Martin’s target performance-based cash compensation should be split between the 2011 Bonus Plan (75%) and 2011 Sales Incentive Compensation Plan (25%). The Compensation Committee believed that this split provided Mr. Martin with an opportunity to balance his focus on sales with the strategic goals of Infinera, which is consistent with our overall compensation philosophy for our named executive officers. Mr. Martin’s total cash compensation remained at 100% of his base salary. For fiscal 2011, the total target cash compensation as compared to the market group was set at less than the 25th percentile for Mr. Fallon, the 31st percentile for Ms. Brennan, the 53rd percentile for Dr. Welch, the 43rd percentile for Mr. McCarthy and greater than the 75th percentile for Mr. Martin. Total target cash compensation includes base salary and annual performance-based incentive cash awards in the form of bonuses and, in the case of Mr. Martin, sales commissions. The following table shows the target bonus as a percentage of base salary for each of our named executive officers for fiscal 2010 and 2011: Name and Principal Position Fiscal 2010 Target Bonus (as a percentage of base salary) Fiscal 2011 Target Bonus (as a percentage of base salary) Thomas J. Fallon, President and CEO . . . . . . . . . . . . . . . . . . . . . . . . . . Ita M. Brennan, CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D., Executive Vice President, Chief Strategy Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael O. McCarthy III, Chief Legal and Administrative Officer . . . . . . Ronald D. Martin, Senior Vice President, Worldwide Sales . . . . . . . . . . 125% 50% 65% 65% 100%(1) 125% 65% 80% 65% 100%(1) (1) Mr. Martin’s total target cash incentive compensation was targeted at 100% of his base salary and split between the Bonus Plan (50% for fiscal 2010 and 75% for fiscal 2011) and the Sales Incentive Compensation Plan (50% for fiscal 2010 and 50% for fiscal 2011). The 2011 Bonus Plan provided for a 200% cap on the annual targeted bonus payout. In addition, the Compensation Committee retained discretion to increase or decrease by 25% the bonus that otherwise would be payable to an individual under the 2011 Bonus Plan based on actual performance and other factors determined by the Compensation Committee. The 2011 Bonus Plan provided for a potential mid-year payout, however, a mid-year payout was not paid due to the actual and projected performance against the financial goals established pursuant to the 2011 Bonus Plan. Upon review of the full fiscal 2011 actual financial performance as compared to the targets, the Compensation Committee did not approve a 2011 Bonus Plan payout for our named executive officers because Infinera did not achieve the minimum threshold amounts with respect to the established financial goals. 2011 Sales Incentive Compensation Plan In fiscal 2011, employees in our sales organization, including Mr. Martin, were eligible to receive sales incentive compensation under our 2011 Sales Incentive Compensation Plan, in which payment of 39 P R O X Y commissions was conditioned upon the achievement of certain sales-oriented performance measures, such as customer orders or bookings. The Compensation Committee believes that this type of commission-based incentive compensation arrangement is typical within the sales organization of our peer group companies. However, as discussed above, the Compensation Committee determined that Mr. Martin’s target performance-based cash compensation should be split between the 2011 Bonus Plan (75%) and 2011 Sales Incentive Compensation Plan (25%) to provide Mr. Martin with an opportunity to balance his focus on sales with the strategic goals of Infinera, which is consistent with our overall compensation philosophy for our named executive officers. Pursuant to the 2011 Sales Incentive Compensation Plan, Mr. Martin’s target commission was 25% of his base salary based on 100% achievement of his sales goal for fiscal 2011. Mr. Martin’s sales goal was based on a target number of the aggregate dollar value of invoiced shipments during fiscal 2011. The total target value of invoiced shipments for Mr. Martin was initially set at $525 million, but was reset to $450 million in mid-2011 due to the overall lowered sales forecast and corresponding adjustment to the 2011 Sales Incentive Compensation Plan targets for the entire sales team. At the time that Mr. Martin’s sales goal was set, the Compensation Committee believed the sales goal to be challenging but attainable if Infinera’s sales performance for fiscal 2011 was strong. Y X O R P Commissions are earned on a straight-line basis up to 100% achievement of target and are then subject to certain accelerators for performance above target. Due to the performance of our sales organization under the leadership of Mr. Martin during fiscal 2011, Mr. Martin achieved 86% of his target sales goals and received a payout of 21% of his base salary. For fiscal 2011, Mr. Martin earned commissions in the amount of $75,010 pursuant to the 2011 Sales Incentive Compensation Plan. 2011 Actual Cash Compensation Paid The following table sets forth the total actual cash compensation earned in fiscal 2011 by each of our named executive officers. Name and Principal Position 2011 Base Salary 2011 Bonus Plan 2011 Sales Compensation Plan 2011 Total Actual Cash Compensation Thomas J. Fallon, President and CEO . . . . . . . . . . . $300,000 — Ita M. Brennan, CFO . . . . . . . . . . . . . . . . . . . . . . . . . $300,000 — David F. Welch, Ph.D., Executive Vice President, Chief Strategy Officer . . . . . . . . . . . . . . . . . . . . . . . $300,000 — Michael O. McCarthy III, Chief Legal and Administrative Officer . . . . . . . . . . . . . . . . . . . . . . . $300,000 — Ronald D. Martin, Senior Vice President, — — — — $300,000 $300,000 $300,000 $300,000 Worldwide Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000 — $75,010 $425,010 2011 Long-Term Equity-Based Incentive Compensation Infinera currently maintains the 2007 Equity Incentive Plan (the “2007 Plan”), under which equity awards are granted to eligible employees, including our named executive officers. The Compensation Committee periodically reviews our equity award granting practices and may make adjustments and policy changes as it deems appropriate. In addition, the Compensation Committee has moved to reduce our annual aggregate equity utilization. This has been accomplished by limiting the employees eligible for equity awards, by utilizing a mix of stock options and RSUs, and by reducing the size of the annual grants made to employees, including the named executive officers. The Compensation Committee has also determined it is appropriate to grant performance-based equity awards. The Compensation Committee believes that such performance-based equity awards foster a more direct pay-for-performance culture whereby longer-term incentives are created to more closely align the interests of our executives with those of our stockholders. 40 For fiscal 2011, the Compensation Committee granted a mix of stock options, RSUs and performance-based stock options to each of our named executive officers. In determining the appropriate mix of such equity awards, the Compensation Committee considered how each equity vehicle supports Infinera’s long-term compensation strategy as follows: Type of Award Stock Options Description Why It Is Used • Stock options provide the • Directly aligns executive and P R O X Y stockholder interests. • Provides the opportunity to purchase and maintain an equity interest in Infinera and to share in the appreciation of the value of the stock. • Represents performance- based and at-risk compensation because the executive does not receive any benefit unless the stock price rises after the date of grant. • Provides a direct incentive for future performance. • Supports retention and succession planning. • Provides a direct incentive for future performance. • Useful in recruiting new executives to Infinera. • Supports pay-for- performance philosophy and retention efforts. • Links compensation to Infinera performance for key operational and strategic metrics to support growth and profitability. opportunity to purchase shares at a fixed price (exercise price), allowing the recipient to benefit from increases in stock price from the date of grant. • Stock options typically have a three- or four-year vesting period to encourage a long- term perspective and to encourage key employees to remain at Infinera. • All stock options granted to executive officers to date have an exercise price equal to the fair market value of Infinera’s common stock on the date of the grant. • RSUs provide the opportunity to receive a set number of shares subject to the participant’s continued employment for a specified period. • RSUs typically have a three- or four-year vesting period to encourage a long-term perspective and to encourage key employees to remain at Infinera. • Performance-based stock options provide the right to purchase or receive shares upon vesting of pre- determined performance objectives. • If threshold is not achieved for the specific pre-determined performance metric, the entire portion of the award tied to such performance metric is forfeited. 41 Restricted Stock Units Performance-Based Stock Options Y X O R P Our named executive officers are intended to benefit from these awards based on our sustained performance over time and the ability of our named executive officers to impact the results that drive stockholder value. In addition, the Compensation Committee evaluates the retention value of prior equity awards to an individual based on the potential value of the unvested portion of such equity awards under various scenarios. 2011 Annual Equity Awards In determining the size of the equity awards to grant for fiscal 2011, the Compensation Committee reviewed the equity awards granted to the named executive officers in the prior year and scrutinized the dilutive effect such awards have on stockholders, as well as the awards to be granted in fiscal 2011. The Compensation Committee also considered the importance of maintaining internal equity in the size of the equity awards to the named executive officers. For all of our named executive officers, the Compensation Committee granted equity awards in the form of stock options and RSUs with time- based vesting provisions and at levels between the 50th and 75th percentile. In addition and to achieve a total equity compensation package closer to the 75th percentile of our peer group, the Compensation Committee granted performance-based stock options to each of our named executive officers. These performance-based stock options vest based on the achievement of goals related to Infinera’s next- generation product. Assuming the achievement of the performance criteria, the overall equity award compensation for fiscal 2011 for each of our named executive officers approximates the 75th percentile of the market group. For fiscal 2011, the total equity award compensation as compared to the market group was set at greater than the 75th percentile for Mr. Fallon, the 68th percentile for Ms. Brennan, greater than the 75th percentile for Dr. Welch, greater than the 75th percentile for Mr. McCarthy and the 65th percentile for Mr. Martin. The size of the equity awards for Mr. Martin was slightly lower than the targeted level to reflect his larger total cash compensation. The following table sets forth the equity awards granted to each of our named executive officers for fiscal 2011: Name and Principal Position Stock Options RSUs Performance- Based Stock Options (Target Shares) Thomas J. Fallon, President and CEO . . . . . . . . . . . . . . . . . . . . Ita M. Brennan, CFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D., Executive Vice President, Chief 243,000 65,000 142,000 33,000 243,000 65,000 Strategy Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000 41,000 81,000 Michael O. McCarthy III, Chief Legal and Administrative Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ronald D. Martin, Senior Vice President, Worldwide Sales . . . 65,000 49,000 33,000 25,000 65,000 49,000 The stock options vest monthly over a period of 36 months commencing on February 10, 2011, subject to each named executive officer’s continued service to Infinera. The RSUs vest as to one-third annually on each of February 5, 2012, 2013 and 2014, subject to each named executive officer’s continued service to Infinera. The performance-based stock options will vest based on specific performance metrics related to Infinera’s next generation product, and subject to each named executive officer’s continued service to Infinera. If the performance metrics are not met within the time limits specified in the award agreements, the performance-based stock option awards will be canceled. 42 Perquisites We provide employee benefits to all eligible employees, including our named executive officers, which Infinera and the Compensation Committee believe are reasonable and consistent with its overall compensation objective to better enable us to attract and retain employees. These benefits include medical, dental, vision, and disability benefits and other plans and programs, including our 2007 ESPP, made available to other eligible employees in the applicable country of residence. At this time, we do not provide any special plans or programs for our named executive officers. Accordingly, employee benefits and perquisites are reviewed from time to time only to ensure that benefit levels remain competitive, but are not included in the Compensation Committee’s annual determination of our total compensation for each of our named executive officers. We sponsor a 401(k) tax-qualified retirement savings plan pursuant to which all U.S.-based employees are entitled to participate. Employees may make contributions to the 401(k) plan on a before-tax basis, or on a post-tax basis for those employees participating in the Roth 401(k) plan- component, to the maximum amount prescribed by the Internal Revenue Service. We do not provide any matching contributions to the 401(k) plan. Other than the 401(k) plan, we do not maintain any other deferred savings plans in which the named executive officers participate. We do not maintain or provide any defined benefit plans for our employees. “Double Trigger” Change of Control and Separation Benefits Change of Control Benefits The Compensation Committee considers maintaining a stable and effective management team to be essential to protecting and enhancing the best interests of Infinera and its stockholders. To that end, the Compensation Committee recognized that the possibility of a “Change of Control” of Infinera (as more fully described below) may exist from time to time, and that this possibility, and the uncertainty and questions it may raise among our management team, may result in the departure or distraction of members of our management team to the detriment of Infinera and our stockholders. Accordingly, the Compensation Committee decided to take appropriate steps to encourage the continued attention, dedication and continuity of members of our management team, including the named executive officers, to their assigned duties without the distraction that may arise from the possibility or occurrence of a Change of Control. As a result, Infinera has entered into Change of Control Agreements (the “COC Agreements”) with certain vice president level officers and above, including our named executive officers. Except for the conversion of certain PSUs granted to our named executive officers in November 2009, which will convert to time-based vesting upon a Change of Control, the named executive officers will receive no benefit under the COC Agreements unless their employment is terminated without “Cause,” or by the named executive officer as a result of a “Constructive Termination” (as more fully described below), within 12 months following the effective date of a Change of Control transaction. The Compensation Committee believes that this “double trigger” structure strikes the correct balance between the corporate objectives described above and the potential compensation payable to each named executive officer. We also believe if we engage in discussions or negotiations relating to a Change of Control transaction, which our Board believes is in the best interests of our stockholders, these COC Agreements will help to ensure that our named executive officers remain focused on the consummation of a potential transaction, without significant distraction or concern regarding their personal circumstances such as continued employment. The following terms apply with respect to our named executive officers if we undergo a Change of Control transaction and such individual is terminated without Cause or as a result of a Constructive Termination within 12 months following the Change of Control transaction, subject to such individual entering into and not revoking a release of claims in our favor: • 100% of all outstanding equity awards will vest; 43 P R O X Y • The CEO will be paid a lump sum severance payment equal to two (2) times annual base salary and the other named executive officers will be paid a lump sum severance payment equal to one and one-half (1.5) times annual base salary; and • The CEO will be reimbursed for premiums under COBRA for a period of twenty-four (24) months and the other named executive officers will be reimbursed for premiums under COBRA for a period of eighteen (18) months. Separation Benefits In addition to the Change of Control benefits discussed above, the Compensation Committee determined, in order to remain competitive in the market, it was necessary to take appropriate steps to encourage the continued attention, dedication and continuity of members of our management team, including the named executive officers, to their assigned duties without the distraction that may arise from the possibility of termination, other than for Cause or following a Change of Control. Accordingly, the Compensation Committee established the following terms for severance payments, payable if the individual is terminated without Cause or as a result of a Constructive Termination, subject to such individual entering into and not revoking a release of claims in our favor: Y X O R P • The CEO will be paid a lump sum severance payment equal to one and one-half (1.5) times annual base salary and the other named executive officers will be paid a lump sum severance payment equal to one (1) times annual base salary; and • The CEO will be reimbursed for premiums under COBRA for a period of eighteen (18) months and the other named executive officers will be reimbursed for premiums under COBRA for a period of twelve (12) months. If a named executive officer’s employment with Infinera is less than one year, the amount of severance payable to such individual shall be equal to the lesser of (x) the salary paid to such individual during his or her period of employment, or (y) the severance amount set forth above. The amount of compensation and benefits payable to each named executive officer in connection with a termination without Cause or following a Change of Control has been estimated in the “Estimated Payments and Benefits upon Termination, Change of Control or Death/Disability” table on page 56. Acceleration of Equity Awards Upon Death or Disability During the review of our equity award granting practices in December 2009, the Compensation Committee amended stock option and RSU awards granted under our equity incentive plans to permit accelerated vesting in the event of an employee’s death or terminal illness (with exceptions in certain circumstances). We do not have any other policy with respect to severance benefits in the event of an employee’s death or disability. The Compensation Committee believed that in the event of an employee’s death or terminal illness, it would be appropriate to provide the accelerated vesting of his or her RSUs and stock options. Stock Option Granting Policy In 2007, the Compensation Committee approved a policy for granting equity awards. Under this policy, the Non-Executive Equity Award Subcommittee of the Board is delegated the authority to grant new hire, promotional and annual retention equity awards to non-executive employees pursuant to certain pre-approved guidelines. The Non-Executive Equity Award Subcommittee consists of our CEO, Chief Legal and Administrative Officer and Vice President of Human Resources. The Non-Executive Equity Award Subcommittee generally meets on the first Monday of each month to approve new hire 44 and promotional grants that are within pre-approved guidelines established by the Compensation Committee. Annual performance equity awards for such non-executive employees are also scheduled to occur as part of the monthly meetings of the Non-Executive Equity Award Subcommittee. The delegation to the Non-Executive Equity Award Subcommittee does not include the authority to grant equity awards to new employees who are or are reasonably expected to become Section 16 Officers or to current Section 16 Officers. All equity award grants to Section 16 Officers, as well as grants that are outside of the pre-approved guidelines, must be made by the Compensation Committee. Annual performance equity awards for Section 16 Officers and directors typically are scheduled to occur during the first open trading window of each new calendar year, and are determined as discussed above in this Compensation Discussion and Analysis. Revision of Financial Metrics The Compensation Committee has not adopted a policy with respect to whether we will make retroactive adjustments to any cash- or equity-based incentive compensation paid to named executive officers (or others) where the payment was predicated upon the achievement of financial results that were subsequently the subject of a revision. Tax and Accounting Treatment of Compensation Internal Revenue Code Section 162(m) limits the amount that we may deduct for compensation paid to our CEO and to certain other of our most highly compensated executive officers to $1,000,000 per person, unless certain exemption requirements are met. Exemptions to this deductibility limit are available for various forms of “performance-based” compensation. In addition to salary and bonus compensation, upon the exercise of stock options that are not treated as incentive stock options, the excess of the current market price over the option price, or option spread, is treated as compensation and accordingly, in any year, such exercise may cause an executive officer’s total compensation to exceed $1,000,000. Under certain regulations, option spread compensation from stock options that meet certain requirements will not be subject to the $1,000,000 cap on deductibility, and in the past we have granted stock options that we believe met those requirements. While the Compensation Committee cannot predict how the deductibility limit may impact our compensation program in future years, the Compensation Committee intends to maintain an approach to executive compensation that strongly links pay to performance. While the Compensation Committee has not adopted a formal policy regarding tax deductibility of compensation paid to our CEO and certain other of our most highly compensated executive officers, the Compensation Committee intends to consider tax deductibility under Internal Revenue Code Section 162(m) as a factor in its compensation decisions. We account for equity compensation paid to our employees under the rules of ASC 718, which requires us to estimate and record an expense for each award of equity compensation over the service period of the award. Accounting rules also require us to record cash compensation as an expense at the time the obligation is incurred. Summary The Compensation Committee believes that our compensation philosophy and programs are designed to foster a performance-oriented culture that aligns our executive officers’ interests with those of our stockholders. The Compensation Committee also believes that the compensation of our named executive officers is both appropriate and responsive to the goal of improving stockholder value. 45 P R O X Y Compensation Committee Report The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and discussions with management, the Compensation Committee has recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. Compensation Committee Kenneth A. Goldman, Chairman Dan Maydan, Ph.D. Paul J. Milbury Carl Redfield Y X O R P 46 EXECUTIVE COMPENSATION TABLES The following tabular information and accompanying narratives and footnotes provide all of the compensation awarded to, earned by, or paid to the individuals who served as our principal executive officer and principal financial officer during fiscal 2011 and our three other highest paid executive officers during fiscal 2011. As previously noted, we refer to these executive officers as our “named executive officers.” The summary compensation table below represents “total compensation” in accordance with SEC requirements. This amount is not the actual compensation received by our named executive officers during the years reported. Total compensation includes the dollar amounts set forth in the “Stock Awards” and “Option Awards” columns, which reflect the aggregate grant date fair value of such awards computed in accordance with ASC 718. The aggregate grant date fair value likely will vary from the amounts actually realized by any named executive officer based on a number of factors, including the number of shares that ultimately vest, the timing of any exercise or sale of the shares, and the price of our common stock. The actual value realized by our named executive officers from the exercise of stock option awards and vesting of stock awards during fiscal 2011 is presented in the “Option Exercises and Stock Vested for Fiscal 2011” table. Details about the equity awards granted to our named executive officers during fiscal 2011 can be found in the “Grants of Plan Based Awards in Fiscal 2011” table. P R O X Y Summary Compensation Table for Fiscal 2011 Name and Principal Position Year Salary ($) Stock Awards ($)(1) Option Awards ($)(1)(2) Non-Equity Incentive Plan Compensation ($)(3) — CFO President and CEO Thomas J. Fallon . . . . . . . . . . . . . 2011 300,000 1,218,360 2,204,842 2010 300,000 827,440 2009 290,769 4,572,250 2,717,943 589,773 Ita M. Brennan . . . . . . . . . . . . . . . 2011 300,000 272,895 2010 260,192 734,947 David F. Welch, Ph.D. . . . . . . . . . 2011 300,000 2010 300,000 827,440 2009 290,769 2,916,750 1,373,823 589,773 498,700 849,525 444,598 Michael O. McCarthy III . . . . . . . . 2011 300,000 2010 270,000 2009 260,000 2,029,250 214,500 Executive Vice President, Chief Strategy Officer Chief Legal and Administrative 283,140 420,196 351,780 Ronald D. Martin . . . . . . . . . . . . . 2011 350,000 2010 350,000 — — 283,140 Officer — — Senior Vice President, Worldwide Sales — 750,000 143,416 — 270,000 — 390,000 143,416 — 351,000 107,562 75,010 591,414 Total ($) 3,723,202 1,877,440 7,724,378 1,172,913 1,223,283 1,386,727 1,517,440 4,724,758 1,172,913 1,119,700 3,246,337 1,084,108 941,414 (1) The amounts in this column represent the aggregate grant date fair value of the listed equity awards, computed in accordance with ASC 718. See Note 2 of the notes to our consolidated financial statements contained in our 2011 Annual Report on Form 10-K filed on March 6, 2012 for a discussion of all assumptions made by us in determining the ASC 718 values of equity awards. Includes the grant date fair value of the equity awards granted in connection with Infinera’s fiscal 2010 Option Exchange Program. The new stock options were exchanged on a fair-value basis with the value of the new stock option equal to the value of the cancelled stock options. (2) (3) These amounts represent annual incentive cash awards under the 2011 Bonus Plan or 2011 Sales Incentive Compensation Plan. See the “Grants of Plan Based Awards in Fiscal 2011” table for more information on each annual incentive award granted in fiscal 2011. 47 r u o o t d e t n a r g s d r a w a y t i u q e d n a n o i t a s n e p m o c e v i t n e c n i h s a c l a u n n a 1 1 0 2 l a c s i f i g n d r a g e r Y X O R P 1 1 0 2 l a c s F n i i s d r a w A d e s a B n a P l f o s t n a r G n o i t a m r o f n i h t r o f l s t e s e b a t g n w o i l l o f e h T e t a D t n a r G e s i c r e x E e u l a V r i a F k c o t S f o n o i t p O d n a s d r a w A ) 3 ( ) $ ( e s a B r o f o e c i r P n o i t p O s d r a w A ) h S / $ ( — 0 7 0 , 1 9 0 , 1 2 7 7 , 3 1 1 , 1 0 6 3 , 8 1 2 , 1 2 0 2 , 3 2 4 , 3 — 0 5 8 , 1 9 2 3 2 9 , 7 9 2 0 4 1 , 3 8 2 3 1 9 , 2 7 8 0 9 6 , 3 6 3 7 5 2 , 1 7 3 0 8 7 , 1 5 3 — 7 2 7 , 6 8 0 , 1 — 0 5 8 , 1 9 2 3 2 9 , 7 9 2 0 4 1 , 3 8 2 3 1 9 , 2 7 8 0 1 0 , 0 2 2 8 8 5 , 4 2 2 0 0 5 , 4 1 2 — 8 9 0 , 9 5 6 8 5 . 8 8 5 . 8 — — 8 5 . 8 8 5 . 8 — — 8 5 . 8 8 5 . 8 — — 8 5 . 8 8 5 . 8 — — 8 5 . 8 8 5 . 8 — — n o i t p O r e h t O l l A r e b m u N : s d r a w A k c o t S r e h t O l l A r e b m u N : s d r a w A s e i t i r u c e S f o g n i y l r e d n U s n o i t p O ) # ( 0 0 0 , 3 4 2 — — — — 0 0 0 , 5 6 0 0 0 , 3 4 2 — — 0 0 0 , 5 6 0 0 0 , 1 8 — — — — — — 0 0 0 , 1 8 0 0 0 , 5 6 0 0 0 , 5 6 0 0 0 , 9 4 — — — 0 0 0 , 9 4 s e i t i r u c e S f o g n i y l r e d n U s n o i t p O — — ) # ( — 0 0 0 , 2 4 1 0 0 0 , 2 4 1 — — — 0 0 0 , 3 3 0 0 0 , 3 3 — — — 0 0 0 , 1 4 0 0 0 , 1 4 — — — 0 0 0 , 3 3 0 0 0 , 3 3 — — 0 0 0 , 5 2 — 0 0 0 , 5 2 s t u o y a P e r u t u F d e t a m i t s E s t u o y a P e r u t u F d e t a m i t s E y t i u q E r e d n U ) 2 ( s d r a w A n a P e v l i t n e c n I y t i u q E - n o N r e d n U ) 1 ( s d r a w A n a P e v l i t n e c n I . 1 1 0 2 l a c s i f g n i r u d s r e c i f f o e v i t u c e x e d e m a n m u m x a M i t e g r a T ) # ( ) # ( — — — — — — — — — — — — — — — — — — — — — — — 0 0 0 , 3 4 2 — 0 0 0 , 5 6 0 0 0 , 3 4 2 — — 0 0 0 , 5 6 — 0 0 0 , 1 8 — — 0 0 0 , 1 8 — 0 0 0 , 5 6 — — 0 0 0 , 5 6 — 0 0 0 , 9 4 — — 0 0 0 , 9 4 l d o h s e r h T m u m x a M i t e g r a T l d o h s e r h T ) # ( ) $ ( ) $ ( ) $ ( — — — — — — — — — — — — — — — — — — — — — — — — 0 0 0 , 0 5 7 0 0 0 , 5 7 3 0 0 0 , 0 5 7 0 0 0 , 5 7 3 — — — — — — 0 0 0 , 0 9 3 0 0 0 , 5 9 1 0 0 0 , 0 9 3 0 0 0 , 5 9 1 — — — — — — 0 0 0 , 0 8 4 0 0 0 , 0 4 2 0 0 0 , 0 8 4 0 0 0 , 0 4 2 — — — — — — 0 0 0 , 0 9 3 0 0 0 , 5 9 1 0 0 0 , 0 9 3 0 0 0 , 5 9 1 — — — — — — 0 0 0 , 0 0 7 0 0 0 , 0 5 3 0 0 0 , 0 0 7 0 0 0 , 0 5 3 — — — — — — — — — — — — — — — — — — — — t n a r G e t a D / A N 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 / A N 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 / A N 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 d r a w A f o e p y T n o i t n o i t p O k c o S t p O k c o S t s u n o B U S R . . . . . . . . . . . n o l l a F . J s a m o h T e m a N n o n o n o n o i t i t p O k c o S t p O k c o S t l a t o T . . . . . . . . . . . . . n a n n e r B . M a t I s u n o B U S R l t a o T i t p O k c o S t s u n o B U S R i t p O k c o S t l t a o T . . . . . . . . . D h P , l h c e W . i F d v a D 48 / A N 1 1 0 2 / 0 1 / 1 1 0 2 / 0 1 / 2 2 1 1 0 2 / 0 1 / 2 n o i t n o i t p O k c o S t p O k c o S t s u n o B U S R . . . . . . I I I y h t r a C c M . O l e a h c M i 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 n o n o i t p O k c o S t i t p O k c o S t / s u n o B U S R / A N i i s n o s s m m o C l t a o T l a t o T . . . . . . . . . . ) 4 ( n i t r a M . l D d a n o R 1 1 0 2 l a c s i f r o f s r e c i f f o e v i t u c e x e d e m a n r u o o t d a p e r e w s e s u n o b o N i l . n a P s u n o B 1 1 0 2 e h t r e d n u 1 1 0 2 l a c s i f r o f l s t u o y a p e b s s o p e h t i s t n e s e r p e R e h t n i d e i f i c e p s s t i m i l e m i t e h t n h i t i w t e m t o n e r a s c i r t e m e c n a m r o f r e p e h t f I i . a r e n i f n I o t e c v r e s d e u n i t n o c s ’ r e c i f f o e v i t u c e x e d e m a n h c a e o t j t c e b u s d n a , t c u d o r p n o i t a r e n e g t x e n s a r e n ’ i f n I o t d e t a e r l i s c i r t e m e c n a m r o f r e p c i f i c e p s n o d e s a b t s e v h c h w s n o i t p o k c o t s d e s a b - e c n a m r o f r e p s t n e s e r p e R l n a P n o i t a s n e p m o C e v i t n e c n I l s e a S 1 1 0 2 d n a ) l % 5 7 ( n a P s u n o B 1 1 0 2 e h t n e e w t e b t i l p s s a w n o i t a s n e p m o c e v i t n e c n i h s a c t e g r a t l a t o t ’ s n i t r a M . r M . 8 1 7 C S A h t i w e c n a d r o c c a n i d e t u p m o c d r a w a y t i u q e h c a e f o e u a v l r i a f e t a d t n a r g e t a g e r g g a e h t s t n e s e r p e R l . d e e c n a c e b l l i w s n o i t p o k c o t s d e s a b - e c n a m r o f r e p e h t , s t n e m e e r g a d r a w a l . n a P s u n o B 1 1 0 2 e h t r e d n u . ) % 5 2 ( ) 1 ( ) 2 ( ) 3 ( ) 4 ( Description of Awards Granted in 2011 The following narrative discusses the material information necessary to understand the information in the table above. For each equity award made to our named executive officers during fiscal 2011, the date the award was approved by our Compensation Committee was the same as the grant date. All stock option and RSU awards granted during fiscal 2011 to our named executive officers were granted pursuant to our 2007 Plan. Stock Option Awards. On February 10, 2011, Messrs. Fallon, Martin and McCarthy, Dr. Welch and Ms. Brennan were granted stock options to purchase the respective shares of common stock as indicated above in the “Grants of Plan Based Awards in Fiscal 2011” table. The stock option awards listed in the above table vest monthly over three years beginning on February 10, 2011, subject to each named executive officer’s continued service to Infinera. Performance-Based Stock Option Awards. On February 10, 2011, Messrs. Fallon, Martin and McCarthy, Dr. Welch and Ms. Brennan were granted performance-based stock options to purchase the respective shares of common stock as indicated above in the “Grants of Plan Based Awards in Fiscal 2011” table. The stock option awards listed in the above table will only vest based on specific performance metrics related to Infinera’s next generation product, and subject to each named executive officer’s continued service to Infinera. If the performance metrics are not met within the time limits specified in the award agreements, the performance-based stock option awards will be canceled. Restricted Stock Units. On February 10, 2011, Messrs. Fallon, Martin and McCarthy, Dr. Welch and Ms. Brennan were granted RSUs covering the respective shares of common stock as indicated above in the “Grants of Plan Based Awards in Fiscal 2011” table. The RSUs listed in the above table vest annually over three years beginning on February 5, 2011. Non-Equity Incentive Plan Awards. With the exception of Mr. Martin, these amounts reflect the target and maximum annual incentive cash bonus awards payable under the 2011 Bonus Plan. Mr. Martin’s total target cash incentive compensation was split between the 2011 Bonus Plan (75%) and 2011 Sales Incentive Compensation Plan (25%). Amounts actually earned under the 2011 Bonus Plan, or in the case of Mr. Martin, under the 2011 Bonus Plan and 2011 Sales Incentive Compensation Plan, are reported in the “Non-Equity Incentive Plan Compensation” column of the “Summary Compensation Table for Fiscal 2011” above. The target amounts paid under the 2011 Bonus Plan and the 2011 Sales Incentive Compensation Plan vary depending on how actual performance compares to the established performance metrics set forth and more fully described on pages 38-40 of the Compensation Discussion and Analysis section of this Proxy Statement. Calculation of Grant Date Fair Value. The amounts reported in the “Grant Date Fair Value of Stock and Option Awards” column of the “Grants of Plan Based Awards in Fiscal 2011” table above reflects, for each equity award granted during fiscal 2011, the grant date fair value of each equity award computed in accordance with ASC 718. P R O X Y 49 Y X O R P e v i t u c e x e d e m a n r u o f o h c a e l y b d e h s U S P d n a s U S R , s n o i t p o k c o t s g n d n a i t s t i u o g n d r a g e r n o i t a m r o f n i h t r o f 1 1 0 2 d n E - r a e Y l i a c s F t a s d r a w A y t i u q E g n d n a t s t u O i l s t e s e b a t g n w o i l l o f e h T l . e b a t e h t w o e b l s e t o n t o o f e h t n i h t r o f t e s e r a d r a w a h c a e r o f s n o i t i d n o c g n i t s e v e h T . 1 1 0 2 , 1 3 r e b m e c e D f o s a s r e c i f f o 3 6 9 , 6 0 1 , 1 8 6 2 , 6 7 1 9 7 2 , 0 7 1 0 9 6 , 0 6 1 9 6 9 , 0 3 3 l a t o T t e k r a M f o e u l a V r o s e r a h S f o s t i n U t a h T k c o t S t o N e v a H d e t s e V ) $ ( 0 0 0 , 8 2 6 0 0 0 , 4 1 3 0 0 0 , 2 4 9 0 6 7 , 1 9 8 s d r a w A k c o t S f o r e b m u N r o s e r a h S k c o t S f o s t i n U t o N e v a H t a h T ) 2 1 ( 0 0 0 , 0 0 1 ) 3 1 ( 0 0 0 , 0 5 ) 4 1 ( 0 0 0 , 0 5 1 ) 5 1 ( 0 0 0 , 2 4 1 d e t s e V ) # ( — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 0 0 2 / 0 1 / 2 9 0 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 9 0 0 2 / 3 2 / 1 1 3 5 0 , 1 1 6 5 9 , 6 1 0 0 0 , 4 1 3 0 0 0 , 7 5 1 0 0 0 , 7 5 1 1 5 4 , 2 2 8 8 3 , 8 1 0 5 2 , 6 2 5 2 6 , 6 7 1 0 4 2 , 7 0 2 ) 6 1 ( 0 6 7 , 1 ) 7 1 ( 0 0 7 , 2 ) 2 1 ( 0 0 0 , 0 5 ) 3 1 ( 0 0 0 , 5 2 ) 4 1 ( 0 0 0 , 5 2 ) 8 1 ( 5 7 5 , 3 ) 5 1 ( 8 2 9 , 2 ) 5 1 ( 0 8 1 , 4 ) 9 1 ( 5 2 1 , 8 2 ) 5 1 ( 0 0 0 , 3 3 0 6 7 , 5 7 7 , 2 0 0 0 , 2 4 4 7 0 0 2 / 7 / 6 8 0 0 2 / 8 2 / 2 9 0 0 2 / 2 / 3 9 0 0 2 / 2 / 3 9 0 0 2 / 3 2 / 1 1 0 1 0 2 / 2 2 / 2 0 1 0 2 / 2 2 / 2 0 1 0 2 / 2 2 / 2 0 1 0 2 / 6 2 / 6 1 1 0 2 / 0 1 / 2 6 1 0 2 / 8 / 8 6 1 0 2 / 8 / 8 9 1 0 2 / 0 1 / 2 9 1 0 2 / 0 1 / 8 6 1 0 2 / 3 2 / 1 1 9 1 0 2 / 3 2 / 1 1 9 1 0 2 / 3 2 / 1 1 7 1 0 2 / 6 / 6 7 1 0 2 / 6 / 6 8 1 0 2 / 8 2 / 2 8 1 0 2 / 8 2 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 6 1 0 2 / 7 / 9 6 1 0 2 / 7 / 9 9 1 0 2 / 2 / 3 9 1 0 2 / 0 1 / 8 6 1 0 2 / 3 2 / 1 1 0 2 0 2 / 6 2 / 6 0 2 0 2 / 6 2 / 6 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 0 0 . 2 0 0 . 2 1 1 . 7 5 4 . 7 9 1 . 8 9 1 . 8 9 1 . 8 1 6 . 7 1 6 . 7 1 6 . 7 1 6 . 7 8 5 . 8 8 5 . 8 8 5 . 8 8 5 . 8 0 0 . 2 0 0 . 2 1 7 . 6 5 4 . 7 9 1 . 8 0 9 . 6 0 9 . 6 8 5 . 8 8 5 . 8 8 5 . 8 ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) # ( ) 3 ( 5 9 5 , 5 ) 2 ( 7 1 9 , 2 2 ) 3 ( 5 5 1 , 8 3 1 ) 4 ( 1 6 3 , 1 1 ) 4 ( 1 1 4 , 9 3 ) 5 ( 6 2 5 , 1 ) 5 ( 5 4 2 , 4 4 ) 9 ( 4 2 6 , 9 2 ) 9 ( 6 7 8 , 5 4 1 ) 1 1 ( 0 5 7 , 0 6 ) 1 1 ( 0 5 2 , 2 8 1 0 1 7 , 1 8 6 ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) 2 ( 9 5 4 , 1 1 ) 6 ( 9 5 3 , 8 3 ) 7 ( 6 1 5 , 8 ) 9 ( 5 4 9 , 6 4 ) 1 1 ( 0 5 2 , 6 1 ) 1 1 ( 0 5 7 , 8 4 e t a D t n a r G e t a D n o i t p O n o i t a r i p x E n o i t p O e s i c r e x E e c i r P ) $ ( f o r e b m u N s e i t i r u c e S g n i y l r e d n U f o r e b m u N s e i t i r u c e S g n i y l r e d n U d e s i c r e x e n U d e s i c r e x e n U s n o i t p O s n o i t p O e l b a s i c r e x e n U e l b a s i c r e x E s d r a w A n o i t p O k c o t S ) # ( 0 0 0 , 0 5 0 0 0 , 0 5 0 0 0 , 0 0 1 0 0 0 , 0 5 1 3 8 0 , 2 5 — 0 5 2 , 6 5 1 3 5 8 , 7 1 1 3 9 , 1 6 1 9 2 , 1 8 3 4 , 7 3 5 5 6 , 1 1 5 4 8 , 5 5 — — f o r e b m u N s e i t i r u c e S g n i y l r e d n U s n o i t p O l a t o T t n a r G ) # ( 0 0 0 , 0 5 0 0 0 , 0 5 0 0 0 , 0 0 1 0 0 0 , 0 5 1 5 9 5 , 5 0 0 0 , 5 7 4 1 2 , 9 2 5 0 4 , 4 9 2 2 4 3 , 1 0 1 7 1 8 , 2 3 8 6 , 1 8 9 7 2 , 1 4 0 5 7 , 0 6 1 2 7 , 1 0 2 0 5 2 , 2 8 1 e t a D t n a r G 6 0 0 2 / 8 8 / 6 0 0 2 / 8 8 / 9 0 0 2 / 0 1 2 / 9 0 0 2 / 0 1 8 / 9 0 0 2 / 3 2 / 1 1 9 0 0 2 / 3 2 / 1 1 9 0 0 2 / 3 2 / 1 1 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / . . . . . . . . . . . . . . . . . n o l l a F . J s a m o h T e m a N 50 6 4 3 , 4 4 7 6 5 0 , 6 2 4 , 1 l a t o T 5 2 1 , 3 4 4 3 , 2 0 0 0 , 0 5 0 0 0 , 3 3 1 4 0 , 6 2 7 6 8 , 3 2 8 5 2 , 4 5 5 0 , 8 1 — — 5 2 1 , 3 4 4 3 , 2 0 0 0 , 0 5 0 0 0 , 3 3 0 0 5 , 7 3 6 2 2 , 2 6 4 7 7 , 2 1 0 0 0 , 5 6 0 5 2 , 6 1 0 5 7 , 8 4 6 0 0 2 / 7 9 / 6 0 0 2 / 7 9 / 9 0 0 2 / 2 3 / 9 0 0 2 / 0 1 8 / 9 0 0 2 / 3 2 / 1 1 0 1 0 2 / 6 2 6 / 0 1 0 2 / 6 2 6 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / . . . . . . . . . . . . . . . . . . . n a n n e r B . M a t I 0 0 0 , 4 1 3 0 0 0 , 0 5 3 5 9 , 0 1 1 2 3 1 , 9 3 5 8 0 , 0 5 1 l a t o T P R O X Y t e k r a M f o e u l a V r o s e r a h S f o s t i n U t a h T k c o t S t o N e v a H d e t s e V ) $ ( 0 0 0 , 8 2 6 0 0 0 , 4 1 3 0 0 0 , 4 1 3 0 8 4 , 7 5 2 s d r a w A k c o t S f o r e b m u N r o s e r a h S k c o t S f o s t i n U t o N e v a H t a h T ) 3 1 ( 0 0 0 , 0 5 ) 4 1 ( 0 0 0 , 0 5 ) 5 1 ( 0 0 0 , 1 4 ) 2 1 ( 0 0 0 , 0 0 1 d e t s e V ) # ( — — — — — — — — — — — — — — — — — — — — — — — — — — — 9 0 0 2 / 0 1 / 2 9 0 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 9 0 0 2 / 3 2 / 1 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 0 0 0 , 1 7 4 0 0 5 , 5 3 2 0 0 5 , 5 3 2 0 4 2 , 7 0 2 ) 2 1 ( 0 0 0 , 5 7 ) 3 1 ( 0 0 5 , 7 3 ) 4 1 ( 0 0 5 , 7 3 ) 5 1 ( 0 0 0 , 3 3 0 8 4 , 3 1 5 , 1 0 0 0 , 1 4 2 9 0 0 2 / 0 1 / 2 9 0 0 2 / 0 1 / 2 1 1 0 2 / 0 1 / 2 9 0 0 2 / 3 2 / 1 1 — — — — — — — — — — — — — — — 0 0 5 , 8 7 0 0 5 , 8 7 0 0 0 , 7 5 1 ) 0 2 ( 0 0 5 , 2 1 ) 4 1 ( 0 0 5 , 2 1 ) 5 1 ( 0 0 0 , 5 2 0 4 2 , 9 4 1 , 1 0 0 0 , 3 8 1 9 0 0 2 / 3 / 8 1 1 0 2 / 0 1 / 2 9 0 0 2 / 3 2 / 1 1 6 1 0 2 / 8 / 8 6 1 0 2 / 8 / 8 9 1 0 2 / 0 1 / 2 9 1 0 2 / 0 1 / 8 6 1 0 2 / 3 2 / 1 1 7 1 0 2 / 6 / 6 7 1 0 2 / 6 / 6 8 1 0 2 / 8 2 / 2 8 1 0 2 / 8 2 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 3 1 0 2 / 5 1 / 5 5 1 0 2 / 8 2 / 1 1 6 1 0 2 / 8 / 8 6 1 0 2 / 8 / 8 9 1 0 2 / 0 1 / 2 9 1 0 2 / 0 1 / 8 6 1 0 2 / 3 2 / 1 1 7 1 0 2 / 6 / 6 7 1 0 2 / 6 / 6 8 1 0 2 / 8 2 / 2 8 1 0 2 / 8 2 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 9 1 0 2 / 3 / 8 9 1 0 2 / 3 / 8 6 1 0 2 / 3 2 / 1 1 6 1 0 2 / 3 2 / 1 1 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 1 2 0 2 / 0 1 / 2 0 0 . 2 0 0 . 2 1 1 . 7 5 4 . 7 9 1 . 8 1 6 . 7 1 6 . 7 1 6 . 7 1 6 . 7 8 5 . 8 8 5 . 8 8 5 . 8 8 5 . 8 4 8 . 1 2 3 . 1 0 0 . 2 0 0 . 2 1 1 . 7 5 4 . 7 9 1 . 8 1 6 . 7 1 6 . 7 1 6 . 7 1 6 . 7 8 5 . 8 8 5 . 8 8 5 . 8 8 5 . 8 7 9 . 6 7 9 . 6 9 1 . 8 9 1 . 8 8 5 . 8 8 5 . 8 8 5 . 8 8 5 . 8 e t a D t n a r G e t a D n o i t p O n o i t a r i p x E n o i t p O e s i c r e x E e c i r P ) $ ( f o r e b m u N s e i t i r u c e S g n i y l r e d n U f o r e b m u N s e i t i r u c e S g n i y l r e d n U d e s i c r e x e n U d e s i c r e x e n U s n o i t p O s n o i t p O e l b a s i c r e x e n U e l b a s i c r e x E s d r a w A n o i t p O k c o t S ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) # ( ) 2 ( 7 1 9 , 2 2 ) 4 ( 1 6 3 , 1 1 ) 4 ( 1 1 4 , 9 3 ) 5 ( 6 2 5 , 1 ) 5 ( 5 4 2 , 4 4 ) 9 ( 0 1 8 , 7 2 ) 0 1 ( 0 9 6 , 0 3 ) 1 1 ( 0 5 2 , 0 2 ) 1 1 ( 0 5 7 , 0 6 ) # ( 0 0 0 , 0 5 0 0 5 , 7 3 1 0 0 0 , 0 0 1 0 0 0 , 0 5 1 3 8 0 , 2 5 3 5 8 , 7 1 1 3 9 , 1 6 1 9 2 , 1 8 3 4 , 7 3 5 5 6 , 1 1 5 4 8 , 0 1 — — f o r e b m u N s e i t i r u c e S g n i y l r e d n U s n o i t p O l a t o T t n a r G ) # ( 0 0 0 , 0 5 0 0 5 , 7 3 1 0 0 0 , 0 0 1 0 0 0 , 0 5 1 0 0 0 , 5 7 4 1 2 , 9 2 2 4 3 , 1 0 1 7 1 8 , 2 3 8 6 , 1 8 5 6 4 , 9 3 5 3 5 , 1 4 0 5 2 , 0 2 0 5 7 , 0 6 e t a D t n a r G 6 0 0 2 / 8 8 / 6 0 0 2 / 8 8 / 9 0 0 2 / 0 1 2 / 9 0 0 2 / 0 1 8 / 9 0 0 2 / 3 2 / 1 1 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / . . . . . . . . . . . . . . D h P , l h c e W . i F d v a D e m a N 0 6 9 , 8 5 2 6 9 5 , 0 3 6 6 5 5 , 9 8 8 l a t o T ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) 1 ( — ) 2 ( 8 8 1 , 7 1 ) 4 ( 8 4 0 , 1 1 ) 4 ( 7 4 6 , 2 1 ) 5 ( 8 8 6 , 1 ) 5 ( 9 2 9 , 4 3 ) 9 ( 2 2 9 , 6 2 ) 0 1 ( 3 2 0 , 0 2 ) 1 1 ( 0 5 2 , 6 1 ) 1 1 ( 0 5 7 , 8 4 9 1 3 , 1 6 9 9 , 7 3 0 7 , 8 5 0 8 , 1 1 9 0 3 , 5 4 0 4 0 , 1 5 2 6 0 , 9 3 4 9 5 , 4 1 8 0 7 , 6 1 8 9 1 , 1 1 5 8 , 4 2 5 5 6 , 1 1 0 0 4 , 6 — — 9 1 3 , 1 6 9 9 , 7 3 0 7 , 8 5 0 8 , 1 1 9 0 3 , 5 4 0 4 0 , 1 5 0 5 2 , 6 5 2 4 6 , 5 2 5 5 3 , 9 2 6 8 8 , 2 0 8 7 , 9 5 7 7 5 , 8 3 3 2 4 , 6 2 0 5 2 , 6 1 0 5 7 , 8 4 ) 1 ( — ) 2 ( 2 7 5 , 1 ) 2 ( 8 5 1 , 4 ) 9 ( 7 0 6 , 7 ) 8 ( 4 3 8 , 0 2 ) 0 1 ( 2 8 7 , 7 2 ) 1 1 ( 0 5 2 , 2 1 ) 1 1 ( 0 5 7 , 6 3 0 8 5 2 7 5 , 1 3 8 2 , 7 6 8 0 , 6 1 — 1 1 6 , 3 1 — — 0 8 5 4 4 1 , 3 0 2 9 , 6 3 1 4 4 , 1 1 7 0 6 , 7 3 9 3 , 1 4 0 5 2 , 2 1 0 5 7 , 6 3 5 4 4 , 9 8 1 0 4 6 , 0 4 2 5 8 0 , 0 3 4 3 0 0 2 / 6 1 / 5 5 0 0 2 / 8 2 / 1 1 6 0 0 2 / 8 8 / 6 0 0 2 / 8 8 / 9 0 0 2 / 0 1 2 / 9 0 0 2 / 0 1 8 / 9 0 0 2 / 3 2 / 1 1 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 0 1 0 2 / 2 2 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 9 0 0 2 / 3 8 / 9 0 0 2 / 3 8 / 9 0 0 2 / 3 2 / 1 1 9 0 0 2 / 3 2 / 1 1 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / 1 1 0 2 / 0 1 2 / . . . . . . . . . . . I I I y h t r a C c M . O l e a h c M i 51 l a t o T . . . . . . . . . . . . . . . . . n i t r a M . l D d a n o R Y X O R P (1) This stock option grant is fully vested. (2) The remaining unvested portion of this stock option grant vests in monthly amounts through November 23, 2012, subject to the named executive officer’s continued employment with Infinera. (3) The remaining unvested portion of this stock option grant vests in monthly amounts through November 23, 2013, subject to the named executive officer’s continued employment with Infinera. (4) The remaining unvested portion of this stock option grant vests in monthly amounts through February 5, 2013, subject to the named executive officer’s continued employment with Infinera. (5) The remaining unvested portion of this stock option grant vests in monthly amounts through February 5, 2014, subject to the named executive officer’s continued employment with Infinera. (6) The remaining unvested portion of this stock option grant vests in monthly amounts through June 26, 2014, subject to the named executive officer’s continued employment with Infinera. (7) The remaining unvested portion of this stock option grant vests in monthly amounts through December 26, 2013, subject to the named executive officer’s continued employment with Infinera. (8) The remaining unvested portion of this stock option grant vests in monthly amounts through August 3, 2013, subject to the named executive officer’s continued employment with Infinera. (9) The remaining unvested portion of this stock option grant vests in monthly amounts through February 10, 2014, subject to the named executive officer’s continued employment with Infinera. (10) The remaining unvested portion of this stock option grant vests in monthly amounts through December 10, 2013, subject to the named executive officer’s continued employment with Infinera. (11) These performance-based stock options vest based on specific performance metrics related to Infinera’s next generation product, and subject to each named executive officer’s continued service to Infinera. If the performance metrics are not met within the time limits specified in the award agreements, the performance- based stock options will be canceled. (12) This PSU grant entitles the named executive officer to receive shares of common stock based on our stock price performance as compared to the NASDAQ Composite Index (the “NCI”). The PSUs vest in one annual installment following the measurement period on January 1, 2012. The amount of shares to be awarded is subject to adjustment within a range of 0.5x to 2x payout of shares based upon the change in our stock price as measured against the change of the NCI. The measurement period is a comparison of the six month average between July 1 and December 31, 2011 as compared to the 30 day trailing average as of December 31, 2008. (13) This PSU grant entitles the named executive officer to receive shares of common stock based on our stock price performance as compared to the NCI. The PSUs vest in two equal annual installments following each measurement period on January 1, 2012 and January 1, 2013, respectively. The amount of shares to be awarded pursuant to the PSUs is subject to adjustment within a range of 0.5x to 2x payout of shares based upon the change in our stock price as measured against the change of the NCI. The measurement periods are a comparison of the six month average between July 1 and December 31, 2011 and the six month average between July 1 and December 31, 2012, respectively, as compared to the 30 day trailing average as of December 31, 2008. (14) This PSU grant entitles the named executive officer to receive shares of common stock based on our stock price performance as compared to NCI. The PSUs vest in one annual installment following the measurement period on January 1, 2013. The amount of shares to be awarded is subject to adjustment within a range of 0.5x to 2x payout of shares based upon the change in our stock price as measured against the change of the NCI. The measurement period is a comparison of the six month average between July 1 and December 31, 2012 as compared to the 30 day trailing average as of December 31, 2009. (15) The remaining unvested portion of this RSU grant vests in its entirety on February 5, 2014, subject to the named executive officer’s continued employment with Infinera. (16) The remaining unvested portion of this RSU grant vests in its entirety on October 1, 2012, subject to the named executive officer’s continued employment with Infinera. (17) The remaining unvested portion of this RSU grant vests in its entirety on April 1, 2013, subject to the named executive officer’s continued employment with Infinera. (18) The remaining unvested portion of this RSU grant vests in its entirety on February 5, 2013, subject to the named executive officer’s continued employment with Infinera. (19) The remaining unvested portion of this RSU grant vests in its entirety on July 1, 2014, subject to the named executive officer’s continued employment with Infinera. (20) The remaining unvested portion of this RSU grant vests in its entirety on August 5, 2013, subject to the named executive officer’s continued employment with Infinera. 52 Option Exercises and Stock Vested for Fiscal 2011 The following table sets forth the number of shares acquired and the value realized upon the exercise of stock options and the vesting of RSUs and PSUs during fiscal 2011 by each of the named executive officers. Name Thomas J. Fallon . . . . . . . . . . . . . . . Ita M. Brennan . . . . . . . . . . . . . . . . . David F. Welch, Ph.D. . . . . . . . . . . . . . . . . . . . Michael O. McCarthy III Ronald D. Martin . . . . . . . . . . . . . . . Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($) Number of Shares Acquired on Vesting (#) Value Realized on Vesting ($)(1) — — — — — — — — — — 150,000 47,504 100,000 53,750 12,500 1,395,000 401,343 878,500 483,138 106,563 (1) The value realized on vesting is based on the fair market value of our common stock on the vesting date and does not necessarily reflect the proceeds actually received by the named executive officer. Estimated Payments and Benefits Upon Termination, Change of Control or Death/Disability Change of Control Benefits As discussed above in the “Compensation Discussion and Analysis – “Double Trigger” Change of Control and Separation Benefits” section, the terms below apply with respect to our named executive officers if we undergo a Change of Control transaction and such individual is terminated without Cause or as a result of a Constructive Termination within 12 months following the transaction, subject to such individual entering into and not revoking a release of claims in our favor: P R O X Y • 100% of all outstanding equity awards will vest; • The CEO will be paid a lump sum severance payment equal to two (2) times annual base salary and the other named executive officers will be paid a lump sum severance payment equal to one and one-half (1.5) times annual base salary; and • The CEO will be reimbursed for premiums under COBRA for a period of twenty-four (24) months and the other named executive officers will be reimbursed for premiums under COBRA for a period of eighteen (18) months. Separation Benefits As discussed above in the “Compensation Discussion and Analysis – “Double Trigger” Change of Control and Separation Benefits” section, the Compensation Committee determined that Infinera shall pay severance to our named executive officers if such named executive officer is terminated by Infinera, except in the event of termination following a Change of Control or for Cause. The Compensation Committee established the following terms for severance payments, payable if the individual is terminated without Cause or as a result of a Constructive Termination, subject to such individual entering into and not revoking a release of claims in our favor: • The CEO will be paid a lump sum severance payment equal to one and one-half (1.5) times annual base salary and the other named executive officers will be paid a lump sum severance payment equal to one (1) times annual base salary; and • The CEO will be reimbursed for premiums under COBRA for a period of eighteen (18) months and the other named executive officers will be reimbursed for premiums under COBRA for a period of twelve (12) months. 53 If a named executive officer’s employment with Infinera is less than one year, the amount of severance payable to such individual shall be equal to the lesser of (x) the salary paid to such individual during their period of employment, or (y) the severance amount set forth above. Death and Disability Benefits Pursuant to our 2000 Stock Option Plan and 2007 Plan, accelerated vesting is provided in the event of the death (with exceptions in certain circumstances) or permanent disability of an employee, including the named executive officers. Accrued vacation will also be paid out in the event of the death or permanent disability of such individual. We do not currently provide any other benefits in the event of an employee’s death or permanent disability. For purposes of these benefits, the following terms have the following meanings: Change of Control . . . . . . . . . . . . . . Y X O R P (i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of Infinera representing fifty percent (50%) or more of the total voting power represented by Infinera’s then outstanding voting securities; (ii) the consummation of the sale or disposition by Infinera of all or substantially all of Infinera’s assets; (iii) the consummation of a merger or consolidation of Infinera with any other corporation, other than a merger or consolidation which would result in the voting securities of Infinera outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least fifty percent (50%) of the total voting power represented by the voting securities of Infinera or such surviving entity or its parent outstanding immediately after such merger or consolidation; or (iv) a change in the composition of the Board occurring within a two (2) year period, as a result of which less than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who either (A) are directors of Infinera as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors of Infinera at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to Infinera). Constructive Termination . . . . . . . . The executive officer’s resignation as a result of, and within three (3) months following the expiration of any Company cure period (discussed below) following the occurrence of one or more of the following: (i) a material reduction in the executive officer’s job, duties or responsibilities in a manner that is substantially inconsistent with the position, duties or responsibilities held by the executive officer immediately before such reduction, (ii) a material reduction in the executive officer’s base salary (in other words, a reduction of more than five percent of executive’s base salary within the twelve-month 54 Cause . . . . . . . . . . . . . . . . . . . . . . . . . period following a Change of Control), or (iii) a material change in the work location at which the executive officer is required to perform services for Infinera (in other words, a requirement that the executive officer relocate to a work location that is more than 50 miles from the executive’s work location in effect as of the date immediately prior to a Change in Control). The executive officer will not resign as the result of a Constructive Termination without first providing Infinera with written notice of the acts or omissions constituting the grounds for “Constructive Termination” within ninety (90) days of the initial existence of the grounds for “Constructive Termination” and a cure period of thirty (30) days following the date of such notice. (i) The executive officer’s willful failure to substantially perform his or her duties and responsibilities to Infinera or deliberate violation of a Company policy; (ii) the executive officer’s commission of any act of fraud, embezzlement, dishonesty or any other willful misconduct that has caused or is reasonably expected to result in material injury to Infinera; (iii) unauthorized use or disclosure by the executive officer of any proprietary information or trade secrets of Infinera or any other party to whom the executive officer owes an obligation of nondisclosure as a result of his or her relationship with Infinera; or (iv) the executive officer’s willful breach of any of his or her obligations under any written agreement or covenant with Infinera. The determination as to whether the executive officer is being terminated for Cause will be made in good faith by Infinera and will be final and binding on the executive officer. P R O X Y 55 Summary Tables The amount of compensation and benefits payable to each named executive officer in the case of termination by Infinera, a termination following a Change of Control transaction, or a termination due to death or permanent disability has been estimated in the table below. The value of the outstanding equity award vesting acceleration was calculated based on the assumption that the termination event occurred on December 31, 2011. The closing price of our stock as of the last trading day prior to our fiscal year-end, December 30, 2011, was $6.28, which was used as the value of our common stock in the calculations. The value of the vesting acceleration was calculated by (i) multiplying the number of accelerated shares of common stock underlying unvested, in the money equity awards as of December 31, 2011 by $6.28 and (ii) subtracting the exercise price for the unvested stock options. Y X O R P Name Type of Benefit Thomas J. Fallon . . . . . . . . . . Cash Severance Vesting Acceleration(1) Continued Coverage of Employee Benefits Accrued Vacation Pay Total Benefits Ita M. Brennan . . . . . . . . . . . . Cash Severance Vesting Acceleration(2) Continued Coverage of Employee Benefits Accrued Vacation Pay Total Benefits David F. Welch, Ph.D. . . . . . . Cash Severance Vesting Acceleration(3) Continued Coverage of Employee Benefits Accrued Vacation Pay Total Benefits Michael O. McCarthy III . . . . . Cash Severance Vesting Acceleration(4) Continued Coverage of Employee Benefits Accrued Vacation Pay Total Benefits Ronald D. Martin . . . . . . . . . . Cash Severance Vesting Acceleration(5) Continued Coverage of Employee Benefits Accrued Vacation Pay Total Benefits Potential Payments in Connection With: Termination Under Separation Policy ($) Termination After a Change of Control ($) Termination Upon Death or Disability ($) 450,000 — 34,716 8,784 493,500 300,000 — 7,657 26,742 334,399 300,000 — 23,144 37,125 360,269 300,000 — 23,144 35,626 358,770 350,000 — 23,144 47,116 420,260 600,000 2,775,760 46,287 8,784 3,430,831 450,000 1,106,963 11,486 26,742 1,591,191 450,000 1,513,480 34,716 37,125 2,035,321 450,000 1,149,240 34,716 35,626 1,669,582 525,000 314,000 34,716 47,116 920,832 — 2,775,760 — 8,784 2,784,544 — 1,106,963 — 26,742 1,133,705 — 1,513,480 — 37,125 1,550,605 — 1,149,240 — 35,626 1,184,866 — 314,000 — 47,116 361,116 (1) The vesting of 442,000 shares of common stock would accelerate if Mr. Fallon was terminated without Cause, as a result of a Constructive Termination within 12 months following a Change of Control or upon death or permanent disability as of December 31, 2011. (2) The vesting of 176,268 shares of common stock would accelerate if Ms. Brennan was terminated without Cause, as a result of a Constructive Termination within 12 months following a Change of Control or upon death or permanent disability as of December 31, 2011. (3) The vesting of 241,000 shares of common stock would accelerate if Dr. Welch was terminated without Cause, as a result of a Constructive Termination within 12 months following a Change of Control or upon death or permanent disability as of December 31, 2011. (4) The vesting of 183,000 shares of common stock would accelerate if Mr. McCarthy was terminated without Cause, as a result of a Constructive Termination within 12 months following a Change of Control or upon death or permanent disability as of December 31, 2011. (5) The vesting of 50,000 shares of common stock would accelerate if Mr. Martin was terminated without Cause, as a result of a Constructive Termination within 12 months following a Change of Control or upon death or permanent disability as of December 31, 2011. 56 ADVISORY APPROVAL OF OUR EXECUTIVE COMPENSATION PROPOSAL 3 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, enables our stockholders to vote to approve, on an advisory (nonbinding) basis, the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis and the tabular disclosures of this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, provides our stockholders with the opportunity to express their views on the compensation of our named executive officers. As described in detail under the heading “Compensation of Executive Officers – Compensation Discussion and Analysis,” we believe that the skill, talent, judgment and dedication of our executive officers are critical factors affecting the long-term value of Infinera. The goals of our executive compensation programs are to fairly compensate our executives, attract and retain highly qualified executives able to contribute to our long-term success, encourage performance consistent with clearly defined corporate goals and align our executives’ long-term interests with those of our stockholders. The specific goals that our current executive compensation programs reward are focused on financial and operating goals, including specific revenue and operating income performance metrics and product development goals. Please read the Compensation Discussion and Analysis section of this Proxy Statement beginning on page 28 for additional details about our executive compensation programs, including information about the fiscal 2011 compensation of our named executive officers. Highlights of our executive compensation programs include the following: • A mix of cash and equity incentive awards through the principal compensation components of base salary, incentive cash compensation and long-term equity incentive compensation; • An overall cash compensation (assuming that targeted levels of performance are achieved) at or below the median compensation of our peer group of technology companies; • A long-term equity incentive plan awarding substantially at-risk awards subject to the achievement of performance objectives; • Clearly defined short- and long-term individual and company objectives; and • Annual performance reviews of all named executive officers. Our Board believes that our executive compensation program properly aligns the interests of our executive officers with those of our stockholders, and is worthy of the support of our stockholders. In determining whether to approve this say-on-pay proposal, we believe that our stockholders should consider the following factors: • Independent Compensation Committee. Our executive compensation policies and programs are reviewed and established by the Compensation Committee of the Board, which is comprised entirely of independent directors. The Compensation Committee also receives data, analysis and input from an independent compensation consultant. • Heavy Weighting of Performance-Based Compensation. We have heavily weighted the compensation for our executive officers towards performance-based cash and equity awards. • No Employment Agreements. Our executive officers are “at-will” employees and do not have employment agreements or supplemental executive retirement plans. • Stock Ownership Guidelines. Our executive officers are subject to Stock Ownership Guidelines described in more detail in the “Corporate Governance and the Board of Directors” section of this Proxy Statement. • No Additional Perquisites. Our executive officers are eligible for the same benefits as non-executive employees and do not receive any significant additional perquisites. 57 P R O X Y For these reasons, we are asking our stockholders to indicate their support for the compensation of our named executive officers as described in this Proxy Statement. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies, practices and objectives described in this Proxy Statement. Accordingly, we will ask our stockholders to vote “FOR” the following resolution at the Annual Meeting: “RESOLVED: That Infinera Corporation’s stockholders approve, on an advisory basis, the compensation of the named executive officers, as disclosed in the Proxy Statement for the 2012 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the Summary Compensation Table for Fiscal 2011 and the accompanying footnotes and narratives within the Compensation of Executive Officers section of the Proxy Statement.” As an advisory vote, this say-on-pay proposal is not binding upon Infinera, our Board or the Compensation Committee. However, Infinera, our Board and the Compensation Committee, which are responsible for overseeing, reviewing and administering our executive compensation programs, value the opinions expressed by our stockholders and will continue to consider our stockholders’ concerns in evaluating future compensation decisions for named executive officers. Y X O R P Vote Required Approval of Proposal 3 requires the affirmative vote of a majority of the votes cast on this proposal. Abstentions will have the same effect as an “Against” vote. Broker non-votes will not be counted as having been voted on the proposal. Proposal 3 – Recommendation of the Board The Board unanimously recommends a vote “FOR” the approval of the compensation of our named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the SEC. 58 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS We have adopted a formal policy that our executive officers, directors, and principal stockholders, including their immediate family members and affiliates, are not permitted to enter into a related party transaction with us without the prior consent of our Audit Committee, or other independent members of our Board in the case it is inappropriate for our Audit Committee to review such transaction due to a conflict of interest. Any request for us to enter into a transaction with an executive officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, in which the amount involved exceeds $120,000 must first be presented to our Audit Committee for review, consideration and approval. All of our directors, executive officers and employees are required to report to our Audit Committee any such related party transaction. In approving or rejecting the proposed agreement, our Audit Committee shall consider the relevant facts and circumstances available and deemed relevant to the Audit Committee, including, but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, and, if applicable, the impact on a director’s independence. Our Audit Committee shall approve only those agreements that, in light of known circumstances, are, or are not inconsistent with, our best interests, as our Audit Committee determines in the good faith exercise of its discretion. In fiscal 2011, Infinera did not engage in any related party transactions. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The members of our Board, our executive officers and persons who hold more than 10% of our outstanding common stock are subject to the reporting requirements of Section 16(a) of the Exchange Act, which requires them to file reports with respect to their ownership of our common stock and certain transactions in our common stock. Based solely upon (i) the copies of Section 16(a) reports that we received from such persons for their fiscal 2011 transactions in our common stock and their common stock holdings and (ii) the written representations received from one or more of such persons, we believe that all reporting requirements under Section 16(a) were met in a timely manner during fiscal 2011, except for certain transactions that should have been reported on Form 4 for each of Messrs. Fallon, McCarthy and Martin, Dr. Welch and Ms. Brennan by February 15, 2011, which were actually reported on Form 4 on April 5, 2011. P R O X Y 59 EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2011 with respect to the shares of our common stock that may be issued under our existing equity compensation plans. Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Plan Category Equity compensation plans approved by security holders(2) . . . . . . . . . . . . . . . . . . Equity compensation plans not approved by security holders . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . 18,518,591 — 18,518,591 Y X O R P Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column)(1) 11,624,833 — 11,624,833 Weighted Average Exercise Price of Outstanding Options, Warrants and Rights $3.77 — (1) Includes 1,114,890 shares of common stock available for future issuances under Infinera’s 2007 ESPP. (2) Our 2007 Plan provides that on the first day of our fiscal year, the number of shares of common stock authorized under the 2007 Plan shall be increased by the lesser of (i) 9,000,000 shares of common stock, (ii) 5% of the outstanding shares of common stock on the last day of the immediately preceding fiscal year or (iii) such other amount as is determined by the Board or a committee of the Board. For 2012, the Board approved an increase in the number of shares of common stock authorized under the 2007 Plan of 5,348,809 shares. Our 2007 ESPP provides that on the first day of our fiscal year, the number of shares of common stock authorized under the 2007 ESPP shall be increased by the lesser of (i) 1,875,000 shares of common stock, (ii) 1% of the outstanding shares of common stock on such date or (iii) such other amount as is determined by the Board or a committee of the Board. For 2012, the Board approved an increase in the number of shares of common stock authorized under the 2007 ESPP of 1,069,761 shares. STOCKHOLDER PROPOSALS FOR 2013 ANNUAL MEETING To be considered for inclusion in our Proxy Statement for the 2013 Annual Meeting of Stockholders (the “2013 Annual Meeting”), stockholder proposals must comply with our Bylaws and the requirements of Rule 14a-8 under the Exchange Act and be received by our Corporate Secretary at our principal executive offices no later than November 30, 2012, or no later than 120 calendar days before the one-year anniversary of the date on which we first mailed our Proxy Statement or Notice to stockholders in connection with this year’s Annual Meeting. To be raised at the 2013 Annual Meeting, stockholder proposals must comply with our Bylaws. Under our Bylaws, a stockholder must give timely notice thereof in proper written form to our Corporate Secretary of any business, including nominations of directors for our Board that the stockholder wishes to raise at our 2013 Annual Meeting. To be timely, the stockholder notice must be received by our Corporate Secretary no later than February 13, 2013 nor earlier than January 14, 2013, or no later than the 45th day nor earlier than the 75th day before the one-year anniversary of the date on which we first mailed our Proxy Statement or Notice to stockholders in connection with this year’s Annual Meeting. To be in proper written form, the stockholder notice must contain a brief description of such business and the reasons for conducting such business at the meeting, as well as certain other information as set 60 forth in greater detail in our Bylaws. In connection with a stockholder nomination of a candidate for our Board, the stockholder notice must also include certain information as set forth in our Bylaws about both the nominee and the stockholder making the nomination. If you wish to bring a stockholder proposal or nominate a candidate for director, you are advised to review our Bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations. Our current Bylaws may be found on our website at http://www.infinera.com in the Corporate Governance section on the Investor Relations’ page. Under Rule 14a-8 of the Exchange Act, if the date of the 2013 Annual Meeting changes by more than 30 days from the anniversary of this year’s Annual Meeting, to be included in our Proxy Statement, stockholder proposals must be received by us within a reasonable time before our solicitation is made. Under our Bylaws, if the date of the 2013 Annual Meeting is advanced by more than 30 days prior to or delayed by more than 60 days after the one-year anniversary of the date of this year’s Annual Meeting, then, for notice by the stockholder to be timely, it must be received by our Corporate Secretary no earlier than the close of business on the 120th day prior to the 2013 Annual Meeting and no later than the close of business on the later of (i) the 90th day prior to the 2012 Annual Meeting, or (ii) the tenth day following the day on which disclosure in a press release reported by Marketwire, Inc., Associated Press or a comparable national news service or in a document publicly filed by Infinera with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act of the date of the 2013 Annual Meeting is first made. P R O X Y If we receive notice of a matter to come before the 2013 Annual Meeting that is not in accordance with the deadlines described above and as more fully set forth in our Bylaws and Rule 14a-8 of the Exchange Act, we will use our discretion in determining whether or not to bring such matter before the 2013 Annual Meeting. If such matter is brought before the 2013 Annual Meeting, then our proxy card for such meeting will confer upon our proxy holders’ discretionary authority to vote on such matter. DELIVERY OF DOCUMENTS TO STOCKHOLDERS SHARING THE SAME LAST NAME AND ADDRESS To reduce the expense of delivering duplicate proxy materials to stockholders who may have more than one account holding our common stock, but sharing the same address, we have adopted a procedure, approved by the SEC, called “householding.” Under this procedure, stockholders who have the same last name and address, and who do not participate in electronic delivery of proxy materials, will receive only one copy of our Notice, and as applicable, any additional proxy materials that are delivered. This procedure reduces duplicate mailings and saves printing costs and postage fees, as well as natural resources. Stockholders who participate in “householding” will continue to have access to and utilize separate proxy voting instructions. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy materials or if you would like an additional copy of any of the proxy materials, please notify your broker or direct your written request to Infinera Corporation, 140 Caspian Court, Sunnyvale, CA 94089, Attn: Corporate Secretary, or call (408) 572-5200. Stockholders who currently receive multiple copies of the Proxy Statement at their address and would like to request “householding” of their communications should contact their broker. 61 OTHER MATTERS The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any other matters are properly brought before the Annual Meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment. By Order of the Board, /S/ MICHAEL O. MCCARTHY III Michael O. McCarthy III Chief Legal and Administrative Officer and Corporate Secretary Sunnyvale, California March 30, 2012 Y X O R P 62 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 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: 001-33486 Infinera Corporation (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 77-0560433 (IRS Employer Identification No.) 140 Caspian Court Sunnyvale, CA 94089 (Address of principal executive offices, including zip code) (408) 572-5200 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, $0.001 Par Value The NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ‘ No È Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ‘ No È 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 È 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ 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 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 È Non-accelerated filer ‘ Smaller reporting company ‘ (Do not check if a 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 È The aggregate market value of the registrant’s common stock, $0.001 par value per share, held by non-affiliates of the registrant on June 24, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $560,534,349 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns more than 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 29, 2012, 109,448,819 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding. (1) Portions of the registrant’s Proxy Statement for its 2012 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. DOCUMENTS INCORPORATED BY REFERENCE F O R M 1 0 - K INFINERA CORPORATION ANNUAL REPORT ON FORM 10-K For the Fiscal Year Ended December 31, 2011 Table of Contents Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Item 6. Item 7. Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Item 9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . K - 0 1 M R O F Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Page 1 16 34 34 35 37 38 40 41 63 65 115 115 116 117 117 117 117 117 Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Part IV ITEM 1. BUSINESS Overview Part I Infinera Corporation (“we” or “Infinera”) provides optical networking equipment, software and services to communications service providers, internet content providers, cable operators and subsea network operators (collectively, “Service Providers”) across the globe. Optical networks are deployed by Service Providers facing increasing demands for transmission capacity for high-speed Internet access, 3G/4G mobile broadband, business Ethernet services, cloud-based services and wholesale bandwidth services. We first introduced the Infinera Digital Optical Network architecture to Service Providers in 2004. This architecture is based on optical network platforms built with Infinera’s unique photonic integrated circuits (“PICs”). As of December 31, 2011, 98 Service Providers have selected Infinera’s platforms to efficiently scale the capacity of their optical networks. Infinera manufactures what we believe to be the world’s only commercially-deployed, large-scale PICs. Our first generation PICs transmit and receive 100 Gigabits per second (“Gbps”) of optical transmission capacity and incorporate the functionality of over 60 discrete optical functions into a pair of indium phosphide chips approximately the size of a fingernail. Our next-generation PICs are planned for commercial availability in 2012 and will transmit and receive 500 Gbps, incorporating over 600 discrete optical functions into a pair of indium phosphide chips. Our PICs are combined with high performance Optical Transport Network (“OTN”) switching to enable our differentiated Digital Optical Network architecture to offer Service Providers a unique combination of highly-scalable transmission capacity and the bandwidth management tools to efficiently utilize such capacity across platforms that are easy to operate. Many Service Providers are looking for new network architectures to respond to continued demand for bandwidth across their networks. These architectural changes include scaling optical transmission capacities from 10 Gbps and 40 Gbps to 100 Gbps and integrating OTN switching capabilities within the optical transport platform. Infinera’s DTN platform currently delivers 10 Gbps and 40 Gbps transmission capacity combined with integrated switching capabilities. Infinera’s DTN-X platform will support 100 Gbps of transmission capacity and will also integrate our 5 Terabits per second (“Tbps”) OTN switch. The DTN-X platform will leverage the unique capabilities of our 500 Gbps PICs to deliver high-capacity transmission while optimizing power, cooling, space and operational simplicity. The DTN-X platform is expected to be in volume production in 2012 and is currently in lab trials with Service Providers. Similar to how silicon integrated circuits changed the dynamics of the computing industry by increasing computing performance and reliability while reducing physical size, power consumption and heat dissipation, we believe Infinera’s PICs change the dynamics of the optical network industry by increasing optical performance and reliability while reducing physical size, power consumption and heat dissipation. We fabricate PICs and develop the software and hardware that together comprise the optical network platforms at the foundation of our Digital Optical Network architecture. We sell these optical network platforms to Service Providers along with a comprehensive suite of installation, management and support services. We believe that Service Providers facing increasing demand for greater optical network transmission capacity and the need for more favorable network economics will adopt our DTN-X platform with a 100 Gbps solution once it is broadly available. “Infinera,” “Infinera DTN,” “Infinera DTN-X,” “ATN,” “Infinera Digital Optical Network,” “FlexCoherent,” and other trademarks or service marks of Infinera Corporation appearing in this report are the property of Infinera Corporation. This report contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. 1 F O R M 1 0 - K Infinera was founded in December 2000, originally operated under the name “Zepton Networks,” and is headquartered in Sunnyvale, California. We are incorporated in the State of Delaware. Our principal executive offices are located at 140 Caspian Court, Sunnyvale, CA 94089. Our telephone number is (408) 572-5200. Industry Background Optical networking equipment carries digital information using light waves over fiber optic networks. The advent of wavelength division multiplexing (“WDM”) systems has enabled the transmission of larger amounts of data by using multiple wavelengths over a single optical fiber. Service Providers often use WDM systems to carry communications traffic between cities, referred to as long-haul networks, and within large metropolitan areas, referred to as metro networks. Fiber optic networks are generally capable of carrying most types of communications traffic, from conventional long-distance telephone calls to e-mails and web sessions to high-definition video streaming. As service traffic grows, Service Providers add transmission capacity to existing optical networks or purchase and deploy additional systems to keep pace with bandwidth demands and service expansion. We believe that a number of trends in the communications industry are increasing demand for network capacity and ultimately will increase demand for optical networking systems. These trends include growth in bandwidth-intensive services like video, the proliferation of 4G and WiFi mobile broadband due to the availability of smartphones and tablets, the emergence of cloud services, and the continued expansion of online business and information services. We believe that Service Providers are seeking the following solutions that will allow them to increase their profit margins and/or expand their service offerings: • • • • high-capacity solutions that scale transmission capacity to meet increasing bandwidth demand; efficient solutions that optimize performance and increase reliability while reducing physical space, power consumption and heat dissipation; easy to use solutions that reduce the time to deploy new transmission capacity while lowering operational expenses; and improved integration between Internet Protocol equipment such as routers and optical networking equipment. We believe that Infinera’s Digital Optical Network architecture is uniquely enabled to deliver improvements in these areas compared to competitive WDM systems that still rely on discrete optical components. We believe that our Digital Optical Network architecture enables Service Providers to deploy reliable, high-capacity, efficient optical network solutions that are easy to use and improve the integration between the layers of Service Provider networks. The Infinera Strategy Our goal is to be a preeminent provider of optical networking systems to Service Providers around the world. Key aspects of our strategy to achieve this goal are as follows: • Increasing our customer footprint. We have continued to diversify our customer base across multiple customer segments including long-haul network operators, regional and metro network operators, including Tier 1 telecommunications service providers, bandwidth wholesalers, subsea network operators, cable multiple systems operators (“MSOs”) and internet content providers. In 2012 and beyond, we intend to increase our penetration across existing customers while leveraging our new DTN-X platform to target in particular, Tier 1 U.S. and international communications service providers, including U.S. regional Bell operating 2 K - 0 1 M R O F companies, international postal, telephone and telegraph companies, and other operators of fiber optic networks around the world. In 2011, we increased our presence outside of the United States, with the addition of new customers in Europe and Asia Pacific (“APAC”), as well as deployments in the Other Americas. We also had continued success in the submarine market, as subsea network operators deployed Infinera systems over existing subsea networks to increase capacity and utilize the efficiencies of our Digital Optical Network. • Penetrating adjacent markets. We believe that our Digital Optical Network can benefit submarine network operators and operators with networks that extend to the metro edge. We intend to increase our addressable markets by continually adding functionality to our products and by developing the service and support infrastructure needed to address these markets. • Maintaining and extending our technology lead. We intend to continue to incorporate the functionality of additional discrete functions into our PICs in order to continue to increase our technology lead. In addition, we will pursue the expansion of our digital switching and bandwidth management capabilities in order to enhance the performance, scalability and economic advantages of our products. We intend to introduce platforms with new, higher- capacity features and greater functionality in 2012 and beyond. • Continuing investment in PIC manufacturing activities. We believe that our vertical integration and manufacturing capabilities serve as a competitive advantage and intend to continue to invest in the manufacturing capabilities needed to produce new generations of PICs. In 2011, we expanded our PIC fabrication (“PIC FAB”) facility in preparation for volume shipments of our new 500 Gbps PICs. Products Infinera DTN Platform The Infinera DTN platform utilizes our PIC technology to enable digital processing and management of data with the capability to generate WDM wavelengths and to add, drop, switch, manage, protect and restore network traffic digitally using integrated OTN switching. The DTN platform can automate the connection of circuits and provisioning of new services without costly and cumbersome manual intervention. Our DTN platform is modular in design to provide Service Providers with the ability to add capacity in a cost-efficient manner. The initial deployment of our DTN platform at a customer site involves the installation of a line system (including common equipment, such as a chassis, amplifiers, management controllers and related equipment). Service Providers can increase the capacity to the DTN platform by purchasing our Digital Line Modules, Tributary Adapter Modules and Tributary Optical Modules. We believe that the density and the modular architecture of the DTN platform enable significant flexibility and scalability for Service Providers. Our current DTN platform delivers 10 Gbps and 40 Gbps wavelengths enabling fiber capacity from 1.6 Tbps to 6.4 Tbps. Our DTN platform is carrier-class, which means that it complies with applicable Telcordia and equivalent major international standards for central office-based network elements. Our DTN platform supports a broad range of optical service interfaces including Ethernet (1 Gigabit Ethernet (“GbE”), 10 GbE, 40 GbE and 100 GbE) and separate synchronous optical network/synchronous digital hierarchy. Infinera DTN Platform for Submarine Network Applications For submarine transport applications, the DTN platform can be used as a Submarine Line Terminating Equipment (“SLTE”) node, doubling the total optical capacity of many traditional 3 F O R M 1 0 - K submarine systems to a maximum of up to 6.4 Tbps and distances of up to 8,000 km. The DTN platform also provides dispersion compensation that is significantly simpler and cheaper than the per-channel dispersion management of many existing SLTE systems. Our DTN platform leverages its digital operations and software automation to allow Infinera’s SLTE solution to significantly reduce engineering complexity for submarine cable upgrades and to enable lower cost, faster deployment of additional capacity on existing systems. Infinera Line System Infinera’s DTN platforms are built upon and connected to one another using an optical “line system.” The Infinera Line System (“ILS”) provides optical amplification and enables the management communication channels between network nodes. ILS currently supports up to 6.4 Tbps of optical capacity on a single fiber. Infinera’s bandwidth management capabilities allow our customers to manage and utilize the available capacity as a single pool of bandwidth to satisfy customer requirements, including services at speeds from 1 Gbps up to 40 Gbps. In addition to providing for increased capacity and reach, ILS also lays the foundation for future Infinera systems and is designed to scale with the DTN-X platform to support up to 8 Tbps of optical capacity on a single fiber pair. ILS is fully integrated into Infinera’s management and control software and can be managed seamlessly across DTN platforms. Infinera DTN-X Platform In September 2011, we launched the Infinera DTN-X platform and expect to begin volume shipments in 2012. The DTN-X platform is based on our third generation 500 Gbps PICs that integrate more than 600 discrete optical functions delivering the world’s first 500 Gbps FlexCoherent super- channels based on 100 Gbps channels. The DTN-X platform will deliver a step function improvement in network economics to help Service Providers more efficiently manage the explosive growth of traffic brought on by video, mobile and cloud-based services. The DTN-X platform is a next-generation multi- terabit packet optical transport platform that is fundamentally three products in one: • • • a dense WDM (“DWDM”) transmission system based on the world’s first 500 Gbps super- channels, unleashing cost-effective DWDM transmission capacity; an integrated OTN switching system that will scale from 5 Tbps in its first release and up to 100 Tbps in the future and will enable operators to efficiently manage larger data transmission with grooming of traffic down to 1 Gbps granularity; and a system that is designed to be upgradeable to Multi-Protocol Label Switching (“MPLS”) switching in the future which will help further enable convergence of the network for improved efficiency, reducing the number interconnections between network layers. We believe that the convergence of network layers can only be achieved when the best in class performance of each individual layer is realized in a single platform. In most competitive solutions, a Service Provider must make a choice between maximizing either the system’s transmission capacity or its OTN switching capability. The DTN-X platform, unlike other competitive offerings, was designed to converge switching with DWDM transport without compromising overall system functionality. The purpose-built design centers around three unique technology building blocks – PICs paired with FlexCoherent technologies, custom switching application-specific integrated circuits (“ASICs”) and intelligent Generalized MPLS (“GMPLS”) software. We believe that it will be the only platform available in the market that will allow all components, including the optical functions based on our PIC technology, to scale in a manner consistent with Moore’s Law-like semiconductor manufacturing economics and, therefore, deliver simultaneously best-of-breed switching, integrated with best-of-breed DWDM. 4 K - 0 1 M R O F Infinera ATN Platform The Infinera ATN platform is a state-of-the-art coarse and DWDM aggregation and transport solution designed with 400 Gbps of total capacity. The ATN platform can be used to extend the Digital Optical Network architecture benefits of the DTN platform, and can also be used as a standalone WDM access system. Implementing numerous features in support of simplicity of use and operation, the ATN platform is a cost-effective, efficient multiservice aggregation and transport platform. The ATN platform supports direct wavelength connectivity to DTN nodes, reducing equipment costs and providing unique network management capabilities across our integrated Digital Optical Networks. Infinera IQ Network Operating System The Infinera IQ Network Operating System is our embedded software operating system which enables our customers to simplify and speed up the tasks they perform to deliver, differentiate, and manage services and to optimize the utilization of their networks. The IQ Network Operating System for the DTN platform utilizes GMPLS for end-to-end provisioning, protection and restoration services, and a host of performance monitoring and software-definable testing capabilities. The ATN platform supports end-to-end provisioning through software features similar to the DTN platform. Infinera Management Suite The Infinera Management Suite is a broad set of standards-based network and element management tools and operations support system integration interfaces that are used by Service Providers to manage their DTN and ATN platforms. Our management suite software includes our Digital Network Administrator, a scalable, robust, feature-rich element management system, and our Graphical Node Manager, an easy-to-use web-based management interface. Our hardware products, the DTN and ATN platforms, as well as our future DTN-X platform, are managed in an integrated fashion by the Infinera Management Suite. Technology Digital Optical Network Architecture Infinera was founded with a vision of increasing the functionality and improving the economics of optical transport systems. To that end, our core engineering team consists of optical component and systems experts who have collaborated to create an innovative optical networking architecture that combines the delivery of large amounts of low-cost bandwidth with distributed switching and the embedded software intelligence of bandwidth management to manage larger networks and deliver high-capacity services quickly and cost-effectively. We have focused our efforts, time and capital on developing our Digital Optical Network architecture and our system products. Our Digital Optical Network architecture is designed to allow our customers to expand service reach, expedite service provisioning, ensure reliability and more effectively manage, monitor and scale their networks by processing data digitally rather than in analog format. We believe that the key to delivering this capability in a cost-effective manner is integrating the functionality of multiple discrete devices into a single set of semiconductor chips. This integration allows us to eliminate separate optical packages for each discrete optical device, which we believe is the largest cost challenge facing traditional systems. This integration has further enabled us to provide additional functionality and intelligence to our optical networking systems. 5 F O R M 1 0 - K Infinera PICs We believe that our proprietary PICs are a key source of our value proposition and competitive advantage. We manufacture and package our PICs at our own facilities for use exclusively with our DTN and DTN-X platforms. We began the design and manufacture of our PICs shortly after we were founded in December 2000. We employ a multi-disciplinary approach towards the development and manufacture of our PICs, with significant interaction between our manufacturing, system engineering and advanced technology groups. As a leader in the development of photonic integration, we have protected the intellectual property associated with our PIC manufacturing through a combination of trade secrets, patents and contractual protections. We believe that as a result of the combination of the multiple disciplines that were required to develop our PIC, together with the intellectual property protections that we have established, it will be difficult for others to duplicate the technology we have developed. Our DTN platform transmits optical capacity, utilizing a pair of PICs, in increments of 100 Gbps of optical capacity, based on 10 Gbps optical signals. Our transmitter PIC integrates the functionality of 51 optical functions onto a single chip, including lasers and modulators. In addition, our receiver PIC integrates the functionality of 11 optical functions onto a single chip, including photo-detectors and an optical de-multiplexer. We have designed our next-generation PICs to transmit optical capacity in increments of 500 Gbps, based on 100 Gbps optical signals. Our next-generation PICs are designed to integrate the functionality of over 600 discrete functions into a pair of chips. We believe that large-scale photonic integration enables the application of Moore’s Law-like semiconductor manufacturing economics to optical networking, allowing future optical transport cost reductions to be viably sustained on a cost curve defined by volume manufacturing efficiencies, greater functional integration, increased device density, and manufacturing yield enhancements. Coherent Optical Transmission The term “coherent transmission” generally implies the combination of a number of optical transmission technologies, namely: phase modulation, polarization multiplexing, coherent detection and advanced digital signal processing. The combination of these “coherent technologies” allows higher data capacities to be transmitted over the existing optical fiber infrastructure, typically using the same or better design rules than those used for 10 Gbps transmission. A coherent transmitter uses a more complex optical circuit and requires a significantly greater number of optical components. Leveraging our lead in photonic integration, combined with our proprietary coherent technology, Infinera has been able to implement five channels of 100 Gbps capacity on a single pair of chips, using phase modulation with direct coherent detection, and a highly-sophisticated digital signal processing capability. K - 0 1 M R O F Super-Channels Infinera’s DTN-X platform will support five channels of 100 Gbps capacity in a single line card. This 500 Gbps pool of bandwidth is managed as a super-channel that can be turned up in a single operational motion. Competitive solutions would require the deployment of five discrete line modules, each turned up with its own operational motion, in order to achieve the same system capacity. This results in competitive advantages not only in the areas of space, power consumption and long-term system reliability but also in a significant reduction in operational costs per Gbps of bandwidth. OTN Switching OTN offers a highly-structured approach to service multiplexing and switching and enables customers to reduce operational costs and more efficiently utilize higher-capacity bandwidth in their long-haul networks. Our unique PIC technology will allow our DTN-X platform to fully integrate DWDM transport and OTN switching capabilities in a single platform without compromising overall system functionality or capacity. 6 Customers As of December 31, 2011, we have sold our Digital Optical Networks for deployment to 98 customers worldwide, including customers in each of the following customer segments: • competitive carrier; • MSO/cable; • • • • • • internet content provider; submarine; incumbent carrier; research and education/government; reseller; and bandwidth wholesaler. Some of our announced customers include Colt, Cox Communications, Deutsche Telekom, Equinix, Inc., Interoute, KVH, TeliaSonera, Level 3 Communications (“Level 3”), NTT, OTE, Pacnet and XO Communications. In addition, we currently have 33 customer deployments where customers have purchased our ATN platform to extend the Digital Optical Network experience to their metro edge deployments. We believe that in the longer-term, the metro DWDM market represents one of our most promising growth opportunities. We do not have long-term sales commitments from our customers. In 2011, Level 3 accounted for less than 10% of our revenue, and approximately 15% and 17% of our revenue in 2010 and 2009, respectively. We had no customer that represented over 10% of our revenue for 2011 and no customer other than Level 3 that represented over 10% of our revenue for 2010 and 2009. Support and Services We offer our customers a range of product offerings, including 24/7/365 technical support for all hardware and software products, a full range of deployment and installation services, spares management, first line maintenance services, on-site technical services, professional services, product technical training and extended product warranties. In 2011, we increased our outsourced network monitoring and management services, provided from our two Technical Assistance Centers, one in Annapolis Junction, Maryland, and the other in the United Kingdom. We also expanded our technical support capabilities in APAC to include a new facility in Hong Kong, providing a local environment for product demonstrations, training and support. Our customer support services are provided by our employees and augmented where necessary by strategic support partners. We believe that providing ongoing customer and technical support is critical to successful long-term relationships with, and follow-on sales to, our customers. We are committed to providing our customers with the highest levels of technical support and service on a global scale. F O R M 1 0 - K Sales and Marketing We market and sell our products and related support services primarily through our direct sales force, supported by marketing and product management personnel. We may also use distribution or support partners to enter new markets or when requested by a potential customer. Our sales team has significant previous experience with the buying process and sales cycles typical of high-value telecommunications products. We expect to continue to add sales and support employees as we grow our business. 7 The sales process for our products entails discussions with prospective customers, analyzing their existing networks and identifying how they can utilize our systems capabilities within their networks. This process requires developing strong customer relationships, and we expect to leverage our sales force and customer support capabilities to establish relationships with both domestic and international Service Providers. Over the course of the sales cycle, Service Providers often test our products before buying. Prior to commercial deployment, the Service Provider will generally perform a field trial of our products. Upon successful completion, the Service Provider generally accepts the products installed in its network and may continue with commercial deployment of additional products. We anticipate that our sales cycle, from initial contact with a Service Provider through the signing of a purchase agreement, may, in some cases, take several quarters. Direct Sales Force. Our sales team sells directly to Service Providers worldwide. We maintain sales presences throughout the United States, as well as in a number of international locations, including Argentina, China, France, Germany, Hong Kong, Italy, Japan, Netherlands, Singapore, South Africa, Spain, Russia, and the United Kingdom. We expanded our sales force around the world during 2011 as we prepared to address new geographical markets and in advance of selling our expanded portfolio of products. We expect any incremental sales headcount additions in the near-term to be limited to areas where sales achievements are ahead of planned amounts. Indirect Sales Force. We have and will continue to employ business consultants, resale partners and sales agents to assist in our sales efforts and to accelerate and strengthen our customer relationships. We expect to work with business partners to assist our customers in the sale, deployment and maintenance of our systems and have entered into distribution and resale agreements to facilitate the sale of our products. Marketing and Product Management. Our product management team is responsible for defining the product features and development plan required to maximize our success in the marketplace. Product management supports our sales efforts with product and application expertise. Our marketing team works to create demand for our products by communicating our value proposition and differentiation through direct customer interaction, public relations, attendance at tradeshows and other events, and via the Internet and other marketing channels. Research and Development Continued investment in research and development is critical to our business. To this end, we have assembled a team of engineers with expertise in various fields, including systems, sub-systems and components. Our research and development efforts are currently focused in Sunnyvale, California, Allentown, Pennsylvania, Beijing, China, Bangalore, India and Kanata, Canada. We have invested significant time and financial resources into the development of our Digital Optical Network architecture, and our DTN-X, DTN and ATN platforms, including the IQ Network Operating System and Management Suite software. We will continue to expand our product offerings and capabilities in the future and plan to dedicate significant resources to these continued research and development efforts. We are continually increasing the scalability and software features of our current platforms. We are also working to develop new generations of PICs, and we intend to enable further integration in our Digital Optical Network architecture through continued research and development. Our research and development expenses were $127.1 million, $118.5 million and $97.3 million in 2011, 2010 and 2009, respectively. 8 K - 0 1 M R O F Employees As of December 31, 2011, we had 1,181 employees. A total of 382 of those employees were located outside of the United States. None of our U.S. employees are subject to a collective bargaining agreement. Employees in certain foreign jurisdictions may be represented by local workers’ councils and/or collective bargaining agreements, as may be customary or required in those jurisdictions. We have not experienced any work stoppages, and we consider our employee relationships to be good. Manufacturing We have invested significant time and capital to develop and improve the manufacturing process that we use to produce and package our PICs. This includes significant investments in personnel, equipment and the facilities needed to manufacture and package our PICs in Sunnyvale, California and Allentown, Pennsylvania. We also have invested in automating our manufacturing process and in training and maintaining the quality of our manufacturing workforce. As a leader in the development of photonic integration, our manufacturing processes have been developed over several years and are protected by a significant number of trade secrets. We believe that the trade secrets associated with the manufacturing and packaging of our PICs provide us with a significant competitive advantage. We use both domestic and international manufacturing partners to manufacture certain components of our products. Our contract manufacturers manufacture our products based on our specifications and bill of materials. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in product specifications or delivery schedules. Although we experienced some delays in late 2011 in connection with the floods in Thailand, to date, we have not experienced any significant delays or material unanticipated costs resulting from the use of these contract manufacturers; however, such a strategy involves certain risks, including the potential absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies, and reduced control over delivery schedules, manufacturing yields, quality and costs. Despite outsourcing manufacturing operations for cost-effective scale and flexibility, we perform rigorous in-house quality control testing to ensure the reliability of our products. Shortages in components that we use in our products are possible and our ability to predict the availability of such components may be limited. Some of these components are available only from single or limited sources of supply. Our products include some components that are proprietary in nature and only available from a single source, as well as some components that are generally available from a number of suppliers. Recently, we have increased our reliance on third parties to develop and manufacture components for our products. In some cases, significant time would be required to establish relationships with alternate suppliers or providers of proprietary components. We do not have any long-term contracts with any component providers that guarantee supply of components or their manufacturing services. If we encounter difficulty continuing our relationship with a supplier, or if a supplier is unable to meet our needs, we may encounter manufacturing delays that could adversely affect our business. Our ability to timely deliver products to our customers would be materially adversely impacted if we needed to qualify replacements for any of a number of the components used in our products. We believe that our current manufacturing facilities can accommodate an increase in capacity for PIC production sufficient for our current product offerings. In 2011, we expanded our PIC FAB manufacturing facility in Sunnyvale, California in preparation for volume shipments of our 500 Gbps PICs in 2012. Backlog As of December 31, 2011, our backlog was $56.8 million. These orders are subject to future events that could cause the amount or timing of the related revenue to change, and, in certain cases, 9 F O R M 1 0 - K may be cancelled without penalty. We do not believe that backlog should be viewed as an indicator of future performance. A backlogged order may not result in revenue in a particular period, and the actual revenue may not be equal to our backlog amounts. Our presentation of backlog may not be comparable with that of other companies in our industry. Competition The optical communications network equipment market is highly competitive. Competition in this market is based on any one or a combination of the following factors: • • • • • • • price and other commercial terms; functionality; existing business and customer relationships; the ability of products and services to meet customers’ immediate and future network requirements; installation capability; services; scalability; and • manufacturing capability. Competition in the optical networking market is dominated by a number of very large, multi- national companies. Many of our competitors have substantially greater name recognition and technical, financial, and marketing resources, and greater manufacturing capacity, as well as better established relationships with the incumbent carriers, than we do. Many of our competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products and technologies and in creating market awareness for these products and technologies. In addition, many of our competitors have the financial resources to offer competitive products at below market pricing levels that could prevent us from competing effectively. Further, many of our competitors have built long-standing relationships with some of our prospective customers and a number of competitors have the ability to provide financing to customers and could, therefore, have an inherent advantage in selling products to those customers. Strong growth of bandwidth demand is driving the need for higher fiber capacity systems. Some of our competitors offer 40 Gbps and 100 Gbps solutions to customers today allowing them to increase the capacity of their fiber. In September 2011, we launched our DTN-X platform, a 100 Gbps solution, with expected volume production in 2012. The DTN-X platform will incorporate our 500 Gbps PICs, 5 Terabit OTN switch and will combine competitive fiber capacity with the unique features of the Digital Optical Network. In order to respond to customer needs in the interim, we have introduced a non-PIC based 40 Gbps solution that will increase the fiber capacity of the DTN platform from 1.6 Tbps to up to 6.4 Tbps. Our competitors include current WDM suppliers, such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Ericsson, Fujitsu Limited, Huawei Technologies Co. Ltd., NEC Corporation, Nokia-Siemens Networks, Tellabs and ZTE Corporation. These companies have historically set the competitive benchmarks for price and functionality. There are also smaller companies, including startups, that have announced plans or developed products that would compete for long-haul and metro optical transport business. We also face additional competition in certain market segments from companies which offer one or more products that compete directly or indirectly with our products. In addition, we may compete with other companies as we expand into new markets or as other companies develop products that are competitive with us. 10 K - 0 1 M R O F Intellectual Property Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks, as well as customary contractual protections. We rely primarily on trade secret protection for our PIC and PIC manufacturing processes, including design, fabrication and testing of our PICs. However, there can be no assurances that trade secrets will be sufficient to provide us with a competitive advantage or that others have not or will not reverse engineer our designs or discover, develop or disclose the same or similar designs and manufacturing processes. As of December 31, 2011, we held 163 U.S. patents and three international patents expiring between 2021 and 2031, and held 178 U.S. and 28 foreign pending patent applications. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. We may not receive competitive advantages from the rights granted under our patents and other intellectual property. Any patents granted to us may be contested, circumvented or invalidated over the course of our business, and we may not be able to prevent third parties from infringing these patents. Therefore, the exact effect of the protection of these patents cannot be predicted with certainty. We believe that the frequency of assertions of patent infringement is increasing as patent holders, including entities that are not in our industry and who purchase patents as an investment or to monetize such rights by obtaining royalties, use such actions as a competitive tactic as well as a source of additional revenue. We have been sued by Cheetah Omni LLC (“Cheetah”) and Cambrian Science Corporation (“Cambrian”) for alleged infringement of their patents. See the section set forth in Part II, Item 3. “Legal Proceedings” for additional information regarding these lawsuits. Any claim of infringement from a third party, even those without merit, could cause us to incur substantial costs defending against such claims, and could distract our management from running our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which would require significant effort and expense and may ultimately not be successful. In addition to trade secret and patent protections, we generally control access to and the use of our proprietary software and other confidential information. This protection is accomplished through a combination of internal and external controls, including contractual protections with employees, contractors, customers, and partners, and through a combination of U.S. and international copyright laws. We incorporate a number of third-party software programs into our products pursuant to license agreements. We license some of our software pursuant to agreements that impose restrictions on our customers’ ability to use such software, such as prohibiting reverse engineering and limiting the use of copies. We also seek to avoid disclosure of our intellectual property by relying on non-disclosure and assignment of intellectual property agreements with our employees and consultants that acknowledge our exclusive ownership of all intellectual property developed by the individual during the course of his or her work with us. The agreements also require that each person maintain the confidentiality of all proprietary information disclosed to them. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. We also rely on contractual rights to establish and protect our proprietary rights in our products. 11 F O R M 1 0 - K We incorporate open source software into our products. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition. Environmental Matters Our business and operations are subject to environmental laws in various jurisdictions around the world including the Waste Electrical and Electronic Equipment and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment regulations adopted by the European Union. We seek to operate our business in compliance with such laws. We are currently subject to laws relating to the materials and content of our products and certain requirements relating to product take back and recycling. Environmental regulation is increasing, particularly outside of the United States, and we expect that our international operations will be subject to additional environmental compliance requirements, which may expose us to additional costs. To date, our compliance costs relating to environmental regulations have not resulted in a material adverse effect on our business, results of operations or financial condition. Business Segment Data and Our Foreign Operations We operate in the single industry segment of optical networking systems. Information concerning revenues, results of operations and revenues by geographic area is set forth in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 15, “Segment Information,” of Notes to Consolidated Financial Statements, both of which are incorporated herein by reference. Information concerning identifiable assets is also set forth in Note 15, “Segment Information,” of Notes to Consolidated Financial Statements. Information on risks attendant to our foreign operations is set forth below in Item 1A. “Risk Factors.” K - 0 1 M R O F Executive Officers and Directors Our executive officers and directors, and their ages and positions as of December 31, 2011, are set forth below: Name Age Position Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David F. Welch, Ph.D.(3) . . . . . . . . . . . . . . . . . . . . . . . . . President, Chief Executive Officer and Director 50 51 Co-founder, Executive Vice President, Chief Ita M. Brennan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ronald D. Martin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michael O. McCarthy III . . . . . . . . . . . . . . . . . . . . . . . . . Kambiz Y. Hooshmand(1)(3) . . . . . . . . . . . . . . . . . . . . . . Kenneth A. Goldman(2)(4) . . . . . . . . . . . . . . . . . . . . . . . . Philip J. Koen(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dan Maydan, Ph.D.(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . Paul J. Milbury(2)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carl Redfield(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mark A. Wegleitner(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Member of Nominating and Governance Committee (2) Member of Compensation Committee (3) Member of Technology and Acquisition Committee (4) Member of Audit Committee Strategy Officer and Director Senior Vice President, Worldwide Sales 44 Chief Financial Officer 63 46 Chief Legal and Administrative Officer 50 Chairman of the Board 62 Director 59 Director 76 Director 63 Director 64 Director 61 Director 12 Thomas J. Fallon has served as our President and Chief Executive Officer since January 2010 and as a member of our board of directors since July 2009. Mr. Fallon served as our Chief Operating Officer from October 2006 to December 2009 and as our Vice President of Engineering and Operations from April 2004 to September 2006. From August 2003 to March 2004, Mr. Fallon was Vice President, Corporate Quality and Development Operations of Cisco Systems, Inc., a networking and telecommunications company. From May 2001 to August 2003, Mr. Fallon served as Cisco’s General Manager of the Optical Transport Business Unit. Mr. Fallon is currently a member of the Engineering Advisory Board of the University of Texas at Austin. Mr. Fallon holds a B.S.M.E. and M.B.A. from the University of Texas at Austin. David F. Welch, Ph.D. co-founded our company and has served as our Executive Vice President, Chief Strategy Officer since January 2004 and as a member of our board of directors since October 2010. Dr. Welch previously served as our Chief Development Officer/Chief Technology Officer from May 2001 to January 2005, as our Chief Marketing Officer from January 2005 to January 2009, as a member of our board of directors from May 2001 to November 2006. From February 2001 to April 2001, Dr. Welch served as Chief Technology Officer of the Transmission Products Group of JDS Uniphase Corporation, an optical component company. From January 1985 to February 2001, Dr. Welch served in various executive roles, including Chief Technology Officer and Vice President of Corporate Development of SDL Inc., an optical component company. Dr. Welch is the Founder and President of Students Matter, a non-profit organization focused on improving K-12 public education in California. Dr. Welch holds a B.S. in Electrical Engineering from the University of Delaware and a Ph.D. in Electrical Engineering from Cornell University. Dr. Welch holds over 130 patents, and has been awarded the Adolph Lomb Medal, Joseph Fraunhofer Award and the John Tyndall Award in recognition of his technical contributions to the optical industry. He is a Fellow of the Optical Society of America (OSA) and the Institute of Electrical and Electronics Engineers (IEEE). Ita M. Brennan has served as our Chief Financial Officer since July 2010. Prior to becoming our Chief Financial Officer, Ms. Brennan served as our Vice President of Finance and Corporate Controller since July 2006. From September 1997 to July 2006, Ms. Brennan held various roles at Maxtor Corporation, an information storage solutions company, including Vice President of Finance of Worldwide Operations. Ms. Brennan is a chartered accountant and public accounting alumna of Deloitte and Touche, having worked at the firm in Ireland and the U.S. Ronald D. Martin has served as our Senior Vice President of Worldwide Sales since August 2009. From November 2007 to June 2009, Mr. Martin served as Chief Marketing and Strategy Officer and President of ADVA Optical Networking’s North American subsidiary, an optical networking company. From May 2001 to November 2007, Mr. Martin served as Vice President and General Manager of the optical business unit of Cisco Systems, Inc., a networking and telecommunications company. From May 1987 to May 2001, Mr. Martin served as Chief Operating Officer at Fujitsu Network Communications, a networking and telecommunications company. Mr. Martin holds an A.A. from Iowa Lakes College. Michael O. McCarthy III has served as our Chief Legal and Administrative Officer since March 2010. From January 2008 to March 2010, Mr. McCarthy served as our Chief Legal Officer. From May 2003 to January 2008, Mr. McCarthy served as our Vice President and General Counsel. Prior to joining our Company, Mr. McCarthy served in various executive roles, including Senior Vice President of Worldwide Sales and Support and Senior Vice President and General Counsel of Ciena Corporation, a communications equipment company. Prior to working at Ciena, Mr. McCarthy worked at MCI Communications Corporation and at the law firms of Hogan and Lovells and Baker & Mckenzie. Mr. McCarthy holds a B.A. in Mathematical Economics from Colgate University and a J.D. from Vanderbilt University’s School of Law. 13 F O R M 1 0 - K Kambiz Y. Hooshmand has been a member of our board of directors since December 2009 and has served as Chairman of our board of directors since October 2010. From March 2005 to May 2009, Mr. Hooshmand served as President and Chief Executive Officer of Applied Micro Circuits Corporation, a communications solutions company. From March 2000 to February 2002, Mr. Hooshmand served as Vice President and Division General Manager of the DSL Business Unit of Cisco. From February 2002 to March 2005, Mr. Hooshmand also served as Group Vice President and General Manager of Cisco. From June 1997 to February 2000, Mr. Hooshmand served as Cisco’s Vice President of Engineering. From January 1992 to June 1997, Mr. Hooshmand served as Director of Engineering of StrataCom, Inc., a networking solutions company. Mr. Hooshmand holds a B.S. in Electrical Engineering and Computer Science from California State University, Chico and an M.S. in Engineering from Stanford University. Kenneth A. Goldman has been a member of our board of directors since February 2005. Mr. Goldman has been the Senior Vice President, Finance and Administration, and Chief Financial Officer of Fortinet Inc., a provider of unified threat management solutions, since September 2007. From November 2006 to August 2007, Mr. Goldman served as Executive Vice President and Chief Financial Officer of Dexterra, Inc. From August 2000 until March 2006, Mr. Goldman served as Senior Vice President, Finance and Administration, and Chief Financial Officer of Siebel Systems, Inc., a supplier of customer software solutions and services. From December 1999 to December 2003, Mr. Goldman served as an advisory council member of the Financial Accounting Standards Board Advisory Council. Mr. Goldman serves on the board of directors of NXP Semiconductor N.V., a mixed signal and standards product semiconductor company. Mr. Goldman is currently on the board of trustees of Cornell University and was formerly a member of the Treasury Advisory Committee on the Auditing Profession, a public committee that made recommendations in September 2008 to encourage a more sustainable auditing profession. Mr. Goldman holds a B.S. in Electrical Engineering from Cornell University and an M.B.A. from the Harvard Business School. Philip J. Koen has been a member of our board of directors since February 2010. Mr. Koen has been Chairman of the Board of Directors and Chief Executive Officer of Intermedia.net, Inc., a cloud- based provider of hosted Microsoft Exchange, collaboration and content management services since June 2011. From February 2010 to May 2011, Mr. Koen served as the Chief Executive Officer of Montero Partners, an advisory services company. From March 2006 to January 2010, Mr. Koen served as Chief Executive Officer and Director of SAVVIS, Inc., a cloud infrastructure and hosted IT solutions provider. From July 1999 until February 2006, Mr. Koen was employed by Equinix, Inc., a provider of network neutral data centers and Internet exchange services, as President and Chief Operating Officer and as Chief Financial Officer. Mr. Koen is currently on the board of trustees of Webster University. Mr. Koen holds a B.A. in Economics from Claremont McKenna College and an M.B.A. from the University of Virginia. Dan Maydan, Ph.D. has been a member of our board of directors since September 2001. From December 1993 to April 2003, Dr. Maydan served as President of Applied Materials Inc., a semiconductor equipment manufacturing company, and was appointed President Emeritus of Applied Materials in April 2003. Dr. Maydan was a member of the board of directors of Applied Materials from June 1992 until March 2006. Dr. Maydan serves on the board of directors of Electronics for Imaging, Inc., a digital imaging and print management solutions company. Dr. Maydan is currently on the board of trustees of The Palo Alto Medical Foundation. Dr. Maydan holds a B.S. and M.S. in Electrical Engineering from the Israel Institute of Technology and a Ph.D. in Physics from Edinburgh University of Scotland. Paul J. Milbury has been a member of our board of directors since July 2010. Mr. Milbury served as Vice President of Operations and Chief Financial Officer of Starent Networks Corp., a provider of mobile network solutions, from January 2007 until its acquisition by Cisco in 2009. From December 2009 to July 2010, he played a key role in integrating Starent Networks into Cisco to create the Mobile 14 K - 0 1 M R O F Internet Technology Group. From December 2000 to March 2007, Mr. Milbury served as Vice President and Chief Financial Officer of Avid Technology, Inc., a digital media creation, management, and distribution solutions company. Mr. Milbury holds a B.B.A. in Business and Economics and an M.B.A. from the University of Massachusetts, Amherst. Carl Redfield has been a member of our board of directors since August 2006. From September 2004 to his retirement in May 2008, Mr. Redfield served as Senior Vice President, New England executive sponsor, of Cisco. From February 1997 through September 2004, Mr. Redfield served as Cisco’s Senior Vice President, Manufacturing and Logistics. Mr. Redfield holds a B.S. in Materials Engineering from Rensselaer Polytechnic Institute and has completed post-graduate studies at the Harvard Business School. Mark A. Wegleitner has been a member of our board of directors since May 2011. From September 2007 until his retirement in July 2010, Mr. Wegleitner served as the Senior Vice President, Technology, for Verizon Communications Inc., a telecommunications company, where his responsibilities included technology assessment, network architecture, platform development and laboratory testing for wireline and wireless communications networks. From July 2000 to September 2007, he served as Chief Technology Officer for Verizon, with responsibility for wireline communications technologies. Prior to the creation of Verizon, Mr. Wegleitner held various positions in the Network Services division of Bell Atlantic, a telecommunications company, including Chief Technology Officer from January 1999 to July 2000. Prior to joining Bell Atlantic, he worked at Bell Laboratories and AT&T General Departments. Mr. Wegleitner holds a B.A. in Mathematics from St. John’s University and an M.S. in Electrical Engineering and Computer Science from the University of California at Berkeley. Our board of directors is currently composed of nine members. Messrs. Goldman, Hooshmand, Koen, Milbury, Redfield and Wegleitner and Dr. Maydan qualify as independent directors in accordance with the listing requirements of NASDAQ Global Select Market (“NASDAQ”). The NASDAQ definition of independence includes a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director, nor any of his family members, has engaged in various types of business dealings with us. In addition, as further required by the NASDAQ rules, our board of directors has made a subjective determination as to each independent director that no relationships exist that, in the opinion of our board of directors, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. In making these determinations, our directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities as they may relate to us and our management. F O R M 1 0 - K Available Information Our website address is http://www.infinera.com. Information contained on our website is not incorporated by reference into this Form 10-K unless expressly noted. We file reports with the Securities and Exchange Commission (“SEC”), which we make available on our website free of charge. These reports include Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. 15 ITEM 1A. RISK FACTORS Investing in our securities involves a high degree of risk. Set forth below and elsewhere in this Annual Report on Form 10-K, and in other documents we file with the SEC, are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward- looking statements contained in this Annual Report on Form 10-K. Because of the following factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. We have a history of significant operating losses and may not achieve profitability on an annual basis in the future. For the fiscal years ended December 31, 2011 and December 25, 2010, we recorded net losses of $81.7 million and $27.9 million, respectively. As of December 31, 2011, our accumulated deficit was $487.0 million. We expect to continue to make significant expenditures related to the continued development of our business. These expenditures may include the addition of personnel related to the sales, marketing and research and development of our products and other costs related to the maintenance and expansion of our manufacturing facilities and research and development operations. We may therefore sustain significant operating losses and negative cash flows in the future. We will have to maintain significant increased revenue and product gross margins to achieve profitability on an annual basis. Our revenue and operating results may fluctuate significantly, which could make our future results difficult to predict and could cause our operating results to fall below investor or analyst expectations. Our revenue and operating results may fluctuate due to a variety of factors, many of which are outside of our control. Over the past four fiscal quarters, our revenue has ranged from $92.9 million to $112.0 million and our operating loss has ranged from $16.0 million to $24.1 million. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Our budgeted expense levels are based, in large part, on our expectations of long-term future revenue and the development efforts associated with these future revenues. As a result, fluctuations in our revenue and gross margins will have a significant impact on our operating results. Given the relatively fixed nature of our operating costs including those relating to our personnel and facilities, particularly for our engineering personnel, any substantial adjustment to our expenses to account for lower levels of revenue will be difficult and may take time. Consequently, if our revenue does not meet projected levels in the short-term, our inventory levels and operating expenses would be high relative to revenue, resulting in additional operating losses. In addition to other risks discussed in this section, factors that may contribute to fluctuations in our revenue and our operating results include: • • • • • fluctuations in demand, sales cycles and prices for products and services, including discounts given in response to competitive pricing pressures; fluctuations in our product mix, including the mix of higher and lower margin products and significant mix changes resulting from new customer deployments; changes in customers’ budgets for optical communications network equipment purchases and changes in their purchasing cycles; order cancellations or reductions or delays in delivery schedules by our customers; timeliness of our customers’ payments for their purchases; 16 K - 0 1 M R O F • • • • • • our ability to control costs, including our operating expenses and the costs of components we purchase for our products; readiness of customer sites for installation of our products; the timing of product releases or upgrades by us or by our competitors. In particular, if we fail to achieve targeted release dates for our next-generation (100 Gbps) product, our revenue and operating results may be negatively impacted; any significant changes in the competitive dynamics of our market, including any new entrants, technological advances or substantial discounting of products; availability of third party suppliers to provide contract engineering and installation services for us; the timing of recognizing revenue in any given quarter, including the impact of recently announced revenue recognition standards and any future changes in U.S. generally accepted accounting principles (“GAAP”) or new interpretations of existing accounting rules; and • general economic conditions in domestic and international markets. Many factors affecting our results of operations are beyond our control and make it difficult to predict our results for a particular quarter or to accurately predict future revenues beyond a one-quarter time horizon. If our revenue or operating results fall below the expectations of investors or securities analysts or below any guidance we may in the future provide to the market, the price of our common stock may decline substantially. Our gross margins may fluctuate from quarter-to-quarter and may be adversely affected by a number of factors, some of which are beyond our control. Our gross margins fluctuate from period-to-period and vary by customer and by product specification. Over the past four fiscal quarters, our gross margins have ranged from 39% to 46%. Our gross margins are likely to continue to fluctuate and will be affected by a number of factors, including: • • • • • • • • • • • the mix in any period of the customer’s purchasing our products and the product mix, including the relative mix of higher and lower margin products and services; significant new customer deployments, often with a higher portion of lower or negative margin common equipment; price discounts negotiated by our customers; introduction of new products, with initial sales at relatively small volumes and higher product costs; sales volume from each customer during the period; the amount of equipment we sell or expect to sell for a loss in any given quarter; increased price competition, including competition from low-cost producers from China; charges for excess or obsolete inventory; changes in the price or availability of components for our products; changes in our manufacturing costs, including fluctuations in yields and production volumes; and increased warranty or repair costs. 17 F O R M 1 0 - K It is likely that the average unit prices of our products will decrease over time in response to competitive pricing pressures, increased negotiated sales discounts, new product introductions by us or our competitors or other factors. In addition, some of our customer contracts contain annual technology discounts that require us to decrease the sales price of our products to these customers. In response, we will need to reduce the cost of our products through manufacturing efficiencies, design improvements and cost reductions. If these efforts are not successful or if we are unable to reduce our costs to a greater extent than the reduction in the price of our products, our revenue and gross margin will decline, causing our operating results to decline. Fluctuations in gross margin may make it difficult to manage our business and achieve or maintain profitability. Aggressive business tactics by our competitors may harm our business. The markets in which we compete are extremely competitive and have resulted in aggressive business tactics by our competitors, including: • • • • • • aggressively pricing their products, including offering significant one-time discounts and guaranteed future price decreases; providing financing, marketing and advertising assistance to customers; announcing competing products prior to market availability combined with extensive marketing efforts; influencing customer requirements to emphasize different product capabilities, such as greater minimum bandwidth requirements or higher transport speeds; offering to repurchase our equipment from existing customers; asserting intellectual property rights. The level of competition and pricing pressure tend to increase during periods of economic weakness or during periods when there are fewer network build-out projects. If we fail to compete successfully against our current and future competitors, or if our current or future competitors continue or expand aggressive business tactics, including those described above, demand for our products could decline, we could experience delays or cancellations of customer orders, or we could be required to reduce our prices or increase our expenses. Our ability to increase our revenue will depend upon continued growth of demand by consumers and businesses for additional network capacity. Our future success depends on factors such as the continued growth of the Internet and IP traffic and the continuing adoption of high-capacity, revenue-generating services to increase the amount of data transmitted over communications networks and the growth of optical communications networks to meet the increased demand for bandwidth. If demand for such bandwidth does not continue, or slows down, the need for increased bandwidth across networks and the market for optical communications network products may not continue to grow. If this growth does not continue or slows down, our product sales would be negatively impacted. In addition, if general economic conditions weaken, our customers and potential customers may slow or delay their purchase decisions, which would have an adverse effect on our business and financial condition. Any delays in the development and introduction of our products, and any future delays in releasing new products or in releasing enhancements to our existing products may harm our business. Because our products are based on complex technology, including, in some cases, the development of next-generation PICs and specialized ASICs, we may experience unanticipated delays 18 K - 0 1 M R O F in developing, improving, manufacturing or deploying these products. The development process for our PICs is lengthy, and any modifications to our PICs, including the development of our next-generation PICs, entail significant development cost and risks. At any given time, various new product introductions and enhancements to our existing products, such as future products based on our next-generation PICs, are in the development phase and are not yet ready for commercial manufacturing or deployment. Recently, we have increased our reliance on third parties, some of which are relatively early stage companies, to develop and manufacture components for our next-generation products, some of which require custom development. The maturing process from laboratory prototype to customer trials, and subsequently to general availability, involves a significant number of simultaneous development efforts. These efforts often must be completed in a timely manner so that they may be introduced into the product development cycle for our systems, and include: • • • • • • completion of product development, including the completion of any associated PIC development, such as our next-generation PICs, and the completion of associated module development, including modules developed by third parties; the qualification and multiple sourcing of critical components; validation of manufacturing methods and processes; extensive quality assurance and reliability testing and staffing of testing infrastructure; validation of software; and establishment of systems integration and systems test validation requirements. Each of these steps, in turn, presents risks of failure, rework or delay, any one of which could decrease the speed and scope of product introduction and marketplace acceptance of our products. New generations of our PICs, specialized ASICs and intensive software testing and validation are important to the timely introduction of new products, enhancements to our existing products and our entrance into new markets. In addition, unexpected intellectual property disputes, failure of critical design elements, and a host of other execution risks may delay, or even prevent, the introduction of new products or enhancements to our existing products. If we do not develop and successfully introduce or enhance products in a timely manner, our competitive position will suffer. In addition, if we do not develop and successfully introduce or enhance products in sufficient time so as to satisfy our customer’s expectations, we may lose future business from such customers and harm our reputation and our customer relationships, either of which would harm our business and operating results. F O R M 1 0 - K The introduction of our DTN-X platform may adversely impact the timing of our revenues, our results of operations and our margins. We are planning to introduce the new DTN-X platform in 2012. Among the risks associated with the introduction of new products, such as the DTN-X, are delays in development or manufacturing, variations in costs, delays in customer purchases or reductions in price of our existing DTN platform in anticipation of this new introductions, difficulty in predicting customer demand for this new platform and effectively managing inventory levels so that they are in line with anticipated demand, risks associated with customer qualification and evaluation of the DTN-X and the risk that this new platform may have reliability, quality or other defects. As we introduce new products, such as the DTN and DTN-X platforms, with some overlapping feature sets, we face the risk that customers may forego purchases of one product in favor of another product with similar, but greater, functionality. As we introduce our DTN-X platform in 2012, a portion of our DTN platform revenues will be impacted by this new product as some of our customers and prospects will choose to purchase the DTN-X platform in place of the DTN platform. Because the 19 DTN-X platform is a new product for which customers may require additional testing requirements prior to acceptance, initial revenue recognition for the DTN-X platform may take longer than for sales of the DTN platform. Any delay in the revenue recognition may adversely impact our quarterly revenue results. In addition, if we are required to write off or write down a significant amount of inventory, our results of operations for the period would be adversely affected. In addition, we may be required to recognize costs and expenses for our DTN-X platform before we can recognize the related revenue. New products are less profitable due to higher research and development expenses. Accordingly, until we can ramp up the manufacture of our DTN-X platform, our margins related to the initial sales of the DTN-X platform will be negatively impacted. Such uncertainty related to the introduction and market acceptance of our DTN-X platform could have a material adverse effect on our business, financial condition, operating results and prospects. The markets in which we compete are highly competitive and dominated by large corporations, and we may not be able to compete effectively. Competition in the optical networking equipment market is intense, and we expect such competition to increase. A number of very large companies have historically dominated the optical communications network equipment industry. Our competitors include current wavelength division multiplexing suppliers, such as Alcatel-Lucent, Ciena Corporation, Cisco Systems, Ericsson, Fujitsu Limited, Huawei Technologies Co., NEC Corporation, Nokia-Siemens Networks, Tellabs and ZTE Corporation. Competition in these markets is based on price, commercial terms, functionality, manufacturing capability, pre-existing installation, services, existing business and customer relationships, scalability and the ability of products and breadth and quality of services to meet our customers’ immediate and future network requirements. Other companies have, or may in the future develop, products that are or could be competitive with our products. In particular, if a competitor develops a photonic integrated circuit with similar functionality to our PICs, our business could be harmed. Recent mergers from our competitors and any future acquisitions or combinations between or among our competitors may adversely affect our competitive position by strengthening our competitors. K - 0 1 M R O F Many of our competitors have substantially greater name recognition and technical, financial and marketing resources, greater manufacturing capacity and better established relationships with incumbent carriers and other potential customers than we have. Many of our competitors have more resources to develop or acquire, and more experience in developing or acquiring, new products and technologies and in creating market awareness for those products and technologies. In addition, many of our competitors have the financial resources to offer competitive products at aggressive pricing levels that could prevent us from competing effectively. Further, many of our competitors have built long-standing relationships with some of our prospective customers and have the ability to provide financing to customers and could, therefore, have an inherent advantage in selling products to those customers. We compete with low-cost producers from China that can increase pricing pressure on us and a number of smaller companies that provide competition for a specific product, customer segment or geographic market. These competitors often base their products on the latest available technologies. Due to the narrower focus of their efforts, these competitors may achieve commercial availability of their products more quickly than we can and may provide attractive alternatives to our customers. Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that result in increased cost of sales, decreased revenue and lower average selling prices and gross margins, all of which would harm our operating results. Substantial changes in the optical networking industry have occurred over the last few years. Many potential customers have confronted static or declining revenue. Many of our customers have substantial debt burdens, many have experienced financial distress, and some that have gone out of 20 business have been acquired by other service providers or announced their withdrawal from segments of the business. Consolidation in the markets in which we compete has resulted in changes in the structure of the communications networking industry, with greater concentration of purchasing power in a small number of large service providers, cable operators, internet content providers and government agencies. For example, in October 2011, Level 3 announced that it had completed its acquisition of Global Crossing. This transaction and resulting combined purchasing power may negatively impact the revenue we receive from the combined entity in the future. The increased concentration among our customer base may also lead to increased competition for new network deployments and increased negotiating power for our customers. This may require us to decrease our average selling prices which would have an adverse impact on our operating results. Further, many of our customers are large communications service providers that have substantial purchasing power and leverage in negotiating contractual arrangements with us. Our customers have and may continue to seek advantageous pricing, payment and other commercial terms and may require us to develop additional features in the products we sell to them. If we are required to develop additional features for our product for a customer, we may be required to defer some of our revenue for such a customer until we have developed and delivered such additional features. We have and may continue to be required to agree to unfavorable commercial terms with these customers, including reducing the average selling price of our products or agreeing to extended payment terms in response to these commercial requirements or competitive pricing pressures. To maintain acceptable operating results, we will need to comply with these commercial terms, develop and introduce new products and product enhancements on a timely basis and continue to reduce our costs. We expect the factors described above to continue to affect our business and operating results for an indeterminate period, in several ways, including: • overall capital expenditures by many of our customers or potential customers may be flat or reduced; • we will continue to have only limited ability to forecast the volume and product mix of our sales; • managing expenditures and inventory will be difficult in light of the uncertainties surrounding our business; and • increased competition will enable customers to insist on more favorable terms and conditions for sales, including product discounts, extended payment terms or financing assistance, as a condition of procuring their business. F O R M 1 0 - K If we are unable to offset any reductions in our average selling prices with increased sales volumes and reduced production costs, or if we fail to develop and introduce new products and enhancements on a timely basis, or if we disagree on our interpretation and compliance with the commercial terms of our customer agreements, our relationships with our customers and our operating results would be harmed. We must respond to rapid technological change and comply with evolving industry standards and requirements for our products to be successful. The optical networking equipment market is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We continually invest in research and development to sustain or enhance our existing products, but the introduction of new communications technologies and the emergence of new industry standards or requirements could render our products obsolete. Further, in developing our products, we have made, and will continue to make, assumptions with respect to which standards or requirements will be adopted by our customers and competitors. If 21 the standards or requirements adopted by our prospective customers are different from those on which we have focused our efforts, market acceptance of our products would be reduced or delayed and our business would be harmed. We are continuing to invest a significant portion of our research and development efforts in the development of our next-generation products. We expect our competitors to continue to improve the performance of their existing products and to introduce new products and technologies and to influence customers’ buying criteria so as to emphasize product capabilities that we do not, or may not, possess. To be competitive, we must properly anticipate future customer requirements and we must continue to invest significant resources in research and development, sales and marketing and customer support. If we do not anticipate these future customer requirements and invest in the technologies necessary to enable us to have and to sell the appropriate solutions, it may limit our competitive position and future sales, which would have an adverse effect on our business and financial condition. We may not have sufficient resources to make these investments and we may not be able to make the technological advances necessary to be competitive. We are dependent on sole source and limited source suppliers for several key components, and if we fail to obtain these components on a timely basis, we will not meet our customers’ product delivery requirements. We currently purchase several key components for our products from single or limited sources. In particular, we rely on our own production of certain components of our products, such as PICs, and on third parties as sole source suppliers for certain of the components of our products, including ASICs, field-programmable gate arrays, processors, and other semiconductor and optical components. We purchase these items on a purchase order basis and have no long-term contracts with many of these sole source suppliers. Recently, we have increased our reliance on third parties to develop and manufacture components for our next-generation (40 Gbps and 100 Gbps) products, some of which require custom development. For example, for the 40 Gbps application of our DTN platform, we purchase customized discrete components. If any of our sole or limited source suppliers suffer from capacity constraints, lower than expected yields, deployment delays, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedule which could result in lost revenue, additional product costs and deployment delays that could harm our business and customer relationships. Further, our suppliers could enter into exclusive arrangements with our competitors, refuse to sell their products or components to us at commercially reasonable prices or at all, go out of business or discontinue their relationships with us. We may be unable to develop alternative sources for these components. The loss of a source of supply, or lack of sufficient availability of key components, could require us to redesign products that use such components, which could result in lost revenue, additional product costs and deployment delays that could harm our business and customer relationships. If we do not receive critical components for our products in a timely manner, we will be unable to deliver those components to our contract manufacturer in a timely manner and would, therefore, be unable to meet our prospective customers’ product delivery requirements. In addition, the sourcing from new suppliers may require us to re-design our products, which could cause delays in the manufacturing and delivery of our products. In the past, we have experienced delivery delays because of lack of availability of components or reliability issues with components that we were purchasing. In addition, some of our suppliers have gone out of business, limited their supply of components to us, or indicated that they may be going out of business. Historically, we have seen a tightening of supply with a number of our suppliers and we have experienced longer than normal lead times and supply delays. We may in the future experience a shortage of certain components as a result of our own manufacturing issues, manufacturing issues at our suppliers or contract manufacturers, capacity problem experiences by our suppliers or contract manufacturers, or strong demand in the industry for such components. A return to 22 K - 0 1 M R O F growth in the economy is likely to continue to create pressure on us and our suppliers to accurately project overall component demand and manufacturing capacity. These supplier disruptions may continue to occur in the future, which could limit our ability to produce our products and cause us to fail to meet a customer’s delivery requirements. Such events could harm our reputation and our customer relationships, either of which would harm our business and operating results. If we fail to accurately forecast demand for our products, we may have excess or insufficient inventory, which may increase our operating costs, decrease our revenue and harm our business. We are required to generate forecasts of future demands for our products several months prior to the scheduled delivery to our prospective customers, which requires us to make significant investments before we know if corresponding revenue will be recognized. Lead times for materials and components, including ASICs, that we need to order for the manufacture of our products vary significantly and depend on factors such as the specific supplier, contract terms and demand for each component at a given time. In the past, we have experienced lengthening in lead times for certain components. If the lead times for components are lengthened, we may be required to purchase increased levels of such components to satisfy our delivery commitments to our customers. If we overestimate demand for our products or particular elements of our products and increase our inventory in anticipation of customer orders that do not materialize, we will have excess inventory, we will face a risk of obsolescence and significant inventory write-downs and our fixed costs will be spread across fewer units raising our per unit costs. If we underestimate demand for our products, we will have inadequate inventory, which could slow down or interrupt the manufacturing of our products and result in delays in shipments and our ability to recognize revenue. If actual market conditions are less favorable than our internal projections, additional inventory write-offs may be required. In addition, we may be unable to meet our supply commitments to customers which could result in a breach of our customer agreements and require us to pay damages. If our contract manufacturers do not perform as we expect, our business may be harmed. We rely on third-party contract manufacturers to perform a significant portion of the manufacturing of our products, and our future success will depend on our ability to have sufficient volumes of our products manufactured in a cost-effective and quality-controlled manner. We have engaged third parties to manufacture certain elements of our products at multiple contract manufacturing sites located around the world but do not have long-term agreements in place with some of our manufacturers and suppliers. There are a number of risks associated with our dependence on contract manufacturers, including: F O R M 1 0 - K • • • • • • • • reduced control over delivery schedules, particularly for international contract manufacturing sites; reliance on the quality assurance procedures of third parties; potential uncertainty regarding manufacturing yields and costs; potential lack of adequate capacity during periods of excess demand; potential uncertainty related to the use of international contract manufacturing sites; limited warranties on components supplied to us; potential misappropriation of our intellectual property; and potential manufacturing disruptions (including disruptions caused by geopolitical events, military actions or natural disasters). 23 Any of these risks could impair our ability to fulfill orders. Our contract manufacturers may not be able to meet the delivery requirements of our customers, which could decrease customer satisfaction and harm our product sales. We do not have long-term contracts or arrangements with our contract manufacturers that will guarantee product availability, or the continuation of particular pricing or payment terms. If our contract manufacturers are unable or unwilling to continue manufacturing our products or components of our products in required volumes or our relationship with any of our contract manufacturers is discontinued for any reason, we would be required to identify and qualify alternative manufacturers, which could cause us to be unable to meet our supply requirements to our customers and result in the breach of our customer agreements. Qualifying a new contract manufacturer and commencing volume production is expensive and time-consuming and if we are required to change or qualify a new contract manufacturer, we would likely lose sales revenue and damage our existing customer relationships. We are dependent on a small number of key customers for a significant portion of our revenue and the loss of, or a significant reduction in, orders from one or more of our key customers would reduce our revenue and harm our operating results. A relatively small number of customers account for a large percentage of our net revenue. As a result, our business will be harmed if any of our key customers do not generate as much revenue as we forecast, stop purchasing from us, or substantially reduce their orders to us. In addition, our business will be harmed if we fail to maintain our competitive advantage with our key customers. Our ability to continue to generate revenue from our key customers will depend on our ability to maintain strong relationships with these customers and introduce new products that are desirable to these customers at competitive prices, and we may not be successful at doing so. Because, in most cases, our sales are made to these customers pursuant to standard purchase agreements rather than long-term purchase commitments, orders may be cancelled or reduced readily. In the event of a cancellation or reduction of an order, we may not have enough time to reduce operating expenses to minimize the effect of the lost revenue on our business. Our operating results will continue to depend on our ability to sell our products to our key customers. K - 0 1 M R O F We are dependent on a single product, and the lack of continued market acceptance of our DTN platform would harm our business. Although we added the ATN platform as part of our product offering in 2009, and expect that the DTN-X product will generate revenue in 2012, our DTN platform accounts for substantially all of our revenue and will continue to account for a significant majority of our business for the foreseeable future. As a result, our business could be harmed by: • • • • • any decline in demand for our DTN platform; the failure of our existing DTN platform to achieve continued market acceptance; the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our DTN platform; technological innovations or new communications standards that our DTN platform does not address; and our inability to release enhanced versions of our DTN platform on a timely basis. 24 If we fail to expand sales of our products into international markets or to sell our products to new types of customers, such as U.S. regional Bell operating companies and international postal, telephone and telegraph companies, our revenue will be harmed. We believe that, in order to grow our revenue and business and to build a large and diverse customer base, we must successfully sell our products in international markets and to new types of customers, such as U.S. regional Bell operating companies and international postal, telephone and telegraph companies. We have limited experience selling our products internationally and to U.S. regional Bell operating companies and international postal, telephone and telegraph companies. Sales cycles for these customers are often very lengthy and competition for these customers is intense. To succeed in these sales efforts, we believe we must hire additional sales personnel to develop our relationships with these potential customers and develop and manage new sales channels through resellers, distributors and systems integrators. If we do not succeed in our efforts to sell to these customers, the size of our total addressable market will be limited. This, in turn, would harm our ability to grow our customer base and revenue. If we fail to protect our intellectual property rights, our competitive position could be harmed or we could incur significant expense to enforce our rights. We depend on our ability to protect our proprietary technology. We rely on a combination of methods to protect our intellectual property, including limiting access to certain information, and utilizing trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may be inadequate to preclude misappropriation or unauthorized disclosure of our proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation, unauthorized disclosure or infringement is uncertain, particularly in countries outside of the United States. This is likely to become an increasingly important issue as we expand our operations and product development into countries that provide a lower level of intellectual property protection. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented or invalidated. Moreover, the rights granted under any issued patents may not provide us with a competitive advantage, and, as with any technology, competitors may be able to develop similar or superior technologies to our own now or in the future. Protecting against the unauthorized use of our products, trademarks and other proprietary rights is expensive, difficult, time consuming and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity or scope of the proprietary rights of others. Such litigation could result in substantial cost and diversion of management resources, either of which could harm our business, financial condition and operating results. Furthermore, many of our current and potential competitors have the ability to dedicate substantially greater resources to enforce their intellectual property rights than we do. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property. Claims by others that we infringe their intellectual property could harm our business. Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, many leading companies in the optical networking industry, including our competitors, have extensive patent portfolios with respect to optical networking technology. We expect that infringement claims may increase as the number of products and competitors in our market increases and overlaps occur. From time to time, third parties may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related standards that are important to our business or seek to invalidate the proprietary 25 F O R M 1 0 - K rights that we hold. Competitors or other third parties have, and may continue to assert claims or initiate litigation or other proceedings against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights, or seeking to invalidate our proprietary rights, with respect to our products and technology. In the event that we are unsuccessful in defending against any such claims, or any resulting lawsuit or proceedings, we could incur liability for damages and/or have valuable proprietary rights invalidated. Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running our business. Furthermore, a party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our products. In addition, we might be required to seek a license for the use of such intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we may be required to develop non-infringing technology, which would require significant effort and expense and may ultimately not be successful. Any of these events could harm our business, financial condition and operating results. Competitors and other third parties have and may continue to assert infringement claims against our customers and sales partners. Any of these claims would require us to initiate or defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because we generally indemnify our customers and sales partners from claims of infringement of proprietary rights of third parties. If any of these claims succeed, we may be forced to pay damages on behalf of our customers or sales partners, which could have an adverse effect on our business, financial condition and operating results. We incorporate open source software into our products. Although we monitor our use of open source software closely, the terms of many open source licenses have not been interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could adversely affect our business, operating results and financial condition. K - 0 1 M R O F We are currently involved in litigation with Cheetah and Level 3 whereby Cheetah alleges that Infinera and Level 3 infringe on two Cheetah patents. In addition, Cambrian Science has filed suit against us and seven of our customers alleging that the use of our DTN platform by our customers infringes upon a Cambrian Science patent. Information regarding these matters is set forth in Part II, Item 3. “Legal Proceedings” and is incorporated herein by reference. We believe these lawsuits are without merit and intend to defend ourselves vigorously, but are unable to predict the likelihood of an unfavorable outcome. In the event that Cheetah or Cambrian Science is successful in obtaining a judgment requiring us to pay damages, obtaining a judgment requiring us to indemnify our customers for damages imposed upon them, or obtaining an injunction preventing the sale of our products, our business and operating results could be harmed. Our manufacturing process is very complex and the partial or complete loss of our manufacturing facility, or a reduction in yields or an inability to scale capacity to meet customer demands could harm our business. The manufacturing process for certain components of our products, including our PICs, is technically challenging. In the event that any of these manufacturing facilities were fully or partially destroyed, as a result of fire, water damage, or otherwise, it would limit our ability to produce our products. Because of the complex nature of our manufacturing facilities, such loss would take a considerable amount of time to repair or rebuild. The partial or complete loss of any of our manufacturing facilities, or an event causing the interruption in our use of such facility for any extended period of time would cause our business, financial condition and operating results to be harmed. 26 Minor deviations in the PIC manufacturing process can cause substantial decreases in yields and, in some cases, cause production to be suspended. In the past, we have had significant variances in our PIC yields, including production interruptions and suspensions and may have continued yield variances, including additional interruptions or suspensions in the future. We expect our manufacturing yield for our next-generation PICs to be lower initially and increase as we achieve full production. Poor yields from our PIC manufacturing process or defects, integration issues or other performance problems in our products could limit our ability to satisfy customer demand requirements, and could cause us customer relations and business reputation problems, harming our business and operating results. Although we are currently in the process of expanding our manufacturing facilities, our manufacturing facilities may not have adequate capacity to meet the demand for our products or we may not be able to increase our capacity to meet potential increases in demand for our products. Our inability to obtain sufficient manufacturing capacity to meet demand, either in our own facilities or through foundry or similar arrangements with third parties, could harm our relationships with customers, our business and our operating results. Unfavorable macroeconomic and market conditions may adversely affect our industry, business and gross margins. Our business depends on the overall demand for additional bandwidth capacity and on the economic health and willingness of our customers and potential customers to make capital commitments to purchase our products and services. As a result of macroeconomic or market uncertainty, we may face new risks that we have not yet identified. In addition, a number of the risks associated with our business, which are disclosed in these risk factors, may increase in likelihood, magnitude or duration. In the past, unfavorable macroeconomic and market conditions have resulted in sustained periods of decreased demand for optical communications products. These conditions may also result in the tightening of credit markets, which may limit or delay our customers’ ability to obtain necessary financing for their purchases of our products. A lack of liquidity in the capital markets or the continued uncertainty in the global economic environment may cause our customers to delay or cancel their purchases, increase the time they take to pay or default on their payment obligations, each of which would negatively affect our business and operating results. Continued weakness and uncertainty in the global economy could cause some of our customers to become illiquid, delay payments or adversely affect our collection of their accounts, which could result in a higher level of bad debt expense. In addition, currency fluctuations could negatively affect our international customers’ ability or desire to purchase our products. F O R M 1 0 - K Challenging economic conditions have from time to time contributed to slowdowns in the telecommunications industry in which we operate. Such slowdowns may result in: • • • • reduced demand for our products as a result of constraints on capital spending by our customers, particularly service providers; increased price competition for our products, not only from our competitors, but also as a result of our customer’s or potential customer’s utilization of inventoried or underutilized products, which could put additional pressure on our near term gross profits; risk of excess or obsolete inventories; excess manufacturing capacity and higher associated overhead costs as a percentage of revenue; and • more limited ability to accurately forecast our business and future financial performance. 27 A lack of liquidity and economic uncertainty may adversely affect our suppliers or the terms on which we purchase products from these suppliers. It may also cause some of our suppliers to become illiquid. Any of these impacts could limit our ability to obtain components for our products from these suppliers and could adversely impact our supply chain or the delivery schedule to our customers. This also could require us to purchase more expensive components, or re-design our products, which could cause increases in the cost of our products and delays in the manufacturing and delivery of our products. Such events could harm our gross margins and harm our reputation and our customer relationships, either of which could harm our business and operating results. Product performance problems, including undetected errors in our hardware or software, or deployment delays could harm our business and reputation. The development and production of new products with high technology content is complicated and often involves problems with software, components and manufacturing methods. Complex hardware and software systems, such as our products, can often contain undetected errors when first introduced or as new versions are released. In addition, errors associated with components we purchase from third parties, including customized components, may be difficult to resolve. We have experienced errors in the past in connection with our DTN platform, including failures due to the receipt of faulty components from our suppliers. We suspect that errors, including potentially serious errors, will be found from time to time in our products. Our products may suffer degradation of performance and reliability over time. If reliability, quality or network monitoring problems develop, a number of negative effects on our business could result, including: K - 0 1 M R O F • • • • • • • • • • • delays in our ability to recognize revenue; costs associated with fixing software or hardware defects or replacing products; high service and warranty expenses; delays in shipments; high inventory excess and obsolescence expense; high levels of product returns; diversion of our engineering personnel from our product development efforts; delays in collecting accounts receivable; payment of damages for performance failures; reduced orders from existing customers; and declining interest from potential customers. Because we outsource the manufacturing of certain components of our products, we may also be subject to product performance problems as a result of the acts or omissions of third parties. From time to time, we encounter interruptions or delays in the activation of our products at a customer’s site. These interruptions or delays may result from product performance problems or from issues with installation and activation, some of which are outside our control. If we experience significant interruptions or delays that we cannot promptly resolve, the associated revenue for these installations may be delayed or confidence in our products could be undermined, which could cause us to lose customers and fail to add new customers. 28 If we lose key personnel or fail to attract and retain additional qualified personnel when needed, our business may be harmed. Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, and finance personnel, many of whom would be difficult to replace. For example, senior members of our engineering team have unique technical experience that would be difficult to replace. We do not have long-term employment contracts or key person life insurance covering any of our key personnel. Because our products are complex, we must hire and retain a large number of highly trained customer service and support personnel to ensure that the deployment of our products do not result in network disruption for our customers. We believe our future success will depend in large part upon our ability to identify, attract and retain highly skilled managerial, engineering, sales, marketing, finance and customer service and support personnel. Competition for these individuals is intense in our industry, especially in the San Francisco Bay Area where we are headquartered. We may not succeed in identifying, attracting and retaining appropriate personnel. The loss of the services of any of our key personnel, the inability to identify, attract or retain qualified personnel in the future or delays in hiring qualified personnel, particularly engineers and sales personnel, could make it difficult for us to manage our business and meet key objectives, such as timely product introductions. Our sales cycle can be long and unpredictable, which could result in an unexpected revenue shortfall in any given quarter. Our products have a lengthy sales cycle, which can extend from six to twelve months and may take even longer for larger prospective customers such as U.S. regional Bell operating companies, international postal, telephone and telegraph companies and U.S. competitive local exchange carriers. Our prospective customers conduct significant evaluation, testing, implementation and acceptance procedures before they purchase our products. We incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale. Because the purchase of our equipment involves substantial cost, most of our customers wait to purchase our equipment until they are ready to deploy it in their network. As a result, it is difficult for us to accurately predict the timing of future purchases by our customers. In addition, product purchases are often subject to budget constraints, multiple approvals and unplanned administrative processing and other delays. If sales expected from customers for a particular quarter are not realized in that quarter or at all, our revenue will be negatively impacted. Our international sales and operations subject us to additional risks that may harm our operating results. We market, sell and service our products globally. In 2011, 2010 and 2009, we derived approximately 30%, 25% and 31%, respectively, of our revenue from customers outside of the United States. We have sales and support personnel in numerous countries worldwide. In addition, we have a large group of development personnel located in Bangalore, India; Beijing, China; and Kanata, Canada. We expect that significant management attention and financial resources will be required for our international activities over the foreseeable future as we continue to expand our international presence. In some countries, our successes in selling our products will depend in part on our ability to form relationships with local partners. Our inability to identify appropriate partners or reach mutually satisfactory arrangements for international sales of our products could impact our ability to maintain or increase international market demand for our products. F O R M 1 0 - K 29 Our international operations are subject to inherent risks, and our future results could be adversely affected by a variety of factors, many of which are outside of our control, including: • • • • • • • • • • • greater difficulty in collecting accounts receivable and longer collection periods; difficulties of managing and staffing international offices, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations; the impact of recessions in economies outside the United States; tariff and trade barriers and other regulatory requirements or contractual limitations on our ability to sell or develop our products in certain foreign markets; certification requirements; greater difficulty documenting and testing our internal controls; reduced protection for intellectual property rights in some countries; potentially adverse tax consequences; political and economic instability; effects of changes in currency exchange rates which could negatively affect our financial results and cash flows; and service provider and government spending patterns. International customers may also require that we comply with certain testing or customization of our products to conform to local standards. The product development costs to test or customize our products could be extensive and a material expense for us. As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks could harm our international operations and reduce our international sales. K - 0 1 M R O F We may be adversely affected by fluctuations in currency exchange rates. A portion of our sales are to countries outside of the United States, and are in currencies other than U.S. dollars, particularly the Euro. Accordingly, fluctuations in foreign currency rates, most notably the strengthening of the dollar against the Euro, could have a material impact on our revenue in future periods. We enter into foreign currency exchange forward contracts to reduce the impact of foreign currency fluctuations on accounts receivable denominated in Euro. These hedging programs reduce the impact of currency exchange rate movements on certain transactions, but do not cover all foreign- denominated transactions and therefore do not entirely eliminate the impact of fluctuations in exchange rates which could negatively affect our results of operations and financial condition. If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected. We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. The provisions of the act require, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. Preparing our financial statements involves a number of complex processes, many of which are done manually and are dependent upon individual data input or review. These processes include, but are not limited to, calculating revenue, deferred revenue and inventory costs. While we continue to automate our processes and enhance our review and put in place controls to reduce the likelihood for errors, we expect that for the foreseeable future, many of our processes will remain manually intensive and thus subject to human error. 30 Any acquisitions we make could disrupt our business and harm our financial condition and operations. We have made strategic acquisitions of businesses, technologies and other assets in the past. While we have no current agreements or commitments, we may in the future acquire businesses, product lines or technologies. In the event of any future acquisitions, we may not ultimately strengthen our competitive position or achieve our goals, or they may be viewed negatively by customers, financial markets or investors and we could: • • • issue stock that would dilute our current stockholders’ percentage ownership; incur debt and assume other liabilities; or incur amortization expenses related to goodwill and other intangible assets and/or incur large and immediate write-offs. Acquisitions also involve numerous risks, including: • • • • • • • problems integrating the acquired operations, technologies or products with our own; diversion of management’s attention from our core business; assumption of unknown liabilities; adverse effects on existing business relationships with suppliers and customers; increased accounting compliance risk; risks associated with entering new markets; and potential loss of key employees. We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future. Our failure to do so could have an adverse effect on our business, financial condition and operating results. Our use and reliance upon development resources in India, China and Canada may expose us to unanticipated costs or liabilities. We have established development centers in India, China and Canada and expect to continue to increase hiring of personnel for these facilities. There is no assurance that our reliance upon development resources in India, China or Canada will enable us to achieve meaningful cost reductions or greater resource efficiency. Further, our development efforts and other operations in these countries involve significant risks, including: F O R M 1 0 - K • • • • • difficulty hiring and retaining appropriate engineering resources due to intense competition for such resources and resulting wage inflation; the knowledge transfer related to our technology and exposure to misappropriation of intellectual property or confidential information, including information that is proprietary to us, our customers and other third parties; heightened exposure to changes in the economic, security and political conditions of India, China and Canada; fluctuation in currency exchange rates and tax risks associated with international operations; and development efforts that do not meet our requirements because of language, cultural or other differences associated with international operations, resulting in errors or delays. 31 Difficulties resulting from the factors above and other risks related to our operations in these countries could expose us to increased expense, impair our development efforts, harm our competitive position and damage our reputation. Unforeseen health, safety and environmental costs could harm our business. Our manufacturing operations use substances that are regulated by various federal, state and international laws governing health, safety and the environment, including the Waste Electrical and Electronic Equipment and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment regulations adopted by the European Union. If we experience a problem with these substances, it could cause an interruption or delay in our manufacturing operations or could cause us to incur liabilities for any costs related to health, safety or environmental remediation. We could also be subject to liability if we do not handle these substances in compliance with safety standards for storage and transportation and applicable laws. If we experience a problem or fail to comply with such safety standards, our business, financial condition and operating results may be harmed. We are subject to governmental import and export controls that could subject us to liability or impair our ability to compete in international markets. We are subject to export control laws that limit which products we sell and where and to whom we sell our products. U.S. export control laws also limit our ability to conduct product development activities in certain countries. In addition, various countries regulate the import of certain technologies and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to implement our products in those countries. Changes in our products or changes in import and export regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the import and export of our products to certain countries altogether. Any change in import and export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Failure to comply with these and similar laws on a timely basis, or at all, decreased use of our products or any limitation on our ability to export or sell our products would adversely affect our business, financial condition and operating results. If we need additional capital in the future, it may not be available to us on favorable terms, or at all. Our business requires significant capital. We have historically relied on significant outside debt and equity financing as well as cash flow from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financings in the future to fund our operations or respond to competitive pressures or strategic opportunities. We have a history of significant operating losses. For 2011, we had a net loss of $81.7 million. In the event that we require additional capital, we may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be limited and our business will be harmed. 32 K - 0 1 M R O F We are subject to government regulations that could adversely impact our business. The Federal Communications Commission, or FCC, has jurisdiction over the entire U.S. communications industry and, as a result, our products and our U.S. customers are subject to FCC rules and regulations. Current and future FCC regulations affecting communications services, our products or our customers’ businesses could negatively affect our business. In addition, international regulatory standards could impair our ability to develop products for international customers in the future. Moreover, many jurisdictions are evaluating or implementing regulations relating to cyber security, privacy and data protection, which can affect the market and requirements for networking and communications equipment. Delays caused by our compliance with regulatory requirements could result in postponements or cancellations of product orders. Further, we may not be successful in obtaining or maintaining any regulatory approvals that may, in the future, be required to operate our business. Any failure to obtain such approvals could harm our business and operating results. Natural disasters, terrorist attacks or other catastrophic events could harm our operations. Our headquarters and the majority of our infrastructure, including our PIC FAB manufacturing facility, are located in Northern California, an area that is susceptible to earthquakes and other natural disasters. Further, a terrorist attack aimed at Northern California or at our nation’s energy or telecommunications infrastructure could hinder or delay the development and sale of our products. In the event that an earthquake, terrorist attack or other catastrophe were to destroy any part of our facilities, or certain of our contract manufacturers’ facilities, destroy or disrupt vital infrastructure systems or interrupt our operations for any extended period of time, our business, financial condition and operating results would be harmed. The trading price of our common stock has been volatile and is likely to be volatile in the future. The trading prices of our common stock and the securities of other technology companies have been and may continue to be highly volatile. Further, our common stock has limited prior trading history. Factors affecting the trading price of our common stock include: • • • • • variations in our operating results; announcements of technological innovations, new services or service enhancements, strategic alliances or agreements by us or by our competitors; the gain or loss of customers; recruitment or departure of key personnel; changes in the estimates of our future operating results or external guidance on those results or changes in recommendations by any securities analysts that elect to follow our common stock; F O R M 1 0 - K • market conditions in our industry, the industries of our customers and the economy as a whole; and • adoption or modification of regulations, policies, procedures or programs applicable to our business. In addition, if the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or operating results. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. Each of these factors, among others, could harm the value of your investment in our 33 common stock. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a suit were filed against us, regardless of its merits or outcome, it could result in substantial costs and divert management’s attention and resources. Anti-takeover provisions in our charter documents and Delaware law could discourage delay or prevent a change in control of our company and may affect the trading price of our common stock. We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law, which apply to us, may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and amended and restated bylaws: • • • • • • authorize the issuance of “blank check” convertible preferred stock that could be issued by our board of directors to thwart a takeover attempt; establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election; require that directors only be removed from office for cause and only upon a supermajority stockholder vote; provide that vacancies on the board of directors, including newly-created directorships, may be filled only by a majority vote of directors then in office rather than by stockholders; prevent stockholders from calling special meetings; and prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS Not applicable. ITEM 2. PROPERTIES Our headquarters are located in Sunnyvale, California. We lease facilities in North America and Asia. The following is a summary of the locations, functions and approximate square footage of those facilities as of December 31, 2011: K - 0 1 M R O F Location Function Corporate headquarters and manufacturing Sunnyvale, CA . . . . . . . . . . . . Allentown, PA . . . . . . . . . . . . Manufacturing and research and development Annapolis Junction, MD . . . . Bangalore, India . . . . . . . . . . Beijing, China . . . . . . . . . . . . Kanata, Canada . . . . . . . . . . Hong Kong, China . . . . . . . . . Tokyo, Japan . . . . . . . . . . . . . Research and development, service and support Research and development Research and development Research and development Sales, service and support Sales and support Square Footage 211,000 44,000 12,000 51,000 22,000 6,000 3,000 2,000 34 The above leases expire between 2013 and 2021. We intend to add new facilities and to expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations. We believe that our existing facilities are adequate to meet our business needs through the next 12 months. ITEM 3. LEGAL PROCEEDINGS Cheetah Patent Infringement Litigation On May 9, 2006, we and Level 3 were sued by Cheetah in the U.S. District Court for the Eastern District of Texas Texarkana Division for alleged infringement of patent no. 6,795,605 (the “‘605 Patent”), and a continuation thereof. On May 16, 2006, Cheetah filed an amended complaint, which requested an order to enjoin the sale of our DTN platform and to recover all damages caused by the alleged willful infringement including any and all compensatory damages available by law, such as actual and punitive damages, attorneys’ fees, associated interest and Cheetah’s costs incurred in the lawsuit. Cheetah’s complaint does not request a specific dollar amount for these compensatory damages. We are contractually obligated to indemnify Level 3 for damages suffered by Level 3 to the extent its product supplied by us is found to infringe, and we have assumed the defense of this matter. On July 20, 2006, we and Level 3 filed an amended response denying all infringement claims under the ‘605 Patent and asserting that the claims of the ‘605 Patent are invalid and that the DTN platform does not infringe the ‘605 Patent. On November 28, 2006, Cheetah filed a second amended complaint and added patent no. 7,142,347 (the “‘347 Patent”) to the lawsuit. On December 18, 2006, we and Level 3 filed responses to Cheetah’s second amended complaint denying all infringement claims under the ‘347 Patent and we and Level 3 asserted counterclaims against Cheetah asserting that the claims are invalid and that the DTN platform does not infringe the patents. On January 30, 2007, Cheetah filed a third amended complaint adding additional assertions of infringement for the two patents in suit. On February 16, 2007, we and Level 3 filed responses to Cheetah’s third amended complaint denying all infringement claims, and we and Level 3 asserted counterclaims against Cheetah asserting that the claims of the patents are invalid and that the DTN platform does not infringe the patents. On March 14, 2007, we submitted requests to the U.S. Patent and Trademark Office (the “U.S. PTO”) for inter partes reexamination of the ‘605 Patent and the ‘347 Patent asking the U.S. PTO to reexamine the patents based on prior art in order to invalidate the patents or limit the scope of each patent’s claims. On March 21, 2007, we and Level 3 filed a motion with the court to stay all proceedings in the lawsuit pending the reexamination of the ‘605 Patent and the ‘347 Patent. On April 11, 2007, we, Level 3 and Cheetah filed a joint motion with the court, agreeing to the following: (1) to stay all proceedings in the lawsuit pending a determination by the U.S. PTO as to whether it will reexamine the ‘605 Patent and the ‘347 Patent; and (2) if the U.S. PTO decides to reexamine either the ‘605 Patent and the 347 Patent, to stay all proceedings in the lawsuit pending final resolution of the reexamination(s) by the U.S. PTO. On April 12, 2007, the court granted the motion staying all proceedings in the lawsuit. On June 26, 2007, the U.S. PTO also ordered reexamination of the ‘605 Patent. On August 1, 2007, the U.S. PTO ordered reexamination of the ‘347 Patent. As a result, all proceedings in this lawsuit are stayed until the final resolution of these reexaminations. In a communication we received from the U.S. PTO dated December 4, 2009, we were advised that various claims in the ‘347 Patent reexamination have been allowed, while other claims have been rejected. In a communication we received from the U.S. PTO dated June 22, 2010, we were advised that various claims in the ‘605 Patent reexamination have been allowed, while other claims have been 35 F O R M 1 0 - K rejected. We have appealed the allowance of certain claims in the ‘347 Patent and ‘605 Patent reexaminations to the Board of Patent Appeals and Interferences at the U.S. PTO and will have an opportunity to appeal the allowance of certain claims in the ‘605 Patent reexamination. We do not know when the U.S. PTO reexamination process will be completed. On January 26, 2010, Cheetah’s counsel filed a motion requesting the court to lift the stay in order to litigate those claims relating to the ‘347 Patent reexamination that the U.S. PTO allowed. The court denied the motion on April 16, 2010. On April 30, 2010, Cheetah filed a motion for reconsideration of the order denying Cheetah’s motion to lift the stay. On May 17, 2010, we filed our opposition to Cheetah’s motion for reconsideration. On August 24, 2010, after a hearing on the matter, the court issued an order keeping the stay in place. We believe the suit is without merit and intend to defend ourselves vigorously, but we are unable to predict the likelihood of an unfavorable outcome. On March 30, 2011, Cheetah filed a motion re-urging the court to lift the stay, which we opposed on April 18, 2011. On May 12, 2011, the court issued an order denying Cheetah’s reurged motion to lift the stay. On May 24, 2011, Cheetah requested reconsideration of the court’s order, and we filed our opposition on June 16, 2011. Cheetah filed a reply to our opposition on June 23, 2011. Although we believe Cheetah’s re-urged motion should be denied, we cannot predict whether the court will grant it. In connection with the reexamination of the ‘605 Patent and the ‘347 Patent, we presented an oral argument before the Board of Patent Appeals and Interferences (“BPAI”) on September 21, 2011. We are awaiting a decision from the BPAI. Based on the information available at this time, we 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, we have made no provision for this lawsuit in our financial statements. Factors that we 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. PTO, 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 July 12, 2011, we were notified by Level 3 that Cambrian filed suit against Level 3 and six other defendants, including Cox Communications, Inc., XO Communications, LLC, Global Crossing Limited, 360Networks (USA), Inc., Integra Telecom, Inc. and IXC, Inc. dba Telekenex (collectively, the “Defendants”) in the U.S. District Court for the Central District of California alleging infringement of patent no. 6,775,312 (the “’312 Patent”) and requesting damages for such alleged infringement (the “Cambrian Claim”). The nature of the Cambrian Claim involves allegations of infringement of the ‘312 Patent resulting from the Defendants’ use of certain products and systems in the Defendants’ networks, including our DTN platform. On August 24, 2011, Cambrian amended the complaint to name the Company as a defendant. We assumed the defense of the Cambrian Claim and filed an answer to Cambrian’s complaint on September 21, 2011, in which we denied infringement of the ‘312 Patent and raised other defenses. Cambrian filed a second amended complaint on October 6, 2011, which included many of the same allegations as in the original complaint. We filed our answer to the second amended complaint on October 21, 2011, in which we maintained the same denials and defenses as in our initial answer. On December 23, 2011, we filed a motion requesting that the court stay the case with respect to each of the above-noted customer Defendants. Cambrian filed its opposition to our motion on December 30, 2011. Although we believe the court should stay the case with regard to the Defendants, we cannot predict whether the court will grant our motion. 36 K - 0 1 M R O F We may be subject to liability pursuant to the indemnification provisions of our agreements with our customers, including the Defendants, should the outcome of the Cambrian Claim be unfavorable to the Defendants. Based on the information available at this time, we 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, we have made no provision for this lawsuit in our financial statements. Factors that we 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. In addition to the matters described above, we are 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, we do not expect that the ultimate costs to resolve these matters will have a material effect on our consolidated financial position, results of operations, or cash flows. ITEM 4. MINE SAFETY DISCLOSURES Not Applicable. F O R M 1 0 - K 37 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the NASDAQ Global Select Market under the symbol “INFN.” The following table sets forth, for the time periods indicated, the high and low sales prices of our common stock as reported on the NASDAQ Global Select Market. Fourth Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.61 $6.07 Third Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.97 $6.00 Second Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.75 $5.91 First Quarter 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.15 $7.13 Fourth Quarter 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.53 $7.79 Third Quarter 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.90 $6.22 Second Quarter 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.10 $5.70 First Quarter 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.27 $6.71 High Low As of February 29, 2012, there were 172 registered holders of record of Infinera’s common stock. A substantially greater number of holders of Infinera common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other financial institutions. We have not paid any cash dividends on our common stock and do not intend to pay any cash dividends on common stock in the foreseeable future. K - 0 1 M R O F 38 STOCK PERFORMANCE GRAPH The following graph compares the cumulative 55-month total return provided stockholders on Infinera Corporation’s common stock relative to the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Telecommunications Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on June 7, 2007 and its relative performance is tracked through December 30, 2011. The NASDAQ Telecommunications Index contains securities of NASDAQ-listed companies classified according to the Industry Classification Benchmark as Telecommunications and Telecommunications Equipment. They include providers of fixed-line and mobile telephone services, and makers and distributors of high- technology communication products. This graph is not deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, and the graph shall not be deemed to be incorporated by reference into any prior or subsequent filing by Infinera under the Securities Act of 1933 or the Exchange Act. COMPARISON OF 55 MONTH CUMULATIVE TOTAL RETURN* Among Infinera Corp., the NASDAQ Composite Index, and the NASDAQ Telecommunications Index $140 $120 $100 $80 $60 $40 $20 $0 6/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 3/11 6/11 9/11 12/11 Infinera Corp. NASDAQ Composite NASDAQ Telecommunications F O R M 1 0 - K 39 ITEM 6. SELECTED FINANCIAL DATA You should read the following selected consolidated historical financial data below in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K. The selected financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. We derived the statements of operations data for the years ended December 31, 2011, December 25, 2010 and December 26, 2009 and the balance sheet data as of December 31, 2011 and December 25, 2010 from our audited consolidated financial statements and related notes, which are included elsewhere in this Annual Report on Form 10-K. We derived the statements of operations data for the years ended December 27, 2008 and December 29, 2007 and the balance sheet data as of December 26, 2009, December 27, 2008 and December 29, 2007 from our audited consolidated financial statements and related notes which are not included in this Annual Report on Form 10-K. We have not declared or distributed any cash dividends. Our historical results are not necessarily indicative of the results that should be expected in the future. Additionally, our revenue trends prior to December 27, 2008 had been significantly impacted by the timing of our attainment of vendor specific objective evidence (“VSOE”) of fair value for most of our services. Prior to 2008, revenue from product sales sold in combination with services (“bundled product sales”) was deferred and recognized ratably over a period of approximately one year. In addition, the attainment of VSOE of fair value for most of our services beginning in the first quarter of 2008 required us to recognize a majority of our 2008 product sales as revenue in the period in which the bundled products were accepted by the customer. The combined effect of the recognition of the deferred revenue from prior periods and the upfront recognition of revenue from bundled product sales in 2008 resulted in significantly increased levels of revenue, gross margin and net income for 2008. In the years presented below subsequent to 2008, we did not recognize significant amounts of product related deferred revenue and deferred gross profit from prior periods and do not expect to do so in the future. December 31, 2011 December 25, 2010 December 26, 2009 December 27, 2008 December 29, 2007 Years Ended Revenue . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . Net income (loss) per common share Basic . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . Weighted average number of shares used in computing basic and diluted net income (loss) per common share $404,877 $165,491 $ (81,744) (In thousands, except per share data) $309,101 $102,101 $ (86,622) $454,352 $206,189 $ (27,932) $519,212 $233,555 $ 78,728 $245,852 $ 76,589 $ (55,342) $ $ (0.78) (0.78) $ $ (0.28) (0.28) $ $ (0.91) (0.91) $ $ 0.85 0.81 $ $ (1.09) (1.09) Basic . . . . . . . . . . . . . . . . . . . . . . 105,432 Diluted . . . . . . . . . . . . . . . . . . . . . 105,432 99,380 99,380 95,468 95,468 92,427 97,088 50,732 50,732 Total cash and cash equivalents, investments and restricted cash . . Total assets . . . . . . . . . . . . . . . . . . . . . Common stock and additional paid-in . . . . . . . . . . . . . . . . . . . . . . . Stockholders' equity . . . . . . . . . . . . . . capital $253,116 $531,704 $295,706 $551,525 $275,477 $491,945 $312,585 $507,067 $305,830 $529,188 $877,034 $387,803 $817,302 $410,749 $747,677 $368,507 $699,799 $405,463 $663,962 $294,574 40 K - 0 1 M R O F ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectation of earnings, revenues, gross margins, expenses or other financial items; any statements of the plans, strategies and objectives of management for future operations and personnel; factors that may affect our operating results; statements concerning new products or services, including future PIC capacity and new product delivery and revenue dates; statements related to capital expenditures; statements related to future economic conditions, performance, market growth or our sales cycle; statements related to the liquidity of our auction rate securities; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” or “will,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K. You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion and analysis should be read in conjunction with our “Selected Consolidated Financial Data” and consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Background Infinera was founded in December 2000 with a unique vision for optical networking. Prior to Infinera, service provider optical networks were built from fairly commoditized products, broadly known as dense wavelength division multiplexing (“DWDM”) systems. Recent growth in bandwidth demand has increased the need for the delivery of high-capacity low-cost bandwidth throughout the network. We believe that traditional point-to-point network architectures do not provide the required flexibility to meet this demand. It takes large amounts of low-cost bandwidth, pervasive Optical Transport Network (“OTN”) switching, and the intelligence of bandwidth management to manage these larger networks and deliver high-capacity services quickly and cost-effectively. Infinera believes this can only be achieved with photonic integrated circuits (“PICs”) and that only through photonic integration can network operators scale their network bandwidth without significant increases in space, power or operational workload. We first introduced our Digital Optical Network architecture to the market in 2004. This architecture is based on our unique PICs and enables high-capacity low-cost bandwidth in the cloud and distributed switching throughout the network. Since 2004, our strategy has been to extend the benefits of our Digital Optical Network throughout the optical networking market. We have made significant enhancements to our Digital Transport Node System (“DTN platform”) during this time by increasing reach and fiber capacity for the long-haul market, adding the Infinera MTC, a 19-inch chassis option tailored for the metro core market, and adding a submarine version of the DTN platform for the Submarine Line Terminating Equipment market. In addition, we introduced our ATN metro access platform (“ATN platform”), extending Infinera’s digital bandwidth management and intelligent network benefits to the network edge. Finally, in order to meet the growing bandwidth demands of our customers, we introduced our 40 Gigabits per second (“Gbps”) non-PIC based solution in late 2011 41 F O R M 1 0 - K and launched our DTN-X 100 Gbps PIC-based platform, which we anticipate will be available in 2012. The DTN, DTN-X and ATN platforms are designed to operate as a tightly-integrated network with a single management system providing an end-to-end Digital Optical Network experience. 2011 Financial and Business Performance Although 2011 was a challenging year from a financial performance perspective, we made significant progress in relation to our new product offerings with the introduction of our 40Gbps product and the successful launch of our DTN-X platform. Prior to the release of our 40 Gbps product in the fourth quarter of 2011, we were competitively disadvantaged when competing for higher capacity opportunities. We also experienced reduced sales to Level 3 Communications (“Level 3”) during the year. These combined factors contributed to an 11% decrease in revenues on a year-over-year basis. Our DTN platform continued to compete effectively for other non-capacity constrained opportunities with the addition of 16 new customers during the year, Our gross margin was 41% in 2011, a decrease from 45% in 2010, reflecting significant DTN-X platform related operational costs and increased competitive pricing pressure. Capital expenditures increased to $39.4 million from $20.7 million in 2010 as we made additional investments associated with DTN-X platform manufacturing equipment and the expansion of our PIC fabrication plant. These investments were made in advance of the recognition of any DTN-X platform related revenues and therefore resulted in lower gross margin as well as operating margin, and an overall reduction to cash resources at the end of the year. We expect to leverage these investments and begin to recognize revenue from the DTN-X platform in the second half of 2012. Future Business and Industry Trends Traffic patterns in the optical network continue to grow to accommodate increased bandwidth demand from video, mobility and cloud computing. The market is seeing growing demand for increased fiber capacity with networks migrating from the current 10 Gbps wavelength solutions to 40 Gbps solutions in the short-term and 100 Gbps solutions in the longer-term. Infinera launched the DTN-X platform, a 100 Gbps PIC-based solution, in September 2011, with expected volume production in 2012. The DTN-X platform will incorporate our 500 Gbps PICs and our 5 Terabit OTN switch and will combine competitive fiber capacity with the unique features of the Digital Optical Network. We continue to extend our Digital Optical Network into the metro market with new releases of our ATN platform and into the submarine market with a product extension of our DTN platform. Our ATN platform is a metro access solution that extends Infinera’s digital bandwidth management and intelligent software operating system benefits to the network edge. K - 0 1 M R O F Our goal is to be a leading provider of optical networking systems to communications service providers, internet content providers, cable operators, subsea network operators, and others. Our revenue growth will depend on the continued acceptance of our products, growth of communications traffic and the proliferation of next-generation bandwidth-intensive services, which are expected to drive the need for increased levels of bandwidth. Our ability to increase revenue and achieve profitability will be directly affected by the level of acceptance of our products in the long-haul and metro DWDM markets and by our ability to cost-effectively develop and sell innovative products that leverage our technology advantages on a time-to-market basis. As of December 31, 2011, we have sold our network platforms for deployment in the optical networks of 98 customers worldwide, including Colt, Cox Communications, Deutsche Telekom, Equinix, Inc., Interoute, KVH, TeliaSonera, Level 3, NTT, OTE, Pacnet and XO Communications. We currently have 33 ATN customers enjoying the benefits of an ATN platform and 28 of those have deployed an integrated ATN-DTN solution. We do not have long-term sales commitments from our 42 customers. To date, a few of our customers have accounted for a significant portion of our revenue. In particular, Level 3 accounted for less than 10%, and approximately 15% and 17% of our revenue in 2011, 2010 and 2009, respectively. Our business will be harmed if any of our key customers, including Level 3, do not generate as much revenue as we forecast, stop purchasing from us, or substantially reduce their orders to us. In October 2011, Level 3 announced that it had completed its acquisition of Global Crossing. This transaction may negatively impact the revenue we receive from the combined entity in the future, although we cannot predict the timing of such impact. We are headquartered in Sunnyvale, California, with employees located throughout the Americas, Europe, and the Asia Pacific region. We expect to continue to add some personnel in the United States and internationally to develop our products and provide additional geographic sales and technical support coverage. We primarily sell our products through our direct sales force, with a small portion sold indirectly through resellers. We derived 97%, 98% and 94% of our revenue from direct sales to customers for 2011, 2010 and 2009, respectively. We expect to continue generating a substantial majority of our revenue from direct sales in the future. Our near-term year-over-year and quarter-over-quarter revenue will likely be volatile and may be impacted by several factors including general economic and market conditions, time-to-market development of new products, acquisitions of new customers and the timing of large product deployments. We will continue to make significant investments in the business, and management currently believes that operating expenses for 2012 will range from $260 million to $270 million, including stock- based compensation expense of approximately $40 million to $45 million. Results of Operations Revenue The following table sets forth, for periods presented, certain consolidated statements of operations information (in thousands, except %): Revenue: Product . . . . . . . . . . . . . . . . . . . . . . Ratable product and related support and services . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . . . Cost of revenue: Product . . . . . . . . . . . . . . . . . . . . . . Ratable product and related support and services . . . . . . . . . Services . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs (credit) related to cost of revenue . . . . . . . . . . . . . . . . . . . Total cost of revenue . . . . . . . Gross profit . . . . . . . . . . . . . . . December 31, 2011 % of total revenue December 25, 2010 % of total revenue December 26, 2009 % of total revenue Years Ended $349,468 86% $401,578 89% $276,012 89% 3,176 52,233 $404,877 1% 13% 6,155 46,619 100% $454,352 1% 10% 4,231 28,858 100% $309,101 1% 10% 100% $219,710 54% $225,183 50% $189,723 61% 1,096 18,580 — % 5% 3,217 19,945 1% 4% 1,931 12,308 — $239,386 $165,491 (182) — % 59% $248,163 41% $206,189 3,038 — % 55% $207,000 45% $102,101 1% 4% 1% 67% 33% F O R M 1 0 - K 43 The following table summarizes our revenue by geography and sales channel for the periods presented (in thousands, except %): Years Ended December 31, 2011 December 25, 2010 December 26, 2009 Total revenue by geography Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $283,443 121,434 $342,461 111,891 $212,923 96,178 % Revenue by geography Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International $404,877 $454,352 $309,101 70% 30% 100% 75% 25% 100% 69% 31% 100% Total revenue by sales channel Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect $391,811 13,066 $444,168 10,184 $290,972 18,129 % Revenue by sales channel Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indirect $404,877 $454,352 $309,101 97% 3% 100% 98% 2% 100% 94% 6% 100% 2011 Compared to 2010. Total revenue decreased to $404.9 million in 2011 from $454.4 million in 2010. The decrease in revenue was primarily due to a reduction in demand from existing customers, reflecting increased customer demand for higher capacity solutions that we did not offer in 2011 and a reduction in overall demand from Level 3. The effects of this reduction in demand from existing customers, combined with the impact of increased pricing pressure, was somewhat offset by improved levels of common equipment deployments with new customers. International revenue increased to 30% of total revenue in 2011 from 25% of total revenue in 2010. The increases were primarily due to an increased proportion of our sales occurring in Europe. While we expect international revenues to continue to grow in absolute dollars on a long-term basis as we increase our sales activities in Europe, Asia Pacific and other regions, this metric may fluctuate as a percentage of total revenue depending on the size and timing of deployments both internationally and in the United States. Total product revenue decreased to $349.5 million in 2011 from $401.6 million in 2010. A reduction in demand from existing customers, including Level 3, combined with a competitive pricing environment during 2011, were the key drivers for the reduction in product revenues. Product and related support services revenue that is recognized ratably includes sales of products and services that were deferred under previous accounting standards, prior to our adoption of ASU 2009-13 and ASU 2009-14 as further discussed in Note 2, “Summary of Significant Accounting Policies,” to the Notes to Consolidated Financial Statements, because vendor specific objective evidence of fair value had not been established for the undelivered elements. Total ratable revenue levels decreased to $3.2 million in 2011 from $6.2 million in 2010 due to an overall reduction in sales of products and services that were deferred following our adoption of ASU 2009-13 and ASU 2009-14. We have a limited number of software offerings and related support services that will continue to be 44 K - 0 1 M R O F accounted for under the software revenue recognition rules. We expect to continue to record a small amount of ratable revenue when arrangements include bundled services related to our software offerings for which VSOE has not been established. Total services revenue increased to $52.2 million in 2011 from $46.6 million in 2010 primarily reflecting the incremental recognition of $5.4 million related to extended hardware warranty service revenue, $2.5 million related to our software subscription service revenue, $1.8 million related to our spares management service revenue, $0.4 million of network management services revenue, and $0.4 million of first line management services revenue, partially offset by decrease of $4.9 million related to deployment services revenue. As our installed customer base grows, we expect to continue to grow our extended hardware warranty and spares management services revenues in future periods. We do not have the visibility necessary to accurately predict future revenues beyond a one-quarter time horizon, particularly as we ramp production and gain customer adoption of our new products in 2012. However, we continue to believe that our competitive positioning will improve throughout 2012 as we introduce these new products. 2010 Compared to 2009. Total revenue increased to $454.4 million in 2010 from $309.1 million in 2009. This increase in revenue reflected an overall recovery in the economy combined with increased bandwidth demand across our customer base. We experienced increased business activity with many of our customers, including strong demand from our cable and internet content customers in North America and from Level 3. Revenue levels in the first half of 2009 were significantly impacted by the downturn in the economy as new and existing customers delayed purchasing decisions and limited their new purchases. International revenue decreased to 25% of total revenue in 2010 from 31% in 2009. This decrease was primarily attributable to increased levels of sales to domestic customers in 2010. While we expect international revenues to continue to grow in absolute dollars on a long-term basis as we increase our sales activities in Europe, Asia Pacific and other regions, this metric may fluctuate as a percentage of total revenue depending on the size and timing of deployments both internationally and in the United States. Total product revenue increased to $401.6 million in 2010 from $276.0 million in 2009 primarily due to increased sales of our DTN platform to new and existing customers, reflecting an overall improvement in the economic environment and continued growth in bandwidth demand. Product and related support and services revenue that is recognized ratably includes sales of products and services that were deferred under previous accounting standards, because VSOE of fair value had not been established for undelivered elements. Total ratable revenue levels increased to $6.2 million in 2010 from $4.2 million in 2009. This increase in 2010 was primarily due to the recognition of revenue from prior period sales of our ATN platform where the products were bundled with new services for which VSOE had not been established. Total services revenue increased to $46.6 million in 2010 from $28.9 million in 2009. This increase primarily reflected the incremental recognition of $8.3 million related to deployment services revenue, $4.3 million related to our software subscription service revenue, $3.0 million related to extended hardware warranty service revenue, and $1.6 million related to our spares management service revenue. 45 F O R M 1 0 - K Cost of Revenue and Gross Margin 2011 Compared to 2010. Gross margin decreased to 41% in 2011 from 45% in 2010. This decrease primarily reflected incremental costs associated with the expansion of our PIC FAB facility and new product introduction costs related to our next-generation products combined with reduced product shipments and the need for increased pricing discounts in order to remain competitive. 2010 Compared to 2009. Gross margin increased to 45% from 33% in 2009. A higher proportion of our revenue came from our higher gross margin tributary adaptor and line modules in 2010 as compared to 2009. This reflected strong demand for bandwidth in the year as customers filled out higher capacity footprint. Additionally, the unusually low level of gross margin in 2009 was primarily due to the following factors: • we recognized revenue and costs related to a large number of negative or lower margin common equipment deployments; • gross margin was negatively impacted by the usage of significant common equipment discounts; • we incurred restructuring and other related costs of $3.0 million related to the closure of our Maryland-based semiconductor fabrication plant (the “Maryland FAB”) plan announced in July 2009; and • we incurred inventory write-downs for excess and obsolete inventory of $6.6 million which includes $1.5 million of inventory write-downs related to the closure of our Maryland FAB. See Note 7, “Restructuring and Other Related Costs,” to the Notes to Consolidated Financial Statements for more information on our Maryland FAB restructuring plan. We do not have the visibility necessary to accurately predict future gross margins beyond a one-quarter time horizon. However, based on our current outlook, we expect gross margins in 2012 to be consistent with current levels as we ramp production and gain customer adoption of our new products. Operating Expenses The following table summarizes our operating expenses for the periods presented (in thousands, except %): December 31, 2011 % of total revenue December 25, 2010 % of total revenue December 26, 2009 % of total revenue Years Ended Research and development . . . . . . Sales and marketing . . . . . . . . . . . . General and administrative . . . . . . Restructuring and other costs . . . . $127,120 64,773 54,375 31% $118,518 58,103 16% 58,098 14% 159 (129) — % 26% $ 97,288 48,391 13% 45,269 13% 814 — % Total operating expenses . . . . $246,139 61% $234,878 52% $191,762 31% 16% 15% — % 62% K - 0 1 M R O F 46 The following table summarizes the stock-based compensation expense included in our operating expenses (in thousands): Years Ended December 31, 2011 December 25, 2010 December 26, 2009 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,990 8,818 18,502 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,310 $14,301 7,896 19,903 $42,100 $10,302 6,505 15,061 $31,868 Research and Development Expenses 2011 Compared to 2010. Research and development expenses increased $8.6 million in 2011 from 2010 primarily due to increased headcount and personnel-related costs of $2.6 million primarily associated with next-generation product development. This comprised of $1.9 million of cash compensation and $0.7 million of stock-based compensation expense. In addition, during 2011, we incurred $1.6 million of increased depreciation, $1.4 million increase in professional and outside services, $1.1 million in travel and entertainment expenses, $1.2 million increase in spending on equipment and software, and $0.7 million increase in facilities and other costs, as compared to 2010. 2010 Compared to 2009. Research and development expenses increased $21.2 million in 2010 from 2009 primarily due to increased headcount and personnel-related costs of $14.2 million, including $10.2 million of cash compensation and $4.0 million of stock-based compensation expenses. In addition, in 2010, we incurred $7.5 million of increased spending related to materials, prototype and new product spending and $0.6 million in professional and outside services. This was partially offset by a decrease of $1.1 million related to depreciation expense and other costs. This increase in research and development expenses reflects ongoing investments in our higher fiber capacity platforms combined with investments in our ATN platform. Sales and Marketing Expenses 2011 Compared to 2010. Sales and marketing expenses increased $6.7 million in 2011 from 2010 primarily due to $2.7 million in compensation and personnel-related expenses due to increased headcount, $1.7 million of increased travel and related expenses, $1.2 million of increased marketing program expenses and trade show costs, $0.9 million of increased stock-based compensation expense, a $0.4 million increase related to outside professional services, $0.6 million of increased facilities and other costs, and $0.2 million related to increased expenses for customer lab trials. These increases were offset by $1.0 million in decreased sales commission expense. 2010 Compared to 2009. Sales and marketing expenses increased $9.7 million in 2010 from 2009 primarily due to an increase of $5.8 million in cash compensation and personnel expenses. This increase included $4.4 million of sales commissions primarily related to an over-achievement of the sales plan for the year. Additionally, stock-based compensation expense increased $1.4 million and travel and entertainment expenses and other costs increased $1.1 million. In 2010, we also incurred $0.9 million related to incremental customer lab trials and marketing prototype materials, and $0.5 million of additional professional and outside services. General and Administrative Expenses 2011 Compared to 2010. General and administrative expenses decreased $3.7 million in 2011 from 2010 primarily due to a $2.1 million decrease in cash compensation which included the impact of reduced management bonuses, $1.4 million of decreased stock-based compensation expense, and a 47 F O R M 1 0 - K $0.7 million decrease in facilities and other costs. These decreases were partially offset by increased depreciation costs of $0.4 million and increased professional services costs of $0.1 million. 2010 Compared to 2009. General and administrative expenses increased $12.8 million in 2010 from 2009 primarily due to $5.0 million of cash compensation, which includes the impact of increased headcount and management bonuses, and $4.8 million of stock-based compensation expense. In addition, facilities and professional services costs increased by $0.8 million and depreciation and amortization expense increased by $0.5 million. Additionally, 2009 was impacted by a recovery of doubtful accounts of $1.7 million. Restructuring and Other Costs In 2011, we recorded a credit of $0.1 million due to a change in estimates associated with facility- related costs. In 2010, we incurred $0.2 million of restructuring and other costs associated with the closure of our Maryland FAB. We incurred $0.8 million of restructuring and other related costs in 2009 which was comprised of non-cash charges of $0.6 million associated with operating lease termination costs and equipment and facilities-related costs and $0.2 million related to severance and related expenses and other exit costs. We completed our restructuring actions in 2010. For more information, see Note 7, “Restructuring and Other Related Costs,” to the Notes to Consolidated Financial Statements. Other Income (Expense), Net Years Ended December 31, 2011 December 25, 2010 December 26, 2009 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other-than-temporary impairment losses . . . . . . . . Portion of loss recognized in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — Net impairment losses recognized in earnings . . . . . . . . . . . . Other gain (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (419) — — — — (316) $ 2,688 — (2,747) 1,653 (1,094) (426) $1,014 (In thousands) $1,390 Total other income (expense), net . . . . . . . . . . . . . . . $ 595 $1,074 $ 1,168 2011 Compared to 2010. Interest income decreased in 2011 from 2010 due to lower interest rates on investments and lower average investment balances. Other gain (loss), net for 2011 includes $1.0 million of unrealized and realized losses due to foreign currency exchange, a gain of $0.3 million from the sale of assets and a gain of $0.2 million related to an insurance claim settlement. 2010 Compared to 2009. Interest income decreased in 2010 from 2009 due to lower interest rates on investments and lower average investment balances. In 2009, we recognized net credit impairment losses of $1.1 million related to the determination that our available-for-sale auction rate securities (“ARS”) were other-than-temporarily impaired, as discussed in Note 3, “Fair Value Measurements and Other-Than-Temporary Impairments,” of the Notes to Consolidated Financial Statements. Other gain (loss), net for 2010 includes $0.7 million of unrealized and realized losses due to foreign currency exchange re-measurement and $0.3 million gain on asset sales. Income Tax Provision (Benefit) During 2009, we recognized a tax benefit of approximately $2.1 million for a reversal of 2008 federal and state tax provisions, following a favorable ruling by the Internal Revenue Service in the third quarter of 2009. Exclusive of this one-time benefit in 2009, we recognized income tax expense of 48 K - 0 1 M R O F approximately $1.7 million in 2011 and $0.3 million in each of the fiscal years 2010 and 2009, on pre-tax book losses of $80.1 million, $27.6 million and $88.5 million, respectively. Exclusive of the one-time benefit mentioned above, the resulting effective tax rates of 2.1%, 1.1% and 0.4% for 2011, 2010 and 2009, respectively, differs from the expected statutory rate of 35% based upon unbenefited U.S. losses, non-deductible stock compensation charges and foreign taxes provided on foreign subsidiary earnings, offset by the benefit related to refundable research and development tax credits in 2009. The increase in the 2011 tax expense relates primarily to the expiration of the India tax holiday as well as the re-measurement of India transfer pricing FIN 48 reserves following a recent Competent Authority Ruling with similar fact patterns. Our India subsidiary operated under a tax holiday which expired on March 31, 2011 and the net impact of this tax holiday in prior years was to decrease our net loss by approximately $0.5 million and $0.4 million in 2010 and 2009, respectively, resulting in no per share effect in each year. During 2011, 2010 and 2009, income tax benefits of $0.1 million, $0.3 million and $0.3 million, respectively, for each year were allocated to the tax provision from continuing operations, related to the tax effects of items credited directly to other comprehensive income (“OCI”). Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided within the intra-period tax allocations rules when there is a pre-tax loss from continuing operations and there are items charged or credited to other categories, including OCI, in the current year. The intra-period tax allocation rules related to items charged or credited directly to OCI can result in disproportionate tax effects that remain in OCI until certain events occur. As of December 31, 2011, we recorded a full valuation allowance against our U.S. net deferred tax assets based upon our cumulative loss incurred since inception. Realization of deferred tax assets is dependent upon future taxable earnings, if any, the timing and amount of which are uncertain. Accordingly, the net U.S. deferred tax assets were fully offset by a valuation allowance. As of December 31, 2011, we have net operating loss carryforwards of approximately $266.9 million for federal tax purposes and $239.8 million for state tax purposes. If not utilized, these carryforwards will begin to expire in 2021 for federal tax purposes and 2013 for state tax purposes. Additionally, we have federal and California research and development credits available to reduce future income tax expense of approximately $22.9 million and $19.1 million, respectively. The federal research credits will begin to expire in the year 2021 if not utilized, while the California research credits have no expiration date. We maintain net operating losses generated from excess tax benefits associated with the accumulated stock award attributes in a memo account, not included in the deferred tax inventory balances. The additional tax benefit associated with these stock award attributes, of which the net operating loss amounts are included in the carryforward amounts noted above, is not recognized until the deduction reduces cash taxes payable. At December 31, 2011, we had unbenefited stock option deductions for federal and California tax purposes of $35.9 million and $33.2 million, respectively. When utilized, the estimated tax benefits of approximately $14.3 million will result in a credit to stockholders’ equity. Utilization of these net operating losses and tax credit carryforwards will be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant stockholder allocation or equity structure. Based upon our analysis, we have determined that an ownership change has occurred, however, the resulting limitation is not significant enough to cause our tax loss and credit carryforwards to expire unutilized. 49 F O R M 1 0 - K In determining future taxable income, we make 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 our income forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the existing valuation allowance. Utilization of these net operating losses and tax credit carryforwards will be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we experience an “ownership change” that may occur, for example, by a change in significant stockholder allocation or equity structure. Based upon our analysis, we have determined that an ownership change has occurred, however, the resulting limitation is not significant enough to cause our tax loss and credit carryforwards to expire unutilized. In determining future taxable income, we make 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 our income forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the existing valuation allowance. Liquidity and Capital Resources Net cash flow provided by (used in): Years Ended December 31, 2011 December 25, 2010 December 26, 2009 (In thousands) Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,965) $(25,168) $ 8,513 $ 30,537 $(45,722) $ 18,985 $(32,646) $(33,347) $ 8,944 K - 0 1 M R O F Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term and long-term investments . . . . . . . . . . . . . . . . . . . . . Short-term and long-term restricted cash . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2011 December 25, 2010 (In thousands) $ 94,458 155,611 3,047 $253,116 $113,649 177,966 4,091 $295,706 Cash, cash equivalents, short-term and long-term investments and short-term and long-term restricted cash consist of highly-liquid investments in certificates of deposits, money market funds, commercial paper, corporate bonds, U.S. agency notes and U.S. treasuries. As of December 31, 2011, long-term investments include $8.3 million (par value) of available-for-sale ARS. The restricted cash balance amounts are pledged as collateral for certain stand-by and commercial letters of credit. Operating Activities Net cash used in operating activities for 2011 was $2.0 million as compared to net cash provided by operating activities of $30.5 million for the corresponding period in 2010 and $32.6 million net cash used in operating activities in 2009. Cash flow from operating activities consists of net income (loss), adjusted for non-cash charges, plus or minus working capital changes. Our working capital 50 requirements can fluctuate significantly depending on the timing of deployments and the acceptance, billing and payment terms on those deployments. Additionally, our ability to manage inventory turns and our ability to negotiate favorable payment terms with our vendors may also impact our working capital requirements. Net loss for 2011 was $81.7 million, which included non-cash charges of $72.2 million, compared to a net loss of $27.9 million in the corresponding period in 2010, including non-cash charges of $69.2 million. Net loss for 2009 was $86.6 million, which included non-cash charges of $55.0 million. The deterioration in operating results in 2011 as compared to 2010 was the key driver for the significant change in cash flows for 2011. Net cash provided by working capital was $7.5 million for 2011. Working capital requirements for the fourth quarter of 2011 were impacted by the disruption of the supply chain due to flooding events in Thailand. As we implemented certain dual sourcing strategies to recover and meet customer commitments, we experienced non-linear supplier receipts and customer invoicing combined with higher ending inventory balances. The net effect of these factors on cash provided by working capital was a usage of cash of $1.4 million. Included in prepaid expenses and other assets was an $11.1 million decrease in deferred tax assets which was offset by a corresponding decrease in deferred tax liabilities included in accrued liabilities and other expenses. Other working capital changes included a reduction of other receivables of $3.4 million, reduction of deferred inventory costs of $2.0 million and an increase in warranty accruals of $1.4 million. The improved operating results in 2010 as compared to 2009, was the key driver for the improvement in cash flows for 2010. Net cash used to fund working capital was $10.8 million for 2010 primarily due to an increase in inventory of $13.1 million and an increase in accounts receivable of $6.8 million, offset by an increase in accrued liabilities of $9.2 million. We increased our inventory levels in early 2010 in response to industry supply chain constraints and expected increased customer demand for our products. However, revenues in the fourth quarter were lower than expected resulting in higher inventory levels exiting 2010. Accounts receivable increased primarily reflecting invoicing trends that were weighted towards the end of the period. Accrued liabilities and other expenses increased due to the timing and level of compensation related payments. Net cash used to fund working capital was $1.0 million for 2009. Accrued liabilities increased by $19.0 million primarily due to increases in compensation accruals of $5.8 million related to timing of payroll payments and an increase in management bonuses and sales commissions at the end of 2009. In addition, included in the increase in accrued liabilities was a $6.9 million increase in deferred tax liabilities which was offset by a corresponding increase in long-term deferred tax assets included in other non-current assets in our consolidated balance sheet. The remainder of the increase in accrued liabilities related to accruals for outside services incurred at the end of the year. These favorable changes in working capital were offset by an increase in inventories of $8.6 million related to increased levels of inventory awaiting customer acceptance at customer sites and increased service depot inventory required to support new service contracts sold during the year. In addition, deferred inventory costs increased by $6.2 million primarily due to a number of sales contracts where the earnings process was not complete at the end of 2009. Investing Activities Net cash used in investing activities in 2011 was $25.2 million primarily reflecting $39.4 million of capital expenditures and net proceeds of $18.5 million from purchases, net of maturities, calls and sales of investments in the period. We also invested an additional $4.5 million in an existing cost- method equity investment. Net cash used in investing activities in 2010 was $45.7 million primarily reflecting a net usage of cash of $20.8 million from purchases, net of maturities and calls of investments which also included 51 F O R M 1 0 - K proceeds of $24.5 million related to our exercise of the Put Rights associated with our UBS Financial Services, Inc. ARS. Additionally, we used $20.7 million related to capital expenditures during the year and we made a $4.5 million cost-method equity investment in the second quarter of 2010. During 2009, net cash used in investing activities was $33.3 million primarily due to a net usage of cash of $17.5 million from purchases, net of maturities, calls and sales of investments in the period and additions to property, plant and equipment for the period of $15.4 million. This was offset by a change in restricted cash of $1.1 million. Financing Activities Net proceeds from financing activities in 2011 were $8.5 million primarily related to $10.0 million in proceeds from the issuance of common stock under our Employee Stock Purchase Plan (“ESPP”) and other equity plans. This was offset by $1.2 million related to the repurchase of shares from employees to satisfy minimum tax withholdings and $0.3 million related to payments for purchase of assets under a financing arrangement. Net proceeds from financing activities in 2010 were $19.0 million primarily related to $19.3 million in proceeds from the issuance of common stock under our ESPP and other equity plans. This was offset by $0.3 million related to payments for purchase of assets under a financing arrangement. Net proceeds from financing activities in 2009 were $8.9 million primarily due to $9.3 million in proceeds from the issuance of common stock under our ESPP and other equity plans partially offset by $0.2 million reduction of tax benefit from stock option transactions. Liquidity As of December 31, 2011, we held $8.3 million (par value) with a fair value of $7.7 million of available-for-sale ARS with two issuers. Of these ARS, $5.0 million (par value) was AAA rated and $3.3 million (par value) was A3 rated. These ARS have contractual maturity terms of up to 33.9 years and it is not clear when we will be able to liquidate these investments. In 2009, we determined that the present value of the expected cash flows for these securities was below their par value, and recorded an initial other-than-temporary impairment (“OTTI”) of $2.7 million, equal to the difference between the fair value and the par value had occurred. During 2011, $0.6 million of these ARS were called at par value. K - 0 1 M R O F Failed auctions resulted in a lack of liquidity in the ARS but do not affect the underlying collateral of the securities. We do not anticipate that any potential lack of liquidity in our ARS, even for an extended period of time, will affect our ability to finance our operations, including our continued investments in research and development and planned capital expenditures. We continue to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. Our ARS investments are classified as non-current assets until we have better visibility as to when their liquidity will be restored. For 2012, capital expenditures are expected to be in the range of approximately $30 million to $35 million, primarily for product development. In addition, we may experience an increase in working capital requirements as we prepare for volume shipment of our DTN-X platform. We believe that our current cash and cash equivalents and investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least 12 months. If these sources of cash are insufficient to satisfy our liquidity requirements beyond 12 months, we may require 52 additional capital from equity or debt financings to fund our operations, to respond to competitive pressures or strategic opportunities, or otherwise. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer dilution in their percentage ownership of us, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Contractual Obligations The following is a summary of our contractual obligations as of December 31, 2011: Payments Due by Period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years (In thousands) Purchase obligations(1) . . . . . . . . . . . . . . . . . . . $ 58,816 $58,816 $ — $ — Operating leases(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other contracts(3) 41,178 6,178 9,857 650 5,442 5,528 8,770 — $ — 17,109 — Total contractual obligations(4) . . . . . . . . . $106,172 $69,786 $10,507 $8,770 $17,109 (1) We have service agreements with our major production suppliers under which we are committed to purchase certain parts. (2) We lease facilities under non-cancelable operating lease agreements. These leases have varying terms, predominantly no longer than ten years each and contain leasehold improvement incentives, rent holidays and escalation clauses that range from one to ten years. In addition, some of these leases have renewal options for up to five years. We also have contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. At the inception of a lease with such conditions, we record an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. An assumption of lease renewal where a renewal option exists is used only when the renewal has been determined to be reasonably assured. The estimated useful life of leasehold improvements is 1 one to 10 years. (3) Other contracts are related to contractual obligations for non-recurring engineering costs. (4) Tax liabilities of $1.5 million related to uncertain tax positions are not included in the table because we are unable to determine the timing of settlement if any, of these future payments with a reasonably reliable estimate. We 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. We had $4.0 million of standby letters of credit outstanding as of December 25, 2010. These consisted of $1.7 million related to a customer proposal guarantee, $1.3 million related to a value added tax license and $1.0 million related to property leases. Off-Balance Sheet Arrangements As of December 31, 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 53 F O R M 1 0 - K Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include revenue recognition, stock-based compensation, inventory valuation, allowances for sales reserves, allowances for doubtful accounts, accrued warranty, cash equivalents, fair value measurement of investments, other- than-temporary impairments, derivative instruments and accounting for income taxes. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected. Revenue Recognition In October 2009, the FASB amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to: • • • provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; require an entity to allocate revenue in an arrangement using ESP of deliverables if a vendor does not have VSOE of selling price or TPE of selling price; and eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price. We elected to early adopt this accounting guidance at the beginning of our first quarter of 2010 on a prospective basis for applicable transactions entered into or materially modified after December 26, 2009. In connection with our adoption of these standards, we re-evaluated the appropriate revenue recognition treatment of our products and determined that the majority of our products, which have both software and non-software components that function together to deliver the products’ essential functionality, are scoped out of the previous software specific revenue recognition guidance. Substantially all of our product sales are sold in combination with software support services comprised of either software warranty or software subscription services. We also periodically sell training, installation and deployment services, spares management and on-site hardware replacement services with our product sales. Training services include the right to a specified number of training classes and installation and deployment services may include customer site assessments, equipment installation and testing. Training and installation and deployment services are generally delivered over a 90-120 day period. Software warranty provides customers with maintenance releases and patches during the warranty support period. Software subscription also includes maintenance releases and patches and provides customers with rights to receive unspecified software product upgrades released during the support period. These support services are generally delivered over a one-year period. Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements and are generally delivered over a one-year period. 54 K - 0 1 M R O F We recognize product revenue when all of the following have occurred: (1) we have entered into a legally binding arrangement with the customer; (2) delivery has occurred, which is when product title and risk of loss have transferred to the customer; (3) customer payment is deemed fixed or determinable; and (4) collectability is reasonably assured. We allocate revenue to each element in our multiple-element arrangements based upon their relative selling prices. We determine the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or ESP if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met. VSOE of selling price is used in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. In certain instances, we are not able to establish VSOE for all deliverables in an arrangement with multiple elements. This mainly occurs where insufficient standalone sales transactions have occurred or where pricing for that element has not been consistent. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As our products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is typically difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. ESP represents the best estimate of the price at which we would transact a sale if the product or service was sold on a standalone basis. We determine ESP for a product or service by considering multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through formal approval by our management, taking into consideration the overall go-to-market pricing strategy. As our go-to-market strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP. As a result, our future revenue recognition for multiple element arrangements could differ materially from that recorded in the current period. We regularly review VSOE, TPE, and ESP and maintain internal controls over the establishment and update of these inputs. We limit the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges. We evaluate each deliverable in an arrangement to determine whether they represent separate units of accounting. Under the new revenue recognition guidance, more of our products and services qualify as separate units of accounting based on the selling price hierarchy for determination of relative selling price. Our adoption of the new accounting guidance for revenue recognition resulted in an increase in total revenues of $31.0 million, from $423.4 million to $454.4 million in the year ended December 25, 2010. In addition, the new accounting guidance for revenue recognition resulted in a decrease in net loss of $12.3 million, from a net loss of $40.2 million to net loss of $27.9 million in the year ended December 25, 2010. These increases in revenues are primarily related to an increase in net product revenues from bundled arrangements which would have previously been deferred until all deliverables had been completed or recognized ratably over the longest undelivered service period as VSOE of selling price had not been established for the undelivered element. In addition, we recognized product revenue on a number of purchase orders which had been partially shipped at the end of 2010. The impact of the new revenue recognition guidance in future periods will depend on the number of bundled arrangements entered into by us with undelivered elements for which VSOE of selling price had not been established under the existing software revenue recognition guidance. 55 F O R M 1 0 - K We have a limited number of software offerings which are not required to deliver the tangible product’s essential functionality and can be sold separately. Revenue from sales of these software products and related post-contract support will continue to be accounted for under software revenue recognition rules. Our multiple-element arrangements may therefore have a software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue recognition accounting guidance. Revenues related to these software offerings are not expected to be significant. Revenue arrangements entered into prior to the first quarter of 2010 continue to be accounted for under our previous revenue recognition policy. Services revenue includes software subscription services, training, installation and deployment services, spares management, on-site hardware replacement services and extended hardware warranty services. Revenue from software subscription, spares management, on-site hardware replacement services and extended hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally one year. Revenue related to training and installation and deployment services is recognized as the services are completed. Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. Revenue is recognized only when title and risk of loss pass to customers. In instances where acceptance of the product occurs upon formal written acceptance, revenue is deferred until such written acceptance has been received. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. However, payment terms greater than 120 days but less than or equal to one year from invoice may be considered standard if payment is supported by an irrevocable commercial letter of credit (“LOC”) issued by a creditworthy bank or if the LOC has been accepted and confirmed by a creditworthy bank. In the event payment terms are provided that differ from our standard business practices, the fees are deemed to not be fixed or determinable and, therefore, revenue is not recognized until the fees become fixed or determinable which we believe is when they are legally due and payable. We assess our ability to collect from our customers based primarily on the creditworthiness and past payment history of the customer. For sales to resellers, the same revenue recognition criteria apply. It is our practice to identify an end-user prior to shipment to a reseller. We do not offer rights of return or price protection to our resellers. Shipping charges billed to customers are included in product revenue and related shipping costs are included in product cost. We report revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the requisite service period (generally the vesting period) under the straight-line amortization method. We estimate the fair value of the stock options granted using the Black-Scholes option pricing formula and a single option award approach. For new-hire grants, options typically vest with respect to 56 K - 0 1 M R O F 25% of the shares one year after the option’s vesting commencement date and the remainder ratably on a monthly basis over three years, commencing one year after the vesting commencement date. For annual refresh grants, options typically vest ratably on a monthly basis over three, four or five years. In the first quarter of 2011, we granted performance-based stock options to executives as part of our annual refresh grant process. The performance-based stock options entitle our executive team to receive a number of options to purchase our common stock based on pre-established performance criteria over approximately two and a half years. These performance metrics are classified as performance conditions, and we evaluate the performance status at the end of each period and record the expense when deemed probable. We make a number of estimates and assumptions in determining stock-based compensation related to options including the following: • The expected forfeiture rate is estimated based on our historical forfeiture data and compensation costs are recognized only for those equity awards expected to vest. The estimation of the forfeiture rate requires judgment, and to the extent actual forfeitures differ from expectations, changes in estimate will be recorded as an adjustment in the period when such estimates are revised. Actual results may differ substantially from the estimates. • In October 2009, we started using our own historical data to estimate the expected term. Previously, we elected to use the simplified method to estimate the expected term due to increased liquidity of the underlying options in the post-IPO era as compared to our historical grants. • Expected volatility of our stock is based on the weighted-average implied and historical volatility of Infinera and our peer group. The peer group is comprised of similar companies in the same industrial sector. As we gain more historical volatility data, the weighting of our own data in the expected volatility calculation associated with options will gradually increase. We estimate the fair value of the rights to acquire stock under our ESPP using the Black-Scholes option pricing formula. Our ESPP typically provides for consecutive six-month offering periods and we use our own historical volatility data in the valuation of ESPP shares. We account for the fair value of restricted stock units (“RSUs”) using the closing market price of our common stock on the date of grant. For new-hire grants, RSUs typically vest ratably on an annual basis over four years. For annual refresh grants, RSUs typically vest ratably on an annual basis over three, four or five years. In 2009, we granted retention RSUs to executives which cliff vest after an approximate two-year period and to other employees which vest ratably on a monthly basis over one or two years. F O R M 1 0 - K We estimate the fair value of performance share units (“PSUs”) granted using a Monte Carlo simulation model. We granted PSUs to our executives in 2009 as part of our annual refresh grant process. The PSUs entitle our executive officers and members of our board of directors to receive a number of shares of our common stock based on our stock price performance over a three-year or four-year period as compared to the NASDAQ Composite Index (“NASDAQ”) for the same period. The PSUs cliff vest after three or four years and the number of shares to be issued upon vesting ranges from 0.5 to 2.0 times the number of PSUs granted depending on the relative performance of our common stock price compared to NASDAQ. This performance metric is classified as a market condition. The Monte Carlo simulation model is based on a discounted cash flow approach, with the simulation of a large number of possible stock price outcomes for our stock and NASDAQ. The use of the Monte Carlo simulation model requires the input of a number of assumptions including expected volatility of our stock price, expected volatility of NASDAQ, correlation between changes in our stock price and changes in NASDAQ, risk-free interest rate, and expected dividends. Expected volatility of our stock is based on the weighted-average implied and historical volatility of our peer group in the 57 industry in which we do business. Expected volatility of NASDAQ is based on the historical and implied data. Correlation is based on the historical relationship between our peer group stock price and NASDAQ composite average. The risk-free interest rate is based upon the treasury zero-coupon yield appropriate for the term of the PSU as of the grant date. The expected dividend yield is zero for us as we do not expect to pay dividends in the future. The expected dividend yield for NASDAQ is the annual dividend yield expressed as a percentage of the composite average of NASDAQ on the grant date. Inventory Valuation Inventories consist of raw materials, work-in-process and finished goods and are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market. Market value is based upon an estimated selling price reduced by the estimated cost of disposal. The determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing and technological obsolescence of our products. Inventory that is obsolete or in excess of our forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand. As of December 31, 2011 and December 25, 2010, our inventory value had been reduced by $6.3 million and $5.2 million, respectively, for excess and obsolescence. In valuing our deferred inventory costs, we considered whether the utility of the products delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. We concluded that, in the instances where the utility of the products delivered or expected to be delivered was less than cost, it was appropriate to value the inventory costs and deferred inventory costs at cost or market, whichever is lower, thereby recognizing the cost of the reduction in utility in the period in which the reduction occurred or can be reasonably estimated. We have, therefore, recognized inventory write-downs as necessary in each period in order to reflect inventory at the lower of cost or market (“LCM”). As of December 31, 2011 and December 25, 2010, our inventory value had been reduced by $7.3 million and $2.5 million, respectively, for LCM adjustments. K - 0 1 M R O F We considered whether we should accrue losses on firm purchase commitments related to inventory items. Given that the expected selling price of common equipment in the future remains below-cost, we have also recorded losses on these firm purchase commitments in the period in which the commitment is made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the purchase commitment. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Accounts Receivable and Allowances for Doubtful Accounts Accounts receivable consist of trade receivables recorded upon recognition of revenue for product and services revenues, reduced by reserves for estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on evaluation of the customer’s financial condition. We record our accounts receivable at the invoiced value. We make judgments as to our ability to collect outstanding receivables and provide allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a review of all significant outstanding invoices. At December 31, 2011 and December 25, 2010, our allowance for doubtful accounts was zero. 58 Allowances for Sales Returns Customer product returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns, where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are provided for as a reduction to revenue in 2009, 2010 and 2011. These were insignificant for any period presented on our consolidated financial statements. At December 31, 2011 and December 25, 2010, revenue reserves recorded for potential sales returns were $0.2 million and $0.1 million, respectively. Accrued Warranty We warrant that our products will operate substantially in conformity with product specifications. Upon delivery of our products, we provide for the estimated cost to repair or replace products or the related components that may be returned under warranty. Our hardware warranty periods range from one to five years from date of acceptance for hardware and 90 days for software warranty. The hardware warranty accrual is based on actual historical returns experience and the application of those historical return rates to our in-warranty installed base. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. We have software warranty support obligations to a small number of our customers and the costs associated with providing these software warranties have been insignificant to our consolidated financial statements to date. Cash, Cash Equivalents and Short-term and Long-term Investments We consider all highly liquid instruments with an original maturity at the date of purchase of 90 days or less to be cash equivalents. We maintain our cash in bank deposit accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. Marketable securities consist of certificates of deposit, commercial paper, corporate bonds, U.S. agency notes, U.S. treasuries and ARS. We consider all debt instruments with original maturities at the date of purchase greater than 90 days and remaining time to maturity of one year or less to be short- term investments. We classify debt instruments with remaining maturities greater than one year as long-term investments, unless we intend to settle our holdings within one year or less and in such case it is considered to be short-term investments. We determine the appropriate classification of our marketable securities at the time of purchase and re-evaluate such designations as of each balance sheet date. Available-for-sale investments are stated at fair market value with unrealized gains and losses recorded in Accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets and Other income (expense), net in the accompanying consolidated statements of operations. We evaluate our available-for-sale marketable debt securities for other-than-temporary impairments as discussed below and record any credit loss portion in Other income (expense), net in our consolidated statements of operations. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and for any credit losses incurred on these securities. Gains and losses are recognized when realized in the consolidated statements of operations under the specific identification method. Trading securities investments are stated at fair value with unrealized gains and losses reported in Other income (expense), net in the consolidated statements of operations, consisting of ARS trading securities and related Put Rights. Fair Value Measurement of Investments 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 59 F O R M 1 0 - K 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, we consider 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 us are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect our 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. We measure our cash equivalents, derivative instruments and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy. Our 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. We classify our 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 K - 0 1 M R O F We review 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 We review 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. 60 Corporate Bonds We review 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, we obtain 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, we classify our corporate bonds as Level 2 of the fair value hierarchy. U.S. Agency Notes We review 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, we use 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 Consolidated Financial Statements, we mainly hold non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. We estimate 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, we classify our derivative instruments as Level 2 of the fair value hierarchy. We classify our ARS within Level 3 of the fair value hierarchy. Our 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. These ARS represent approximately 4% of our total investment portfolio as of December 31, 2011. Uncertainties in the credit markets have affected all of our 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 our ARS, we 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, we 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 December 31, 2011, and therefore incorporated both valuations in our fair value measurement. The significant unobservable inputs and assumptions used in the discounted cash flow model to determine the fair value of our ARS, as of December 31, 2011, 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. 61 F O R M 1 0 - K • 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 205 bps to 335 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 December 31, 2011, we held $5.0 million (par value) of AAA rated securities and $3.3 million (par value) of A3 rated securities. Our 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. Our valuation analysis indicates that the estimated credit risk element included in the discount rate was 210 bps for A3 rated securities and 263 bps for AAA rated securities. • Estimated maturity We estimated the workout period of our 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, we 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 9.2 years for A3 rated securities and 10 years for AAA securities. Other-Than-Temporary Impairments We review our available-for-sale marketable debt securities on a regular basis to evaluate whether or not a security has experienced an other-than-temporary decline in fair value. If a debt security’s market value is below amortized cost and we either intend to sell the security or it is more likely than not that we will be required to sell the security before our anticipated recovery, we record an OTTI charge to earnings for the entire amount of the impairment. When we do not intend to sell an impaired security and it is not more likely than not that we will be required to sell prior to recovery of its amortized cost basis, we separate the OTTI into credit and non-credit loss portions. The amount representing the credit loss is recognized in Other income (expense), net, and the amount related to all other factors is recognized in Accumulated other comprehensive loss. In determining if a credit loss has occurred, it is our policy to isolate the credit loss related portion of the discount rate used to derive the fair market value of the security and apply this to the expected cash flows in order to determine the portion of the OTTI that is credit loss related. This credit related portion of the discount rate is based on the financial condition of the issuer, changes in rating agency credit ratings for the security or increases in credit related yield spreads on similar securities offered by the same issuer. Once a credit impairment loss has been recognized in our consolidated statements of operations, the amortized cost basis of that available-for-sale security is reduced by the amount of the credit impairment loss, resulting in a new cost basis for the security. Any non-credit related unrealized gains and losses are recorded in Accumulated other comprehensive loss in our consolidated balance sheets. We will continue to monitor the security’s credit rating and credit spread and will accrete any reduction in the credit impairment loss to interest income over the expected life of the security. Derivative Instruments As discussed in Note 5, “Derivative Instruments,” to the Notes to Consolidated Financial Statements, we mainly hold non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. We estimate the fair values of derivatives based on quoted 62 K - 0 1 M R O F 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, we classify our derivative instruments as Level II of the fair value hierarchy. Accounting for Income Taxes As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income within the respective jurisdictions against which these deductions, losses and credits can be utilized within the applicable future periods. We must assess the likelihood that some portion or all of our deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent we believe that recovery does not meet the “more-likely-than-not” standard, we must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2011 and December 25, 2010, certain of our domestic net deferred tax assets were fully reserved with a valuation allowance because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize those deferred tax assets in the future. We intend to maintain a valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance. We make estimates and judgments about our future taxable income, by jurisdiction, based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Recent Accounting Pronouncements See Note 2, “Significant Accounting Policies,” to the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoptions and effects on us. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Risk A majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do incur some insignificant operating costs in other currencies. In addition, certain of our sales contracts are priced in Euros and, therefore, a portion of our revenue is subject to foreign currency risks. Our operating expenses and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the India Rupee, Chinese Yuan, British pound and the Euro. The effect of an immediate 10% adverse change in exchange rates on foreign denominated transactions as of December 31, 2011 and December 25, 2010 would result in a loss of approximately $1.0 million and $1.8 million, respectively for the year then ended. Beginning in the second quarter of 2009, we established a foreign currency risk management program to help protect against the impact 63 F O R M 1 0 - K of foreign currency exchange rate movements on our operating results. We enter into foreign currency exchange forward contracts to reduce the impact of foreign currency fluctuations on accounts receivable denominated in currencies other than our functional currency, which is the U.S. dollar. As a result, we do not expect a significant impact to our results from a change in exchange rates on foreign denominated accounts receivable balances in the near-term. Fluctuations in our currency exchange rates could impact our business in the future. Interest Rate Sensitivity We had cash and cash equivalents, short-term and long-term investments and short-term and long-term restricted cash totaling $253.1 million and $295.7 million as of December 31, 2011 and December 25, 2010, respectively. As of December 31, 2011, we invested in certificates of deposit, money market funds, commercial paper, corporate bonds, U.S. agency notes, U.S. treasuries and ARS. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for speculative purposes. We believe that we do not have any material exposure to changes in the fair value as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income. If overall interest rates fell by 10% in 2011 and 2010, our interest income would have declined approximately $0.1 million and $0.1 million for such years, assuming consistent investment levels. As of December 31, 2011 and December 25, 2010, we had no debt outstanding. Auction Rate Securities As of December 31, 2011, we held $8.3 million (par value) with a fair value of $7.7 million of available-for-sale ARS with two issuers. Of these ARS, $5.0 million (par value) was AAA rated and $3.3 million (par value) was A3 rated. These ARS have contractual maturity terms of up to 33.9 years and it is not clear when we will be able to liquidate these investments. In 2009, we determined that the present value of the expected cash flows for these securities was below their par value, and recorded an initial OTTI of $2.7 million, equal to the difference between the fair value and the par value had occurred. During 2011, $0.6 million of these A3 rated ARS were called at par value. K - 0 1 M R O F Failed auctions resulted in a lack of liquidity in the ARS but do not affect the underlying collateral of the securities. We do not anticipate that any potential lack of liquidity in our ARS, even for an extended period of time, will affect our ability to finance our operations, including our continued investments in research and development and planned capital expenditures. We continue to monitor efforts by the financial markets to find alternative means for restoring the liquidity of these investments. Our ARS investments are classified as non-current assets until we have better visibility as to when their liquidity will be restored. See Note 3, “Fair Value Measurements and Other-Than-Temporary Impairment,” to the Notes to Consolidated Financial Statements for further information. 64 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 66 68 69 70 72 73 F O R M 1 0 - K 65 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm The Board of Directors and Stockholders Infinera Corporation We have audited the accompanying consolidated balance sheets of Infinera Corporation as of December 31, 2011 and December 25, 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Infinera Corporation at December 31, 2011 and December 25, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. K - 0 1 M R O F As discussed in Note 2 to the consolidated financial statements, Infinera Corporation changed its method of accounting for revenue recognition with the adoption of amendments to the Financial Accounting Standards Board Accounting Standards Codification resulting from Accounting Standards Update No. 2009-13, Multiple-Deliverable Arrangements, and Accounting Standards Update No. 2009-14, Certain Revenue Arrangements That Include Software Elements, both adopted effective December 27, 2009. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Infinera Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2012 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP San Jose, California March 6, 2012 66 Report of Ernst & Young LLP, Independent Registered Public Accounting Firm The Board of Directors and Stockholders Infinera Corporation We have audited Infinera Corporation’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Infinera Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Infinera Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Infinera Corporation as of December 31, 2011 and December 25, 2010, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011 of Infinera Corporation and our report dated March 6, 2012 expressed an unqualified opinion thereon. /s/ ERNST & YOUNG LLP San Jose, California March 6, 2012 67 F O R M 1 0 - K INFINERA CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except par values) December 31, 2011 December 25, 2010 ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred inventory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred inventory costs, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . . . . Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued warranty, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94,458 101,296 — 80,616 1,346 88,996 5,987 10,532 383,231 76,753 1,020 54,315 9,000 3,047 822 3,516 $ 531,704 $ 48,838 22,421 18,966 5,692 22,781 767 119,465 7,173 3,410 13,853 $ 113,649 168,013 1,856 75,931 4,420 81,893 6,715 9,118 461,595 51,740 2,512 9,953 4,500 2,235 11,882 7,108 $ 551,525 $ 35,658 19,790 25,098 5,696 21,958 11,882 120,082 5,726 4,633 10,335 Commitments and contingencies (Note 10) Stockholders’ equity: Preferred stock, $0.001 par value Authorized shares—25,000 and no shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — Common stock, $0.001 par value Authorized shares—500,000 in 2011 and 2010 Issued and outstanding shares—106,976 in 2011 and 102,492 in 2010 . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . 107 876,927 (2,195) (487,036) 387,803 $ 531,704 102 817,200 (1,261) (405,292) 410,749 $ 551,525 The accompanying notes are an integral part of these consolidated financial statements. 68 K - 0 1 M R O F INFINERA CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Years Ended December 31, 2011 December 25, 2010 December 26, 2009 Revenue: Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratable product and related support and services . . . . . Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $349,468 3,176 52,233 $401,578 6,155 46,619 $276,012 4,231 28,858 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404,877 454,352 309,101 Cost of revenue: Cost of product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of ratable product and related support and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs (credit) related to cost of 219,710 225,183 189,723 1,096 18,580 3,217 19,945 revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Total cost of revenue . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses: Research and development . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other costs (credit) . . . . . . . . . . . . . . . . 239,386 165,491 127,120 64,773 54,375 (129) Total operating expenses . . . . . . . . . . . . . . . . . . 246,139 (182) 248,163 206,189 118,518 58,103 58,098 159 234,878 Loss from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other-than-temporary impairment losses . . . . . Portion of loss recognized in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net impairment losses recognized in earnings . . . . . . . . . Other gain (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014 — — — (419) 1,390 — — — (316) (80,648) (28,689) (89,661) Total other income (expense), net . . . . . . . . . . . Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (benefit from) income taxes . . . . . . . . . . . . . . . . . 595 (80,053) 1,691 1,074 (27,615) 317 Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (81,744) $ (27,932) $ (86,622) Net loss per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (0.78) (0.78) $ $ (0.28) (0.28) $ $ (0.91) (0.91) Weighted average shares used in computing net loss per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,432 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,432 99,380 99,380 95,468 95,468 The accompanying notes are an integral part of these consolidated financial statements. 69 1,931 12,308 3,038 207,000 102,101 97,288 48,391 45,269 814 191,762 2,688 (2,747) 1,653 (1,094) (426) 1,168 (88,493) (1,871) F O R M 1 0 - K INFINERA CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended December 26, 2009, December 25, 2010 and December 31, 2011 (In thousands, except per share data) Balance at December 27, 2008 . . . . . . . . . Stock options exercised . . . . . . . . . . . ESPP shares purchased . . . . . . . . . . . Stock options repurchased . . . . . . . . . Reclassification of options exercised but not vested . . . . . . . . . . . . . . . . . . Restricted stock units released . . . . . Warrants, net exercised . . . . . . . . . . . Stock-based compensation . . . . . . . . Tax benefit from stock option transactions . . . . . . . . . . . . . . . . . . . Comprehensive loss: Unrealized non-credit related other-than-temporary impairment loss on available-for-sale investments . . . . . . . . . . . . . . . . Unrealized gain on all other available-for-sale investments . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . Tax related to available-for-sale investment . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . Total comprehensive loss . . . . . . . . . . Balance at December 26, 2009 . . . . . . . . . Stock options exercised . . . . . . . . . . . ESPP shares purchased . . . . . . . . . . . Stock options repurchased . . . . . . . . . Reclassification of options exercised but not vested . . . . . . . . . . . . . . . . . . Restricted stock units released . . . . . Stock-based compensation . . . . . . . . Comprehensive loss: Unrealized non-credit related other-than-temporary impairment gain on available-for-sale investments . . . . . . . . . . . . . . . . Unrealized gain on all other available-for-sale investments . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . . Tax related to available-for-sale investment . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . Total comprehensive loss . . . . . . . . . . Common Stock Shares Amount 94,163 954 1,239 $ 94 1 1 (16) — Additional Paid-in Capital $699,705 2,108 7,200 (31) — 466 68 — — — — — — — — 1 — — — — — — — — 640 (1) — 38,552 (593) — — — — — 96,874 3,094 1,205 $ 97 3 1 (3) — $747,580 11,847 7,561 (14) — 1,322 — — 1 — 200 (13) 50,039 — — — — — — — — — — — — — — — Accumulated Other Comprehensive Loss $(3,598) — — — — — — — — (923) 2,805 221 (315) — $(1,810) — — — — — — 820 (30) 75 (316) — Accumulated Deficit Total $(290,738) $405,463 2,109 7,201 (31) — — — — — — — — — — — — (86,622) 640 — — 38,552 (593) (923) 2,805 221 (315) (86,622) (84,834) $(377,360) $368,507 11,850 7,562 (14) — — — — — — — — — — (27,932) 200 (12) 50,039 820 (30) 75 (316) (27,932) (27,383) Balance at December 25, 2010 . . . . . . . . . 102,492 $102 $817,200 $(1,261) $(405,292) $410,749 The accompanying notes are an integral part of these consolidated financial statements. 70 K - 0 1 M R O F INFINERA CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY For the Years Ended December 26, 2009, December 25, 2010 and December 31, 2011— (Continued) (In thousands, except per share data) Balance at December 25, 2010 . . . . . . . . Stock options exercised . . . . . . . . . . ESPP shares purchased . . . . . . . . . Stock options repurchased . . . . . . . Reclassification of options exercised but not vested . . . . . . . Restricted stock units released . . . . Stock-based compensation . . . . . . . Comprehensive loss: Unrealized non-credit related other-than-temporary impairment gain on available-for-sale investments . . . . . . . . . . . . . . Unrealized gain on all other available-for-sale investments . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . . . . . Tax related to available-for-sale investment . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . Total comprehensive loss . . . . . . . . Common Stock Shares Amount 102,492 378 1,309 (140) — $102 1 1 Additional Paid-in Capital $817,200 1,449 8,461 (1,248) — 2,937 — — 3 — 1 (3) 51,067 — — — — — — — — — — — — — — — Accumulated Other Comprehensive Loss $(1,261) — — — — — — 410 (105) (1,117) (122) — Accumulated Deficit Total $(405,292) $410,749 1,450 8,462 (1,248) — — — — — — — — — — (81,744) 1 — 51,067 410 (105) (1,117) (122) (81,744) (82,678) Balance at December 31, 2011 . . . . . . . . 106,976 $107 $876,927 $(2,195) $(487,036) $387,803 F O R M 1 0 - K The accompanying notes are an integral part of these consolidated financial statements. 71 INFINERA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash Flows from Operating Activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash restructuring and other costs (credit) . . . . . . . . . . . . . . . . . Net credit impairment losses in earnings . . . . . . . . . . . . . . . . . . . . . . Provision for other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recovery of doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of premium on investments . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on Put Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized holding gain for trading securities . . . . . . . . . . . . . . . . . . . Tax benefit of stock option transactions . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefit from stock option transactions . . . . . . . . . . . . . . . Non-cash tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . Deferred inventory costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities and other expenses . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) operating activities . . . . . . Cash Flows from Investing Activities: Purchase of available-for-sale investments . . . . . . . . . . . . . . . . . . . . Purchase of cost-method investment . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of available-for-sale investments . . . . . . . . . . . Proceeds from maturities and calls of investments, and exercise of Put Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . Advance to secure manufacturing capacity . . . . . . . . . . . . . . . . . . . . Reimbursement of manufacturing capacity advance . . . . . . . . . . . . . Change in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . Cash Flows from Financing Activities: Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . Reduction of tax benefit from stock option transactions . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments for purchase of assets under financing arrangement Net cash provided by financing activities . . . . . . . . . . . . . . . Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . Years Ended December 31, 2011 December 25, 2010 December 26, 2009 $ (81,744) $ (27,932) $ (86,622) 17,859 (129) — 563 — 4,215 50,157 — — — — (95) (335) (4,686) 3,440 (6,007) 12,695 1,999 9,342 (10,282) (401) 1,444 (1,965) (273,334) (4,500) 4,072 287,781 262 (39,382) (1,500) 450 983 (25,168) 10,023 — (1,248) (262) 8,513 (571) (19,191) 113,649 15,619 100 — — — 3,761 50,335 1,696 (1,696) — — (316) (275) (6,448) (307) (13,143) (2,640) 928 1,161 9,196 216 282 30,537 (253,130) (4,500) — 232,333 324 (20,672) — — (77) (45,722) 19,348 — (14) (349) 18,985 (10) 3,790 109,859 16,547 2,973 1,094 — (1,700) 604 37,375 3,761 (4,584) 248 (593) (315) (418) 1,571 263 (8,618) (9,589) (6,180) (2,594) 18,964 3,968 1,199 (32,646) (163,870) — 1,536 144,795 699 (15,394) — — (1,113) (33,347) 9,310 (248) (31) (87) 8,944 138 (56,911) 166,770 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 94,458 $ 113,649 $ 109,859 Supplemental disclosures of cash flow information: Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental schedule of non-cash financing activities Purchase of assets under financing arrangement . . . . . . . . . . . . . . . $ $ 1,487 — $ $ 739 — $ $ 1,442 567 The accompanying notes are an integral part of these consolidated financial statements. 72 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Basis of Presentation Infinera Corporation (“Infinera” or the “Company”), headquartered in Sunnyvale, California, was founded in December 2000 and incorporated in the State of Delaware. Infinera specializes in Digital Optical Networking systems that are designed to continually improve the economics of optical networking by combining the speed of optics with the simplicity of digital. Infinera is unique in its use of breakthrough semiconductor technology: Large Scale Photonic Integrated Circuit (PIC). Infinera’s systems leverage PIC technology to provide customers with a service-ready architecture that enables faster time-to-revenue and greater profitability through network efficiency and the ability to rapidly deliver differentiated services without reengineering their optical infrastructure. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal year 2011 was a 53-week year that ended on December 31, 2011. Fiscal years 2010 and 2009 were 52-week years that ended on December 25, 2010 and December 26, 2009, respectively. The next 52-week year will end on December 29, 2012 and the next 53-week year will end on December 31, 2016. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated. The Company reclassified certain amounts reported in previous periods to conform to the current presentation. 2. Significant Accounting Policies Use of Estimates The consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”). These accounting principles require the Company to make certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, 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. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected. F O R M 1 0 - K Revenue Recognition In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements to: • • provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; require an entity to allocate revenue in an arrangement using estimated selling price (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence (“TPE”) of selling price; and 73 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) • eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price. The Company elected to early adopt this accounting guidance at the beginning of its first quarter of 2010 on a prospective basis for applicable transactions entered into or materially modified after December 26, 2009. In connection with its adoption of these standards, the Company re-evaluated the appropriate revenue recognition treatment of its products and determined that the majority of its products, which have both software and non-software components that function together to deliver the products’ essential functionality, are scoped out of the previous software specific revenue recognition guidance. Substantially all of the Company’s product sales are sold in combination with software support services comprised of either software warranty or software subscription services. The Company also periodically sells training, installation and deployment services, spares management and on-site hardware replacement services with its product sales. Training services include the right to a specified number of training classes and installation and deployment services may include customer site assessments, equipment installation and testing. Training and installation and deployment services are generally delivered over a 90-120 day period. Software warranty provides customers with maintenance releases and patches during the warranty support period. Software subscription also includes maintenance releases and patches and provides customers with rights to receive unspecified software product upgrades released during the support period. These support services are generally delivered over a one-year period. Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements and are generally delivered over a one-year period. K - 0 1 M R O F The Company recognizes product revenue when all of the following have occurred: (1) it has entered into a legally binding arrangement with the customer; (2) delivery has occurred, which is when product title and risk of loss have transferred to the customer; (3) customer payment is deemed fixed or determinable; and (4) collectability is reasonably assured. The Company allocates revenue to each element in its multiple-element arrangements based upon their relative selling prices. The Company determines the selling price for each deliverable based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, TPE if VSOE is not available, or ESP if neither VSOE nor TPE is available. Revenue allocated to each element is then recognized when the basic revenue recognition criteria for that element has been met. VSOE of selling price is used in the selling price allocation in all instances where it exists. VSOE of selling price for products and services is determined when a substantial majority of the selling prices fall within a reasonable range when sold separately. In certain instances, the Company is not able to establish VSOE for all deliverables in an arrangement with multiple elements. This mainly occurs where insufficient standalone sales transactions have occurred or where pricing for that element has not been consistent. TPE of selling price can be established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As the Company’s products contain a significant element of proprietary technology and the solution offered differs substantially from that of competitors, it is typically difficult to obtain the reliable standalone competitive pricing necessary to establish TPE. 74 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) ESP represents the best estimate of the price at which the Company would transact a sale if the product or service was sold on a standalone basis. The Company determines ESP for a product or service by considering multiple factors including, but not limited to customer type, geography, market conditions, competitive landscape, gross margin objectives and pricing practices. The determination of ESP is made through formal approval by the Company’s management, taking into consideration the overall go-to-market pricing strategy. As the Company’s go-to-market strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP. As a result, the Company’s future revenue recognition for multiple element arrangements could differ materially from that recorded in the current period. The Company regularly reviews VSOE, TPE and ESP and maintains internal controls over the establishment and update of these inputs. The Company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or refund privileges. The Company evaluates each deliverable in an arrangement to determine whether they represent separate units of accounting. Under the new revenue recognition guidance, more of the Company’s products and services qualify as separate units of accounting based on the selling price hierarchy for determination of relative selling price. The Company’s adoption of the new accounting guidance for revenue recognition resulted in an increase in total revenues of $31.0 million, from $423.4 million to $454.4 million in the year ended December 25, 2010. In addition, the new accounting guidance for revenue recognition resulted in a decrease in net loss of $12.3 million, from a net loss of $40.2 million to net loss of $27.9 million in the year ended December 25, 2010. The Company has a limited number of software offerings which are not required to deliver the tangible product’s essential functionality and can be sold separately. Revenue from sales of these software products and related post-contract support will continue to be accounted for under software revenue recognition rules. The Company’s multiple-element arrangements may therefore have a software deliverable that is subject to the existing software revenue recognition guidance. The revenue for these multiple-element arrangements is allocated to the software deliverable and the non-software deliverables based on the relative selling prices of all of the deliverables in the arrangement using the hierarchy in the new revenue recognition accounting guidance. Revenues related to these software offerings are not expected to be significant. F O R M 1 0 - K Revenue arrangements entered into prior to the first quarter of 2010 continue to be accounted for under the Company’s previous revenue recognition policy. Services revenue includes software subscription services, training, installation and deployment services, spares management, on-site hardware replacement services and extended hardware warranty services. Revenue from software subscription, spares management, on-site hardware replacement services and extended hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally one year. Revenue related to training and installation and deployment services is recognized as the services are completed. Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. Revenue is recognized only when title and risk of loss pass to 75 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) customers. In instances where acceptance of the product occurs upon formal written acceptance, revenue is deferred until such written acceptance has been received. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. However, payment terms greater than 120 days but less than or equal to one year from invoice may be considered standard if payment is supported by an irrevocable commercial letter of credit (“LOC”) issued by a creditworthy bank or the LOC has been accepted and confirmed by a creditworthy bank. In the event payment terms are provided that differ from the Company’s standard business practices, the fees are deemed to not be fixed or determinable and, therefore, revenue is not recognized until the fees become fixed or determinable which the Company believes is when they are legally due and payable. The Company assesses its ability to collect from its customers based primarily on the creditworthiness and past payment history of the customer. For sales to resellers, the same revenue recognition criteria apply. It is the Company’s practice to identify an end-user prior to shipment to a reseller. The Company does not offer rights of return or price protection to its resellers. Shipping charges billed to customers are included in product revenue and related shipping costs are included in product cost. The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority. Stock-Based Compensation Stock-based compensation cost is measured at the grant date based on the fair value of the award, and is recognized as expense over the requisite service period (generally the vesting period) under the straight-line amortization method. The Company estimates the fair value of the stock options granted using the Black-Scholes option pricing formula and a single option award approach. For new-hire grants, options typically vest with respect to 25% of the shares one year after the option’s vesting commencement date and the remainder ratably on a monthly basis over three years, commencing one year after the vesting commencement date. For annual refresh grants, options typically vest ratably on a monthly basis over three, four or five years. In the first quarter of 2011, we granted performance-based stock options to executives as part of our annual refresh grant process. The performance-based stock options entitle the Company’s executive team to receive a number of options to purchase the Company’s common stock based on pre-established performance criteria over approximately two and a half years. These performance metrics are classified as performance conditions, and the Company evaluates the performance status at the end of each period and records the expense when deemed probable. The Company makes a number of estimates and assumptions in determining stock-based compensation related to options including the following: • The expected forfeiture rate is estimated based on the Company’s historical forfeiture data and compensation costs are recognized only for those equity awards expected to vest. The estimation of the forfeiture rate requires judgment, and to the extent actual forfeitures differ from expectations, changes in estimate will be recorded as an adjustment in the period when such estimates are revised. Actual results may differ substantially from the estimates. • In October 2009, the Company started using its own historical data to estimate the expected term. Previously, the Company elected to use the simplified method to estimate the expected 76 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) term due to increased liquidity of the underlying options in the post-IPO era as compared to the Company’s historical grants. • Expected volatility of the Company’s stock is based on the weighted-average implied and historical volatility of Infinera and its peer group. The peer group is comprised of similar companies in the same industrial sector. As the Company gains more historical volatility data, the weighting of its own data in the expected volatility calculation associated with options will gradually increase. The Company estimates the fair value of the rights to acquire stock under its Employee Stock Purchase Plan (“ESPP”) using the Black-Scholes option pricing formula. The Company’s ESPP typically provides for consecutive six-month offering periods and the Company uses its own historical volatility data in the valuation of ESPP shares. The Company accounts for the fair value of restricted stock units (“RSUs”) using the closing market price of the Company’s common stock on the date of grant. For new-hire grants, RSUs typically vest ratably on an annual basis over four years. For annual refresh grants, RSUs typically vest ratably on an annual basis over three, four or five years. In 2009, the Company also granted retention RSUs to executives which cliff vest after an approximate two-year period and to other employees which vest ratably on a monthly basis over one or two years. The Company estimates the fair value of performance stock units (“PSUs”) granted using a Monte Carlo simulation model. The Company granted PSUs in 2009 as part of the Company’s annual refresh grant process. The PSUs entitle the Company’s executive officers and members of its board of directors to receive a number of shares of the Company’s common stock based on the Company’s stock price performance over a three-year or four-year period as compared to the NASDAQ Composite Index (“NASDAQ”) for the same period. The PSUs cliff vest after three or four years and the number of shares to be issued upon vesting ranges 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 NASDAQ. This performance metric is classified as a market condition. The Monte Carlo simulation model is based on a discounted cash flow approach, with the simulation of a large number of possible stock price outcomes for the Company’s stock and NASDAQ. The use of the Monte Carlo simulation model requires the input of a number of assumptions including expected volatility of the Company’s stock price, expected volatility of NASDAQ, correlation between changes in the Company’s stock price and changes in NASDAQ, risk-free interest rate, and expected dividends. Expected volatility of the Company’s stock is based on the weighted-average implied and historical volatility of the Company’s peer group in the industry in which the Company does business. Expected volatility of NASDAQ is based on the historical and implied data. Correlation is based on the historical relationship between the Company’s peer group stock price and NASDAQ composite average. The risk-free interest rate is based upon the treasury zero-coupon yield appropriate for the term of the PSU as of the grant date. The expected dividend yield is zero for the Company as it does not expect to pay dividends in the future. The expected dividend yield for NASDAQ is the annual dividend yield expressed as a percentage of the composite average of NASDAQ on the grant date. Inventory Valuation Inventories consist of raw materials, work-in-process and finished goods and are stated at standard cost adjusted to approximate the lower of actual cost (first-in, first-out method) or market. Market value is based upon an estimated selling price reduced by the estimated cost of disposal. The 77 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) determination of market value involves numerous judgments including estimated average selling prices based upon recent sales volumes, industry trends, existing customer orders, current contract price, future demand and pricing and technological obsolescence of the Company’s products. Inventory that is obsolete or in excess of the Company’s forecasted demand or is anticipated to be sold at a loss is written down to its estimated net realizable value based on historical usage and expected demand. As of December 31, 2011 and December 25, 2010, the Company’s inventory value had been reduced by $6.3 million and $5.2 million, respectively, for excess and obsolescence. In valuing its deferred inventory costs, the Company considered whether the utility of the products delivered or expected to be delivered at less than cost, primarily comprised of common equipment, had declined. The Company concluded that, in the instances where the utility of the products delivered or expected to be delivered was less than cost, it was appropriate to value the inventory costs and deferred inventory costs at cost or market, whichever is lower, thereby recognizing the cost of the reduction in utility in the period in which the reduction occurred or can be reasonably estimated. The Company has, therefore, recognized inventory write-downs as necessary in each period in order to reflect inventory at the lower of cost or market (“LCM”). As of December 31, 2011 and December 25, 2010, the Company’s inventory value had been reduced by $7.3 million and $2.5 million, respectively, for LCM adjustments. The Company considered whether it should accrue losses on firm purchase commitments related to inventory items. Given that the expected selling price of common equipment in the future remains below-cost, the Company has also recorded losses on these firm purchase commitments in the period in which the commitment is made. When the inventory parts related to these firm purchase commitments are received, that inventory is recorded at the purchase price less the accrual for the loss on the purchase commitment. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Accounts Receivable and Allowances for Doubtful Accounts Accounts receivable consist of trade receivables recorded upon recognition of revenue for product and services revenues, reduced by reserves for estimated bad debts and returns. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Credit is extended based on evaluation of the customer’s financial condition. The Company records its accounts receivable at the invoiced value. Management makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a review of all significant outstanding invoices. At December 31, 2011 and December 25, 2010, the Company’s allowance for doubtful accounts was zero. Allowances for Sales Returns Customer product returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns, where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are provided for as a reduction to revenue in 2009, 2010 and 2011. These were insignificant for any period presented on the Company’s consolidated financial statements. At December 31, 2011 and December 25, 2010, revenue reserves recorded for potential sales returns were $0.2 million and $0.1 million, respectively. 78 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Accrued Warranty The Company warrants that its products will operate substantially in conformity with product specifications. Upon delivery of the Company’s products, the Company provides for the estimated cost to repair or replace products or the related components that may be returned under warranty. The Company’s hardware warranty periods range from one to five years from date of acceptance for hardware and 90 days to 60 months for software warranty. The hardware warranty accrual is based on actual historical returns experience and the application of those historical return rates to the Company’s in-warranty installed base. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The Company has software warranty support obligations to a small number of its customers and the costs associated with providing these software warranties have been insignificant to the Company’s consolidated financial statements to date. Cash, Cash Equivalents and Short-term and Long-term Investments The Company considers all highly liquid instruments with an original maturity at the date of purchase of 90 days or less to be cash equivalents. These instruments may include cash, money market funds and commercial paper. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Marketable securities consist of certificates of deposit, commercial paper, corporate bonds, U.S. agency notes, U.S. treasuries and auction rate securities (“ARS”). The Company considers all debt instruments with original maturities at the date of purchase greater than 90 days and remaining time to maturity of one year or less to be short-term investments. The Company classifies debt instruments with remaining maturities greater than one year as long-term investments, unless the Company intends to settle its holdings within one year or less and in such case it is considered to be short-term investments. The Company determines the appropriate classification of its marketable securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Available-for-sale investments are stated at fair market value with unrealized gains and losses recorded in Accumulated other comprehensive loss in the Company’s consolidated balance sheets and Other income (expense), net in the Company’s consolidated statements of operations. The Company evaluates its available-for-sale marketable debt securities for other-than-temporary impairments as discussed below and records any credit loss portion in Other income (expense), net in the Company’s consolidated statements of operations. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity and for any credit losses incurred on these securities. Gains and losses are recognized when realized in the Company’s consolidated statements of operations under the specific identification method. Trading securities investments are stated at fair value with unrealized gains and losses reported in Other income (expense), net in the Company’s consolidated statements of operations, consisting of ARS trading securities and related Put Rights. Fair Value Measurement of Investments 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 79 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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. 80 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 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 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. These ARS represent approximately 4% of our total investment portfolio as of December 31, 2011. 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 December 31, 2011, and therefore incorporated both valuations in the Company’s fair value measurement. F O R M 1 0 - K 81 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2011, 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 205 bps to 335 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 December 31, 2011, the Company held $5.0 million (par value) of AAA rated securities and $3.3 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 210 bps for A3 rated securities and 263 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 9.2 years for A3 rated securities and 10 years for AAA securities. Other-Than-Temporary Impairments The Company reviews its available-for-sale marketable debt securities on a regular basis to evaluate whether or not a security has experienced an other-than-temporary decline in fair value. If a debt security’s market value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the Company records an other-than-temporary impairment (“OTTI”) charge to earnings for the entire amount of the impairment. When the Company does not intend to sell an impaired security and it is not more likely than not that the Company will be required to sell prior to recovery of its amortized cost basis, the Company separates the OTTI into credit and non-credit loss portions. The amount representing the credit loss is recognized in Other income (expense), net, and the amount related to all other factors is recognized in Accumulated other comprehensive loss. In determining if a credit loss has occurred, it is the Company’s policy to isolate the credit loss related portion of the discount rate used to derive the fair market value of the security and apply this to the expected cash flows in order to determine the portion of the OTTI that is credit loss related. This 82 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) credit related portion of the discount rate is based on the financial condition of the issuer, changes in rating agency credit ratings for the security or increases in credit related yield spreads on similar securities offered by the same issuer. Once a credit impairment loss has been recognized in the Company’s consolidated statements of operations, the amortized cost basis of that available-for-sale security is reduced by the amount of the credit impairment loss, resulting in a new cost basis for the security. Any non-credit related unrealized gains and losses are recorded in Accumulated other comprehensive loss in the Company’s consolidated balance sheets. The Company will continue to monitor the security’s credit rating and credit spread and will accrete any reduction in the credit impairment loss to interest income over the expected life of the security. Property, Plant and Equipment Property, plant and equipment are stated at cost. This includes enterprise-level business software that the Company customizes to meets its specific operational needs. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or estimated useful life of the asset. An assumption of lease renewal where a renewal option exists is used only when the renewal has been determined to be reasonably assured. Repair and maintenance costs are expensed as incurred. The estimated useful life for each asset category is as follows: Laboratory and manufacturing equipment . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer hardware and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Enterprise-level software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 to 10 years 3 to 5 years 1.5 to 3 years up to 7 years 1 to 10 years Estimated Useful lives The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable or that the useful life is shorter than originally estimated. If impairment indicators are present and the projected future undiscounted cash flows are less than the carrying value of the assets, the carrying values are reduced to the estimated fair value. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the carrying value of the assets is depreciated over the newly determined remaining useful lives. F O R M 1 0 - K Deferred Inventory Costs When the Company’s products have been delivered, but the product revenue associated with the arrangement has been deferred as a result of not meeting the revenue recognition criteria or the costs are related to product sales bundled with training, software warranty or product support services where the revenue is deferred and recognized ratably, the Company also defers the related inventory costs for the delivered items and recognizes the inventory costs either ratably or when the related revenue meets the revenue recognition criteria. Accounting for Income Taxes As part of the process of preparing the Company’s consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual 83 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) current tax expense together with assessing temporary differences resulting from different treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income within the respective jurisdictions against which these deductions, losses and credits can be utilized within the applicable future periods. We must assess the likelihood that some portion or all of our deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent we believe that recovery does not meet the “more-likely-than-not” standard, we must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2011 and December 25, 2010, certain of our domestic net deferred tax assets were fully reserved with a valuation allowance because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize those deferred tax assets in the future. We intend to maintain a valuation allowance until sufficient evidence exists to support the reversal of the valuation allowance. We make estimates and judgments about our future taxable income, by jurisdiction, based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. Concentration of Risk Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash equivalents, short-term investments, long-term investments, cost-method investments and accounts receivable. Investment policies have been implemented that limit investments to investment- grade securities. As of December 31, 2011, the Company held $8.3 million (par value) of investments comprised of ARS, which are variable-rate debt securities and have a long-term maturity with the interest rate being reset through auctions that are typically held every 7 to 35 days. These securities have historically traded at par value and are callable at par value at the option of the issuer. Interest is typically paid at the end of each auction period or semiannually. Since February 2008, most of the auctions for these ARS have failed and there is no assurance that future auctions will succeed. As a result, the Company’s ability to liquidate its investment in the near term may be limited. These ARS were purchased from a single broker, who to date, has not offered to repurchase these remaining ARS from the Company. Of these ARS, $5.0 million and $3.3 million (par value) are AAA and A3 rated, respectively, and are mostly collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program. During 2011, $0.6 million of these A3 rated ARS (par value) were called at par value. It is not clear when the Company will be able to liquidate these investments. As of December 31, 2011, the Company invested $9.0 million in a privately-held company. This investment has been 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. See Note 4, “Cost-method Investment,” to the Notes to Consolidated Financial Statements for more information. 84 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The risk with respect to accounts receivable is mitigated by ongoing credit evaluations that the Company performs on its customers. As the Company expands its sales internationally, it may experience increased levels of customer credit risk associated with those regions. Collateral is generally not required for accounts receivable but may be used in the future to mitigate credit risk associated with customers located in certain geographical regions. As of December 31, 2011, the Company had amounts due from one customer that represented approximately 10% of the Company’s accounts receivable balance. As of December 25, 2010, the Company had amounts due from one customer that represented approximately 12% of the Company’s accounts receivable balance. To date, a few of our customers have accounted for a significant portion of our revenue. No customer accounted for over 10% of the Company’s revenue in 2011. Level 3 accounted for approximately 15% and 17% of the Company’s revenue in 2010 and 2009, respectively. The Company had no other customer that represented over 10% of the Company’s revenue for 2010 and 2009. The Company depends on a single or limited number of suppliers for components and raw materials. The Company generally purchases these single or limited source components and materials through standard purchase orders and does not have long-term contracts with many of these limited- source suppliers. While the Company seeks to maintain sufficient reserve stock of such components and materials, the Company’s business and results of operations could be adversely affected by a stoppage or delay in receiving such components and materials, the receipt of defective parts, an increase in the price of such components and materials or the Company’s inability to obtain reduced pricing from its suppliers in response to competitive pressures. Derivative Instruments The Company is exposed to foreign currency exchange rate fluctuations in the normal course of its business. As part of its risk management strategy, the Company uses derivative instruments, specifically forward contracts, to reduce the impact of foreign exchange fluctuations on earnings. The forward contracts are with one high-quality institution and the Company monitors the creditworthiness of the counter party consistently. The Company’s objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting fair values of assets. None of the Company’s derivative instruments contain credit-risk related contingent features, any rights to reclaim cash collateral or any obligation to return cash collateral. The Company does not have any leveraged derivatives. The Company does not use derivative contracts for trading or speculative purposes. F O R M 1 0 - K 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 2011 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. 85 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) From time to time, the Company also uses foreign currency exchange forward contracts to hedge exposures related to forecasted sales denominated in Euro. These contracts are designated as cash flow hedges and would match the underlying forecasted transactions in duration. The contracts would be carried on the balance sheet at fair value, and the effective portion of the contracts’ gains and losses would be recorded as Accumulated other comprehensive loss until the forecasted transaction occurs. For foreign currency exchange forward contracts designated as cash flow hedges, the Company evaluates and calculates the effectiveness of each hedge quarterly, using the critical terms match method. When the forecasted transaction occurs, the Company reclassifies the related gain or loss on the cash flow hedge to revenue. If it is determined that a hedged forecasted transaction is unlikely to occur, the Company discontinues its cash flow hedges and any gains or losses on the foreign currency exchange forward contracts would be reclassified from other comprehensive income into earnings. Foreign Currency Translation and Transactions The Company considers the functional currencies of its foreign subsidiaries to be the local currency. Assets and liabilities recorded in foreign currencies are translated at the exchange rate as of the balance sheet date, and costs and expenses are translated at average exchange rates in effect during the period. Equity transactions are translated using historical exchange rates. The effects of foreign currency translation adjustments are recorded as a separate component of Stockholders’ equity in the accompanying consolidated balance sheets. For all non-functional currency account balances, the re-measurement of such balances to the functional currency will result in either a foreign exchange transaction gain or loss which is recorded to Other gain (loss), net in the same period that the re-measurement occurred. Aggregate foreign currency transaction loss recorded in 2011, 2010 and 2009 were $1.0 million, $0.7 million and $1.7 million, respectively. The Company entered into foreign currency exchange forward contracts to reduce the impact of foreign exchange fluctuations on earnings from accounts receivable balances beginning in 2009, and restricted cash beginning in the third quarter of 2011, both accounts receivable and restricted cash are primarily denominated in Euro. The foreign currency transactions on these forward contracts amounted to a loss of $1.3 million in 2011 and a gain of $0.9 million in 2010, and substantially offset the transaction gains and losses from the re-measurement of the related accounts receivable. K - 0 1 M R O F Advertising All advertising costs are expensed as incurred. Advertising expenses in 2011, 2010 and 2009 were $1.5 million, $1.1 million and $0.8 million, respectively. Research and Development All costs to develop the Company’s hardware products are expensed as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Generally, the Company’s software products are released soon after technological feasibility has been established. As a result, costs subsequent to achieving technological feasibility have not been significant and all software development costs have been expensed as incurred. 86 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Recent Accounting Pronouncements In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires an entity to disclose separately the amounts of significant transfers in and out of Level I and II fair value measurements, and describe the reasons for the transfers. Also, it requires additional disclosure regarding purchases, sales, issuances and settlements within the Level III fair value measurements. ASU 2010-06 was effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level III measurements, which was effective for fiscal years beginning after December 15, 2010. The Company adopted the amended disclosure requirements for Levels I and II beginning in its fiscal quarter ended March 26, 2010 and for Level III beginning in its fiscal quarter ended March 26, 2011. The adoption of the amended disclosure requirements for fair value measurements resulted in the enhancement of certain disclosures but did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In May 2011, the 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. This accounting update will be applicable to the Company beginning in the first quarter of fiscal year 2012 and should be applied prospectively. The Company is currently evaluating the impact of its pending adoption of ASU 2011-04 on its financial statements. 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. This accounting update will be applicable to the Company beginning in the first quarter of fiscal year 2012. Other than requiring additional disclosures, the Company does not anticipate material impacts on its financial statements upon adoption. F O R M 1 0 - K 87 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 3. Fair Value Measurements and Other-Than-Temporary Impairments Fair Value Measurements The following tables represent the Company’s fair value hierarchy for its marketable securities measured at fair value on a recurring basis (in thousands): December 31, 2011 Level I Level II Level III Total Assets Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,208 $ Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. treasuries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 27,577 — — $ — $ 53,208 16,778 5,888 87,694 9,999 27,577 7,675 16,778 5,888 87,694 9,999 — — 7,675 — — — — — K - 0 1 M R O F Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,785 $120,359 $7,675 $208,819 Liabilities Foreign currency exchange forward contracts . . . . . . $ — $ 82 $ — $ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 82 $ — $ 82 82 December 25, 2010 Level I Level II Level III Total Assets Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,010 $ Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — $ — $ 37,010 240 240 82,415 82,415 90,620 90,620 7,790 303 — 7,790 303 — — — — Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,010 $173,578 $7,790 $218,378 Liabilities Foreign currency exchange forward contracts . . . . . . $ — $ 74 $ — $ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 74 $ — $ 74 74 During 2011, there were no transfers of assets or liabilities between Level I and Level II and there were no transfers into or out of Level III 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 III) inputs (in thousands): December 25, 2010 Total Net Gains Included in Other Comprehensive Income Calls December 31, 2011 ARS—available-for-sale . . . . . . . . . . . . . . . $7,790 $403(1) $(518)(2) $7,675 (1) Amount represents the change in the non-credit gain related other-than-temporary impairments (“OTTI”) recorded in Accumulated other comprehensive loss in the accompanying consolidated balance sheets. 88 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (2) Amount represents the fair market value of the securities called. Realized gains on these calls for 2011 were insignificant. Total Net Gains (Losses) Included In December 26, 2009 Other Income (Expense), Net Other Comprehensive Income Calls December 25, 2010 ARS—available-for-sale . . . ARS—trading securities . . . Put Rights . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . $ 7,671 49,911 10,864 $68,446 $ — 1,696(1) (1,696)(2) $ — $763(3) — — $763 $ (644)(4) (51,607)(4) (9,168)(4) $7,790 — — $(61,419) $7,790 (1) Unrealized holding gains for ARS trading securities were included in Other gain (loss), net in the accompanying consolidated statements of operations. (2) Amount represents the decrease in the fair value of the Put Rights recorded as Other gain (loss), net in the accompanying consolidated statements of operations. (3) Amount represents the change in the non-credit loss related OTTI recorded in Accumulated other comprehensive loss in the accompanying consolidated balance sheet. (4) Amount represents the fair market value of the securities called and related Put Rights. Realized gains on these calls were insignificant. Investments were as follows (in thousands): Money market funds . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . U.S. agency notes . . . . . . . . . . . . . . . . . . . . U.S. treasuries . . . . . . . . . . . . . . . . . . . . . . . ARS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Amortized Cost $ 53,208 16,797 5,898 87,808 9,998 27,577 7,368(1) December 31, 2011 Gross Unrealized Gains Gross Unrealized Losses $ — — — 7 2 5 307 $ — (19) (10) (121) (1) (5) — Fair Value $ 53,208 16,778 5,888 87,694 9,999 27,577 7,675(2) Total available-for-sale investments . . . . . . $208,654 $321 $(156) $208,819 F O R M 1 0 - K Adjusted Amortized Cost $ 37,010 240 82,428 90,644 7,893(3) December 25, 2010 Non-credit OTTI Gross Unrealized Gains Gross Unrealized Losses $ — — — — (103) $— — 4 8 — $— — (17) (32) — Estimated Fair Value $ 37,010 240 82,415 90,620 7,790(2) Money market funds . . . . . . . . . . . . . . . Certificates of deposit Commercial paper . . . . . . . . . . Corporate bonds . . . . . . . . . . . ARS . . . . . . . . . . . . . . . . . . . . . Total available-for-sale investments . . . . . . . . . . $218,215 $(103) $ 12 $(49) $218,075 (1) Amount represents the par value less $0.9 million of credit-related OTTI recognized through earnings in prior years. (2) Amount represents the par value less $1.0 million of credit-related OTTI recognized through earnings in prior years. 89 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (3) Amount reflects investments in a continuous loss position for twelve months or longer. As of December 31, 2011, 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 up to 17 months, and ARS have contractual maturity terms of up to 33.9 years. Proceeds from sales, maturities and calls of available-for-sale investments were $291.9 million, $232.3 million and $146.3 million in 2011, 2010 and 2009, respectively. Gross realized gains (losses) on short-term and long-term investments were insignificant 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 December 31, 2011, the Company held $8.3 million (par value) of available-for-sale ARS with two issuers, $5.0 million of which was AAA rated and $3.3 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 a net increase in fair value of $0.4 million for 2011. 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 2011. During 2011, $0.6 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): Balance at December 25, 2010 . . Unrealized gain . . . . . . . . . . . . . . . Call on investments . . . . . . . . . . . . Amortized Cost $7,893 — (526) Balance at December 31, 2011 . . $7,367 Cumulative OTTI in Earnings $(958) — 74 $(884) Unrealized Gain $1,286 403 (70) $1,619 OTTI Loss in Accumulated Other Comprehensive Loss Accumulated Other Comprehensive Income (Loss) $(1,389) — 77 $(1,312) $(103) 403 7 $ 307 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 90 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 2011. 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 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 December 31, 2011, 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 2011. 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 2011 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. F O R M 1 0 - K As of December 31, 2011, 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 2011, 2010, and 2009, 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 $1.3 million, a gain of $0.9 million, and a loss of $1.0 million, respectively, included in Other gain (loss), net in the consolidated statement of operations. Cash Flow Hedges In 2010, the Company used foreign currency exchange forward contracts to hedge exposures related to forecasted sales denominated in Euro. These contracts were designated as cash flow hedges and matched the underlying forecasted transactions in duration. The contracts were carried on 91 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) the balance sheet at fair value, and the effective portion of the contracts’ gains and losses was recorded as Accumulated other comprehensive income until the forecasted transaction occurred. For foreign currency exchange forward contracts designated as cash flow hedges, the Company evaluated and calculated the effectiveness of each hedge quarterly, using the critical terms match method. When the forecasted transaction occurred, the Company reclassified the related gain or loss on the cash flow hedge to revenue. If it was determined that a hedged forecasted transaction was unlikely to occur, any gains or losses on the foreign currency exchange forward contracts were reclassified from other comprehensive income into earnings. Prior to December 25, 2010, these contracts were designated as cash flow hedges and the Company ceased hedge accounting prospectively at the end of fiscal 2010 because it was no longer probable that the original forecasted transactions would occur within two months of the originally specified transaction dates. In 2010, the Company recognized a gain of $0.3 million in Other gain (loss), net, resulting from the discontinuance of hedge accounting for its cash flow hedges. During the fourth quarter of 2011, all the remaining open contracts related to these forecasted sales were terminated and settled. In 2011, the Company recognized a loss of $0.2 million in Other gain (loss), net, from the change of fair value on the related contracts. The before-tax effect of foreign currency forward contracts that were designated as cash flow hedges was as follows (in thousands): Gain recognized in total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) recognized in Accumulated other comprehensive loss . . . . . . . . . . . Gain reclassed from Accumulated other comprehensive loss to total Year Ended December 25, 2010 $ 26(1) $432 K - 0 1 M R O F revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129 Gain reclassed from Accumulated other comprehensive loss to Other gain (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $303 (1) Amount represents gain recognized in total revenue related to forward contracts initiated during the first quarter of 2010. The fair value of derivative instruments not designated as hedging instruments in the Company’s consolidated balance sheets was as follows (in thousands): As of December 31, 2011 As of December 25, 2010 Prepaid Expenses and Other Current Assets Gross Notional(1) Other Accrued Liabilities Gross Notional(1) Prepaid Expenses and Other Current Assets Other Accrued Liabilities Foreign currency exchange forward contracts Related to Euro denominated receivables . . . . . . . . . . . . . . . $9,437 Related to restricted cash . . . . . $1,455 Related to forecasted sales denominated in Euro . . . . . . . $ — $— $— $— $ 71 $ 11 $21,248 $ — $ — $ — $— $ 5,117 $303 $ 74 $— $— (1) Represents the face amounts of forward contracts that were outstanding as of the period noted. 92 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 6. Balance Sheet Details Restricted Cash The Company’s restricted cash balance is primarily comprised of certificates of deposit, of which the majority are not insured by the Federal Deposit Insurance Corporation. These amounts primarily collateralize the Company’s issuances of stand-by and commercial letters of credit. Additionally, the Company’s restricted cash balance includes a leave encashment fund for India employees. The following table provides details of selected balance sheet items (in thousands): December 31, 2011 December 25, 2010 Inventory: Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,081 37,007 39,908 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,996 Property, plant and equipment, net: Computer hardware . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Laboratory and manufacturing equipment Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,311 7,584 101,228 1,107 26,736 25,843 $ 23,104 14,798 43,991 $ 81,893 $ 7,599 6,523 85,651 711 17,266 12,106 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization(2) . . . . . . . $170,809 (94,056) $129,856 (78,116) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,753 $ 51,740 Accrued expenses: Loss contingency related to non-cancelable purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued rebate and customer prepay liability . . . . . . . . . . . . Leasehold improvements accrual . . . . . . . . . . . . . . . . . . . . . Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,705 3,111 1,309 4,078 1,248 6,970 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,421 $ 1,421 2,043 1,548 3,877 3,686 7,215 $ 19,790 (1) Included in finished goods inventory at December 31, 2011 and December 25, 2010 were $8.9 million and $9.0 million, respectively, of inventory at customer locations for which product acceptance had not occurred. (2) Depreciation expense was $17.7 million, $15.4 million and $19.3 million for 2011, 2010 and 2009, respectively. In 2009, the Company recognized $3.0 million of depreciation expense caused by the shortening of the useful life of assets associated with the restructuring plan related to the closure of its Maryland-based semiconductor fabrication (the “Maryland FAB”) plan. 93 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 7. Restructuring and Other Related Costs In July 2009, the Company announced a restructuring plan under which it closed its Maryland FAB and consolidated these activities into its primary fabrication plant located in Sunnyvale, California. This consolidation of activities into one location was expected to facilitate collaboration across integration platforms in support of the Company’s next-generation products. As a result, during 2009, the Company recorded $3.9 million of restructuring and other related costs including severance and related expenses, equipment and facilities-related costs, operating lease termination costs, and other exit costs. Equipment and facilities-related costs consist of increased depreciation expense related to restructured assets caused by shortening the useful life or updating the salvage value of depreciable fixed assets to coincide with the end of production under the approved restructuring plan. The Company completed its restructuring actions in 2010. The types of restructuring and other related costs recorded were as follows (in thousands): Years Ended December 31, 2011 December 25, 2010 December 26, 2009 Cost of Revenue Operating Expenses Cost of Revenue Operating Expenses Cost of Revenue Operating Expenses Severance and related expenses (credits) . . . . . . . . . . . . . . . . . . . . $— $ — $(144) $ 55 $ 647 $154 Equipment and facilities-related expenses (credits) . . . . . . . . . . . Lease termination . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . — — — (129) — — (38) — — — 104 — 2,359 — 32 160 411 89 Total . . . . . . . . . . . . . . . . . . . . . $— $(129) $(182) $159 $3,038 $814 K - 0 1 M R O F Cumulative restructuring and other related costs through December 25, 2010 totaled $3.8 million. During 2011, the Company recorded a credit of $0.1 million related to change in estimates in facilities- related expenses. The following table sets forth the activity and balance of the restructuring liability account for severance and operating lease and contract termination costs (in thousands): Balance at December 27, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 26, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 25, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring Liability $ — 1,212 (568) $ 644 213 (580) (148) $ 129 (129) Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 94 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 8. Comprehensive Income (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 (losses) on available-for-sale investments are included in Accumulated other comprehensive loss in the consolidated balance sheets. The components of accumulated other comprehensive loss are as follows (in thousands): Accumulated net unrealized loss on foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . Accumulated unrealized non-credit related other- than-temporary impairment gain (loss) on available-for-sale investments . . . . . . . . . . . . . . . . . Accumulated unrealized holding loss on all other December 31, 2011 December 25, 2010 December 26, 2009 $(1,607) $ (490) $ (565) 307 (103) (923) available-for-sale investments . . . . . . . . . . . . . . . . . (142) (37) (7) Accumulated tax effect on items related to available-for-sale investments . . . . . . . . . . . . . . . . . (753) (631) (315) Total accumulated other comprehensive loss . . . $(2,195) $(1,261) $(1,810) The following table reconciles net loss to comprehensive loss (in thousands): Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in foreign currency translation gain (loss) . . . Change in unrealized non-credit related other-than- temporary impairment losses on available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in unrealized gain (loss) on all other available-for-sale investments . . . . . . . . . . . . . . . . . Change in tax effect related to available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years Ended December 31, 2011 December 25, 2010 December 26, 2009 $(81,744) (1,117) $(27,932) 75 $(86,622) 221 410 (105) (122) 820 (923) (30) 2,805 (316) (315) Total comprehensive loss . . . . . . . . . . . . . . . . . . $(82,678) $(27,383) $(84,834) 9. Basic and Diluted Net Loss Per Common Share Basic net loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during the period. Diluted net loss per common share is computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed vesting of outstanding restricted stock units (“RSUs”) and performance stock units (“PSUs”), assumed exercise of outstanding warrants, and assumed issuance of stock under the Company’s employee stock purchase plan (“ESPP”) using the treasury stock method. 95 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table sets forth the computation of net loss per common share—basic and diluted (in thousands, except per share amounts): Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares outstanding . . . . . $ (81,744) 105,432 $(27,932) 99,380 $(86,622) 95,468 Net loss per common share - basic and diluted . . . . . $ (0.78) $ (0.28) $ (0.91) Years Ended December 31, 2011 December 25, 2010 December 26, 2009 The Company incurred net losses for the years ended December 31, 2011, December 25, 2010 and December 26, 2009, and as a result, potential common shares from options, stock awards, employee stock purchase plan shares and warrants totaling 19.5 million shares, 18.0 million shares and 23.7 million shares, respectively, were not included in the net loss per common share calculation, as their inclusion would have been anti-dilutive. The Company had the following equity awards outstanding that could potentially dilute basic net loss per common share in the future, but were excluded from the computation of diluted loss per common share in the periods presented as their effect would have been anti-dilutive (in thousands): As of December 31, 2011 December 25, 2010 December 26, 2009 Stock options outstanding . . . . . . . . . . . . . . . . . . Restricted stock units . . . . . . . . . . . . . . . . . . . . . . Performance stock units . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan shares . . . . . . . . Warrants to purchase common stock . . . . . . . . . 9,873 5,957 2,595 943 93 7,815 6,783 2,682 636 124 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,461 18,040 14,568 5,066 3,304 677 124 23,739 10. Commitments and Contingencies Operating Leases The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms, predominantly no longer than ten years each and contain leasehold improvement incentives, rent holidays and escalation clauses that range from one to ten years. In addition, some of these leases have renewal options for up to five years. The Company also has contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. At the inception of a lease with such conditions, we record an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. At the inception of a lease with such conditions, we record an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. Asset retirement obligations were $3.0 million and $1.1 million as of December 31, 2011 and December 25, 2010, respectively. These obligations are classified as other long-term liabilities on the accompanying consolidated balance sheets. The Company incurred $1.9 million and $0.3 million of asset retirement obligation liabilities in 2011 and 2010, respectively. 96 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company recognizes rent expense on a straight-line basis over the lease period factoring in leasehold improvement incentives, rent holidays and escalation clauses, and has accrued for rent expense incurred but not paid. Rent expense for all leases was $6.1 million, $5.1 million and $5.1 million for 2011, 2010 and 2009, respectively. Sublease rental income was zero, zero and $0.1 million for 2011, 2010 and 2009, respectively. Future annual minimum operating lease payments at December 31, 2011 were as follows (in thousands): Operating lease payments . . . . . . . . . . $5,441 $5,182 $4,676 $4,622 $4,148 $17,109 $41,178 2012 2013 2014 2015 2016 Thereafter Total Purchase Commitments The Company has service agreements with its major production suppliers, where the Company is committed to purchase certain parts. These obligations are typically less than our purchases. As of December 31, 2011, December 25, 2010 and December 26, 2009, these non-cancelable purchase commitments were $58.8 million, $39.4 million and $35.1 million, respectively. Other contracts are related to contractual obligations for non-recurring engineering costs. As of December 31, 2011, December 25, 2010 and December 26, 2009, these other contracts were $6.2 million, $5.4 million and $2.4 million, respectively. Future purchase commitments at December 31, 2011 were as follows (in thousands): Purchase obligations . . . . . . . . . . $58,816 $ — $— $— Other contracts . . . . . . . . . . . . . . . $ 5,528 $650 $— $— $— $— $— $— $58,816 $ 6,178 2012 2013 2014 2015 2016 Thereafter Total The contractual obligation tables above exclude tax liabilities of $1.5 million related to uncertain tax positions because the Company is unable to determine the timing of settlement if any, of these future payments with a reasonably reliable estimate. Indemnification Obligations From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third-party claims. These contracts primarily relate to: (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and certain key employees, under which the Company may be required to indemnify such persons for liabilities; and (iii) certain provisions in the Company’s customer agreements that may require the Company to indemnify their customers and their affiliated parties against certain liabilities, including if the Company’s products infringe a third party’s intellectual property rights. The terms of such indemnification obligations vary. Because the maximum obligated amounts under these agreements generally are not explicitly stated, the maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited. 97 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) To date, the Company has not incurred any material costs as a result of the indemnification obligations and has not accrued any liabilities related to such obligations in the Company’s consolidated financial statements. The Company has agreed to indemnify Level 3 in connection with the lawsuit filed by Cheetah Omni LLC (“Cheetah”) on May 9, 2006 (see Note 12, “Legal Matters,” to the Notes to Consolidated Financial Statements). The Company is contractually obligated to indemnify Level 3 for damages suffered by Level 3 to the extent the Company’s product is found to infringe the two Cheetah patents at issue (Patent Nos. 6,795,605 and 7,142,347), and the Company has assumed the defense of this matter. In addition, the Company may be obligated to indemnify the defendants in connection with the lawsuit filed by Cambrian Science Corporation (“Cambrian”) on July 7, 2011, to the extent the Company’s product is found to infringe the Cambrian patent at issue (Patent No. 6,775,312) (see Note 12, “Legal Matters,” to the Notes to Consolidated Financial Statements). As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements whereby it indemnifies certain of its officers and each of its directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of December 31, 2011 and December 25, 2010, as this liability is not reasonably estimable even though liability under these agreements is not remote. 11. 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): Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges to operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in estimate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,422 9,776 (7,242) (1,091) Balance at the end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . $12,865 $11,140 12,350 (9,010) (3,058) $11,422 December 31, 2011 December 25, 2010 98 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (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. Letters of Credit 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. The Company had $4.0 million of standby letters of credit outstanding as of December 25, 2010. These consisted of $1.7 million related to a customer proposal guarantee, $1.3 million related to a value added tax license and $1.0 million related to property leases. 12. Legal Matters Cheetah Patent Infringement Litigation On May 9, 2006, the Company and Level 3 were sued by Cheetah in the U.S. District Court for the Eastern District of Texas Texarkana Division for alleged infringement of patent no. 6,795,605 (the “‘605 Patent”), and a continuation thereof. On May 16, 2006, Cheetah filed an amended complaint, which requested an order to enjoin the sale of the Company’s DTN platform and to recover all damages caused by the alleged willful infringement including any and all compensatory damages available by law, such as actual and punitive damages, attorneys’ fees, associated interest and Cheetah’s costs incurred in the lawsuit. Cheetah’s complaint does not request a specific dollar amount for these compensatory damages. The Company is contractually obligated to indemnify Level 3 for damages suffered by Level 3 to the extent its product supplied by the Company is found to infringe, and the Company has assumed the defense of this matter. On July 20, 2006, the Company and Level 3 filed an amended response denying all infringement claims under the ‘605 Patent and asserting that the claims of the ‘605 Patent are invalid and that the DTN platform does not infringe the ‘605 Patent. On November 28, 2006, Cheetah filed a second amended complaint and added patent no. 7,142,347 (the “347 Patent”) to the lawsuit. On December 18, 2006, the Company and Level 3 filed responses to Cheetah’s second amended complaint denying all infringement claims under the ‘347 Patent and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims are invalid and that the DTN platform does not infringe the patents. On January 30, 2007, Cheetah filed a third amended complaint adding additional assertions of infringement for the two patents in suit. On February 16, 2007, the Company and Level 3 filed responses to Cheetah’s third amended complaint denying all infringement claims, and the Company and Level 3 asserted counterclaims against Cheetah asserting that the claims of the patents are invalid and that the DTN platform does not infringe the patents. On March 14, 2007, the Company submitted requests to the U.S. PTO for inter partes reexamination of the ‘605 Patent and the ‘347 Patent asking the U.S. PTO to reexamine the patents based on prior art in order to invalidate the patents or limit the scope of each patent’s claims. On March 21, 2007, the Company and Level 3 filed a motion with the court to stay all proceedings in the lawsuit pending the reexamination of the ‘605 Patent and the ‘347 Patent. 99 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) On April 11, 2007, the Company, Level 3 and Cheetah filed a joint motion with the court, agreeing to the following: (1) to stay all proceedings in the lawsuit pending a determination by the U.S. PTO as to whether it will reexamine the ‘605 Patent and the ‘347 Patent; and (2) if the U.S. PTO decides to reexamine either the ‘605 Patent and the 347 Patent, to stay all proceedings in the lawsuit pending final resolution of the reexamination(s) by the U.S. PTO. On April 12, 2007, the court granted the motion staying all proceedings in the lawsuit. On June 26, 2007, the U.S. PTO also ordered reexamination of the ‘605 Patent. On August 1, 2007, the U.S. PTO ordered reexamination of the ‘347 Patent. As a result, all proceedings in this lawsuit are stayed until the final resolution of these reexaminations. In a communication the Company received from the U.S. PTO dated December 4, 2009, the Company was advised that various claims in the ‘347 Patent reexamination have been allowed, while other claims have been rejected. In a communication the Company received from the U.S. PTO dated June 22, 2010, the Company was advised that various claims in the ‘605 Patent reexamination have been allowed, while other claims have been rejected. The Company has appealed the allowance of certain claims in the ‘347 Patent and ‘605 Patent reexaminations to the Board of Patent Appeals and Interferences at the U.S. PTO and will have an opportunity to appeal the allowance of certain claims in the ‘605 Patent reexamination. The Company does not know when the U.S. PTO reexamination process will be completed. On January 26, 2010, Cheetah’s counsel filed a motion requesting the court to lift the stay in order to litigate those claims relating to the ‘347 Patent reexamination that the U.S. PTO allowed. The court denied the motion on April 16, 2010. On April 30, 2010, Cheetah filed a motion for reconsideration of the order denying Cheetah’s motion to lift the stay. On May 17, 2010, the Company filed an opposition to Cheetah’s motion for reconsideration. On August 24, 2010, after a hearing on the matter, the court issued an order keeping the stay in place. The Company believes the suit is without merit and intends to defend the Company vigorously, but the Company is unable to predict the likelihood of an unfavorable outcome. On March 30, 2011, Cheetah filed a motion re-urging the court to lift the stay, which the Company opposed on April 18, 2011. On May 12, 2011, the court issued an order denying Cheetah’s re-urged motion to lift the stay. On May 24, 2011, Cheetah requested reconsideration of the court’s order, and the Company filed its opposition on June 16, 2011. Cheetah filed a reply to the Company’s opposition on June 23, 2011. Although the Company believes Cheetah’s reurged motion should be denied, the Company cannot predict whether the court will grant it. In connection with the reexamination of the ‘605 Patent and the ‘347 Patent, the Company presented an oral argument before the Board of Patent Appeals and Interferences (“BPAI”) on September 21, 2011. The Company is awaiting a decision from the BPAI. 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 not made provisions for this lawsuit in our 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. PTO, 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. 100 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Cambrian Science Patent Infringement Litigation On July 12, 2011, the Company was notified by Level 3 that Cambrian filed suit against Level 3 and six other defendants, including Cox Communications, Inc., XO Communications, LLC, Global Crossing Limited, 360Networks (USA), Inc., Integra Telecom, Inc. and IXC, Inc. dba Telekenex (collectively, the “Defendants”) in the U.S. District Court for the Central District of California alleging infringement of patent no. 6,775,312 (the “‘312 Patent”) and requesting damages for such alleged infringement (the “Cambrian Claim”). The nature of the Cambrian Claim involves allegations of infringement of the ‘312 Patent resulting from the Defendants’ use of certain products and systems in the Defendants’ networks, including the Company’s DTN platform. On August 24, 2011, Cambrian amended the complaint to name the Company as a defendant. The Company assumed the defense of the Cambrian Claim and filed an answer to Cambrian’s complaint on September 21, 2011, in which the Company denied infringement of the ‘312 Patent and raised other defenses. Cambrian filed a second amended complaint on October 6, 2011, which included many of the same allegations as in the original complaint. The Company filed its answer to the second amended complaint on October 21, 2011, in which the Company maintained the same denials and defenses as in its initial answer. On December 23, 2011, the Company filed a motion requesting that the court stay the case with respect to each of the above-noted customer Defendants. Cambrian filed its opposition to the Company’s motion on December 30, 2011. Although the Company believes the court should stay the case with regard to the Defendants, the Company cannot predict whether the court will grant its motion. The Company may be subject to liability pursuant to the indemnification provisions of the agreements between the Company and its customers, including the Defendants, should the outcome of the Cambrian Claim be unfavorable to the 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 not made provisions for this lawsuit in our 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 December 31, 2011, the Company has not accrued or recorded any such material liabilities. 13. Stockholders’ Equity 2000 Stock Plan, 2007 Equity Incentive Plan and Employee Stock Purchase Plan In December 2000, the Company adopted the 2000 Stock Plan (“2000 Plan”). Under the 2000 Plan, as amended, the Company had reserved an aggregate of 14.2 million shares of its common 101 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) stock for issuance. As of December 31, 2011, options to purchase 2.1 million shares of the Company’s common stock were outstanding under the 2000 Plan. The Company’s board of directors decided not to grant any additional options or other awards under the 2000 Plan following the Company’s IPO in 2007. The 2000 Plan expired on December 6, 2010. However, the 2000 Plan will continue to govern the terms and conditions of the outstanding options previously granted under the plan. In February 2007, the Company’s board of directors adopted the 2007 Equity Incentive Plan (“2007 Plan”) and the Company’s stockholders approved the 2007 Plan in May 2007. As of December 31, 2011, the Company reserved a total of 32.9 million shares of common stock for issuance of options, RSUs and PSUs to employees, non-employees and members of the Company’s board of directors, pursuant to the 2007 Plan. The 2007 Plan has a maximum term of 10 years from the date of adoption, or it can be earlier terminated by the Company’s board of directors. Additionally, in February 2007, the Company’s board of directors adopted, and in May 2007, its stockholders approved the Company’s ESPP. The ESPP has a 20-year term, and as of December 31, 2011, the Company had authorized the issuance of approximately 5.7 million shares of common stock. Stock Option Exchange Program On June 11, 2009, the Company’s stockholders approved a one-time stock option exchange program (the “Option Exchange Program”), and on January 25, 2010, the Company launched the Option Exchange Program pursuant to which eligible employees were able to exchange certain outstanding stock options under our 2007 Plan with an exercise price greater than or equal to $8.16 per share and a grant date on or before January 25, 2009, for a lesser amount of new RSUs or, for new stock options for senior executives. The Option Exchange Program was approved by our stockholders in June 2009 and was available for employees of the Company residing in the U.S., India and U.K. who held eligible shares. The Option Exchange Program expired on February 22, 2010, and there were 4,926,790 shares tendered for exchange. All surrendered options were cancelled effective as of the expiration of the Option Exchange Program, and immediately thereafter, the Company granted (i) new options with an exercise price of $7.61 per share to purchase an aggregate of 1,564,727 shares of Infinera common stock and (ii) RSUs representing 814,017 shares of Infinera common stock. The Option Exchange Program was an expense neutral exchange and it did not result in any significant incremental stock-based compensation expense. K - 0 1 M R O F 102 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Equity Incentive Plans The Company’s stock-based compensation plans include stock options, RSUs, PSUs and employee stock purchases under the Company’s ESPP. As December 31, 2011, there were a total of 10.5 million shares available for grant under the Company’s 2007 Plan. The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data): Outstanding at December 27, 2008 . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 26, 2009 . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options granted in connection with the stock option exchange program . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options canceled in connection with the stock option exchange program . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 25, 2010 . . . . . . . . . . . . . . . . . . Options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . Vested and expected to vest at December 31, 2011 . . Exercisable at December 31, 2011 . . . . . . . . . . . . . . . . . . . Number of Options 11,366 4,697 (954) (541) 14,568 836 1,565 (3,094) (4,927) (1,133) 7,815 2,571 (378) (135) 9,873 9,789 6,263 Weighted-Average Exercise Price Per Share $ 8.13 $ 7.60 $ 2.31 $10.59 $ 8.25 $ 8.19 $ 7.61 $ 3.85 $13.53 $ 8.28 $ 6.52 $ 8.17 $ 3.81 $ 8.63 $ 7.03 $ 6.36 Number of Restricted Stock Units Weighted-Average Grant Date Fair Value Per Share Outstanding at December 27, 2008 . . . . . . . . . . . . . . . . . . RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 26, 2009 . . . . . . . . . . . . . . . . . . RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs granted in connection with the stock option exchange program . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 25, 2010 . . . . . . . . . . . . . . . . . . RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . Expected to vest at December 31, 2011 . . . . . . . . . . . . . . 2,298 3,584 (466) (350) 5,066 2,828 814 (1,322) (603) 6,783 2,490 (2,937) (379) 5,957 5,732 103 $ 13.71 $ 7.45 $ 14.15 $ 10.83 $ 9.44 $ 8.92 $ 7.61 $ 9.59 $ 9.10 $ 9.03 $ 8.18 $ 8.84 $ 8.91 $ 8.77 Aggregate Intrinsic Value $ 34,125 $ 5,514 $ 35,462 $ 17,538 $ 30,923 $ 1,691 $ 7,924 $ 7,924 $ 7,924 Aggregate Intrinsic Value $ 19,646 $ 3,933 $ 45,287 $ 12,681 $ 69,927 $ 25,968 $ 37,407 $ 35,997 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Number of Performance Stock Units Weighted-Average Grant Date Fair Value Per Share Outstanding at December 26, 2009 . . . . . . . . . . . . . . . . . PSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 25, 2010 . . . . . . . . . . . . . . . . . PSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . Expected to vest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,304 — — (622) 2,682 — — (87) 2,595 2,566 $ 10.51 $ — $ — $ 10.51 $ 10.51 $ — $ — $ 10.43 $ 10.51 Aggregate Intrinsic Value $ 29,541 $ 27,660 $ 16,304 $ 16,112 The aggregate intrinsic value of unexercised options, unreleased RSUs and PSUs is calculated as the difference between the closing price of the Company’s common stock of $6.28 at December 30, 2011 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 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 granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of December 31, 2011, which is 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,624 $33,876 $ 3,737 1.7 1.9 1.0 The following table summarizes information about options outstanding at December 31, 2011. Options Outstanding Vested and Exercisable Options Exercise Price $0.76 - $1.84 . . . . . . . . . . . . . $2.00 - $4.04 . . . . . . . . . . . . . $6.30 - $7.55 . . . . . . . . . . . . . $7.61 . . . . . . . . . . . . . . . . . . . $7.68 - $13.00 . . . . . . . . . . . . $13.16 - $23.86 . . . . . . . . . . . Number of Shares (In thousands) 531 1,380 2,410 936 4,529 87 9,873 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price (In years) 2.97 4.37 7.86 5.88 7.67 5.30 6.81 104 $ 1.35 $ 2.43 $ 7.10 $ 7.61 $ 8.78 $14.66 $ 7.03 Number of Shares (In thousands) 531 1,380 1,870 464 1,935 83 6,263 Weighted- Average Exercise Price $ 1.35 $ 2.43 $ 7.14 $ 7.61 $ 9.13 $14.64 $ 6.36 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Employee Stock Options During 2011, the Company granted options to employees and members of the Company’s board of directors to purchase an aggregate of 2.6 million shares of common stock at a weighted-average price of $8.17 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. Options granted during this period have exercise prices equal to the closing market prices of the Company’s common stock on the dates these options were granted. Total fair value of stock options granted to employees and directors that vested during 2011 and 2010 was approximately $9.0 million and $11.6 million, respectively, based on the grant date fair value. Included in the 2.6 million shares of stock options granted during 2011, the Company granted 0.9 million shares of performance-based stock options to certain executive officers of the Company during 2011. The options had an exercise price of $8.58 per share, equal to the closing price of the Company’s common stock on the date of grant. The options will vest upon the achievement of the pre-determined performance goals within the established timeframes. If the performance goals are not met within the established timeframes, the total number of shares subject to vesting upon achievement of such performance goals will be canceled immediately and any recognized compensation cost will be reversed. The grant date fair value per share of the options has been calculated using the Black- Scholes option pricing model. Excluding options granted in connection with the Company’s one-time stock option exchange program, which occurred in fiscal 2010, 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: Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . . . . . . . . Estimated fair value . . . . . . . . . . . . . . . . . Total stock-based compensation December 31, 2011 58% - 62% 1.7% - 2.6% 4.6 - 5.5 years $3.47 - $4.63 Years Ended December 25, 2010 56% - 61% 1.4% - 2.9% 4.8 - 5.4 years $3.32 - $5.72 December 26, 2009 60% - 73% 1.6% - 3.1% 3.8 - 6.1 years $3.86 - $5.87 F O R M 1 0 - K expense (in thousands) . . . . . . . . . . . . $12,590 $14,904 $17,873 Employee Stock Purchase Plan The fair value of the ESPP shares was estimated at the date of grant using the following assumptions: December 31, 2011 Years Ended December 25, 2010 December 26, 2009 Volatility . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . Expected life . . . . . . . . . . . . . . . . . . . . . . Estimated fair value . . . . . . . . . . . . . . . . 51% - 66% 45% - 55% 0.12% - 0.20% 0.20% - 0.23% 0.36% - 0.54% 0.5 years $2.13 - $2.58 0.5 years $2.09 - $2.70 0.5 years $2.32 - $2.83 63% - 95% 105 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company’s ESPP activity for the following periods was as follows (in thousands): December 31, 2011 Years Ended December 25, 2010 December 26, 2009 Stock-based compensation expense . . . . . . . . . . Employee contributions . . . . . . . . . . . . . . . . . . . . Shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . $3,561 $8,459 1,309 $2,802 $7,562 1,207 $3,157 $7,201 1,239 As of December 31, 2011, there were approximately 1.1 million shares reserved for grant under the ESPP. Restricted Stock Units During 2011 and 2010, the Company granted RSUs to employees and members of the Company’s board of directors to receive an aggregate of 2.5 million and 3.6 million shares of the Company’s common stock, respectively, at no cost. Included in the RSUs granted in 2010 are 0.8 million shares granted in connection with the Option Exchange Program. 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 RSU stock-based compensation in 2011, 2010 and 2009 was approximately $25.5 million, $23.8 million and $10.8 million, respectively. Performance Stock Units During 2009, the Company granted 3.3 million shares of PSUs, primarily to members of the Company’s board of directors and executive officers, with the shares cliff vesting at the end of a three- year or four-year period. The number of shares to be issued upon vesting of these 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 NASDAQ over a three-year or four-year period. Amortization of stock-based compensation related to PSUs in 2011, 2010 and 2009 was approximately $9.2 million and $7.6 million and $6.7 million, respectively. The grant date fair value of PSUs was estimated using a Monte Carlo simulation model with the following assumptions: K - 0 1 M R O F Year Ended December 26, 2009 Performance Stock Unit Grants Infinera volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NASDAQ volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Correlation between Infinera and NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70% - 75% 28% - 35% 1.25% - 1.71% 0.60 - 0.62 $9.65 - $12.46 Common Stock Warrants During 2009, warrants to purchase 0.1 million shares of common stock were net exercised. The aggregate consideration for such exercises was approximately $0.3 million. During 2011, warrants to purchase 31,250 shares of common stock expired. As of December 31, 2011, 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. 106 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Stock-based Compensation Expense The following tables summarize the effects of stock-based compensation on the Company’s consolidated balance sheets and statements of operations for the periods presented (in thousands): Stock-based compensation effects in inventory . . . . . . . . . . . Stock-based compensation effects in deferred inventory cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation effects in fixed assets . . . . . . . . . Stock-based compensation effects in net loss before income taxes Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenue—amortization from balance sheet(1) . . . . . . . Years Ended December 31, 2011 December 25, 2010 December 26, 2009 $ 3,479 $ 2,497 $ 2,879 $ $ 179 36 287 $ $ — 201 $ $ — $ 2,923 14,990 8,818 18,502 45,233 4,924 $ 2,598 14,301 7,896 19,903 44,698 5,637 $ 1,861 10,302 6,505 15,061 33,729 3,646 Total stock-based compensation expense . . . . . . . . . . . . . . . . $50,157 $50,335 $37,375 (1) Represents stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period. Shares Reserved for Future Issuances Common stock reserved for future issuance was as follows (in thousands): Outstanding stock options and awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserved for future option and award grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserved for future ESPP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total common stock reserved for stock options and awards . . . . . . . . . . . . Warrants to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total common stock reserved for future issuances . . . . . . . . . . . . . . . . . . . . F O R M 1 0 - K December 31, 2011 18,426 10,510 1,115 30,051 93 30,144 107 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 14. Income Taxes The following is a geographic breakdown of the provision for (benefit from) income taxes (in thousands): December 31, 2011 Years Ended December 25, 2010 December 26, 2009 Current: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current . . . . . . . . . . . . . . . . . . . . . . Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred . . . . . . . . . . . . . . . . . . . . . Total provision (benefit) . . . . . . . . . . . . . . . . . . . . $ (107) 213 1,841 $1,947 $ — — (256) $ (256) $1,691 $(264) (17) 790 $ 509 $(200) — 8 $(192) $ 317 $(1,131) (1,145) 520 $(1,756) $ (76) (39) — $ (115) $(1,871) Income before provision for income taxes from international operations was $5.3 million, $3.5 million and $2.4 million for the years ended December 31, 2011, December 25, 2010 and December 26, 2009, respectively. The provisions for income taxes differ from the amount computed by applying the statutory federal income tax rates as follows: December 31, 2011 Years Ended December 25, 2010 December 26, 2009 Expected tax benefit at federal statutory rate . . . State taxes, net of federal benefit . . . . . . . . . . . . Research credits . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . Release in prior year taxes following IRS ruling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Effective tax rate . . . . . . . . . . . . . . . . . . . . . . (35.0)% 0.1% (2.9)% 4.1% — 36.1% (0.3)% 2.1% (35.0)% 0.1% (9.4)% 7.5% — 40.6% (2.7)% 1.1% (35.0)% 0.1% (3.6)% 4.9% (2.4)% 34.6% (0.7)% (2.1)% During 2009, the Company recognized a tax benefit of approximately $2.1 million for a reversal of the 2008 federal and state tax provision, following a favorable ruling by the Internal Revenue Service in the third quarter of 2009. Exclusive of this one-time benefit in 2009, we recognized income tax expense of approximately $1.7 million in 2011 and $0.3 million in each of fiscal years 2010 and 2009, on pre-tax book losses of $80.1 million, $27.6 million and $88.5 million, respectively. Exclusive of the one-time benefit mentioned above, the resulting effective tax rates of 2.1%, 1.1% and 0.4% for 2011, 2010 and 2009, respectively, differs from the expected statutory rate of 35% based upon unbenefited U.S. 108 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) losses, non-deductible stock compensation charges and foreign taxes provided on foreign subsidiary earnings, offset by the benefit related to refundable research and development tax credits in 2009. The significant increase in the 2011 tax expense relates primarily to the expiration of the India tax holiday as well as the re-measurement of India transfer pricing FIN 48 reserves following a recent Competent Authority Ruling with similar fact patterns. The Company’s India subsidiary operated under a tax holiday which expired on March 31, 2011 and the net impact of this tax holiday in prior years was to decrease the Company’s net loss by approximately $0.5 million and $0.4 million in 2010 and 2009, respectively, resulting in no per share effect in each year. During 2011, 2010 and 2009, income tax benefits of $0.1 million, $0.3 million and $0.3 million for each year were allocated to the tax provision from continuing operations, related to the tax effects of items credited directly to other comprehensive income (“OCI”). Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided within the intra-period tax allocations rules when there is a pre-tax loss from continuing operations and there are items charged or credited to other categories, including OCI, in the current year. The intra-period tax allocation rules related to items charged or credited directly to OCI can result in disproportionate tax effects that remain in OCI until certain events occur. Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands): Years Ended December 31, 2011 December 25, 2010 Deferred tax assets: Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nondeductible accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,951 26,326 29,836 2,007 9,453 27,949 $ 88,419 20,628 23,058 3,118 13,541 23,203 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,522 (188,351) $ 171,967 (155,847) Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Deferred revenue tax accounting method change . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 171 $ 16,120 — — — $ (16,120) (86) $ (16,206) 171 $ (86) 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 December 31, 2011 and December 25, 2010. The valuation allowance for deferred tax assets as of 109 F O R M 1 0 - K INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) December 31, 2011 and December 25, 2010 was $188.4 million and $155.8 million, respectively. The net change in the valuation allowance was an increase of $32.5 million and $13.4 million for the years ended December 31, 2011 and December 25, 2010, respectively. As of December 31, 2011, the Company has net operating loss carryforwards of approximately $266.9 million for federal tax purposes and $239.8 million for state tax purposes. If not utilized, these carryforwards will begin to expire in 2021 for federal tax purposes and 2013 for state tax purposes. Additionally, the Company has federal and California research and development credits available to reduce future income tax expense of approximately $22.9 million and $19.1 million, respectively. The federal research credits will begin to expire in the year 2021 if not utilized, while the California research credits have no expiration date. The Company maintains net operating losses generated from excess tax benefits associated with the accumulated stock award attributes in a memo account, not included in the deferred tax inventory balances. The additional tax benefit associated with these stock award attributes, of which the net operating loss amounts are included in the carryforward amounts noted above, is not recognized until the deduction reduces cash taxes payable. At December 31, 2011, the Company had unbenefited stock option deductions for federal and California tax purposes of $35.9 million and $33.2 million, respectively. When utilized, the estimated tax benefits of approximately $14.3 million will result in a credit to stockholders’ equity. Under the Tax Reform Act of 1986, the amount of benefit from net operating loss and tax credit carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50 percent as defined, over a three-year testing period. As of December 31, 2011, the Company has determined that ownership changes have occurred that would result in limitations on the current and future utilization of its net operating loss carryforwards. However, based on the work performed, the limitations are not significant enough to impact the future utilization of the tax attributes. The Company’s policy with respect to its undistributed foreign subsidiaries’ earnings is to consider those earnings to be indefinitely reinvested and, accordingly, no related provision for U.S. federal and state income taxes has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes in the various foreign countries. At December 31, 2011, the undistributed earnings approximated $13.1 million. The future tax consequence of the remittance of these earnings is negligible because of the significant net operating loss carryforwards for U.S. and state purposes and full valuation allowance provided against such carryforwards. The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in thousands): December 31, 2011 December 25, 2010 December 26, 2009 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax position related to current year: Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax positions related to prior years Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapses of statute of limitations . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,970 2,759 1,810 (210) (263) $13,066 $8,295 1,055 55 (402) (33) $8,970 $6,350 1,881 171 (107) — $8,295 110 K - 0 1 M R O F INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) As of December 31, 2011, the cumulative unrecognized tax benefit was $13.1 million, of which $11.6 million was netted against deferred tax assets, which would have otherwise been subjected with a full valuation allowance. Of the total unrecognized tax benefit as of December 31, 2011, approximately $1.5 million, if recognized, would impact the Company’s effective tax rate. As of December 31, 2011, December 25, 2010 and December 26, 2009, the Company had $0.2 million, $0.2 million and $0.1 million of accrued interest or penalties related to unrecognized tax benefits, respectively, of which $0.1 million, $0.1 million and an insignificant amount, respectively, was included in the Company’s provision for income taxes for the years ended December 31, 2011, December 25, 2010 and December 26, 2009. The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the Company’s provision for income taxes. The Company is potentially subject to examination by the Internal Revenue Service and the relevant state income taxing authorities under the statute of limitations for years 2001 and forward. The Company has received assessments of tax resulting from a transfer pricing examinations in India for fiscal years ending March 31, 2005 through March 31, 2008. The Company is appealing the assessment and does not expect a significant adjustment to unrecognized tax benefits as a result of this inquiry. Fiscal years subsequent to March 2008 remain open to examination in India. The Company does not currently believe there to be a reasonable possibility of a significant change in total unrecognized tax benefits that would occur within the next 12 months and, as such, amounts are classified as other long-term liabilities on the accompanying consolidated balance sheets as of December 31, 2011. 15. 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. F O R M 1 0 - K 111 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 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 December 31, 2011 Years Ended December 25, 2010 December 26, 2009 Americas: United States . . . . . . . . . . . . . . . . . . . . . . . . . Other Americas . . . . . . . . . . . . . . . . . . . . . . . Europe, Middle East and Africa . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $283,443 11,543 $294,986 93,428 16,463 Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . $404,877 $342,461 16,162 $358,623 84,786 10,943 $454,352 $212,923 9,837 $222,760 77,928 8,413 $309,101 Property, plant and equipment, net United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total property, plant and equipment, net . . . . . . . . . . . . . . . . . . . December 31, 2011 December 25, 2010 $74,340 230 2,183 $76,753 $49,186 49 2,505 $51,740 K - 0 1 M R O F 16. Employee Benefit Plan In July 2001, the Company’s board of directors approved the adoption of a savings plan under Section 401(k) of the Internal Revenue Code (the “Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary contributions for eligible U.S. employees. Employee contributions are limited to a maximum annual amount as set periodically by the Internal Revenue Code. Expenses related to the Company’s 401(k) plan were insignificant for 2011, 2010 and 2009. 112 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) 17. Financial Information by Quarter (Unaudited) The following table sets forth the Company’s unaudited quarterly consolidated statements of operations data for each of the eight quarters ended December 31, 2011. The data has been prepared on the same basis as the audited consolidated financial statements and related notes included in this report and you should read the following table in conjunction with such financial statements. The table includes all necessary adjustments, consisting only of normal recurring adjustments that the Company considers necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period. For the Three Months Ended (Unaudited) 2011 2010 Dec. 31 Sep. 24 Jun. 25 Mar. 26 Dec. 25 Sep. 25 Jun. 26 Mar. 27 (In thousands, except per share data) Revenue: Product . . . . . . . . . . . . . . . . $ 93,025 $ 89,554 $ 84,361 $ 82,528 $102,255 $115,121 $98,035 $ 86,167 Ratable product and related support and 847 services . . . . . . . . . . . . . . 13,621 Services . . . . . . . . . . . . . . . Total revenue . . . . . . . . . . . 112,009 104,022 593 18,391 814 10,781 95,956 922 9,440 1,664 13,480 11,699 92,890 117,133 130,061 111,398 1,417 13,461 1,460 1,614 7,979 95,760 Cost of revenue: Cost of product . . . . . . . . . . Cost of ratable product and related support and services . . . . . . . . . . . . . . Cost of services . . . . . . . . . Restructuring and other credit related to cost of revenue . . . . . . . . . . . . . . Total cost of revenue . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . Income (loss) from operations . . . . . . . . . . . . . . . . . . Other income (expense), net Income (loss) before income 61,103 57,449 54,540 46,618 53,523 58,552 57,668 55,440 250 5,972 167 5,757 294 3,708 385 3,143 659 5,659 874 6,223 929 5,520 755 2,542 — 67,325 44,684 63,544 — — — 63,373 58,542 50,146 40,649 62,351 37,414 61,491 42,744 58,753 — 59,841 57,292 60,067 (60) (29) 65,589 64,088 64,472 47,310 60,342 57,051 (93) 58,644 37,116 57,418 (18,860) 56 (21,702) 393 (24,077) 245 (16,009) (99) (2,775) 332 4,130 455 (9,741) 117 (20,302) 169 F O R M 1 0 - K taxes . . . . . . . . . . . . . . . . . . . . (18,804) (21,309) (23,832) (16,108) (2,443) 4,585 (9,624) (20,133) Provision for (benefit from) income taxes . . . . . . . . . . . . . (142) Net income (loss) . . . . . . . . . . . . $ (19,350) $ (21,806) $(24,194) $(16,394) $ (2,740) $ 4,360 $ (9,561) $(19,991) (63) 286 225 546 297 362 497 Net income (loss) per common share Basic . . . . . . . . . . . . . . . . . . $ (0.18) $ (0.21) $ (0.23) $ (0.16) $ (0.03) $ 0.04 $ (0.10) $ (0.21) Diluted . . . . . . . . . . . . . . . . . $ (0.18) $ (0.21) $ (0.23) $ (0.16) $ (0.03) $ 0.04 $ (0.10) $ (0.21) The Company’s operating results may fluctuate due to a variety of factors, many of which are outside of the Company’s control. As a result, comparing the Company’s operating results on a period-to-period basis may not be meaningful. You should not rely on the Company’s past results as an indication of its future performance. In July 2009, the Company announced a restructuring plan under which it closed its Maryland FAB and consolidated these activities into its primary FAB located in Sunnyvale, California. This consolidation 113 INFINERA CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) of activities into one location was expected to facilitate collaboration across integration platforms in support of the Company’s next-generation products. As a result, during the third and fourth quarters of 2009, the Company recorded $3.4 million and $0.5 million, respectively, of restructuring and other related costs including severance and related expenses, equipment and facilities-related costs, operating lease termination costs, and other exit costs. Equipment and facilities-related costs primarily consist of increased depreciation expense related to restructured assets caused by shortening the useful life or updating the salvage value of depreciable fixed assets to coincide with the end of production under the approved restructuring plan. Cumulative restructuring and other related costs through December 25, 2010 totaled $3.8 million. The Company completed its restructuring actions in 2010. The Company operates and reports financial results on a fiscal year of 52 or 53 weeks ending on the last Saturday of December in each year. Accordingly, fiscal year 2011 was a 53-week year that ended on December 31, 2011. The quarters ended March 26, June 25, and September 24, 2011 were 13-week quarters and the quarter ended December 31, 2011 was a 14-week quarter. K - 0 1 M R O F 114 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Attached as exhibits to this Form 10-K are certifications of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). This “Controls and Procedures” section includes information concerning the internal controls and controls evaluation referred to in the certifications. Evaluation of Disclosure Controls and Procedures Based on an evaluation under the supervision and with the participation of our management, our CEO and CFO have concluded that our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were effective as of December 31, 2011 covered by this report to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. Changes in Internal Control Over Financial Reporting As part of our efforts to ensure compliance with the requirements of Section 404 of the Sarbanes- Oxley Act of 2002, we conduct a continual review of our internal control over financial reporting. The review is an ongoing process and it is possible that we may institute additional or new internal controls over financial report as a result of the review. There were no changes to our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Annual Report on Internal Control Over Financial Reporting Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011, the end of our fiscal year. Management based its assessment on the framework established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Management’s assessment included evaluation of such elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our internal audit and finance personnel. Based on our assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2011, the end of the Company’s fiscal year, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. 115 F O R M 1 0 - K Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal control over financial reporting, which appears in Part II, Item 8 of this Annual Report on Form 10-K. Inherent Limitations of Internal Controls Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us have been detected. These inherent limitations include the realities that judgments in decision- making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. ITEM 9B. OTHER INFORMATION None. K - 0 1 M R O F 116 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this item with respect to our directors and executive officers is incorporated by reference to the information set forth in our proxy statement for the 2012 Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of Infinera’s fiscal year ended December 31, 2011. For information pertaining to our executive offers and directors, refer to the “Executive Officers and Directors” section of Part 1, Item 1 of this Annual Report on Form 10-K. As part of our system of corporate governance, our board of directors has adopted a code of business conduct and ethics. The code applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), agents and representatives, including our independent directors and consultants, who are not employees of Infinera, with regard to their Infinera-related activities. The full text of our code of business conduct and ethics is posted on our web site at http://www.infinera.com . We intend to disclose future amendments to certain provisions of our code of business conduct and ethics, or waivers of such provisions, applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions or our directors on our web site identified above. The inclusion of our web site address in this report does not include or incorporate by reference the information on our web site into this report. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2012 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. F O R M 1 0 - K 117 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a)(1) Consolidated Financial Statements This Annual Report on Form 10-K contains the following financial statements which appear under Part II, Item 8 of this Form 10-K on the pages noted below: Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 66 68 69 70 72 73 (a)(2) Financial Statement Schedule Schedule II: Valuation and Qualifying Accounts Years Ended December 31, 2011 December 25, 2010 December 26, 2009 (In thousands) K - 0 1 M R O F Deferred tax asset, valuation allowance Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,847 32,504 — $142,420 13,427 — $109,637 32,783 — Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $188,351 $155,847 $142,420 Allowance for doubtful accounts Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for other receivables Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — — — — — 563 — 563 $ $ $ $ — — — — — — — — $ 1,700 — (1,700) $ $ $ — — — — — Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. (a)(3) Exhibits. See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Annual Report on Form 10-K. 118 Exhibit No. Description INDEX TO EXHIBITS 3.1 3.2 4.1 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12* 14.1 21.1 23.1 31.1 31.2 32.1** 32.2** Amended and Restated Certificate of Incorporation of the Registrant. (1) Amended and Restated Bylaws. (2) Form of Common Stock certificate of the Registrant. (3) Form of Indemnification Agreement between Registrant and each of its directors and executive officers. (4) 2000 Stock Plan, as amended, and forms of stock option agreements thereunder. (4) 2007 Equity Incentive Plan. (4) 2007 Employee Stock Purchase Plan. (4) Bonus Plan. (5) Form of CEO Amended and Restated Change of Control Severance Agreement. (6) Form of Section 16 Officer Amended and Restated Change of Control Severance Agreement. (6) Form of Section 16 Officer Restricted Stock Unit Agreement under the 2007 Equity Incentive Plan of Registrant. (7) Form of Section 16 Officer Performance Share Agreement under the 2007 Equity Incentive Plan of Registrant. (7) Form of Stock Option Agreement under the 2007 Equity Incentive Plan of Registrant. (8) Form of Stock Option Agreement for International Based Employees under the 2007 Equity Incentive Plan of Registrant. (8) Form of Annual Performance Share Agreement for the Board of Directors under the 2007 Equity Incentive Plan of Registrant. (9) Code of Ethics. (10) Subsidiaries of Registrant. Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS*** XBRL Instance Document 101.SCH*** XBRL Taxonomy Extension Schema Document 101.CAL*** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF*** XBRL Taxonomy Extension Definition Linkbase Document 101.LAB*** XBRL Taxonomy Extension Label Linkbase Document 101.PRE*** XBRL Taxonomy Extension Presentation Linkbase Document 119 F O R M 1 0 - K * Management contracts or compensation plans or arrangements in which directors or executive ** officers are eligible to participate. This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. (1) (2) (4) (3) *** XBRL information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document. Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on June 12, 2007. Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on February 17, 2009. Incorporated by reference to exhibit filed with Registrant’s Form S-1/A (No. 333-140876), filed with the SEC on April 27, 2007. Incorporated by reference to exhibit filed with Registrant’s Form S-1 (No. 333-140876), filed with the SEC on February 26, 2007. Incorporated by reference to exhibit filed with Registrant’s Current Report on 8-K (No. 001-33486), filed with the SEC on February 14, 2011. Incorporated by reference to exhibit filed with Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on September 13, 2010. Incorporated by reference to exhibit filed with Registrant’s Quarterly Report on Form 10-Q (No. 001-33486), filed with the SEC on November 2, 2010. Incorporated by reference to exhibit filed with Registrant’s Quarterly Report on Form 10-Q (No. 001-33486), filed with the SEC on May 5, 2010. Incorporated by reference to exhibit filed with Registrant’s Quarterly Report on Form 10-Q (No. 001-33486), filed with the SEC on May 7, 2009. Incorporated by reference to exhibit filed with Registrant’s Annual Report on Form 10-K (No. 001-33486), filed with the SEC on February 19, 2008. (10) (9) (8) (6) (5) (7) K - 0 1 M R O F 120 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 6, 2012 Infinera Corporation Registrant By: /S/ ITA M. BRENNAN Ita M. Brennan Chief Financial Officer Principal Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /S/ THOMAS J. FALLON /S/ KAMBIZ Y. HOOSHMAND Thomas J. Fallon Director, President, Chief Executive Officer and Principal Executive Officer March 6, 2012 /s/ ITA M. BRENNAN Ita M. Brennan Chief Financial Officer, Principal Financial and Accounting Officer March 6, 2012 /s/ DAVID F. WELCH, PH.D. David F. Welch, Ph.D. Co-founder, Executive Vice President, Chief Strategy Officer and Director March 6, 2012 /s/ PHILIP J. KOEN Philip J. Koen Director March 6, 2012 Kambiz Y. Hooshmand Chairman of the Board March 6, 2012 /s/ KENNETH A. GOLDMAN Kenneth A. Goldman Director March 6, 2012 /s/ DAN MAYDAN, PH.D. Dan Maydan, Ph.D. Director March 6, 2012 /s/ PAUL J. MILBURY Paul J. Milbury Director March 6, 2012 /s/ CARL REDFIELD /s/ MARK A. WEGLEITNER Carl Redfield Director March 6, 2012 Mark A. Wegleitner Director March 6, 2012 F O R M 1 0 - K 121 EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas J. Fallon, certify that: 1. I have reviewed this Annual Report on Form 10-K of Infinera Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: March 6, 2012 By: /S/ THOMAS J. FALLON Thomas J. Fallon President and Chief Executive Officer (Principal Executive Officer) K - 0 1 M R O F CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 I, Ita M. Brennan, certify that: 1. I have reviewed this Annual Report on Form 10-K of Infinera Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: March 6, 2012 By: /S/ ITA M. BRENNAN Ita M. Brennan Chief Financial Officer (Principal Financial and Accounting Officer) F O R M 1 0 - K INFINERA CORPORATION Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 32.1 I, Thomas J. Fallon, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended, that, to my knowledge on the date hereof: (a) the Annual Report on Form 10-K of Infinera Corporation for the year ended December 31, 2011 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Infinera Corporation. Date: March 6, 2012 /S/ THOMAS J. FALLON Thomas J. Fallon President and Chief Executive Officer (Principal Executive Officer) A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Infinera Corporation and will be retained by Infinera Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification “accompanies” the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing. K - 0 1 M R O F INFINERA CORPORATION Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 32.2 I, Ita M. Brennan, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended, that, to my knowledge on the date hereof: (a) that the Annual Report on Form 10-K of Infinera Corporation for the year ended December 31, 2011 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) the information contained in the Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Infinera Corporation. Date: March 6, 2012 /s/ ITA M. BRENNAN Ita M. Brennan Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Infinera Corporation and will be retained by Infinera Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification “accompanies” the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing. F O R M 1 0 - K [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] [THIS PAGE INTENTIONALLY LEFT BLANK] 

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