Infinera Corporation
2019 Proxy Statement
and
2018 Annual Report on Form 10-K
Infinera Corporation
140 Caspian Court
Sunnyvale, California 94089
NOTICE OF 2019 ANNUAL MEETING OF STOCKHOLDERS
To Be Held on May 23, 2019
10:00 a.m. Pacific Time
Dear Stockholder:
You are cordially invited to attend the 2019 Annual Meeting of Stockholders (the “Annual Meeting”) of Infinera
Corporation, a Delaware corporation. Notice is hereby given that the meeting will be held on Thursday, May 23,
2019, at 140 Caspian Court, Sunnyvale, California 94089 at 10:00 a.m. Pacific Time, for the following purposes:
1. To elect to the Board of Directors the two nominees for Class III directors named in the Proxy Statement;
2. To approve an amendment of the Infinera Corporation 2016 Equity Incentive Plan to increase the number
of shares authorized for issuance thereunder by 7,300,000 shares;
3. To approve an amendment of the Infinera Corporation 2007 Employee Stock Purchase Plan to increase
the number of shares authorized for issuance thereunder by 10,500,000 shares;
4. To approve, on an advisory basis, the compensation of Infinera’s named executive officers, as described
in the Proxy Statement;
5. To ratify the appointment of Ernst & Young LLP as Infinera’s independent registered public accounting
firm for the fiscal year ending December 28, 2019; and
6. 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 April 2, 2019. 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 we 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 the Annual Meeting.
As a stockholder, 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. To vote your
shares, please follow the instructions in the Notice of Internet Availability of Proxy Materials, which is
being mailed to you on or about April 11, 2019.
On behalf of the Board of Directors, thank you for your participation in this important annual process.
By Order of the Board,
/s/ BRAD D. FELLER
Brad D. Feller
Chief Financial Officer
Sunnyvale, California
April 10, 2019
TABLE OF CONTENTS
PROXY STATEMENT SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 Annual Meeting of Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Meeting Agenda and Voting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board and Governance Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation Program Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Leadership Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Board Oversight of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Code of Business Conduct and Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Governance Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock Ownership Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Information Regarding the Board and its Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Interlocks and Insider Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Director Equity Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Director Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information with Respect to Director Equity Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . .
COMPENSATION DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview of our Executive Compensation Program Philosophy and Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information Regarding Our Compensation Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMPENSATION COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXECUTIVE COMPENSATION TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Grants of Plan-Based Awards Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Outstanding Equity Awards at Fiscal Year-End Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 Option Exercises and Stock Vested Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 CEO Pay Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated Payments and Benefits upon Termination, Change of Control or Death/Disability . . . . . . . . . . . . . . . . .
Fiscal 2018 Estimated Payments and Benefits Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK ASSESSMENT OF COMPENSATION PRACTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 2—APPROVAL OF AMENDMENT OF THE INFINERA CORPORATION 2016 EQUITY INCENTIVE
PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 3—APPROVAL OF AMENDMENT OF THE INFINERA CORPORATION 2007 EMPLOYEE STOCK
PURCHASE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPOSAL 4—ADVISORY APPROVAL OF NAMED EXECUTIVE OFFICER COMPENSATION . . . . . . . . . . . . . . . .
PROPOSAL 5—RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
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FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Independent Registered Public Accounting Firm’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Pre-Approval Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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REPORT OF THE AUDIT COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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EQUITY COMPENSATION PLAN INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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STOCKHOLDER PROPOSALS FOR 2020 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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DELIVERY OF DOCUMENTS TO STOCKHOLDERS SHARING THE SAME LAST NAME AND ADDRESS . . . . . . . .
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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APPENDIX A—UNAUDITED RECONCILIATIONS FROM GAAP TO NON-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B—INFINERA CORPORATION 2016 EQUITY INCENTIVE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
APPENDIX C—INFINERA CORPORATION 2007 EMPLOYEE STOCK PURCHASE PLAN . . . . . . . . . . . . . . . . . . . . . C-1
INFINERA CORPORATION
PROXY STATEMENT SUMMARY
This summary highlights selected information contained elsewhere in this Proxy Statement. The summary
does not contain all of the information that you should consider, and you should read and consider carefully the
complete Proxy Statement before voting. Infinera Corporation is referred to herein as “Infinera,” “we,” “us” and
“our.”
2019 Annual Meeting of Stockholders
Time and Date: 10:00 a.m. Pacific Time, on Thursday, May 23, 2019
Place:
Record Date:
Voting:
Infinera Corporation, 140 Caspian Court, Sunnyvale, California 94089
April 2, 2019
Stockholders as of the record date are entitled to vote. Each share of common stock is entitled to
one vote for each director nominee and one vote for each of the other proposals to be voted on.
Meeting Agenda and Voting Matters
Agenda Items
1. To elect to the Board of Directors the two nominees for Class III
directors named in the Proxy Statement.
2. To approve an amendment of the Infinera Corporation 2016 Equity
Incentive Plan to increase the number of shares authorized for
issuance thereunder by 7,300,000 shares.
3. To approve an amendment of the Infinera Corporation 2007
Employee Stock Purchase Plan to increase the number of shares
authorized for issuance thereunder by 10,500,000 shares.
4. To approve, on an advisory basis, the compensation of Infinera’s
named executive officers, as described in the Proxy Statement.
5. To ratify the appointment of Ernst & Young LLP as Infinera’s
independent registered public accounting firm for the fiscal year
ending December 28, 2019.
6. To transact such other business that may properly come before
the meeting or any postponement or adjournment thereof.
Board Nominees
Board Vote
Recommendation
Page Reference
(for more detail)
FOR EACH
DIRECTOR NOMINEE
FOR
FOR
FOR
FOR
11
57
66
72
73
Name
Age Director Since
Independent(1)
AC
CC
NGC
TAC
Marcel Gani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mark A. Wegleitner . . . . . . . . . . . . . . . . . . . . . . . . .
66
68
2014
2011
X
X
M
— —
C —
M
—
C
Committee Memberships
AC = Audit Committee; CC = Compensation Committee; NGC = Nominating and Governance Committee;
TAC = Technology and Acquisition Committee; C = Chairman; M = Member
(1) Under the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and the listing standards of
The Nasdaq Stock Market (“Nasdaq”).
1
Board and Governance Highlights
Board Independence. Seven out of nine of our directors are independent.
Board Composition. The size of the Board of Directors (the “Board”) of Infinera is currently fixed at nine
directors and is divided into three classes. The Board annually assesses its performance through a board self-
evaluation. After the Annual Meeting, with the departure of John P. Daane, the size of the Board will be fixed
at eight directors.
Board Tenure. The average tenure of our current Board members is 6.0 years. We have appointed three new
directors in the last four years.
Board Diversity. The Board consists of a diverse group of professionals who bring significant leadership and
distinct qualities and skill sets to Infinera. We believe the current composition of the Board is culturally and
ethnically diverse, which provides a diverse range of perspectives and experience to engage each other and
management to effectively represent our stockholders. To accomplish this, the Nominating and Governance
Committee will continue to require that search firms engaged by us include a robust selection of women and
ethnically diverse candidates in all prospective director candidate pools.
Board Committees. We have four standing committees of the Board—Audit, Compensation, Nominating and
Governance and Technology and Acquisition. With the exception of the Technology and Acquisition
Committee (David F. Welch, Ph.D., our Chief Innovation Officer, serves on this committee), all other
committees are composed entirely of independent directors. In October 2018, we formed an Integration
Oversight Committee for a term of one year to assist management with the integration of Coriant.
Leadership Structure. We have separated the positions of Chairman and Chief Executive Officer (“CEO”).
Director Stock Ownership. Each non-employee director is required to own shares of Infinera common stock
having a value of at least four times the annual cash retainer.
Risk Oversight. 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.
Executive Compensation Program Highlights
The design of our executive compensation program for fiscal 2018 reflects our ongoing commitment to
pay-for-performance and the continued strong alignment of the interests of our named executive officers (“NEOs”)
with those of our stockholders. At the beginning of fiscal 2018, when a majority of executive compensation
decisions were made, the Compensation Committee considered the performance of our company as we exited
fiscal 2017 and the expectation of a challenging fiscal 2018. The decisions made were a proactive effort to
maintain a strong pay-for-performance profile and support accountability of our leadership team for our financial
performance. Highlights of our executive compensation program for fiscal 2018 included:
• There were no increases in target cash compensation for our NEOs.
• During the Compensation Committee’s annual review in February 2018, the Compensation
Committee approved no increases in base salary or annual incentive targets for our NEOs in fiscal
2018. This decision was based on an analysis of competitive market data provided by the
Compensation Committee’s independent consultant, with consideration given to the challenging
business environment expected during fiscal 2018.
2
• The majority of our CEO’s fiscal 2018 target total direct compensation was in the form of equity.
•
74% of our CEO’s target total direct compensation (the sum of base salary, target cash incentive
opportunity and target equity incentive compensation) was in the form of equity awards, which
closely links our CEO’s compensation directly to the value of our common stock. In fiscal 2018, our
CEO was granted a time-based restricted stock unit (“RSU”) and a performance stock unit (“PSU”)
award with vesting tied to our relative total stockholder return performance (“TSR”). For the purpose
of this discussion and in the chart below, the grant date value of PSUs reflects the face value of the
target number of shares awarded on the grant date, which differs from the accounting value
presented in the Summary Compensation Table below.
FY18 TOTAL DIRECT COMPENSATION: CEO
Base Salary
Base Salary
11.8%
11.8%
Target
Cash
Incentive
I
14.7%
t
Target
y
Equity
ve
Incentive
%
73.5%
• Our long-term incentive program continues to emphasize performance-based awards. For our
CEO, 60% of the target value of equity granted in fiscal 2018 was in the form of PSUs that will vest based
upon our TSR performance relative to a networking sector benchmark (the “2018 TSR Award”). TSR
performance is measured relative to the TSR of each of the companies (the “Index Companies”) listed in
the Standard & Poor’s North American Technology Multimedia Networking Index (“S&P Networking
Index”). To support our “pay-for-performance” philosophy and further emphasize the importance of
creating long-term stockholder value, the 2018 TSR Award contained several features we consider best
practices.
• Stretch goal for maximum performance. To earn the maximum number of shares under the 2018
TSR Award, which is 200% of the target number of shares, our TSR must exceed the 85th percentile
of the companies included in the S&P Networking Index. In addition, to earn the maximum number of
shares, our TSR must sustain at least 85th percentile performance for each of the one-, two- and
three-year measurement periods (coinciding with the end of our fiscal 2018, 2019 and 2020).
• Payment cap. Regardless of our performance versus the Index Companies in the S&P Networking
Index, the number of shares that may be earned under the 2018 TSR Award is capped at 100% of
target for any period in which our TSR is negative. Therefore, even if we significantly outperform the
Index Companies in challenging market conditions, this award only provides rewards above the
target performance level if incremental stockholder value is created.
• Our fiscal 2018 payouts reflect our pay-for-performance philosophy. Our fiscal 2018 payouts reflect
the alignment of our executive compensation program to the performance of Infinera. As indicated above,
a significant portion of our executive compensation program is designed to align the compensation
outcomes for our NEOs with performance against measurable objectives. This resulted in no payout to
our NEOs under our 2018 Bonus Plan (the “2018 Bonus Plan”), as we did not meet the minimum
threshold established by the Compensation Committee for the financial objectives under the 2018 Bonus
Plan. Further, during fiscal 2018, there were portions of three PSU awards for which payout was based
3
entirely or in part on our performance during the year, which included the 2018 TSR Award. We
underperformed as compared to the S&P Networking Index for the 2016 PSU award, which resulted in no
payout for the performance period that concluded at the end of fiscal 2018. In addition, we
underperformed relative to the Index Companies in the S&P Networking Index, which resulted in no
payouts under the 2017 PSU award and the 2018 TSR Award.
• We continue to maintain sound corporate governance policies and practices. We seek to maintain
sound corporate governance standards. During fiscal 2018, the following policies and practices continued
to be in effect:
• No Guaranteed Bonuses for our NEOs
• Executive Clawback Policy
• Anti-Hedging Policy
• No Pledging of our Common Stock by
NEOs
• Fully Independent Compensation
Committee
• Stock Ownership Policy
“Double-Trigger” Change-of-Control Agreements
• Majority Voting for the Election of Directors
•
• Annual Compensation Risk Assessment
• No Executive Perquisites
•
Independent Compensation Consultant Reporting
Directly to Compensation Committee
• No Tax Gross-Ups
4
PROXY STATEMENT
2019 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 Infinera is providing you access to these proxy materials in connection with the solicitation of
proxies by the Board for use at the 2019 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on
Thursday, May 23, 2019 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 April 11, 2019.
Q: What is the Notice of Internet Availability of Proxy Materials?
A:
In accordance with rules and regulations adopted by the SEC, instead of mailing a printed copy of our 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.
Choosing to receive the Notice by email will save us the cost of printing and mailing the documents to you and
will reduce the impact of the Annual Meeting on the environment. If you choose to receive the Notice by email,
you will receive an email next year with instructions containing a link to the proxy materials and a link to the
proxy voting site. Your election to receive the Notice by email will remain in effect until you terminate it.
On the date of mailing of the Notice, all stockholders of record and beneficial owners will have the ability to
access all of our 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 our 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 April 2, 2019 (the “Record Date”). If you are a stockholder of record, please bring a
form of personal identification to be admitted to the meeting. If your shares are held in the name of your
broker, trustee or other nominee, you must obtain a legal proxy issued in your name from the broker, trustee
or other nominee that holds your shares, together with a form of personal identification, to be admitted to the
meeting. The Annual Meeting will begin promptly at 10:00 a.m. Pacific Time.
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 two Class III directors to serve until the 2022 Annual Meeting of Stockholders or until their
successors have been duly elected and qualified;
• The approval of an amendment of the Infinera Corporation 2016 Equity Incentive Plan (the “2016 Plan”)
to increase the number of shares authorized for issuance thereunder by 7,300,000 shares;
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• The approval of an amendment of the Infinera Corporation 2007 Employee Stock Purchase Plan (the
“2007 ESPP”) to increase the number of shares authorized for issuance thereunder by 10,500,000
shares;
• The approval, on an advisory basis, of the compensation of Infinera’s NEOs, as described in the Proxy
Statement; and
• The ratification of the appointment of Ernst & Young LLP as Infinera’s independent registered public
accounting firm for the fiscal year ending December 28, 2019.
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 at 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.
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 majority vote, which 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 for each
nominee 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” the nominees listed in Proposal 1.
Proposal 2—The approval of an amendment of the 2016 Plan to increase the number of shares authorized for
issuance thereunder by 7,300,000 shares, 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 approval of an amendment of the 2007 ESPP to increase the number of shares authorized
for issuance thereunder by 10,500,000 shares, 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.
Proposal 4—The approval, on an advisory basis, of the compensation of Infinera’s NEOs 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 4.
Proposal 5—The ratification of the appointment of Ernst & Young LLP as Infinera’s independent registered
public accounting firm for the fiscal year ending December 28, 2019, 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.
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Broker non-votes, if any, 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 5.
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, Inc., you are the stockholder of record with respect to those shares, and the Notice has been
sent directly to you.
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, please 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 issued in your name 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 our 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 177,415,495 shares of common stock outstanding and entitled to vote at the Annual
Meeting. Shares held as of the Record Date include shares that are held directly in your name as the
stockholder of record and those shares held for you as a beneficial owner through a broker, trustee or other
nominee.
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 our 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 (i) are present in person at the Annual Meeting or (ii) 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 the broker holding shares for a beneficial owner does not vote on a particular
proposal because the broker does not exercise available discretionary voting power with respect to that
proposal or, in the absence of discretionary voting power, has not received instructions from the beneficial
owner on how to vote the shares. Broker non-votes will be counted towards the presence of a quorum, but will
not be counted towards the vote total for any proposal.
Q: Which proposals are considered “routine” or “non-routine?”
A: The election of directors (Proposal 1), the amendment of the 2016 Plan (Proposal 2), the amendment of the
2007 ESPP (Proposal 3) and the non-binding advisory vote on Infinera’s NEO compensation (Proposal 4) are
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“non-routine” matters for which discretionary voting power does not exist under applicable rules. A broker,
trustee or other nominee cannot vote without instructions on non-routine matters, and therefore, broker
non-votes may exist in connection with Proposals 1 through 4. Thus, if you hold your shares beneficially in
street name and you do not instruct your broker, trustee or other nominee how to vote with respect to
Proposals 1 through 4, no votes will be cast on your behalf.
The ratification of Ernst & Young LLP as our independent registered public accounting firm (Proposal 5) is
considered a “routine” matter for which discretionary voting power exists under applicable rules. A broker,
trustee or other nominee may generally vote on routine matters, and therefore no broker non-votes are
expected to exist in connection with Proposal 5.
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. To vote in person, please bring a form of
personal identification to be admitted to the meeting.
Beneficial Owners—Shares held beneficially in street name may be voted in person at the Annual Meeting
only if you obtain a legal proxy issued in your name from the broker, trustee or other nominee that holds your
shares, giving you the right to vote the shares at the Annual Meeting. Otherwise, you will not be permitted to
vote at the Annual Meeting.
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 our 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.
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 are a stockholder of record and 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 proxy voting form 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, 3 and 4. 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 through 4 and will be counted as broker non-votes, and with respect to Proposal 5 may be voted 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.
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Stockholders of Record—If you are a stockholder of record, you may change your vote by (1) filing with our
Corporate Secretary, 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) 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 our
Corporate Secretary 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 our Corporate Secretary or should be sent to our principal
executive offices, Attn: Corporate Secretary. A stockholder of record who 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.
Beneficial Owners—If you are a beneficial owner of shares held in street name, you may change your vote by
(1) submitting new voting instructions by any of the applicable voting methods allowed to your broker, trustee
or other nominee, or (2) attending the Annual Meeting and voting in person if you have obtained a proxy
voting form from the broker, trustee or other nominee that holds your shares giving you the right to vote the
shares.
Q: Who will bear the cost of soliciting votes for the Annual Meeting?
A: We will bear all expenses of soliciting proxies for the Annual Meeting. We 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. We have engaged the services of Morrow Sodali
LLC, 470 West Avenue, Stamford, Connecticut 06902, as our proxy solicitor to aid in the solicitation of proxies
from certain brokers, bank nominees and other institutional owners. Morrow’s fees for this service are
estimated to be $9,500 plus expenses.
Q: Where can I find the voting results of the Annual Meeting?
A: We intend 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.
Q: Are votes confidential? Who counts the votes?
A: Proxy instructions, ballots, and voting tabulations that identify individual stockholders are handled in a manner
that protects your voting privacy. We will not disclose the proxy instructions or ballots of individual
stockholders, except:
•
•
•
•
as necessary to meet applicable legal requirements and to assert or defend claims for or against Infinera;
to facilitate a successful proxy solicitation;
if a stockholder makes a written comment on the proxy card or otherwise communicates his or her vote to
management; or
to allow the independent inspector of election to certify the results of the vote.
A representative from Broadridge will serve as the inspector of election.
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.
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Q: Can I access Infinera’s proxy materials and Annual Report on Form 10-K via the Internet?
A: Our proxy materials will be available on our website at 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 www.proxyvote.com. Our Annual Report on Form 10-K for the fiscal year
ended December 29, 2018 (the “2018 Annual Report”) is also available on the Internet as indicated in the
Notice. In addition, you can access this Proxy Statement and the 2018 Annual Report by going to Infinera’s
website at www.infinera.com/annual_meeting. The 2018 Annual Report is not incorporated into this Proxy
Statement and is not considered proxy soliciting material.
Q: What information from this proxy statement is incorporated by reference into certain Company SEC
filings?
A: We have made previous filings under the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) that incorporate future filings, including this proxy statement, in
whole or in part. However, the Compensation Committee Report and the Report of the Audit Committee shall
not be incorporated by reference into any such filings.
Q: How can I view or request copies of Infinera’s corporate documents and SEC filings?
A: Our website contains our Amended and Restated Bylaws (“Bylaws”), Corporate Governance Guidelines,
Board committee charters, Code of Business Conduct and Ethics, and SEC filings. To view these documents,
please go to www.infinera.com, click on “Investor Relations” under the “Company” heading and then click on
“Committee Charters & Governance Documents” under the “Corporate Governance” heading. To view our
SEC filings and Forms 3, 4 and 5 filed by our directors and executive officers, please go to www.infinera.com,
click on “Investor Relations” under the “Company” heading and then click on “SEC Filings” under the
“Financials” heading.
We will promptly deliver free of charge, upon request, a copy of our Corporate Governance Guidelines, Board
committee charters or Code of Business Conduct and Ethics to any stockholder requesting a copy. Requests
should be directed to Infinera Corporation, c/o Corporate Secretary, 140 Caspian Court, Sunnyvale, California
94089.
We will promptly deliver free of charge, upon request, a copy of the 2018 Annual Report and this Proxy
Statement to any stockholder requesting a copy. Requests should be directed to Infinera Corporation, c/o
Corporate Secretary, 140 Caspian Court, Sunnyvale, California 94089.
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PROPOSAL 1—ELECTION OF DIRECTORS
General
The Board currently consists of nine directors and is divided into three classes. Each class of the Board
serves a staggered three-year term. Our Class III directors, whose terms expire at the Annual Meeting, are Marcel
Gani and Mark A. Wegleitner. On January 24, 2019, John P. Daane informed the Board that he will be resigning
from the Board effective immediately prior to the Annual Meeting and will not be standing for re-election. After the
Annual Meeting, the Board will consist of eight members.
There are two nominees for election to Class III of the Board this year, Messrs. Gani and Wegleitner. 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 III directors, if elected, will serve for a three-year term expiring at the 2022 Annual Meeting of Stockholders,
or until his successor is duly elected and qualified, or until his earlier death, resignation or removal from the Board.
Our Bylaws provide that, in an election of directors where the number of nominees does not exceed the
number of directors to be elected, each director nominee must receive a majority of votes cast with respect to that
director nominee. Should one of the nominees up for election not receive a majority of votes cast, the Board, after
taking into consideration the recommendation of the Nominating and Governance Committee, will determine
whether or not to accept the pre-tendered resignation of such nominee. The Board will publicly disclose its
decision and its rationale within 90 days of the certification of the election results. The director whose resignation is
under consideration shall abstain from participating in any decision regarding that resignation.
We believe the current Board consists of a diverse group of professionals, including former CEOs, CFOs and
industry leaders, who bring significant leadership and distinct qualities and skill sets to Infinera. This group
provides a diverse range of perspectives and experience to engage each other and management to effectively
represent our stockholders.
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 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 our business. This diversity of background and
experience includes ensuring that the Board includes individuals with experience and skills sufficient to meet the
requirements of the various rules and regulations of the SEC and Nasdaq, 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 our business, operations and markets.
Each of the nominees to fill positions as Class III directors have 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 the Annual Meeting, proxies solicited by the Board will be voted by the proxy holders for the
election of any other person or persons as the Board may recommend, at its option, or may decide to 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 III director at the
Annual Meeting, as well as for each director continuing to serve on the Board, including their ages as of the
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Record Date, 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 the 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 III Directors whose terms expire at the 2019 Annual Meeting of
Stockholders. If re-elected, the Class III Directors terms would expire at the 2022 Annual Meeting of
Stockholders.
Marcel Gani
Director since 2014
Age 66
Mark A. Wegleitner
Director since 2011
Age 68
Marcel Gani has been a member of the Board since June 2014. Mr. Gani
has been working as an independent consultant since 2009. His previous
experience includes Lecturer in Accounting and Finance at the Leavey
School of Business at Santa Clara University, and multiple roles at
Juniper Networks, Inc., including Chief of Staff from January 2005 to
March 2006 and Executive Vice President and Chief Financial Officer
(“CFO”) from February 1997 to December 2004. Prior to Juniper,
Mr. Gani served as Vice President and CFO of NVIDIA Corporation from
February 1996 to February 1997. Mr. Gani also served as CFO of Grand
Junction Networks, Primary Access Corporation and NeXT Computer,
Inc. Mr. Gani currently serves on the board of directors of SolarEdge
Technologies, Inc., a power optimizer solutions company. Mr. Gani
previously served on the board of directors of Envivio, Inc., a video
technology company, from May 2011 through October 2015.
Mr. Gani’s executive management experience as a former CFO for
various public and private companies in the technology industry provides
the Board with broad experience in finance, including accounting and
financial reporting. In addition, the Board also benefits from Mr. Gani’s
service as Chairman of the Compensation Committee and as a member
of the Audit Committee, as well as being an Audit Committee Financial
Expert.
Mark A. Wegleitner has been a member of the Board since May 2011.
Since April 2011, Mr. Wegleitner has served as President of Wegleitner
Consulting, LLC, a privately-owned telecommunications consulting
company. 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 (“CTO”) 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 CTO from
January 1999 to July 2000. Prior to joining Bell Atlantic, he worked at Bell
Laboratories and AT&T General Departments.
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 Chairman of the
Technology and Acquisition Committee and as a member of the
Nominating and Governance Committee.
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Incumbent Class I Directors whose terms expire at the 2020 Annual Meeting of Stockholders.
Thomas J. Fallon
Director since 2009
Age 57
Kambiz Y. Hooshmand
Director since 2009
Age 57
Thomas J. Fallon has served as our CEO since January 2010 and as a
member of the Board since July 2009. From January 2010 to June 2013,
Mr. Fallon also served as our President. Mr. Fallon served as our Chief
Operating Officer (“COO”) 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 served as
Vice President, Corporate Quality and Development Operations at Cisco
Systems Inc., a networking and telecommunications company. From
March 1991 to August 2003, Mr. Fallon served in a variety of functions at
Cisco Systems, including General Manager of the Optical Transport
Business Unit and Vice President of Service Provider Manufacturing.
Prior to joining Cisco Systems, Mr. Fallon served in various
manufacturing roles at Sun Microsystems and Hewlett Packard.
Mr. Fallon currently serves on one other public company board, Hercules
Capital, Inc., a specialty finance company. Mr. Fallon also serves on the
Engineering Advisory Board of the Cockrell School at the University of
Texas.
As the CEO of Infinera, 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. 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.
Kambiz Y. Hooshmand has been a member of the Board since
December 2009 and has served as Chairman of the Board since October
2010. From March 2005 to May 2009, Mr. Hooshmand served as
President and CEO of Applied Micro Circuits Corporation (“AMCC”), a
communications solutions company. From February 2002 to March 2005,
Mr. Hooshmand served as Group Vice President and General Manager of
Cisco Systems. 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 June 1997 to February 2000,
Mr. Hooshmand served as Cisco Systems’ 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
our business, financial position and operations to the Board’s
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 as a member of the Audit
Committee, Nominating and Governance Committee and Technology and
Acquisition Committee.
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Rajal M. Patel
Director since 2015
Age 50
Rajal M. Patel has been a member of the Board since September 2015.
Mr. Patel brings more than 20 years of experience in scaling cloud
infrastructure and applications for consumer Internet, SaaS and other
service providers globally. Since April 2016, Mr. Patel has served as the
Vice President, Cloud Platform Engineering at Symantec Corporation.
From March 2014 to April 2016, Mr. Patel served as the Head of Cloud
Engineering at Pinterest. Prior to Pinterest, Mr. Patel served as Senior
Vice President for Technical Operations at Salesforce.com from July
2013 to December 2013. Mr. Patel was Vice President for Cloud Services
Engineering at Cisco Systems from April 2010 to July 2013 for the Webex
collaboration portfolio, and held various engineering and management
roles at Yahoo! Inc. from 2004 to early 2010. Prior to joining Yahoo!,
Mr. Patel worked at Exodus Communications, which was shortly
thereafter acquired by Cable and Wireless. While at Cable and Wireless,
Mr. Patel served as Vice President of Network Services and facilitated the
integration of Exodus technology assets into Cable and Wireless.
Mr. Patel began his career at Pacific Bell, which is now AT&T, and over a
10-year span was last the GM of the Advanced Technologies Group.
With over 20 years of experience in technology management and
engineering over several transformations of infrastructure and networking
technologies ranging from traditional service providers to the most
modern webscale networks at the advent of consumer internet providers,
Mr. Patel’s leadership and know-how are additive to Infinera as it pursues
these markets. The Board also benefits from Mr. Patel’s service as a
member of the Nominating and Governance Committee and Technology
and Acquisition Committee.
14
Incumbent Class II Directors whose terms expire at the 2021 Annual Meeting of Stockholders.
Gregory P. Dougherty
Director since 2019
Age 59
Paul J. Milbury
Director since 2010
Age 70
Gregory P. Dougherty has been a member of the Board since January
2019. Mr. Dougherty served as CEO of Oclaro, Inc. from June 2013 until
its acquisition by Lumentum Holdings Inc. in December 2018.
Mr. Dougherty also served as a director of Oclaro from April 2009 until
December 2018. Prior to Oclaro, Mr. Dougherty served as a director of
Avanex Corporation, a leading global provider of intelligent photonic
solutions, from April 2005 to April 2009, when Avanex and Bookham
merged to become Oclaro. Mr. Dougherty also served as a director of
Picarro, Inc., a manufacturer of ultra-sensitive gas spectroscopy
equipment using laser-based technology, from October 2002 to August
2013, and as its Interim CEO from January 2003 to April 2004. He also
served as a Board member of the Ronald McDonald House at Stanford
from January 2004 to December 2009, and the Bay Area Make-A-Wish
Foundation. Earlier in his career, Mr. Dougherty served as the COO at
SDL from 1997 to 2001, when the company was acquired by JDS
Uniphase Corporation, where he continued in the role until 2002. From
1989 to 1997, Mr. Dougherty was the Director of Product Management
and Marketing at Lucent Technologies Microelectronics in the
Optoelectronics Strategic Business Unit. Mr. Dougherty currently serves
on the board of directors of IPG Photonics Corporation, a fiber laser
manufacturer, and Fabrinet, an optical, electro-mechanical and electronic
manufacturing services company.
In addition to bringing public company CEO experience to the Board,
Mr. Dougherty has extensive experience on compensation committees
(Avanex and Oclaro from 2004 to 2013, as chairperson), audit
committees (Avanex and Oclaro from 2004 to 2013) and has served as
the Lead Independent Director at Avanex. His knowledge of the fiber optic
component and transceiver markets will help to provide assistance in the
strategic direction for the company. Mr. Dougherty also has been involved
in several restructuring and integration programs over his career. The
Board also benefits from Mr. Dougherty’s service as a member of the
Compensation Committee.
Paul J. Milbury has been a member of the Board since July 2010.
Mr. Milbury served as Vice President of Operations and CFO of Starent
Networks, Corp., a provider of mobile network solutions, from January
2007 until its acquisition by Cisco Systems 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 CFO of Avid Technology, Inc., a digital
media creation, management and distribution solutions company.
Mr. Milbury previously served on the board of directors of Gigamon, Inc.,
a provider of network traffic visibility solutions, from January 2014 through
its acquisition in December 2017.
Having been a CFO for a number of technology companies, Mr. Milbury
provides the Board with a strong understanding and high level of
experience in the areas of finance, accounting and operations and serves
as the Chairman of the Audit Committee and as an Audit Committee
Financial Expert. The Board also benefits from Mr. Milbury’s service as a
member of the Compensation Committee through his executive
management experience at Starent Networks, Cisco Systems and Avid
Technology, and his experience as a director at various public and private
companies.
15
David F. Welch, Ph.D.
Director since 2010
Age 58
David F. Welch, Ph.D. co-founded Infinera and has been a member of
the Board since October 2010, and also served as a member of the
Board from May 2001 to November 2006. In October 2018, Dr. Welch
transitioned to the role of Chief Innovation Officer. From November 2017
to October 2018, Dr. Welch served as our Chief Strategy and Technology
Officer. From June 2013 to November 2017, Dr. Welch served as our
President and from May 2004 to June 2013, he served as our Executive
Vice President and Chief Strategy Officer. From May 2001 to May 2004,
he served as our Chief Development Officer/CTO. From February 2001 to
April 2001, he served as CTO of the Transmission Division of JDS
Uniphase Corporation, an optical component company. From January
1985 to February 2001, he served in various executive roles, including
Chief Technology Officer and Vice President of Corporate Development
of SDL, an optical component company. Dr. Welch currently serves on
the board of directors of CytoDyn Inc., a biopharmaceutical company.
Dr. Welch holds over 130 patents, and has been awarded the Optical
Society of America’s (“OSA”) Adolph Lomb Medal, Joseph Fraunhofer
Award, the John Tyndall Award and the IET JJ Thompson Medal for
Achievement in Electronics, in recognition of his technical contributions to
the optical industry. He is a Fellow of OSA and the Institute of Electrical
and Electronics Engineers. Dr. Welch holds a B.S. in Electrical
Engineering from the University of Delaware and a Ph.D. in Electrical
Engineering from Cornell University.
As co-founder and Chief Innovation Officer of Infinera, Dr. Welch has
strong institutional knowledge of Infinera, coupled with a deep technical
understanding of the optical networking industry. Dr. Welch’s leadership
skills, industry experience and comprehensive technical knowledge
provide the Board with an important perspective into our product
development, marketing and selling strategies. The Board also benefits
from Dr. Welch’s service as a member of the Technology and Acquisition
Committee.
Vote Required
Directors are elected by a majority vote, which means that each of the two director nominees requires the
affirmative vote of a majority of the votes cast in order to be elected. 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 1—Recommendation of the Board
The Board unanimously recommends a vote “FOR” the election of each of the two Class III nominees listed
above.
16
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
We have adopted a number of policies and practices, some of which are described below, that highlight our
commitment to sound corporate governance principles. We also maintain a Corporate Governance section on the
Investor Relations page on our website, which can be found at www.infinera.com.
Independence of the Board
On an annual basis, in accordance with the current listing standards of Nasdaq, the Board 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.
Stockholder Communications with the Board
Stockholders may communicate with the Board by writing to the following address:
Board of Directors
c/o Corporate Secretary
Infinera Corporation
140 Caspian Court
Sunnyvale, California 94089
Communications are distributed to the Board or to any individual director, as appropriate, depending on the
facts and circumstances outlined in the communication. At the direction of the Board, all mail received may be
opened and screened for security purposes. 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
The Board believes its current leadership structure best serves the objectives of the Board’s oversight of
management, the Board’s ability to carry out its roles and responsibilities on behalf of our stockholders, and our
overall corporate governance. Separating the positions of Chairman of the Board and CEO 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 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.
Mr. Hooshmand has served as Chairman of the Board since October 2010.
The Board also believes that the combination of an independent chairman, three of our four standing
committees being 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.
Board Oversight of Risk
Risk is inherent with every business and the Board is responsible for overseeing our risk management
function, including a regular review of our strategic plans and business objectives. 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
addition, each of the committees of the Board considers any risks that may be within its area of responsibilities and
17
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, key
accounting and reporting policies, and cybersecurity, as well as meeting with the Head of Internal Audit and our
external independent auditors. 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
technology development and smaller acquisitions and investments. Each of the committee chairs reports to the full
Board at regular meetings concerning the activities of the committee, the significant issues it has discussed and
the actions taken by the committee.
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics, which 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 our
policy of dealing with all persons, including our customers, employees, investors and suppliers, with honesty and
integrity. The Code of Business Conduct and Ethics was last amended on March 1, 2019. 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 www.infinera.com in the Corporate Governance section on our
Investor Relations page. You may also obtain a copy of our Code of Business Conduct and Ethics without charge
by writing to: Infinera Corporation, c/o Corporate Secretary, 140 Caspian Court, Sunnyvale, California 94089. 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 Current Report on Form 8-K if required by the applicable listing standards.
Corporate Governance Guidelines
The Board has adopted Corporate Governance Guidelines which govern, among other things, Board
composition, Board responsibilities, committee composition, management succession and stockholder
communications. You can access these Corporate Governance Guidelines, along with other materials such as
Board committee charters, on our website at www.infinera.com in the Corporate Governance section on our
Investor Relations page.
Stock Ownership Policy
The Board believes that it is important to link the interests of our directors and management to those of our
stockholders. Accordingly, the Board has adopted a Stock Ownership Policy for our directors and executive
officers who are designated as reporting officers under Section 16 of the Exchange Act (“Section 16 Officers”). For
additional information regarding our Stock Ownership Policy, please see the section entitled “Compensation
Discussion and Analysis—Additional Information Regarding Our Compensation Practices—Stock Ownership
Policy.”
Corporate Social Responsibility
We aim to create a corporation that strategically considers all choices in light of our role in the global
community. As an established player in transport networking, we recognize that we have some level of influence in
the communities where we operate and in the marketplace. We view this influence as a privilege that inspires us to
lead with bold and intentional socially responsible practices. Whenever possible, our hope is to use that influence
to drive new best practices and a sense of obligation to the world around us. Each year we summarize our
sustainability program and activities in a report, the Infinera Sustainability Report.
18
In addition, we expect all suppliers to comply with our Supplier Code of Conduct, which addresses the rights
of workers to safe and healthy working conditions, environmental responsibility, and compliance with applicable
laws. Copies of the Supplier Code of Conduct as well as other related policies related information can be found on
the “Corporate Social Responsibility” page of our website at www.infinera.com.
Information Regarding the Board and its Committees
The Board met eleven times during fiscal 2018. The Board acted by written consent three times during fiscal
2018. During fiscal 2018, 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 the Board attended our 2018 Annual Meeting of Stockholders.
Currently, the Board is pursuing the addition of a new Board member with a particular focus on women
candidates to increase Board diversity.
The Board has four standing committees: an Audit Committee, a Compensation Committee, a Nominating and
Governance Committee, and a Technology and Acquisition Committee. The Board also established an Integration
Oversight Committee with a one-year term in October 2018 (as described in more detail below). 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 its standing committees of the Board as of the end of fiscal 2018:
Name
Board Audit Compensation
John P. Daane(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marcel Gani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kambiz Y. Hooshmand . . . . . . . . . . . . . . . . . . . . . . . . . .
Paul J. Milbury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rajal M. Patel
Mark A. Wegleitner . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D.
M
M
M
C
M
M
M
M
Total Meetings in Fiscal 2018 . . . . . . . . . . . . . . . . . . . .
11
—
—
M
M
C
—
—
—
9
M(2)
—
C
—
M
—
—
—
8
Nominating
and
Governance
Technology
and
Acquisition
C
—
—
M
—
M
M
—
4
—
—
—
M
—
M
C
M
3
C = Chairman; M = Member
(1) On January 24, 2019, Mr. Daane informed the Board that he will be resigning from the Board effective immediately prior to
the Annual Meeting and will not be standing for re-election.
(2) Effective as of January 29, 2019, Mr. Dougherty joined the Board and replaced Mr. Daane on the Compensation Committee.
Below is a description of each standing committee of the Board as well as the current composition of each
committee.
Audit Committee
The Audit Committee reviews and monitors our financial statements, financial reporting process 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 as well as our
compliance with legal matters that have a significant impact on our financial statements. The 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. The
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, the
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. Any related
19
party transactions are subject to approval by the Audit Committee. A more detailed description of the Audit
Committee’s functions can be found in our Audit Committee charter. In addition, the Audit Committee meets in
executive sessions, without management present and with the independent registered public accounting firm,
during most regular meetings of the Audit Committee. A copy of the Audit Committee charter is available on our
website at www.infinera.com in the Corporate Governance section on our Investor Relations page.
The current members of the Audit Committee are Messrs. Gani, Hooshmand and Milbury. Mr. Milbury chairs
the Audit Committee. Each current member of the Audit Committee served the entire fiscal year. The Audit
Committee met nine times during fiscal 2018. The Audit Committee did not act by written consent during fiscal
2018. Each member of the 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 the Audit Committee can read and understand fundamental financial statements in
accordance with Nasdaq Audit Committee requirements. The Board has determined that Messrs. Gani and Milbury
are each an “Audit Committee Financial Expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. The designation
does not impose on Messrs. Gani 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 policies and programs. The Compensation Committee
establishes our compensation philosophy and policies, administers all of our compensation plans for executive
officers, and recommends the compensation for the non-employee directors of the Board. The Compensation
Committee seeks to assure that our compensation policies and practices promote stockholder interests and
support our compensation objectives and philosophy as described in more detail in the Compensation Discussion
and Analysis section of this Proxy Statement.
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 www.infinera.com in the
Corporate Governance section on our Investor Relations page.
The current members of the Compensation Committee are Messrs. Dougherty, Gani and Milbury. Mr. Gani
chairs the Compensation Committee. In addition, Mr. Dougherty replaced Mr. Daane on the Compensation
Committee effective as of January 29, 2019. Other than Mr. Dougherty, each current member of the
Compensation Committee served the entire fiscal year. The Compensation Committee met eight times during
fiscal 2018. The Compensation Committee acted by written consent once during fiscal 2018. Each member of the
Compensation Committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange
Act, an outside director, as defined pursuant to Section 162(m) (“Section 162(m)”) of the Internal Revenue Code,
as amended (the “Code”) and satisfies the director and compensation committee independence requirements
under the listing standards of Nasdaq.
Non-Executive Equity Award Subcommittee
The guidelines for the size of new hire, promotional and annual retention equity awards for Section 16 Officers
are reviewed and approved by the Compensation Committee. The Compensation Committee has delegated to the
Non-Executive Equity Award Subcommittee (the “Subcommittee”) 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 to the 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. The delegation of authority to the Subcommittee is not exclusive and the Board and
Compensation Committee have retained the right to approve any equity awards at their discretion. The
Subcommittee acted by written consent 12 times during fiscal 2018. This Subcommittee is typically comprised of
our CEO, SVP of Human Resources and General Counsel.
20
Nominating and Governance Committee
The Nominating and Governance Committee reviews and recommends changes to corporate governance
policies and practices applicable to Infinera. 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 also oversees an annual board evaluation process to determine
whether the Board is functioning effectively. The Nominating and Governance Committee is also responsible for
reviewing developments in corporate governance practices, and evaluating and making recommendations to the
Board concerning corporate governance matters. In addition, the Nominating and Governance Committee
oversees our succession planning process. 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 the
Nominating and Governance Committee charter is available on our website at www.infinera.com in the Corporate
Governance section on our Investor Relations page.
The current members of the Nominating and Governance Committee are Messrs. Daane, Hooshmand, Patel
and Wegleitner. Mr. Daane chairs the Nominating and Governance Committee. Each current member of the
Nominating and Governance Committee served the entire fiscal year. On January 24, 2019, Mr. Daane informed
the Board that he will be resigning from the Board and Nominating and Governance Committee effective
immediately prior to the Annual Meeting and will not be standing for re-election. Hence, Mr. Patel will assume the
position of Chairman of the Nominating and Governance Committee effective as of May 23, 2019. The Nominating
and Governance Committee met four times during fiscal 2018. The Nominating and Governance Committee did
not act by written consent during fiscal 2018. Each member of the Nominating and Governance Committee
satisfies the independence requirements under the listing standards of Nasdaq.
Board Nominees and Diversity
The Nominating and Governance Committee reviews and reports to the 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, the Nominating and Governance Committee reviews and makes
recommendations to the Board regarding the size and composition of the Board and the appropriate skills and
characteristics required of our directors in the context of the then-current composition of the Board. This includes
an assessment of each candidate’s independence, 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. The Board and
the Nominating and Governance Committee follow a process that we consider best practices 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. The Board and Nominating and Governance Committee have
created a map of key skill sets needed to provide the right level of guidance and oversight to the management
team. Within the context of appropriately addressing this map of key skills needed on the Board, the Nominating
and Governance Committee also considers diversity of background, including gender, ethnicity, specialized
expertise and a range of insight gathered from relevant industries. These factors, and others considered useful by
the Nominating and Governance Committee, are reviewed in the context of an assessment of the perceived needs
of the Board at a particular point in time. As a result, the priorities and emphasis of the Nominating and
Governance Committee and of the 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.
The Nominating and Governance Committee leads the search for, selects and recommends candidates for
election to the Board. Consideration of new director candidates typically involves a series of committee
discussions, review of information concerning candidates and interviews with selected candidates. From time to
time, the Nominating and Governance Committee may engage the services of a third-party search firm to identify
director candidates. Any search firms retained to assist the Nominating and Governance Committee will be
specifically advised to seek to include qualified, diverse candidates from traditional and nontraditional
environments, including women and ethnically diverse minorities. The 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
21
stockholders are evaluated by the 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 our 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 Corporate Secretary at our principal executive offices, and must include the following
information:
• 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 would be 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 may engage from time to time. The Technology and Acquisition Committee
serves to enhance the Board’s understanding of our technology and product development to allow for better input
and direction regarding our strategy, progress and risks. In addition, the Technology and Acquisition Committee
also evaluates the execution, financial results and integration of any such potential transactions. 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 www.infinera.com in the Corporate Governance section on our Investor Relations page.
The current members of the Technology and Acquisition Committee are Messrs. Hooshmand, Patel and
Wegleitner and Dr. Welch. Mr. Wegleitner chairs the Technology and Acquisition Committee. Each current
member of the Technology and Acquisition Committee served the entire fiscal year. The Technology and
Acquisition Committee met three times during fiscal 2018. The Technology and Acquisition Committee did not act
by written consent during fiscal 2018.
Integration Oversight Committee
In October 2018, the Board formed the Integration Oversight Committee to provide guidance to the
management of the Company in its integration of the business, personnel and infrastructure of Coriant with
Infinera, and assist the Board in its oversight of the integration. The Integration Oversight Committee reviews and
exercises general oversight of all activities related to the integration, oversees the formulation and implementation
of a plan for the integration and oversees the execution, performance and results of the integration. This
committee has a one-year term.
The current members of the Integration Oversight Committee are Messrs. Dougherty, Hooshmand and
Milbury. Mr. Dougherty replaced Mr. Daane as a member of the Integration Oversight Committee effective as of
March 1, 2019. The Integration Oversight Committee met twice during fiscal 2018. The Integration Oversight
Committee did not act by written consent during fiscal 2018.
Compensation Committee Interlocks and Insider Participation
During fiscal 2018, Messrs. Daane, Gani and Milbury served on the Compensation Committee. None of these
individuals was at any time during fiscal 2018, or at any other time, an executive officer or employee of Infinera. No
member of the Compensation Committee had any relationship with Infinera during fiscal 2018 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 the Board or Compensation Committee.
22
COMPENSATION OF DIRECTORS
Our compensation program for our non-employee directors is designed to attract and retain highly-qualified,
independent directors to represent stockholders on the Board and to act in their best interests. The Compensation
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. During fiscal 2018, the Compensation Committee engaged an outside advisor to provide
relevant market data regarding our director compensation program in order to review the program. The
Compensation Committee and Board determined that a mix of cash compensation and equity awards should
continue to be used in our compensation program for our non-employee 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. The full Board last approved changes to the director cash
compensation program in December 2015 that took effect beginning in fiscal 2018. The Compensation Committee
did not recommend any changes to our director compensation program after its review during fiscal 2018, except
in connection with the formation of the Integration Oversight Committee in late September 2018.
Director Fees
During fiscal 2018, our cash compensation program for our non-employee directors was as follows:
Position
Non-Employee Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Committee Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Audit Committee Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation Committee Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nominating and Governance Committee Chairman . . . . . . . . . . . . . . . . . . . . . . . . .
Nominating and Governance Committee Member
. . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and Acquisition Committee Chairman . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Technology and Acquisition Committee Member
Integration Oversight Committee Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Annual Retainer Fee
($)
50,000
50,000
30,000
12,500
20,000
10,000
11,000
6,000
10,000
5,000
15,000(1)
(1) Beginning at the end of the third quarter of fiscal 2018, the annual retainer for non-employee directors serving as a member
of the Integration Oversight Committee was set at $15,000 annually.
We do not pay meeting fees for the Board or any of the committees of the Board. We pay the retainer fees set
forth above in quarterly installments. Retainer fees are paid in arrears. In addition, we have a policy of reimbursing
our non-employee directors for reasonable travel, lodging and other expenses incurred in connection with their
attendance at Board and committee meetings.
Director Equity Awards
Non-employee directors are eligible to receive equity awards as follows:
•
Initial RSU Award. Each individual who commences service as a non-employee director upon his or her
appointment to the Board or election at an annual meeting of stockholders will receive an RSU award
covering a number of shares with an aggregate fair market value as reported on Nasdaq on the day prior
to the grant date equal to approximately $165,000. The Initial RSU Award vests in annual installments
over three years, provided that the non-employee director remains a service provider of Infinera through
each applicable vesting date.
• Annual RSU Award. On the date of each annual meeting of stockholders, each individual who continues
to serve as a non-employee director after that annual meeting will be eligible to receive an RSU award
covering a number of shares with an aggregate fair market value as reported on Nasdaq on the day prior
to the grant date equal to approximately $165,000. The Annual RSU Award will vest as to 100% of the
23
underlying shares on the earlier of the date of the next annual meeting of stockholders or the one-year
anniversary of the date of grant, provided that the non-employee director remains a service provider of
Infinera on the applicable vesting date.
Assuming a non-employee director is appointed to the Board at least six months prior to the next annual
meeting of stockholders, such non-employee director will also be eligible for an RSU award covering a number of
shares with an aggregate fair market value as reported on Nasdaq on the day prior to the grant date equal to
approximately $165,000. The number of shares covering this RSU award will be prorated for the number of
months remaining until the next scheduled annual meeting of stockholders.
For the Annual RSU Award in connection with the 2018 Annual Meeting of Stockholders, we granted RSU
awards covering 18,292 shares of Infinera common stock to each non-employee director then in office. These
RSU awards vest in full on May 23, 2019, subject to each non-employee director’s continued service to Infinera on
the applicable vesting date.
Fiscal 2018 Director Compensation
The following table sets forth all of the compensation awarded to or earned by the non-employee members of
the Board in fiscal 2018.
Name
Fees Earned
or Paid in Cash
($)(1)
Stock
Awards
($)(2)
Option
Awards
($)
John P. Daane(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marcel Gani . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kambiz Y. Hooshmand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paul J. Milbury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rajal M. Patel
Mark A. Wegleitner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,874
82,500
127,374
93,874
61,000
66,000
169,567 —
169,567 —
169,567 —
169,567 —
169,567 —
169,567 —
Total
($)
244,441
252,067
296,941
263,441
230,567
235,567
(1) For a description of the annual non-employee director retainer fees and retainer fees for chair positions and for service as
Chairman of the Board, see the disclosure above under “Director Fees.”
(2) The amounts reported in this column represent the aggregate grant date fair value of the RSU awards granted in fiscal 2018
computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718,
“Compensation—Stock Compensation” (“ASC 718”) and without any adjustment for estimated forfeitures. These amounts
reflect our accounting expense for these awards and do not correspond to the actual value that will be recognized by the
non-employee directors with respect to these awards at the time the shares of Infinera common stock underlying the RSU
awards are vested and/or sold. There can be no assurance that the actual value realized by a non-employee director will be
at or near the grant date fair value of the RSU awards granted.
(3) Mr. Daane has decided not to stand for re-election and will no longer serve as a director after the Annual Meeting.
Additional Information with Respect to Director Equity Awards
Name
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John P. Daane(2)
Marcel Gani
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kambiz Y. Hooshmand . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paul J. Milbury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rajal M. Patel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mark A. Wegleitner
(1)
Includes unvested RSU awards.
Shares Subject to
Stock Awards Outstanding
at Fiscal Year-End
(#)(1)
Shares Subject to
Option Awards Outstanding
at Fiscal Year-End
(#)
21,801
18,292
18,292
18,292
18,292
18,292
—
—
—
7,600
—
40,000
(2) Mr. Daane has decided not to stand for re-election and will no longer serve as a director after the Annual Meeting.
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 NEOs;
• Each of our directors; and
• All current executive officers and directors as a group.
The information provided in this table is based on our records, information filed with the SEC and information
provided to Infinera, except where otherwise noted. To our knowledge and unless as otherwise indicated, each
stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly
with such person’s spouse. Percentage beneficially owned is based on 177,415,495 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, California 94089.
Name of Beneficial Owner
5% or More Stockholders
FMR LLC(2)
. . . . . . . . . . . . . . . . . . . . . . .
Oaktree Optical Holdings, L.P.(3) . . . . . .
The Vanguard Group(4)
. . . . . . . . . . . . .
BlackRock, Inc.(5)
. . . . . . . . . . . . . . . . . .
Named Executive Officers and
Directors
Thomas J. Fallon(6) . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D.(7) . . . . . . . . . . . . .
David W. Heard . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . . .
John P. Daane . . . . . . . . . . . . . . . . . . . .
Gregory P. Dougherty . . . . . . . . . . . . . .
Marcel Gani . . . . . . . . . . . . . . . . . . . . . . .
Kambiz Y. Hooshmand(8) . . . . . . . . . . . .
Paul J. Milbury . . . . . . . . . . . . . . . . . . . .
Rajal M. Patel(9)
. . . . . . . . . . . . . . . . . . .
Mark A. Wegleitner . . . . . . . . . . . . . . . . .
All Current Executive Officers and
Directors as a Group
(12 Persons) . . . . . . . . . . . . . . . . . . . .
Common
Shares
Currently
Held
Common Shares
That May Be
Acquired Within
60 Days of the
Record Date(1)
Total
Beneficial
Ownership
Percent
Beneficially
Owned
26,204,780
20,975,384
16,216,790
13,943,456
1,377,075
236,106
1,574,767
44,532
179,061
51,337
—
122,281
104,297
54,063
41,921
67,197
—
—
—
—
26,204,780
20,975,384
16,216,790
13,943,456
14.8%
11.8%
9.1%
7.9%
434,306
61,317
379,608
17,188
31,621
18,292
—
18,292
18,292
25,892
18,292
58,292
1,811,381
297,423
1,954,375
61,720
210,682
69,629
—
140,573
122,589
79,955
60,213
125,489
1.0%
*
1.1%
*
*
*
*
*
*
*
*
*
3,852,637
1,081,392
4,934,029
2.8%
*
(1)
Less than 1% of the outstanding shares of common stock.
Includes shares represented by vested, unexercised stock options as of the Record Date and stock options, RSUs or other
rights that are expected to vest within 60 days of the Record Date. 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) According to a Schedule 13G/A filed with the SEC on February 13, 2019 by FMR LLC (“FMR”), Abigail P. Johnson (FMR’s
Director, Chairman and CEO) and Fidelity Growth Company Fund (“Fidelity”). Such amendment states that FMR is deemed
to be the beneficial owner of 26,204,780 shares by virtue of its control over Fidelity, which is deemed to be the beneficial
owner of 12,894,773 shares as a result of its acting as investment advisor to various investment companies registered under
Section 8 of the Investment Company Act of 1940. Such amendment further states that (a) FMR has sole voting power over
9,468,356 shares, shared voting power over no shares, sole dispositive power over 26,204,780 shares, and shared
25
dispositive power over no shares; (b) Ms. Johnson has neither sole nor shared voting power over any shares, sole
dispositive power over 26,204,780 shares, and shared dispositive power over no shares and (c) Fidelity has sole voting
power over 12,894,773 shares, shared voting power over no shares, sole dispositive power over no shares, and shared
dispositive power over no shares. The address of FMR is 245 Summer Street, Boston, Massachusetts 02210.
(3) According to a Schedule 13D filed with the SEC on October 11, 2018 jointly, pursuant to a joint filing agreement, by
(i) Oaktree Optical Holdings, L.P., a Delaware limited partnership (“Optical”), whose principal business is to invest in
securities; (ii) Oaktree Fund GP, LLC, a Delaware limited liability company (“GP LLC”), whose principal business is to serve
as and perform the functions of the general partner of certain investment funds including Optical; (iii) Oaktree Fund GP I,
L.P., a Delaware limited partnership (“GP I”), whose principal business is (A) serve as, and perform the functions of, the
general partner of certain investment funds or to serve as, and perform the functions of, the managing member of the
general partner of certain investment funds or (B) to act as the sole shareholder of certain controlling entities of certain
investment funds; (iv) Oaktree Capital I, L.P., a Delaware limited partnership (“Capital I”), whose principal business is to
serve as, and perform the functions of, the general partner of GP I; (v) OCM Holdings I, LLC, a Delaware limited liability
company (“Holdings I”), whose principal business is to serve as, and perform the functions of, the general partner of Capital I
and to hold limited partnership interests in Capital I; (vi) Oaktree Holdings, LLC, a Delaware limited liability company
(“Holdings”), whose principal business is to serve as, and perform the functions of, the managing member of Holdings I;
(vii) Oaktree Capital Group, LLC, a Delaware limited liability company (“OCG”), whose principal business is to act as the
holding company and controlling entity of each of the general partner and investment adviser of certain investment funds
and separately managed accounts; and (viii) Oaktree Capital Group Holdings GP, LLC, a Delaware limited liability company
(“OCGH GP” and together with Optical, GP I, Capital I, Holdings I, Holdings, OCG and GP LLC, collectively, the “Reporting
Persons”), whose principal business is to serve as, and perform the functions of, the manager of OCG. The principal
business address of each of the Reporting Persons is c/o Oaktree Capital Group Holdings GP, LLC, 333 South Grand
Avenue, 28th Floor, Los Angeles, California 90071.
(4) According to a Schedule 13G/A filed with the SEC on February 12, 2019 by The Vanguard Group (“Vanguard”). Vanguard is
the beneficial owner of 16,216,790 shares and has sole voting power over 147,204 shares, shared voting power over 29,846
shares, sole dispositive power over 16,054,694 shares and shared dispositive power over 162,096 shares. The address of
Vanguard is 100 Vanguard Boulevard, Malvern, Pennsylvania 19355.
(5) According to a Schedule 13G/A filed with the SEC on February 11, 2019 by BlackRock, Inc. (“BlackRock”). BlackRock is the
beneficial owner of 13,943,456 shares and has sole voting power over 13,008,791 shares and sole dispositive power over
13,943,456 shares. The address of BlackRock is 55 East 52nd Street, New York, New York 10055.
(6) Shares held by The Fallon Family Revocable Trust dated 9/7/1994.
(7) Consists of (i) 1,454,974 shares held by The Welch Family Trust U/A DTD 4/3/1996; (ii) 117,293 shares held by LRFA, LLC,
a limited liability company of which Dr. Welch is the sole managing member; and (iii) 2,500 shares held by Dr. Welch as
trustee for his children. Dr. Welch disclaims beneficial ownership of the shares held in trust for his children.
(8) Consists of (i) 64,042 shares held by Mr. Hooshmand; and (ii) 40,255 shares held by 2002 Hooshmand Family Trust UA
03/01/2002.
(9) Shares held by The Rajal & Brinda Patel Trust U/A DTD 9/6/2016.
26
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides information related to the fiscal 2018 compensation
program and related decisions for our NEOs identified below. For fiscal 2018, these individuals included the
following:
• Thomas J. Fallon, our CEO;
• Brad D. Feller, our CFO;
• David F. Welch, Ph.D., our Chief Innovation Officer;
• David W. Heard, our COO; and
• Robert J. Jandro, our Senior Vice President, Worldwide Sales.
Fiscal 2018 Management Changes. In February 2018, when the Compensation Committee established fiscal
2018 target compensation for our NEOs, Dr. Welch’s title was Chief Strategy and Technology Officer and
Mr. Heard’s title was General Manager, Products and Solutions. In connection with the acquisition of Coriant on
October 1, 2018, Dr. Welch transitioned to the role of Chief Innovation Officer and Mr. Heard transitioned to the
role of COO. In addition, for fiscal 2019, Dr. Welch is no longer considered an executive officer for reporting
purposes.
Executive Summary
Fiscal 2018 Business Summary
We are a global supplier of networking solutions comprised of networking equipment, software and services.
Our portfolio of solutions includes optical transport platforms, converged packet-optical transport platforms, optical
line systems and disaggregated router platforms, as well as software-defined networking, network management
and routing software. Our end-user services and applications include, but are not limited to, high-speed internet
access, business Ethernet services, 4G/5G mobile broadband, cable high-speed Internet distribution, cloud-based
services, high-definition video streaming services, virtual and augmented reality and the Internet of Things.
• Our systems are highly scalable, flexible and designed with open networking principles for ease of
deployment.
• Our portfolio includes systems that leverage our innovative optical engine technology comprised of large-
scale photonic integrated circuits (“PICs”) and digital signal processors (“DSPs”). We optimize the
manufacturing process by using indium phosphide to build our PICs, which enables the integration of
hundreds of optical functions onto a set of semiconductor chips.
• This large-scale integration of our PICs and advanced DSPs allows us to deliver high-performance
transport networking platforms with features that customers care about the most, including cost per bit,
low power consumption and space savings.
• We design our optical engines to increase the capacity and reach performance of our products by
leveraging coherent optical transmission.
Our overall fiscal 2018 performance fell short of the expectations we established at the beginning of the year
to measure pay-for-performance. We did not achieve the non-GAAP operating margin requirement for short-term
incentives to be paid out to our NEOs under our 2018 Bonus Plan and none of the PSU awards for which the
performance period ended in 2018 resulted in any portion of the PSUs becoming eligible to vest. Despite these
results for the last fiscal year, we believe our acquisition of Coriant, which occurred in October 2018, positions us
as one of the largest vertically integrated optical network equipment providers in the world and represents a critical
opportunity to build long-term stockholder value. The acquisition is expected to significantly increase revenue while
expanding our customer base and the combination positions us to deliver a powerful suite of innovative,
end-to-end packet optical network solutions for communications service providers and internet content providers.
The following fiscal 2018 financial information included the fourth quarter results of the Coriant business that
we acquired on October 1, 2018. Historical comparison may not be meaningful.
• GAAP Revenue was $943.4 million, compared to $740.7 million in fiscal 2017 and $870.1 million in fiscal
2016.
27
• GAAP gross margin was 34.0%, compared to 32.9% in fiscal 2017 and 45.2% in fiscal 2016.
• Non-GAAP gross margin(1) was 38.4%, compared to 39.3% in fiscal 2017 and 48.3% in fiscal 2016.
• GAAP operating margin for the year was (19.7)%, compared to (24.7)% in fiscal 2017 and (3.0)% in fiscal
2016.
• Non-GAAP operating margin for the year was (5.1)%, compared to (10.1)% in fiscal 2017 and 6.2% in
fiscal 2016.
• GAAP net loss was $(1.36) per share, compared to a GAAP net loss of $(1.32) per share in fiscal 2017
and a GAAP net loss of $(0.17) per share in fiscal 2016.
Our overall increase in revenue during fiscal 2018 was benefited by the addition of Coriant, whose results
were included in the fourth quarter of fiscal 2018. Prior to the fourth quarter of 2018, our revenue through the first
three quarters of fiscal 2018 was $611.3 million, up by 12.2%, compared to $544.9 million in the same period of
fiscal 2017. This increase was primarily due to the strength of our next-generation ICE4 products and strong first
half spending from our largest cable customer. Gross margin improved to 34.0% in fiscal 2018 from 32.9% in fiscal
2017. This improvement was primarily attributable to benefits of our vertically integrated operating model, driven
by higher revenue spread across our largely fixed cost structure. Additionally, in fiscal 2018 compared to fiscal
2017, we incurred substantially less costs related to bridging customers to our new ICE4 technology and initially
higher costs of early production units of our new ICE4 products. The increased gross margin in 2018 was offset by
lower margins from the Coriant business and increased amortization of intangible assets. Operating expenses in
fiscal 2018 grew by 19% to $506.8 million from $427.1 million in 2017 as the impacts of our restructuring efforts
over the course of the first nine months of 2018 were more than offset by the inclusion of Coriant’s operating
expenses subsequent to the closing of the acquisition along with significant costs related to integration,
restructuring, and other acquisition-related costs incurred in the fourth quarter of 2018 to begin to transform the
business. While we made important strides in our overall performance, the final results did not meet the rigorous
standards of our pay for performance objectives in fiscal 2018.
The following table illustrates our GAAP revenue and non-GAAP operating margin over the last three fiscal
years:
Revenue
Non-GAAP Opera(cid:2)ng Margin(1)
$1,000.0
$870.1
$943.4
$740.7
)
s
d
n
a
s
u
o
h
t
n
I
(
e
u
n
e
v
e
R
$800.0
$600.0
$400.0
$200.0
$0.0
6.2%
i
n
g
r
a
M
g
n
(cid:2)
a
r
e
p
O
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
FY16
FY17
Fiscal Year
FY18
FY16
-5.1%
FY18
-10.1%
FY17
Fiscal Year
(1) For a reconciliation of GAAP to non-GAAP revenue, gross profit, gross margin, operating income (loss) and operating
margin for fiscal 2018, 2017 and 2016, please see Appendix A to this Proxy Statement.
28
The following graph shows our 1-, 3- and 5-year TSR as compared to the S&P Networking Index.
Annualized 1-Year, 3-Year and 5-Year
Total Stockholder Return
INFN
S&P Networking
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-1%
10%
9%
-16%
-37%
-40%
1-Year
3-Year
5-Year
Fiscal 2018 Executive Compensation Program Design Highlights
The design of our executive compensation program for fiscal 2018 reflects our ongoing commitment to
pay-for-performance and the continued strong alignment of the interests of our NEOs with those of our
stockholders. At the beginning of fiscal 2018, when a majority of executive compensation decisions were made,
the Compensation Committee considered the performance of our company as we exited fiscal 2017 and the
expectation of a challenging fiscal 2018. The decisions made reflected a continuing effort to maintain a strong
pay-for-performance profile and support accountability of our leadership team for our financial performance. The
key elements of our executive compensation program include base salary, a cash bonus plan and long-term
incentives in the form of RSUs and PSUs. Highlights of our executive compensation program for fiscal 2018
included the following:
• There were no increases in target cash compensation for our NEOs.
• During the Compensation Committee’s annual review in February 2018, the Compensation
Committee approved no increases in base salary or annual incentive targets for our NEOs in fiscal
2018. This decision was based on an analysis of competitive market data provided by the
Compensation Committee’s independent consultant, with consideration given to the challenging
business environment expected during fiscal 2018.
29
• The majority of our CEO’s fiscal 2018 target total direct compensation was in the form of equity.
•
74% of our CEO’s target total direct compensation (the sum of base salary, target cash incentive
opportunity and target equity incentive compensation) was in the form of equity awards, which
closely links our CEO’s compensation directly to the value of our common stock. In fiscal 2018, our
CEO was granted time-based RSUs and the 2018 TSR Award. For the purpose of this discussion
and in the chart below, the grant date value of PSUs reflects the face value of the target number of
shares awarded on the grant date, which differs from the accounting value presented in the
Summary Compensation Table below.
FY18 TOTAL DIRECT COMPENSATION: CEO
Base Salary
Base Salary
11.8%
11.8%
Target
Cash
Incentive
I
14.7%
t
Target
y
Equity
ve
Incentive
%
73.5%
• Our long-term incentive program continues to emphasize performance-based awards. For our
CEO, 60% of the target value of equity granted in fiscal 2018 was in the form of PSUs that will vest based
upon our TSR performance relative to a networking sector benchmark. To support our
“pay-for-performance” philosophy and further emphasize the importance of creating long-term
stockholder value, the 2018 TSR Award contained several features we consider best practices.
• Stretch goal for maximum performance. To earn the maximum number of shares under the 2018
TSR Award, which is 200% of the target number of shares, our TSR must exceed the 85th percentile
of the companies included in the S&P Networking Index. In addition, to earn the maximum number of
shares, our TSR must sustain at least 85th percentile performance for each of the one-, two- and
three-year measurement periods (coinciding with the end of our fiscal 2018, 2019 and 2020).
• Payment cap. Regardless of our performance versus the Index Companies in the S&P Networking
Index, the number of shares that may be earned under the 2018 TSR Award is capped at 100% of
target for any period in which our TSR is negative. Therefore, even if we significantly outperform the
Index Companies in challenging market conditions, this award only provides rewards above the
target performance level if incremental stockholder value is created.
• Our 2018 Bonus Plan Included a Challenging Financial Goal for Payment. For the 2018 Bonus Plan,
payout to our NEOs was based 100% on non-GAAP operating margin goals. In order for the 2018 Bonus
Plan to be funded, the financial performance objective required us to achieve a non-GAAP operating
margin equal to or greater than 2% for the third and fourth quarters of fiscal 2018 (combined) (the
“Operating Margin Gate”). In the event that the Operating Margin Gate was achieved, the bonus for our
NEOs would be determined based on the level of improvement in non-GAAP operating margin between
the last fiscal quarter of 2017 and the last fiscal quarter of 2018. Our acquisition of Coriant at the
beginning of the fourth quarter of fiscal 2018 was not taken into account in determining the financial
objectives under the 2018 Bonus Plan.
Relative to our bonus plan in 2017, this approach eliminated a 20% weighting on strategic goals that
focused on key quality and product development objectives. Given the challenges facing us beginning in
late 2017 and the impact this had on our stockholder return, the Compensation Committee considered an
30
increased emphasis on improved operating margin as an important feature supporting alignment of the
interests of our executive officers with that of our stockholders.
Pay-for-Performance Outcome in Fiscal 2018
Our emphasis on performance-based incentives is evidenced in the chart below, which illustrates our CEO’s
target total compensation versus his actual realized compensation during the most recent three fiscal years.
Target total compensation is defined as the sum of the base salary rate approved for each fiscal year, the bonus
target for the year, and the grant date target value of equity. The target value of equity reflects the grant date share
price of PSUs, which differs from the value reported in the Summary Compensation Table below. Actual realized
compensation includes the base salary and cash annual incentive earned during the year plus the sum of any
RSUs and PSUs that vested during the year, valued using the share price on the vesting date.
First, the Compensation Committee approved a 20% reduction in our CEO’s base salary as of December
2017. This reduced his target cash compensation for 2018 by 20%. In addition, target equity awards in 2018 were
equal to the value of target grants in 2017, which resulted in a decrease of his target total compensation by
approximately 5% from 2017 to 2018. The Compensation Committee approved this reduction in cash
compensation in connection with the continued challenges facing our business in 2017 and in the context of our
emphasis on returning to a positive non-GAAP operating margin in 2018.
In addition, our CEO’s realized compensation is aligned with our stockholder return in 2018 and was
significantly below target in 2018. This relationship between realized pay and our total stockholder return continues
a pattern from 2017 and demonstrates the alignment of pay and performance inherent in the design of our
executive compensation programs. As the chart below illustrates, realized compensation for our CEO was
approximately 70% below target in both 2017 and 2018. The $1.3 million realized compensation of our CEO in
2018 also represented a 74% decrease from realized compensation in 2016.
Fiscal 2018 Executive Compensation Program Payout Highlights
Our fiscal 2018 payouts reflect the alignment of our executive compensation program to the performance of
Infinera. As indicated above, a significant portion of our executive compensation program was designed to align
the compensation outcomes for our participating NEOs with performance against measurable objectives.
Bonuses under the 2018 Bonus Plan for participating NEOs were determined based on our performance
against the achievement of financial targets. The financial performance objective for our participating NEOs under
the 2018 Bonus Plan were tied to the Operating Margin Gate and improvement in non-GAAP operating margin by
13.3 points. As the required improvement in non-GAAP operating margin did not hit the target set out in the 2018
Bonus Plan, this resulted in no payout to NEOs under the 2018 Bonus Plan.
31
During fiscal 2018, there were portions of three PSU awards for which payout was based entirely or in part on
our performance during the year. One of the awards (the fiscal 2016 award) measured our TSR against the TSR of
the S&P Networking Index. The 2017 and 2018 PSU awards measure our TSR against the TSR of each of the
Index Companies in the S&P Networking Index. Features of the 2018 TSR Awards are more fully described in the
section below, entitled “Fiscal 2018 Compensation—Long-Term Incentive Compensation.”
As summarized in the table below, we failed to outperform the TSR of the S&P Networking Index for either of
the applicable periods, which resulted in no payouts for each of the performance periods that concluded at the end
of fiscal 2018.
Year of
Grant
Applicable
Measurement
Period(1)
% of Target
Award Tied
to Period
Result
Payout as a
% of Target(2)
2018 . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . .
1 year
2 years
3 years
33%
33%
33%
% Rank = 13th percentile
% Rank = 5th percentile
Relative TSR = -115.04 points
0%
0%
0%
(1) One-third of each award is tied to the end of the first, second and third fiscal years after the grant date.
(2) For the 2017 and 2018 TSR Awards, there is no payout for performance below the 25th percentile. For the 2016 TSR Award,
there is no payout for relative TSR (i.e., INFN TSR minus the TSR of the benchmark) below -33 points.
Governance of Executive Compensation
Our executive compensation program includes the following executive compensation governance policies and
practices:
• No Guaranteed Bonuses. We did not provide any guaranteed bonuses in fiscal 2018 for any of our NEOs
with the exception of “sign on” bonuses, if any, that may be negotiated as part of an executive officer new
hire package.
• Executive Clawback Policy. We maintain an executive clawback policy that applies to our Section 16
Officers and provides for recovery of both cash and equity incentive compensation under specified
circumstances.
• Anti-Hedging Policy. Our Insider Trading Policy prohibits all employees, including our NEOs, and Board
members, from hedging their Infinera common stock.
• Anti-Pledging Policy. Our Insider Trading Policy prohibits our NEOs and Board members from pledging
Infinera common stock as collateral for a loan.
• Fully Independent Compensation Committee. Our executive compensation program is administered
annually by the Compensation Committee, which consists solely of independent directors.
• Stock Ownership Policy. Our Section 16 Officers and the non-employee members of the Board are
subject to minimum stock ownership requirements.
• No Tax Gross-Ups. We do not have any arrangements providing for tax “gross-ups” of any compensation
elements with any of our executive officers.
•
“Double-trigger” Change of Control Arrangements. Our change of control agreements contain “double-
trigger” arrangements that require a termination of employment without cause or a constructive
termination of employment following a change of control of Infinera before payments and benefits are
triggered.
• Annual Compensation Risk Assessment. The Compensation Committee annually conducts a
compensation risk assessment to determine whether our compensation arrangements, or components
thereof, create risks that are reasonably likely to have a material adverse effect on Infinera.
• No Executive Perquisites. Our executive officers are only eligible to receive the same benefits and
perquisites as our other U.S. salaried employees.
•
Independent Compensation Consultant Reporting Directly to Compensation Committee. The
Compensation Committee utilizes input from an independent compensation consultant that is retained
32
directly by the Compensation Committee and performed no services for Infinera during fiscal 2018 other
than services for the Compensation Committee.
Advisory Vote on Fiscal 2017 Named Executive Officer Compensation—“Say-on-Pay” Vote
In calendar 2018, stockholders were provided with the opportunity to cast an advisory (non-binding) vote (a
“say-on-pay” proposal) on the compensation of our NEOs for fiscal 2017. Our stockholders approved this
say-on-pay proposal, with over 96% of votes cast voting in favor of our executive compensation program. Noting
the results of this vote, the Compensation Committee considered this when making compensation decisions for
fiscal 2018.
In light of the 2018 say-on-pay vote, the Compensation Committee maintained a consistent general approach
to our executive officer compensation program. This included a continued emphasis on pay-for-performance
through the use of PSUs that reward executive officers only if they deliver value for our stockholders. For fiscal
2018, and as noted above, the Compensation Committee also approved no increases to the base salaries or
target annual incentives of our NEOs when compensation decision were made in February 2018. The 2018 Bonus
Plan applicable to our NEOs was modified so that payout to our NEOs would only be made if the financial
performance objectives were met.
The Compensation Committee will continue to consider input from our stockholders as reflected in the
outcome of our annual say-on-pay vote when making executive compensation program decisions.
Overview of our Executive Compensation Program Philosophy and Process
Compensation Objectives and Philosophy
Our executive compensation program is designed to attract, retain, and reward talented executive officers and
to motivate them to pursue our corporate objectives, while fostering the creation of long-term value for our
stockholders. To achieve this mission, we take a “pay-for-performance” approach that forms the foundation for the
design of our executive compensation program. The Compensation Committee also designs the various
components of our executive compensation program to support our company culture (i.e., increasing levels of
accountability through the use of “at risk” pay for more senior level employees), the internal company environment
relative to industry conditions, current business priorities, strategy and product development cycles, and current
market practices of our peer group.
Compensation-Setting Process
Role and Authority of Compensation Committee. The Compensation Committee is responsible for our
executive compensation program and all related policies and practices. The Compensation Committee has the
responsibility to establish and approve the compensation of each of our executive officers, including our NEOs. In
addition, the Compensation Committee reviews and administers our equity and employee benefit plans and
programs, which are generally available to our employees, including our NEOs. The Compensation Committee
also has the authority to engage its own advisors to assist it in carrying out its responsibilities, and the reasonable
compensation for such advisor services is paid by Infinera.
Role of Compensation Consultant. During fiscal 2018, the Compensation Committee engaged the services of
Compensia, Inc. (“Compensia”), a national compensation consulting firm. Compensia provided the Compensation
Committee with an analysis of industry sector competitive market data regarding NEO compensation, information
on compensation trends, peer group and general market data, as well as assistance with the parameters used to
determine the peer group, base salary, incentive plan design and the structure of our executive compensation
program. During fiscal 2018, Compensia also provided general observations about our compensation programs.
Compensia reports directly to the Compensation Committee. Compensia interacted with management at the
direction of the Compensation Committee but did not provide any other services for Infinera or its management
team in fiscal 2018. Compensia’s fees were paid by Infinera. The Compensation Committee annually reviews the
independence of its compensation consultant and during fiscal 2018 determined that there were no conflicts of
interest in connection with Compensia’s work.
33
Determination of CEO Compensation. Our compensation consultant provides market data and considerations
for the Compensation Committee regarding the amount and form of our CEO’s compensation. As part of this
process, the Compensation Committee considers input from the Board and feedback from the Chairman of the
Board, in particular with respect to the performance of our CEO. After considering the feedback and
recommendations received, all decisions regarding our CEO’s compensation are made by the Compensation
Committee, based on its own judgment and after considering the interests of our stockholders, in executive
sessions excluding our CEO.
Determination of non-CEO Compensation. As a result of his close working relationship with each of the other
NEOs, our CEO is asked to provide his assessment of their performance to the Compensation Committee,
including considerations regarding retention and importance of their contributions to Infinera. Our CEO is assisted
by our Senior Vice President of Human Resources in making these assessments. Our CEO then presents his
performance assessment of the other NEOs and makes formal recommendations to the Compensation Committee
regarding adjustments to base salary, annual cash incentive award opportunities and equity awards for our NEOs
(other than himself). While the Compensation Committee considers the recommendations of our CEO in
determining compensation for our other NEOs, ultimately its decisions are based on its own judgment and the
interests of our stockholders. None of our NEOs makes any recommendations regarding his own compensation
and none of our NEOs are present at meetings in which their compensation is determined. The Compensation
Committee finalized compensation decisions for the CEO in executive session without management present.
Executive Compensation Elements
We provide base salaries to attract, retain and motivate our executive officers for their day-to-day
contributions, annual incentive cash compensation to link payments to the achievement of our annual financial
and/or operational objectives, and long-term incentive compensation delivered in the form of equity awards to align
the interests of our executive officers with those of our stockholders and provide significant motivational and
retention value to our executive officers. These are the key elements of our executive compensation program. We
believe each is necessary to attract, retain and motivate our executive officers, on whom our success largely
depends. In addition, we also provide employee benefits that are generally available to all our employees including
our NEOs, and certain severance and “double-trigger” change of control payments and benefits as part of our
executive compensation program as described further below.
Allocation of Compensation across Pay Elements
In determining how to allocate an NEO’s target total direct compensation opportunity among these various
elements, the Compensation Committee seeks to take into account market competitive practices for companies of
a similar size and with a comparable business focus. Individual retention considerations specific to the individual
are also factored in the Compensation Committee’s final determination of target total direct compensation. Equity
awards, which for fiscal 2018 consisted of awards of time-based RSUs and PSUs, represented the largest
component of our NEOs’ target total direct compensation opportunity. This approach was designed to encourage
sustained, long-term performance and to ensure alignment of the interests of our NEOs with those of our
stockholders. Consistent with our “pay-for-performance” philosophy, a significant portion of our NEOs’ fiscal 2018
target total direct compensation opportunity was completely “at risk,” including 59% of our CEO’s target total direct
compensation opportunity. We define “at risk” compensation as opportunities for which vesting as well as the level
of achievement is contingent upon achievement of specified performance conditions. In fiscal 2018, this included
the 2018 Bonus Plan and PSU awards, where the value of PSUs is included based on the grant date target value
of shares awarded.
34
The following charts show the target total direct compensation mix for fiscal 2018 for our CEO and our other
NEOs as a group (value of equity awards is determined using grant date fair value):
FY18 PAY MIX: CEO
FY18 PAY MIX: OTHER NEO AVERAGE
Perf-
Based
RSUs
44%
Base Salary
Base Salary
12%
12%
Perf-
rf-
Based RSUs
RSUs
22%
%
Target
T
Bonus
15%
Time-Based
Tim
RSUs
R
29%
me-
Time-
RSUs
Based RSUs
%
33%
Base Salary
Base Salary
23%
23%
Target
T
Bonus
B
22%
The foregoing chart for our other NEOs as a group does not take into account the promotion of Mr. Heard to
COO in October 2018. Mr. Heard’s fiscal 2018 annual base salary increased from $500,000 to $520,000 effective
October 1, 2018 and he was granted an additional time-based RSU award of 70,000 shares in connection with his
new role as COO.
Competitive Positioning
In making compensation decisions for our executive officers, the Compensation Committee reviews and
analyzes competitive market practices using data drawn from a group of peer companies and the Radford Global
Technology survey.
In June 2017, the Compensation Committee reviewed the peer group used for executive compensation
decision-making and selected a new group based on updated financial criteria. Although this change in the
selection criteria resulted in significant changes in the composition of the peer group, the Compensation
Committee as well as members of management involved in making compensation decisions felt that this was an
appropriate change based on our decreased revenue and market capitalization profile relative to the last changes
made in May 2017. The target selection criteria for the peer group identified in May 2017 and used for fiscal 2018
compensation decisions were:
•
Industry: companies in the communications equipment or related industry segments;
• Annual Revenue: $290 million to $2.6 billion; and
• Market Capitalization: $365 million to $3.6 billion.
Based on this recalibration, the new peer group now consists of the following 16 companies:
Acacia Communications*
ADTRAN, Inc.
Barracuda Networks*
Ciena Corporation
Extreme Networks*
Finisar Corporation
Harmonic Inc.*
Integrated Device Technology
InterDigital, Inc.
NETGEAR
Oclaro, Inc.*
Plantronics, Inc.
ShoreTel*
Silicon Laboratories
ViaSat, Inc.
Viavi Solutions
*
Indicates an addition to the recalibrated peer group for fiscal 2018. Companies removed from the fiscal 2018 peer group
included ACI Worldwide, Brocade Communications, Coherent, FEI, OPC Photonics Corporation, Mentor Graphics,
Microsemi, MicroStrategy, QLogic and Ubiquiti Networks.
35
Given that not all of the peer companies report data for a position comparable to each of our NEOs, the
Compensation Committee also reviewed market data derived from the Radford Global Technology survey. In this
discussion, where we refer to “market” levels of pay and the “market data,” we are referring to the combined
compensation peer group and survey data described above that were then in effect and applicable to our NEOs.
Use of Market Data
For its fiscal 2018 compensation decisions, the Compensation Committee continued to maintain a holistic and
flexible approach in its use of market data. The Compensation Committee’s goal is generally to set all elements of
compensation within a competitive range, using a balanced approach that does not use rigid percentiles to target
pay levels for each compensation element, but instead makes its compensation decisions based on a variety of
relevant factors, including those listed below. While the Compensation Committee continues to review and
reference market data, the data generally is used to inform the Compensation Committee of market practices to
ensure that our executive compensation program remains within a generally competitive range of our peers. In
addition to the market data, several other factors are taken into account in setting the amount of each NEO’s target
total direct compensation opportunity. These factors include:
• Recruitment, retention and historical factors. The Compensation Committee reviews existing NEO
compensation and retention levels relative to estimated replacement cost with respect to the scope,
responsibilities and skills required of the particular position.
• Lack of directly comparable data for some of our key roles. Compensation data for some of our key
positions (i.e., Chief Strategy Officer) are often not explicitly reported by companies in our compensation
peer group or survey data. This results in limited sample sizes and/or inconclusive data that can be
misleading if targeting a specific percentile for market positioning.
• Market positioning may be distorted by the source of the data. Certain elements of compensation
reported from one source can be consistently higher or lower than the data collected from another, given
differences in methods and samples used by each source to collect market data. Given this variability and
volatility within the market data, the Compensation Committee has determined that targeting pay levels at
specific percentiles of this data could result in outcomes that do not align with the internal value and
strategic importance of various roles at Infinera.
• Desire to account for other factors not captured in the market data. As discussed below, the
Compensation Committee also considers several qualitative factors.
Relevant Qualitative Factors
In addition to our uses of competitive market data as described above, the Compensation Committee
considers a range of subjective and qualitative factors when making compensation decisions for our NEOs,
including:
• The role the executive officer plays and the importance of such individual’s contributions to our ability to
execute on our business strategy and to achieve our strategic objectives;
• Each executive officer’s tenure, skills and experience;
• The responsibilities and particular nature of the functions performed or managed by the executive officer;
• Our CEO’s recommendations and his assessment of each executive officer’s performance (other than his
own performance), and with respect to the CEO’s performance, assessment by the Board;
• The value of unvested equity awards held by each executive officer and in comparison to other members
of our executive management team and senior employees;
•
Internal pay equity across the executive management team;
• The impact of our compensation decisions on key financial and other measures such as our equity award
“burn rate”;
• Our overall performance as compared to internal plans and external benchmarks;
36
• The potential impact on stockholder dilution of our compensation decisions relative to peers and historical
practices; and
• Competitive labor market pressures and the likely cost, difficulty and impact on our business and strategic
objectives that would be encountered in recruiting a replacement for the role filled by each of our NEOs.
The Compensation Committee does not assign relative weights or rankings to any of these factors and does
not solely use any quantitative formula, target percentile or multiple for establishing compensation among the
executive officers or in relation to the market data. Instead, the Compensation Committee relies upon its members’
knowledge and judgment in assessing the various qualitative and quantitative inputs it receives regarding each
individual and makes compensation decisions accordingly.
Fiscal 2018 Compensation
Base Salaries
For fiscal 2018, the Compensation Committee reviewed the base salaries in February 2018 for each of our
NEOs and approved no changes to the base salaries of our NEOs after taking into consideration the market data
provided by its independent compensation consultant and the weaker financial performance over the prior fiscal
year as well as the challenging year that was expected in fiscal 2018. Our CEO’s base salary of $520,000 was
established in December 2017 and represents a 20% decrease from the salary rate in effect at the beginning of
our fiscal 2017. As described above, the Compensation Committee approved this reduction in connection with the
challenges facing our business beginning in late 2017 and in the context of our goal of returning to a positive
non-GAAP operating margin in 2018.
The following table shows the annual base salary for each of our NEOs for fiscal 2017 and fiscal 2018:
Name
Fiscal 2017
Annual Base Salary
Fiscal 2018
Annual Base Salary
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D.
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$520,000(1)
$400,000
$450,000(2)
$500,000
$365,000
$520,000
$400,000
$450,000
$520,000(3)
$365,000
(1) As part of the restructuring announced in November 2017, Mr. Fallon had his current annual base salary at the time
reduced. Mr. Fallon’s current base salary was decreased from $650,000 to $520,000.
(2) As part of the restructuring announced in November 2017, Dr. Welch had his current annual base salary at the time
reduced. Dr. Welch’s current base salary was decreased from $500,000 to $450,000.
(3) Mr. Heard’s fiscal 2018 annual base salary increased from $500,000 to $520,000 effective October 1, 2018 in connection
with his appointment to his new role of COO.
Performance-Based Incentive Cash Compensation (2018 Bonus Plan)
Target Bonus Opportunities. In February 2018, the Compensation Committee reviewed the target bonus
opportunities (which are expressed as a percentage of base salary) for fiscal 2018 for each of our NEOs, and
determined that they all would remain the same as the prior fiscal year. The following table shows the target bonus
opportunities for each of our NEOs for fiscal 2017 and fiscal 2018:
Name
Fiscal 2017
Target Bonus
(as a percentage
of base salary)
Fiscal 2018
Target Bonus
(as a percentage
of base salary)
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D.
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125%
75%
90%
75%
100%
125%
75%
90%
90%(1)
100%
37
(1) Mr. Heard’s fiscal 2018 target bonus opportunity (which is expressed as a percentage of base salary) was changed from
75% to 90% effective October 1, 2018 in connection with his appointment to the new role of COO. In considering the
increased target bonus opportunity for Mr. Heard, the Compensation Committee considered the scope of Mr. Heard’s new
role as well as the competitive market data provided by Compensia.
Bonus Plan Design. Our NEOs were eligible to earn incentive compensation under the 2018 Bonus Plan
based 100% on the achievement of a non-GAAP operating margin goal for fiscal year 2018. Relative to our bonus
plan in 2017, this approach eliminated a 20% weighting on strategic goals that focused on key quality and product
development objectives. Given the continued challenges facing us in fiscal 2017 and the impact this had on our
stockholder return, the Compensation Committee considered an increased emphasis on improved operating
margin as an important feature supporting alignment of the interests of our executive officers with that of our
stockholders.
In addition, if our non-GAAP operating margin performance exceeded the threshold required for payment, the
bonus earned by our NEOs could be modified by an individual performance component that could be used to
adjust the bonus payouts by a factor between 75% and 125% of the funded amount. In the event that our financial
performance provided for a bonus, our CEO would be responsible for reviewing the performance of each NEO
(other than himself) and recommending an individual performance factor for each NEO. The individual
performance factor was based on a qualitative assessment of the NEOs contributions during 2018 and did not
include specific, pre-established, individual performance targets. The Compensation Committee then had sole
discretion to determine any individual performance adjustments for each NEO (including the CEO) and the final
bonus payout for fiscal 2018.
The financial performance metric for the 2018 Bonus Plan was tied to improvement year over year of
non-GAAP operating margin. The Compensation Committee determined to focus on non-GAAP operating margin
to emphasize the importance of driving increases in revenue while at the same time maintaining or improving
profitability. The Compensation Committee believes that non-GAAP operating margin would be a key metric for
our stockholders that supports a balanced approach to long-term growth.
For purposes of the 2018 Bonus Plan, “non-GAAP operating margin” was calculated excluding restructuring
and other related costs, non-cash stock-based compensation expenses, amortization of debt discount on our
convertible senior notes, impairment charge and gain on the sale related to non-marketable equity investments,
accretion of financing lease obligation, amortization and impairment of acquired intangible assets, acquisition and
integration costs, and certain purchase accounting adjustments related to our acquisitions of Coriant and
Transmode AB, along with related tax effects. For a reconciliation of GAAP to non-GAAP operating margin for
fiscal 2018, please see Appendix A to this Proxy Statement.
In order for the 2018 Bonus Plan to be funded, the financial performance objective required us to achieve an
Operating Margin Gate. In the event that the Operating Margin Gate was achieved, the bonus for our NEOs would
be determined based on the level of improvement in non-GAAP operating margin between the last fiscal quarter of
2017 and the last fiscal quarter of 2018. To earn the target bonus at 100%, in addition to achieving the Operating
Margin Gate, our non-GAAP operating margin had to increase by 13.3 points. The CEO would only be paid out if
the financial objectives are reached at target and he would receive no additional payout for overachievement. For
the NEOs (other than the CEO), payout could be earned if we hit a minimum threshold of 70% of target. Any
payouts at threshold would be paid on a sliding scale between 20% and 100% with no additional payout for
overachievement.
Bonus Plan Results. Upon review of our actual financial performance for fiscal 2018 as compared to the
pre-established target levels, the Compensation Committee did not approve a bonus payout to our NEOs
participating in the 2018 Bonus Plan based on failure to achieve the Operating Margin Gate and the required
improvement in non-GAAP operating margin year-over-year. Our acquisition of Coriant at the beginning of the
fourth quarter of fiscal 2018 was not taken into account in determining the financial objectives under the 2018
Bonus Plan.
38
Long-Term Incentive Compensation
Our long-term incentive compensation opportunities are delivered in the form of equity awards. Annual equity
awards for NEOs are generally approved by the Compensation Committee during the first open trading window of
each new calendar year.
Equity Compensation Design. Under the 2016 Plan, the Compensation Committee grants equity awards to
eligible employees, including our NEOs. The Compensation Committee actively monitors our annual aggregate
equity utilization as measured by our burn rate.
The Compensation Committee believes that it is in the best interests of Infinera and our stockholders to grant
a combination of time-based and performance-based equity awards to senior level employees, including our
NEOs. It also believes that our performance-based equity awards foster a “pay-for-performance” culture and multi-
year vesting schedules create longer-term incentives that maintain alignment of the interests of our NEOs with
those of our stockholders. Our NEOs benefit from these equity awards based on our sustained performance over
time and the ability of our NEOs to create the results that drive stockholder value.
In determining the appropriate mix of such equity awards, the Compensation Committee considered how each
equity vehicle supports our compensation strategy as follows:
Type of Award
RSU Award
Description
Why It Is Used
• Provides the opportunity to earn a
• Supports retention and succession
specified number of shares of Infinera
common stock subject to the
participant’s continued employment
for a specified period.
• Typically has a three-year or four-year
vesting period to encourage a long-
term perspective and to encourage
key employees to remain at Infinera.
planning.
• Provides a direct incentive for future
performance.
• Useful in recruiting new executives.
PSU Award
• Provides the opportunity to earn
• Supports pay-for-performance
shares of Infinera common stock upon
the achievement of pre-established
performance objectives.
•
If the threshold performance level is
not achieved, the entire portion of the
award tied to such performance
objective is forfeited.
philosophy and retention efforts.
•
•
Links compensation directly to
Infinera’s stock performance in
areas identified as important by the
Compensation Committee.
Increases alignment with interests
of stockholders.
In February 2018, the Compensation Committee granted annual equity awards for fiscal 2018 in the form of a
time-based RSU award and a PSU award to each of our NEOs. The Compensation Committee continued to
believe that TSR remains an important metric for driving performance and promoting the alignment of the interests
of our NEOs with those of our stockholders.
In determining the size of these annual equity awards, the Compensation Committee considered the factors
described above in the sections entitled “Use of Market Data” and “Relevant Qualitative Factors,” with particular
attention to market data, internal equity considerations, the potential dilutive impact of the equity awards and the
amount and value of unvested equity awards held by each of our NEOs. The Compensation Committee believed a
combination of time-based and performance-based equity awards promote close alignment of the interests of our
NEOs with those of our stockholders.
The Compensation Committee first determined the target value of long-term incentive compensation for each
executive. The number of RSUs and PSUs granted to each executive was then determined based on the closing
price of our stock on the grant date and assuming a 60% allocation of target value into PSUs for Mr. Fallon, and a
39
50% allocation into PSUs for other NEOs. Because the Compensation Committee relied upon the closing price of
our stock on the grant date (rather than the accounting value) to determine the number of PSUs, the target value
approved by the Compensation Committee differs from the Summary Compensation Table reported value of
equity below. The following table sets forth the equity awards granted to our NEOs in February 2018.
Name
2018 TSR Awards
Number of Shares
Subject
to RSU Awards
Target
Number of
Shares
Maximum Number
of Shares
(200% of Target)
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
135,416
68,750
68,750
68,750(1)
53,125
203,125
45,833
45,833
45,833
35,416
406,250
91,666
91,666
91,666
70,832
(1) Mr. Heard was granted an additional time-based RSU award of 70,000 shares in connection with his appointment to the new
role of COO.
The RSU awards in the table above vest in annual installments with one-fourth of the underlying shares of
Infinera common stock vesting on May 5th of each of 2019, 2020, 2021 and 2022, subject to the NEO’s continued
service with Infinera through each applicable vesting date.
In October 2018, in connection with his promotion to COO, Mr. Heard was granted an additional time-based
RSU award of 70,000 shares. These shares vest in annual installments with one-fourth of the underlying shares of
Infinera common stock vesting on October 5th of each of 2019, 2020, 2021 and 2022. In finalizing the terms of this
grant, the Compensation Committee considered the scope of Mr. Heard’s new role with the Company as well as
competitive market data provided by Compensia.
Under the terms of the 2018 TSR Award, for which the design generally remained the same as that of the
annual PSUs granted to our NEOs in fiscal 2017, the Compensation Committee established three performance
periods for the performance-based awards in which our relative TSR is measured against the S&P Networking
Index, with one-third (1/3) of the target number of performance-based awards eligible to vest based on our
one-year TSR relative to the TSR of each of the Index Companies listed in the S&P Networking Index, one-third
(1/3) based on the two-year comparison to the TSR of the Index Companies, and one-third (1/3) based on the
three-year comparison to the TSR of the Index Companies. For purposes of calculating TSR performance for
Infinera and each of the Index Companies, the performance periods are as follows:
(i) For the first performance period, the starting price is the 60-day average (of our closing stock price or the
index, as applicable) leading up to and inclusive of December 30, 2017 (the last day of fiscal 2017), and
the ending price is the 60-day average leading up to and inclusive of December 29, 2018 (the last day of
fiscal 2018);
(ii) For the second performance period, the starting price is the 60-day average leading up to and inclusive of
December 30, 2017 (the last day of fiscal 2017), and the ending price is the 60-day average leading up to
and inclusive of December 28, 2019 (the last day of fiscal 2019); and
(iii) For the third performance period, the starting price is the 60-day average leading up to and inclusive of
December 30, 2017 (the last day of fiscal 2017), and the ending price is the 60-day average leading up to
and inclusive of December 27, 2020 (the last day of fiscal 2020).
An “Index Company” refers to each company that was listed in the S&P Networking Index as of the last day of
fiscal year 2017 and generally remains publicly traded (in other words, its stock is actively traded on an
established stock exchange or national market system) through the last day of the applicable performance period.
The performance-based awards shall only vest upon the determination by the Compensation Committee of the
achievement of the performance metrics and are subject to each NEO’s continued service to Infinera through each
applicable vesting date. Any eligible shares (that is, eligible to vest as a result of performance achievement, as
described below) with respect to the first performance period shall vest on May 5, 2019, any eligible shares with
respect to the second performance period shall vest on May 5, 2020, and any eligible shares with respect to the
third and final performance period shall vest on May 5, 2021.
40
The table below summarizes the performance criteria used to determine the percentage of the eligible shares
subject to the 2018 TSR Award. For each applicable performance period, the number of shares that will become
eligible shares (if any) based on our TSR percentile ranking relative to the TSRs of the Index Companies is
achieved as follows:
INFN TSR Percentile Rank Among Index
Companies
Percentage of the Target Allocated Shares that Become
Eligible Shares for the Performance Period
Less than 25th Percentile
25th Percentile
50th Percentile
85th Percentile or Greater
0%
50%
100%
200%
No shares will become eligible shares if the percentile rank is less than the 25th percentile. If our percentile
rank is between the 25th and 50th percentiles, then the number of shares that will become eligible shares will be
determined by linear interpolation between 50% and 100% of the number of shares. If our percentile rank is
between the 50th and 85th percentiles, then the number of shares that will become eligible shares will be
determined by linear interpolation between 100% and 200% of the number of shares. In addition, if our TSR during
any performance period is negative (as a result of a decline in the stock price during such period), then the
maximum number of shares that can vest is 100% of the target number of shares allocated to that performance
period. In the event that our TSR is negative during any of the one-year or two-year performance periods, then any
shares that would have vested above 100% of the target number of shares for that performance period, but for the
maximum cap described above, would be rolled over once and subject to an additional vesting requirement in the
next performance period, and will vest only in the event that both our relative TSR performance is equal to or
greater than 50% of the Index Companies in the subsequent performance period and our TSR for that subsequent
performance period is positive. If the TSR during the three-year performance period is negative, then the
maximum number of shares that can vest is capped at 100% of the target number of shares.
PSU Results. For the initial performance period ended December 29, 2018 under the 2018 TSR Award, our
TSR performance finished 21 out of 24 Index Companies (13th percentile). As a result, 0% of the target number of
shares of our common stock allocated to the initial performance period became eligible to vest, as shown in the
table below.
Name
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D. . . . . . . . . . . . . . . . . . . . . . .
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 TSR Award Summary for Initial Performance Period
Target Number of PSUs Granted Actual Number of PSUs Vested
203,125
45,833
45,833
45,833
35,416
0
0
0
0
0
41
Outstanding PSU Awards Granted in Prior Fiscal Years. The following table provides information regarding
outstanding PSU awards granted prior to fiscal 2018 that were eligible to be earned in fiscal 2018 by our NEOs
based on the achievement of performance with respect to relative TSR, including the performance requirements
and number of shares of Infinera common stock earned through fiscal 2018.
Name
Total
Number of
PSUs
Remaining
at Target
(#)
Target Number
of Shares that
Could Vest
for Fiscal 2018
Performance
Period
(#)
Fiscal
Year of
Grant
Maximum
Number of
Shares that
Could Vest
for Fiscal 2018
Performance
Period
(#)
Actual Number
of Shares
Vested for
Fiscal 2018
Performance
Period
(#)
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017(1)
2016(2)
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . 2017(1) 172,247
2016(2) 135,990
44,247
33,690
David F. Welch, Ph.D. . . . . . . . . . . . . . . . . . . . . . 2017(1) 172,247
2016(2) 135,990
50,000
42,035
32,700
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . 2017(1)
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . 2017(1)
2016(2)
57,416
45,330
14,749
11,230
57,416
45,330
16,667
14,012
10,900
114,832
90,660
29,498
22,460
114,832
90,660
33,334
28,024
21,800
0
0
0
0
0
0
0
0
0
(1)
(2)
In fiscal 2017, the Compensation Committee granted to the then-current NEOs a PSU award that measures our TSR against
the TSR of the of the Index Companies. This PSU award is subject to a payout of between 0% and 200% of the target
number of shares based on our relative performance against the Index Companies for that period, with 100% of the target
number of shares allocated to the performance. Our TSR performance for the second performance period finished 21 out of
22 Index Companies (5th percentile). As a result, 0% of the target number of shares of our common stock allocated to the
second performance period became eligible to vest. For the two-year performance period ended December 29, 2018, the
start price was the 60-day average (of our closing stock price or the index value, as applicable) leading up to and inclusive of
December 28, 2016 and the end price was the 60-day average (of our closing stock price or the index value, as applicable)
leading up to and inclusive of the last day of fiscal 2018.
In fiscal 2016, the Compensation Committee granted to the then-current NEOs a PSU award that measures our TSR against
the TSR of the S&P Networking Index. This PSU award pays out at 200% if our TSR outperforms the S&P Networking Index
by 50 points or more and 0% if our TSR underperforms the S&P Networking Index by 33 points or more. Our TSR
performance underperformed the TSR performance of this index by approximately 115.04 points for the performance period
measured, which resulted in no payout for this performance period. For the three-year performance period ended
December 29, 2018, the start price was the 60-day average (of our closing stock price or the index value, as applicable)
leading up to and inclusive of December 26, 2015 and the end price was the 60-day average (of our closing stock price or
the index value, as applicable) leading up to and inclusive of the last day of fiscal 2018.
Employee Benefits and Perquisites
Our NEOs are only eligible to receive the same benefits as our U.S. salaried employees except with respect
to accrued paid time off (“PTO”) as explained below. Infinera and the Compensation Committee believe this
approach is reasonable and consistent with the overall compensation objectives to attract and retain employees.
These benefits include medical, dental, vision and disability benefits, a Section 401(k) plan, and other plans and
programs, including the 2007 ESPP, made available to other eligible employees in the applicable country of
residence. In fiscal 2018, we began to provide a matching contribution under the Section 401(k) plan that is
applicable to all eligible participants, including our NEOs. Employee benefits and perquisites are reviewed
periodically to ensure that benefit levels remain competitive, but are not included in the Compensation
Committee’s annual determination of the total compensation for each of our NEOs.
All exempt U.S. employees, at any U.S. work location, participate in our “As Needed” FTO Program (“Flexible
Time Off”). Under this program, these employees may schedule FTO as they see fit and as business necessity
allows, although they must continue to meet all job expectations and remain responsible for ensuring appropriate
coverage for the time they will be out of the office. Under this program, FTO does not accrue for these employees.
42
Additional Information Regarding Our Compensation Practices
Change of Control Payments and Benefits
The Compensation Committee considers maintaining a stable and effective management team to be essential
to protecting the best interests of Infinera and its stockholders. Accordingly, Infinera has entered into Change of
Control Agreements (the “COC Agreements”) with each of our NEOs to encourage their continued attention,
dedication and continuity with respect to their roles and responsibilities without the distraction that may arise from
the possibility or occurrence of a change of control of Infinera. The current terms of these COC Agreements are
included below.
An NEO will receive payments and benefits under the COC Agreement only if his or her employment is
terminated without “cause,” or by him or her as a result of a “constructive termination” (as more fully described in
the section entitled “Estimated Payments and Benefits upon Termination, Change of Control or Death/Disability”
below), beginning on the date three (3) months prior to the first change of control to occur following the effective
date of the COC Agreement and ending on the date eighteen (18) months following a change of control of Infinera.
The Compensation Committee believes that this “double-trigger” structure provides an appropriate balance
between the corporate objectives described above and the potential compensation payable to each NEO upon a
change of control. The Compensation Committee also believes that should Infinera engage in any discussions or
negotiations relating to a change of control that the Board believes is in the best interests of our stockholders,
these COC Agreements will help to ensure that our NEOs remain focused on the consummation of such potential
transaction, without significant distraction or concern regarding their personal circumstances, such as continued
employment.
The following terms apply with respect to each of the NEOs if Infinera undergoes a change of control and the
NEO’s employment is terminated without cause or as a result of a constructive termination during the Change of
Control Period, subject to such individual entering into and not revoking a release of claims in our favor within 60
days of the termination date:
•
100% of all outstanding equity awards will vest (awards based on the achievement of performance
criteria will vest as to 100% of the amount of the award assuming the performance criteria have been
achieved at target levels);
• Our CEO will be paid a lump sum severance payment (less applicable tax withholdings) equal to two
times his annual base salary and our other NEOs will be paid a lump sum severance payment (less
applicable tax withholdings) equal to one and one-half times their annual base salary;
• Our CEO will be paid a lump sum severance payment (less applicable tax withholdings) equal to two
times his annual target incentive bonus amount and our other NEOs will be paid a lump sum severance
payment (less applicable tax withholdings) equal to one and one-half times their annual target incentive
bonus amount; and
• Our CEO will be reimbursed for premiums under COBRA for a period of 24 months and our other NEOs
will be reimbursed for premiums under COBRA for a period of 18 months.
Each COC Agreement will have an initial term of three years commencing on the effective date of such COC
Agreement. On the third anniversary of the effective date, such COC Agreement will renew automatically for an
additional, one-year term unless either party provides the other party with written notice of nonrenewal at least one
year prior to the date of automatic renewal.
Executive Severance Policy
In addition to the change of control-related payments and benefits discussed above, the Compensation
Committee has taken appropriate steps to provide competitive post-employment compensation arrangements that
promote the continued attention, dedication and continuity of the members of our senior management team,
including our NEOs, and enable us to continue to recruit talented senior executive officers. Accordingly, the
Compensation Committee has adopted an executive severance policy, under which the following severance
payments and benefits will become payable if the employment of one of our NEOs is terminated by us without
43
“cause” (as defined in the policy) subject to such individual entering into and not revoking a release of claims in our
favor:
• Our CEO will be paid a lump sum severance payment equal to one and one-half times his annual base
salary and our other NEOs will be paid a lump sum severance payment equal to their annual base salary;
and
• Our CEO will be reimbursed for premiums under COBRA for a period of 18 months and our other NEOs
will be reimbursed for premiums under COBRA for a period of 12 months.
If an NEO’s employment with Infinera is less than one year, the amount of severance payable to such
individual will be equal to the lesser of (x) the base salary paid to such individual during his or her period of
employment, or (y) the severance amount set forth above.
Acceleration of Equity Awards upon Death or Disability. In addition, all awards granted under our equity
incentive plans permit accelerated vesting in the event of an employee’s death or terminal illness (with exceptions
in certain circumstances). Because we do not have any policy with respect to severance payments or benefits in
the event of an employee’s death or disability other than certain disability and life insurance benefits generally
available to our employees, the Compensation Committee believes 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 RSU awards, PSU awards
and stock options.
The estimated payments and benefits that would be received by each NEO in connection with a qualifying
termination of employment are presented in the section entitled “Estimated Payments and Benefits upon
Termination, Change of Control or Death/Disability” below.
Equity Grant Policy
Under our Equity Grant Policy, a Subcommittee of the Compensation Committee has been delegated the
authority to grant new hire, promotional and annual retention equity awards to non-executive employees pursuant
to certain pre-approved guidelines. This Subcommittee is typically comprised of our CEO, SVP of Human
Resources and General Counsel.
The Subcommittee generally meets on the second Monday of each month to approve new hire and
promotional equity awards. Annual retention equity awards for such non-executive employees are also scheduled
to occur as part of the monthly meetings of the Subcommittee. The delegation to the 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.
Executive Clawback Policy
We maintain an Executive Clawback Policy that applies to our Section 16 Officers (which includes each of our
NEOs) and directors. Pursuant to this policy, the Compensation Committee has the authority to seek:
• Repayment of any cash incentive payment;
• Cancellation of unvested, unexercised or unreleased equity awards; and
• Repayment of any compensation earned on previously exercised or released equity awards,
where such payments, equity awards and/or compensation earned on previously exercised or released cash
incentive payments and equity awards was predicated on financial results that were augmented by fraud,
embezzlement, gross negligence or deliberate disregard of applicable rules resulting in significant monetary loss,
damage or injury to Infinera (the “Excess Compensation”), whether or not such activity resulted in a financial
restatement. The Compensation Committee shall have sole discretion under this policy, consistent with any
applicable statutory requirements, to seek reimbursement for any Excess Compensation paid or received by a
Section 16 Officer or director for up to a 12-month period prior to the date of the Compensation Committee action
to require reimbursement of the Excess Compensation. Further, following a restatement of our financial
statements, we will recover any compensation received by our CEO and CFO that is required to be recovered by
Section 304 of the Sarbanes-Oxley Act of 2002.
44
For purposes of this policy, Excess Compensation will be measured as the positive difference, if any, between
the compensation earned by a Section 16 Officer or director and the compensation that would have been earned
by a Section 16 Officer or director had the fraud, embezzlement, gross negligence or deliberate disregard of
applicable rules resulting in significant monetary loss, damage or injury to Infinera not occurred.
Stock Ownership Policy
The Board believes that it is important to link the interests of our NEOs to those of our stockholders. Our
Stock Ownership Policy requires our non-employee directors and Section 16 Officers (which includes each of our
NEOs) to accumulate and hold a minimum number of shares of Infinera common stock within three years of the
later of (i) the effective date of the policy or (ii) the date of appointment of the director or appointment/promotion of
the Section 16 Officer. As of the Record Date, each of our Section 16 Officers and the non-employee members of
the Board has either satisfied these ownership guidelines or had time remaining to do so. The specific Infinera
stock ownership requirements for our Section 16 Officers and non-employee directors are as follows:
• CEO:
• CFO:
• Other NEOs:
• Non-employee directors:
4x annual base salary
2x annual base salary
1x annual base salary
4x annual cash retainer for annual Board service
Shares of Infinera common stock that count towards satisfaction of this policy include: (i) shares owned
outright by the Section 16 Officer or non-employee director or his or her immediate family members residing in the
same household; (ii) shares held in trust for the benefit of the Section 16 Officer or non-employee director or his or
her family; and (iii) shares subject to vested, unexercised, in-the-money stock options (the “spread” or “intrinsic
value” of options). The value of a share of Infinera common stock is measured on the last day of the fiscal year as
the greater of (i) the closing price on the date of calculation or (ii) the purchase price actually paid by the person for
such share of Infinera common stock (for the avoidance of doubt, the purchase price for shares of Infinera
common stock subject to RSU awards, PSU awards and other similar full value awards is zero).
Anti-hedging Policy
Under our Insider Trading Policy, we prohibit our employees, including our NEOs, and Board members, from
hedging the risk associated with ownership of shares of Infinera common stock and other securities.
Anti-pledging Policy
Under our Insider Trading Policy, we prohibit our NEOs and directors from pledging any Infinera securities as
collateral for a loan.
Tax and Accounting Treatment of Compensation
Prior to 2018, Section 162(m) of the Code generally limited the tax deductibility of compensation paid to the
CEO and each of the next three most highly compensated executive officers (excluding the CFO) that exceeded
$1 million in any taxable year unless the compensation over $1 million qualified as “performance-based” within the
meaning of Section 162(m).
The ability to rely on the “performance-based” compensation exception under Section 162(m) was eliminated
in 2017 and the $1 million limitation on deductibility generally was expanded to include any individuals serving as
the CEO or CFO during the tax year, the next three most highly compensated executive officers during the tax
year and any other individual who was considered a covered employee for any prior tax year beginning after 2016.
Thus, we generally will not be able to take a deduction for any compensation paid to our NEOs in excess of
$1 million unless the compensation qualifies for transition relief applicable to certain arrangements in place on
November 2, 2017. We cannot guarantee that any compensation payable to our NEOs will qualify for the transition
relief or that the compensation will ultimately be deductible. Historically, the Compensation Committee had not
adopted a formal policy regarding tax deductibility of compensation paid to our CEO and other senior executive
officers. Nonetheless, the Compensation Committee intends to maintain an approach to executive compensation
that strongly links pay to performance.
45
We account for the equity compensation awarded to our executive officers and other employees under
ASC 718, which requires us to estimate and record an expense for each award of equity compensation over the
service period of the award. Accounting rules also require us to record cash compensation as an expense at the
time the obligation is incurred.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with
management. Based on its review and discussions with management, the Compensation Committee has
recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
Compensation Committee
Marcel Gani (Chair)
Gregory P. Dougherty (appointed as of January 29, 2019)
Paul J. Milbury
John P. Daane (replaced by Mr. Dougherty as of January 29, 2019)
46
EXECUTIVE COMPENSATION TABLES
The following tabular information and accompanying narratives and footnotes provide all of the compensation
awarded to, earned by, or paid to the individuals who served as our principal executive officer, principal financial
officer and our three other highest paid executive officers during fiscal 2018. As previously noted, we refer to these
executive officers as our NEOs.
Fiscal 2018 Summary Compensation Table
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)(2)
All
Other
Compensation
($)(3)
Chief Financial Officer
Chief Executive Officer
Thomas J. Fallon . . . . . . . . . . . . . . 2018 520,000
2017 630,000
2016 648,308
Brad D. Feller . . . . . . . . . . . . . . . . . 2018 400,000
2017 400,000
2016 399,385
. . . . . . . . 2018 450,000
2017 492,308
2016 499,231
. . . . . . . . . . . . . 2018 503,077
David F. Welch, Ph.D.(5)
Chief Innovation Officer
David W. Heard(6)
4,362,442 —
—
4,250,478 —
—
3,300,134 —
—
1,351,009 —
—
1,258,532 —
—
981,030 —
—
1,351,009 —
—
4,250,478 —
—
3,300,134 —
—
1,783,609 —
—
2017 278,846 215,750(7) 2,526,000 —
1,043,955 —
—
1,195,615 —
—
952,176 —
—
Robert J. Jandro . . . . . . . . . . . . . . 2018 365,000
2017 365,000
2016 364,769
Senior Vice President,
Worldwide Sales
Chief Operating Officer
—
—
134,062(4)
—
—
49,500(4)
—
—
74,250(4)
—
—
—
—
60,225(4)
468
312
312
468
312
312
468
312
312
468
312
468
285
285
Total
($)
4,882,910
4,880,790
4,082,816
1,751,477
1,658,844
1,430,227
1,801,477
4,743,098
3,873,927
2,287,154
3,020,908
1,409,423
1,560,900
1,377,455
(1) The amounts reported in this column represent the aggregate grant date fair value of the listed equity awards, computed in
accordance with ASC 718. See Notes 2 and 15 of the notes to our consolidated financial statements contained in our 2018
Annual Report on Form 10-K filed on March 14, 2019 for a discussion of all assumptions made by us in determining the ASC
718 values of equity awards.
(2) The amounts reported in this column represent payouts under our annual cash incentive plan.
(3) The amounts reported in this column represent payments of life insurance premiums.
(4) The amounts reported represent the annual incentive cash awards earned under our bonus plan for fiscal 2016.
(5) Dr. Welch transitioned from serving as our Chief Strategy and Technology Officer to our Chief Innovation Officer, as of
October 1, 2018.
(6) Mr. Heard transitioned from serving as our General Manager, Products and Solutions to our COO, as of October 1, 2018.
(7) Mr. Heard was not eligible to participate in the 2017 Bonus Plan; however, in connection with his new hire package, he
received a one-time bonus in the amount of $215,750, which was paid out at the same time as the 2017 bonus for all
Infinera employees in April 2018.
47
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49
(1) The closing price of our common stock as of the last trading day prior to our fiscal year end, December 28, 2018, was $3.92
per share, which was used as the value of our common stock in the calculations.
(2) This stock option grant is fully vested.
(3) The remaining unvested portion of this RSU grant vests in its entirety on May 5, 2020, subject to the NEO’s continued
service to Infinera through each applicable vesting date.
(4) This PSU award can be earned based on our TSR performance relative to that of the S&P Networking Index as measured
over one-, two- and three-year performance periods. For purposes of calculating TSR performance for Infinera and the S&P
Networking Index under these PSU awards, the baseline value for our relative TSR calculations is the 60-day average
closing price of our common stock and the S&P Networking Index leading up to and inclusive of December 26, 2015, which
was the last day of fiscal 2015. TSR for Infinera and the S&P Networking Index is then calculated by comparing the average
closing price of our common stock and the S&P Networking Index to this baseline value for the final 60 days of our fiscal
2016, 2017 and 2018. This PSU award pays out at a maximum of 200% if our TSR outperforms the S&P Networking Index
by 50 points or more and 0% if our TSR underperforms the S&P Networking Index by 33 points or more. No PSUs subject to
this award vested in March 2019, as the achievement of the third performance period was not met, and the award was
cancelled.
(5) The remaining unvested portion of this RSU grant vests in its entirety on May 5 of 2021, subject to each NEO’s continued
service to Infinera through each applicable vesting date.
(6) This PSU award has three performance periods, with one-third (1/3) of the target number of performance-based awards
eligible to vest based on our one-year TSR relative to the TSR of each of the Index Companies listed in the S&P Networking
Index, one-third (1/3) based on our two-year TSR relative to the TSR of each of the Index Companies, and one-third (1/3)
based on our three-year TSR relative to the to the TSR of each of the Index Companies. For purposes of calculating TSR
performance for Infinera and each of the Index Companies under these PSU awards, the baseline value for our relative TSR
calculations is the 60-day average closing price of our common stock and each of the Index Companies leading up to and
inclusive of December 31, 2016, which was the last day of fiscal 2016. TSR for Infinera and each of the Index Companies is
then calculated by comparing the average closing price of our common stock and each of the Index Companies to this
baseline value for the final 60 days of our fiscal 2017, 2018 and 2019. No PSUs subject to his award vested in March 2019,
as the achievement of the second performance period was not met.
(7) These RSU awards are scheduled to vest in annual installments with one-fourth of the underlying shares vesting on May 5
of each of 2019, 2020, 2021 and 2022, subject to each NEO’s continued service to Infinera through each applicable vesting
date.
(8) This PSU award has three performance periods, with one-third (1/3) of the target number of performance-based awards
eligible to vest based on our one-year TSR relative to the TSR of each of the Index Companies listed in the S&P Networking
Index, one-third (1/3) based on our two-year TSR relative to the TSR of each of the Index Companies, and one-third (1/3)
based on our three-year TSR relative to the to the TSR of each of the Index Companies. For purposes of calculating TSR
performance for Infinera and each of the Index Companies under these PSU awards, the baseline value for our relative TSR
calculations is the 60-day average closing price of our common stock and each of the Index Companies leading up to and
inclusive of December 30, 2017, which was the last day of fiscal 2017. TSR for Infinera and each of the Index Companies is
then calculated by comparing the average closing price of our common stock and each of the Index Companies to this
baseline value for the final 60 days of our fiscal 2018, 2019 and 2020. No PSUs subject to his award vested in March 2019,
as the achievement of the first performance period was not met. For a more detailed description of this PSU award, please
see the section entitled “Fiscal 2018 Compensation—Long-Term Incentive Compensation” in the Compensation Discussion
and Analysis above.
(9) The remaining unvested portion of this RSU grant vests in its entirety on July 5 of 2021, subject to Mr. Heard’s continued
service to Infinera through each applicable vesting date.
(10) This RSU award is scheduled to vest in annual installments with one-fourth of the underlying shares vesting on October 5 of
each of 2019, 2020, 2021 and 2022, subject to Mr. Heard’s continued service to Infinera through each applicable vesting
date.
50
Fiscal 2018 Option Exercises and Stock Vested Table
The following table sets forth the number of shares acquired and the value realized upon the exercise of stock
options and the vesting of RSU awards and PSU awards during fiscal 2018 by each of our NEOs.
Name
Number of Shares
Acquired on
Exercise
(#)
Value Realized
on Exercise
($)(1)
Number of Shares
Acquired on
Vesting
(#)
Value Realized
on Vesting
($)(2)
Thomas J. Fallon . . . . . . . . . . . . . . . . . .
Brad D. Feller . . . . . . . . . . . . . . . . . . . . .
David F. Welch, Ph.D. . . . . . . . . . . . . . .
David W. Heard . . . . . . . . . . . . . . . . . . .
Robert J. Jandro . . . . . . . . . . . . . . . . . .
—
—
—
—
84,500
202,088
—
—
—
—
68,834
66,890
74,396
37,500
24,335
826,696
563,883
893,496
373,125
292,263
(1) The value realized on the exercise date is based on the difference in the fair market value of our common stock on the
exercise date and the exercise price, and does not necessarily reflect the proceeds actually received by the NEO.
(2) The value realized on the vesting date 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 NEO.
2018 CEO Pay Ratio
We are providing the following information regarding the relationship of the annual total compensation of our
median employee to the annual total compensation of our CEO (in each case, the annual total compensation was
calculated in accordance with SEC rules applicable to the Summary Compensation Table above). The pay ratio
included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of
Regulation S-K.
For fiscal 2018:
• Our median employee’s annual total compensation was $100,860.
• Our CEO’s annual total compensation, as reported on page 47 in the Summary Compensation Table,
was $4,882,910.
• Based on this information, the ratio of the annual total compensation of our CEO to the annual total
compensation of our median employee is 48 to 1.
Pay Ratio Methodology
SEC rules allow us to select a methodology for identifying our median employee in a manner that is most
appropriate based on our size, organizational structure and compensation plans, policies and procedures.
We selected December 1, 2018 as the date on which to determine our median employee, which is a date
within the last three months of our last completed fiscal year. As of that date, we had 2,069 employees, with 1,107
employees based in the United States and 962 employees located outside of the United States. The pay ratio
disclosure rules provide an exemption for companies to exclude non-U.S. employees from the median employee
calculation if non-U.S. employees in a particular jurisdiction account for five percent (5%) or less of the company’s
total number of employees. We applied this de minimis exemption when identifying the median employee by
excluding 5 employees in Argentina, 1 employee in Belgium, 1 employee in Denmark, 3 employees in Malaysia,
11 employees in Mexico, 2 employees in Poland, 3 employees in the Russian Federation, and 1 employee in
Switzerland. After taking into account the de minimis exemption, 1,107 employees based in the United States and
935 employees located outside of the United States were considered for identifying the median employee.
For purposes of identifying the median employee from our employee population base, we considered total
cash compensation (base salary, including overtime, annual bonus and the sum of other bonuses, which included
signing bonuses and retention bonuses), as compiled from our payroll records. We selected total cash
compensation as this information is readily available in each country. In addition, we measured compensation for
51
purposes of determining the median employee using the year-to-date period ended December 29, 2018 and
annualized for employees who were employed on December 1, 2018 but did not work for us for all of 2018.
Compensation paid in foreign currencies was converted to U.S. dollars based on exchange rates in effect on the
last trading day of fiscal 2018, which was December 28, 2018.
Estimated Payments and Benefits upon Termination, Change of Control or Death/Disability
Executive Severance Policy
As discussed above in more detail in the section entitled “Compensation Discussion and Analysis—Additional
Information Regarding Our Compensation Practices – Executive Severance Policy,” the Compensation Committee
has taken appropriate steps to provide competitive post-employment compensation arrangements that promote
the continued attention, dedication and continuity of the members of our senior management team, including our
NEOs, and enable us to continue to recruit talented senior executive officers. Infinera shall not pay severance
pursuant to this policy to the individuals subject to this policy in the event of (i) a change of control of Infinera (as
defined below), or (ii) if such individual is terminated for Cause (as defined below).
Death and Disability Benefits
Pursuant to the Infinera Corporation 2007 Equity Incentive Plan (the “2007 Plan”) and the 2016 Plan,
accelerated vesting is provided in the event of the death (with exceptions in certain circumstances) or permanent
disability of an employee, including our NEOs. We do not currently provide any other benefits in the event of an
employee’s death or permanent disability.
Change of Control Payments and Benefits
As discussed above in more detail in the section entitled “Compensation Discussion and Analysis—Additional
Information Regarding Our Compensation Practices—Change of Control Payments and Benefits,” we entered into
revised COC Agreements with each of our NEOs in February 2018 to encourage their continued attention,
dedication and continuity with respect to their roles and responsibilities without the distraction that may arise from
the possibility or occurrence of a change of control of Infinera.
For purposes of these benefits, the following terms have the following meanings:
Change of Control
. . . . . . . . . .
(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
the Exchange 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).
52
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 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.
Cause . . . . . . . . . . . . . . . . . . . . .
53
Fiscal 2018 Estimated Payments and Benefits Table
The amount of compensation and benefits payable to each of our NEOs in the event of a termination of
employment by Infinera, a termination of employment following a Change of Control transaction (as defined
above), or a termination of employment 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 29, 2018, the last day of fiscal 2018. The closing price of our
common stock as of the last trading day of fiscal 2018 (December 28, 2018) was $3.92 per share, which was used
as the value of our common stock in the calculations below. 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 by $3.92 and (ii) subtracting the exercise price for the unvested stock options.
Name
Type of Benefit
Thomas J. Fallon . . . . . . . . Cash Severance
Bonus
Vesting Acceleration(1)
Continued Coverage of Employee Benefits
Potential Payments in Connection With:
Termination
Under
Severance
Policy
($)
Termination
After a
Change
of Control
($)
Termination
Upon
Death or
Disability
($)
780,000
—
—
45,175
1,040,000
1,300,000
2,462,736
60,233
—
—
2,462,736
—
Total Benefits
825,175
4,862,969
2,462,736
Brad D. Feller . . . . . . . . . . . Cash Severance
Bonus
Vesting Acceleration(2)
Continued Coverage of Employee Benefits
400,000
—
—
22,233
600,000
450,000
802,150
33,349
—
—
802,150
—
Total Benefits
422,233
1,885,499
802,150
David F. Welch, Ph.D. . . . . Cash Severance
Bonus
Vesting Acceleration(3)
Continued Coverage of Employee Benefits
450,000
—
—
30,117
675,000
607,500
1,584,821
45,175
—
—
1,584,821
—
Total Benefits
480,117
2,912,496
1,584,821
David W. Heard . . . . . . . . . Cash Severance
Bonus
Vesting Acceleration(4)
Continued Coverage of Employee Benefits
520,000
—
—
26,075
780,000
585,000
1,295,231
39,113
—
—
1,295,231
—
Total Benefits
546,075
2,699,344
1,295,231
Robert J. Jandro . . . . . . . . Cash Severance
Bonus
Vesting Acceleration(5)
Continued Coverage of Employee Benefits
365,000
—
—
17,238
547,500
547,500
684,628
25,857
—
—
684,628
—
Total Benefits
382,238
1,805,485
684,628
(1) The vesting of 628,249 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 29, 2018.
(2) The vesting of 204,630 shares of common stock would accelerate if Mr. Feller 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 29, 2018.
(3) The vesting of 404,291 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 29, 2018.
54
(4) The vesting of 330,416 shares of common stock would accelerate if Mr. Heard 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 29, 2018.
(5) The vesting of 174,650 shares of common stock would accelerate if Mr. Jandro 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 29, 2018.
55
RISK ASSESSMENT OF COMPENSATION PRACTICES
During fiscal 2018, at the request of the Compensation Committee, a review of the risks associated with our
organization-wide compensation policies and practices was conducted. 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 cash and equity compensation plans and arrangements;
• 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, policies, plan features or other factors that mitigate
potential risks.
Although all compensation programs were considered, particular attention was paid to incentive-based plans
and arrangements involving variable payouts, where an employee might be able to influence payout factors and
compensation plans and arrangements involving our executive team. In substantially all cases, these
compensation plans and arrangements are centrally designed and administered and, excluding sales incentive
compensation, are substantially identical across function and geography. Equity incentive compensation was
found to be based on a blend of financial objectives and TSR, which allows us to avoid an over-emphasis on
shorter-term financial goals. In addition, the financial and operational objectives used to determine the
performance measures for our incentive-based compensation plans and arrangements were found to be
substantially derived from our annual operating plan, which is approved by the Board.
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 or encourage risk-taking, including:
• Oversight of major incentive compensation plans and arrangements 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;
• A clawback policy pursuant to which the Compensation Committee has a one-year look-back provision
and provides the authority to recoup up to 100% of any Excess Compensation; and
• Stock ownership guidelines applicable to our Section 16 Officers to align their interests with those of our
stockholders.
Compensia’s review concluded that the risks associated with our compensation policies and practices were
being effectively managed by Infinera. Based on this review, as well as our assessment of the factors described
above, we have determined that the risks associated with our compensation policies and practices are not
reasonably likely to result in a material adverse effect on Infinera. This risk assessment was presented to and
reviewed by the Compensation Committee.
56
PROPOSAL 2—APPROVAL OF AMENDMENT OF THE INFINERA CORPORATION
2016 EQUITY INCENTIVE PLAN
The Board believes that our future success depends on our ability to attract and retain talented employees
and that the ability to grant equity awards is a necessary and powerful recruiting and retention tool for Infinera. The
Board believes that equity awards motivate high levels of performance, more closely align the interests of
employees and stockholders by giving employees an opportunity to hold an ownership stake in Infinera, and
provide an effective means of recognizing employee contributions to the success of Infinera. At the Annual
Meeting, we are requesting that stockholders approve an increase to the number of shares of our common stock
(“Shares”) authorized for issuance under the 2016 Plan by 7,300,000 Shares.
Other than the increase in the Shares authorized for issuance under the 2016 Plan, the 2016 Plan has not
been amended in any material way since our stockholders last approved the amendment and restatement of the
2016 Plan at our 2018 annual meeting of our stockholders. Upon recommendation of the Compensation
Committee, the Board approved this amendment to the 2016 Plan on March 29, 2019, subject to the approval of
our stockholders at the Annual Meeting.
As of March 30, 2019, there were 1,537,690 Shares available for issuance pursuant to awards that may be
granted under the 2016 Plan, excluding Shares already subject to outstanding awards granted under our
predecessor 2007 Plan that, if forfeited, would be added to the number of Shares reserved under the 2016 Plan. If
the proposed amendment to the 2016 Plan is not approved by our stockholders, the 2016 Plan will remain in effect
without the amendment and awards will continue to be made under the 2016 Plan to the extent Shares remain
available. However, we may not be able to continue our equity incentive program in the future. This could preclude
us from successfully attracting and retaining highly skilled employees. The Board and the Compensation
Committee believe that the additional Shares under the increased Share reserve will enable us to continue to use
the 2016 Plan to achieve our recruiting, retention and incentive goals and will be essential to our future success.
If our stockholders approve this amendment to the 2016 Plan, we currently anticipate that the Shares will be
sufficient to meet our expected needs through the date of our 2020 annual meeting of our stockholders. In
determining the number of Shares to be reserved for issuance under the 2016 Plan, the Compensation Committee
and the Board considered the following:
• Historical Grant Practices. The Compensation Committee and the Board considered the historical
amounts of equity awards that we granted in the past three years. In fiscal 2016, 2017 and 2018, we
granted equity awards covering 3.639 million, 5.197 million and 4.277 million Shares, respectively, or a
total of approximately 13.113 million Shares over the three-year period.
• Forecasted Grants. In determining the projected Share utilization, the Compensation Committee and the
Board considered a forecast that included the following factors: (i) the Shares that would be available for
grant under the 2016 Plan, if our stockholders approve this amendment to the 2016 Plan, which was
8,837,690 Shares (consisting of 1,537,690 Shares available for issuance under the 2016 Plan as of
March 30, 2019, plus the 7,300,000 additional Shares pursuant to this amendment to the 2016 Plan, and
excluding Shares already subject to outstanding awards granted under the 2007 Plan that, if forfeited,
would be added to the number of Shares reserved under the 2016 Plan); (ii) the estimated number of
Shares to be added to the 2016 Plan from forfeited awards under the 2007 Plan; and (iii) forecasted
future grants, which are “value-based,” meaning that Share amounts granted will be determined based on
a dollar value of the award to be granted to the participant and stock price of Infinera. Due to our
value-based grant program, any significant changes in our stock price as compared to the stock price we
assumed for forecasting purposes could cause our actual Share usage to deviate significantly from our
anticipated Share usage. The Compensation Committee and the Board also took into account the impact
of future headcount growth on projected Share utilization, including the additional headcount that resulted
from the acquisition of Coriant in October 2018.
• Proxy Advisory Firm Guidelines. Given our significant institutional stockholder base, the Compensation
Committee and the Board considered proxy advisory firm guidelines.
57
Outstanding Awards
The following table sets forth information regarding all outstanding stock options and RSUs and PSUs under
all of our equity plans (other than our 2007 ESPP) as of March 30, 2019. The last sales price of our common stock
as reported on The Nasdaq Global Select Market on March 29, 2019, was $4.34 per share.
Outstanding Options
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
(in years)
Unvested PSUs /
RSUs Outstanding
Number of Shares
Available for Grant
under 2016 Plan*
970,035
$8.244
1.51
15,071,989
1,537,690
*
There are no other outstanding equity plans under which awards of shares could be granted.
Reasons for Voting for the Proposal
The 2016 Plan has been designed consistent with best corporate governance practices.
• Administration. The 2016 Plan is administered by the Compensation Committee of the Board, which is
comprised entirely of independent non-employee directors.
• Stockholder Approval is Required for Additional Shares. The 2016 Plan does not contain an annual
“evergreen” provision but instead reserves a fixed maximum number of Shares for issuance. Stockholder
approval is required to increase that number.
• Share Counting Provisions. Under the 2016 Plan, if an option or stock appreciation right expires or
becomes unexercisable without having been exercised in full, or if Shares subject to other types of
awards are forfeited to or repurchased by us due to failure to vest, those Shares will become available for
issuance again under the 2016 Plan. Shares used to pay the exercise or purchase price of an award will
not become available for future grant under the 2016 Plan. Shares used to satisfy the tax withholding
obligations for awards other than options and stock appreciation rights will become available for future
grant under the 2016 Plan. With respect to stock appreciation rights settled in Shares, the gross number
of Shares exercised under the stock appreciation right award will cease to be available under the 2016
Plan. In addition, to the extent that we pay out an award in cash rather than Shares, such cash payment
will not reduce the number of Shares available for issuance under the 2016 Plan. No Shares purchased
by us with proceeds received from the exercise of an option will become available for issuance under the
2016 Plan or the 2007 Plan.
• Minimum Vesting Requirements. 95% of the Shares reserved for issuance under the 2016 Plan may be
issued only through awards that cannot vest in less than one year from the date of grant unless the
vesting of such awards is accelerated due to the participant’s death, disability, or retirement or a
termination of the participant’s service that occurs in connection with our change in control.
•
Limited Vesting Acceleration Upon a Change in Control. Except (x) as permitted under the minimum
vesting requirements and (y) for any awards made to non-employee directors, the administrator shall not
be permitted to accelerate the vesting of an award upon a change in control other than in the event an
award is not assumed or substituted for as described in this proposal below in the section entitled
“Description of the 2016 Plan—Merger or Change in Control.”
• Repricing Prohibition. The 2016 Plan prohibits any program providing participants the opportunity to
transfer outstanding awards to a financial institution or other person or entity selected by the
administrator, exchange awards for awards of the same type, awards of a different type, and/or cash, or
have the exercise price of awards repriced (i.e., increased or reduced).
• Non-Employee Director Award Limits. Under the 2016 Plan, in any fiscal year, a non-employee director
may be granted equity awards (with an aggregate grant date fair value) and any other compensation
(including cash retainers or fees) of no more than an aggregate of $750,000, increased to $1,000,000 in
our fiscal year of his or her initial service. Any equity awards or other compensation provided to the
director for his or her services as an employee or consultant (other than as a non-employee director) will
be excluded for purposes of these limits.
58
Our executive officers and directors have an interest in the approval of the 2016 Plan by our stockholders
because they would be eligible to receive awards under the 2016 Plan.
Description of the 2016 Plan
The following paragraphs provide a summary of the principal features of the 2016 Plan and its operation.
However, this summary is not a complete description of all of the provisions of the 2016 Plan and is qualified in its
entirety by the specific language of the 2016 Plan. A copy of the 2016 Plan is provided as Appendix B to this Proxy
Statement.
Purposes. The purposes of the 2016 Plan are to attract and retain the best available personnel for positions of
substantial responsibility; to provide additional incentive to employees, directors, and consultants; and to promote
the success of our business. These incentives will be provided through the grant of stock options, stock
appreciation rights, restricted stock, RSUs, performance units, and performance shares as the administrator of the
2016 Plan may determine.
Authorized Shares. Subject to the adjustment provisions contained in the 2016 Plan, the maximum number of
Shares that may be issued pursuant to awards under the 2016 Plan is equal to the sum of (1) 15,400,000 Shares
plus (2) Shares subject to awards granted under the 2007 Plan that after May 12, 2016, expire, are forfeited or
otherwise terminate without being exercised in full (to the extent they were exercisable), or are forfeited to or
repurchased by us due to failure to vest (provided that the maximum number of Shares that may be added to the
2016 Plan with respect to awards granted under the 2007 Plan pursuant to this clause (2) above is 7,700,000
Shares). Our stockholders are being asked to approve an increase of 7,300,000 Shares in the maximum number
of Shares that may be issued pursuant to awards under the 2016 Plan. Thus, if our stockholders approve this
increase, the maximum number of Shares that may be issued pursuant to awards under the 2016 Plan will be
increased to 22,700,000 Shares, plus the number of Shares described in clause (2) above.
Shares may be authorized, but unissued, or reacquired Shares. If an option or stock appreciation right expires
or becomes unexercisable without having been exercised in full, or if Shares subject to other types of awards are
forfeited to or repurchased by us due to failure to vest, those Shares will become available for issuance again
under the 2016 Plan. Shares used to pay the exercise or purchase price of an award will cease to be available for
future grant under the 2016 Plan. Shares used to satisfy the tax withholding obligations related to an award,
except with respect to options and stock appreciation rights, will become available for future grant under the 2016
Plan. With respect to stock appreciation rights settled in Shares, the gross number of Shares exercised under the
stock appreciation right award will cease to be available under the 2016 Plan. In addition, to the extent that we pay
out an award in cash rather than Shares, such cash payment will not reduce the number of Shares available for
issuance under the 2016 Plan. Shares used to pay the exercise price of an award will not be available for future
grant or sale under the 2016 Plan. No Shares purchased by us with proceeds received from the exercise of an
option will become available for issuance under the 2016 Plan or the 2007 Plan.
Plan Administration. The Compensation Committee (or other committee appointed by the Board) administers
the 2016 Plan. The Board or any committee of directors or other individuals satisfying applicable laws appointed
by the Board or a duly authorized committee of the Board may administer the 2016 Plan. With respect to awards
granted or to be granted to certain officers and key employees intended to be an exempt transaction under Rule
16b-3 of the Exchange Act (“Rule 16b-3”), the members of the committee administering the 2016 Plan with respect
to those awards must qualify as “non-employee directors” under Rule 16b-3 will administer the 2016 Plan with
respect to such awards. In the case of awards that historically were intended to qualify as “performance-based
compensation” within the meaning of Section 162(m), the 2016 Plan provided for administration with respect to
those awards by a committee consisting of two or more “outside directors” within the meaning of Section 162(m).
However, this provision relating to Section 162(m) no longer applies under the amended 2016 Plan due to recent
changes to certain tax laws that have eliminated the “performance-based compensation” exemption under
Section 162(m).
Subject to the provisions of the 2016 Plan, the administrator will have the power to determine the award
recipients and the terms of the awards not inconsistent with the 2016 Plan, including the exercise price, the
number of Shares subject to each such award, the exercisability of the awards, and the form of consideration, if
59
any, payable by an option holder upon exercise. The administrator also will have the authority to amend existing
awards, to determine fair market value of Shares, to construe and interpret the 2016 Plan and awards granted
under the 2016 Plan, to establish rules and regulations, including sub-plans for the purpose of satisfying, or
qualifying for favorable tax treatment under, applicable laws in jurisdictions outside of the United States, and to
make all other determinations necessary or advisable for administering the 2016 Plan. The administrator’s
decisions and interpretations will be final and binding on all participants and any other holders of awards, and will
be given the maximum deference permitted by law.
No Repricing. The 2016 Plan prohibits any program providing participants the opportunity to transfer
outstanding awards to a financial institution or other person or entity selected by the administrator, exchange
awards for awards of the same type, awards of a different type, and/or cash, or have the exercise price of awards
repriced (i.e., increased or reduced).
Vesting Requirements. 95% of the Shares reserved for issuance under the 2016 Plan may be issued only
through awards that cannot vest in less than one year from the date of grant unless the vesting of such awards is
accelerated due to the participant’s death, disability, or retirement or a termination of the participant’s service that
occurs in connection with our change in control.
Eligibility. We will be able to grant stock options, stock appreciation rights, restricted stock, RSUs,
performance units, and performance shares under the 2016 Plan to our employees, consultants, and
non-employee directors and employees and consultants of our parent or subsidiary corporations. We will be able
to grant incentive stock options under the 2016 Plan only to individuals who, as of the time of grant, are employees
of ours or of any parent or subsidiary corporation of ours. As of March 30, 2019, we had seven non-employee
directors, and approximately 3,792 employees (including five NEOs) and 77 consultants.
Non-Employee Director Award Limits. The 2016 Plan provides that all non-employee directors will be eligible
to receive all types of awards (except for incentive stock options) under the 2016 Plan. However, in any fiscal year,
a non-employee director may be granted equity awards (with an aggregate grant date fair value) and any other
compensation (including cash retainers or fees) of no more than an aggregate of $750,000, increased to
$1,000,000 in our fiscal year of his or her initial service as a non-employee director. Any equity awards or other
compensation provided to the director for his or her services as an employee or consultant (other than as a
non-employee director) will be excluded for purposes of these limits.
Certain Other Limits. In any fiscal year, subject to any adjustment provisions contained in the 2016 Plan, the
maximum aggregate number of Shares covering equity awards that a participant is permitted to receive under the
2016 Plan is:
• With respect to stock appreciation rights, 1,500,000 Shares, plus an additional 1,500,000 Shares in
connection with his or her initial service as an employee;
• With respect to restricted stock, 1,500,000 Shares, plus an additional 1,500,000 Shares in connection
with his or her initial service as an employee;
• With respect to RSUs, 1,500,000 Shares, plus an additional 1,500,000 Shares in connection with his or
her initial service as an employee;
• With respect to performance shares, 1,500,000 Shares, plus an additional 1,500,000 Shares in
connection with his or her initial service as an employee; and
• The maximum aggregate grant date value of performance units that a participant may receive is
$7,500,000.
In addition, subject to any adjustment provisions contained in the 2016 Plan, the maximum aggregate number
of Shares covering stock options that may be granted under the 2016 Plan to a participant during a fiscal year was
1,500,000 Shares, plus an additional 1,500,000 Shares in connection with his or her initial service as an employee.
Stock Options. We are able to grant stock options under the 2016 Plan. Each option will be evidenced by an
award agreement that specifies the exercise price, the number of Shares subject to the option, the maximum term
60
of the option, forms of consideration for exercise, and such other terms and conditions as the administrator
determines, subject to the terms of the 2016 Plan. The exercise price of options granted under the 2016 Plan must
be at least equal to the fair market value of our common stock on the date of grant, except in special, limited
circumstances as set forth in the 2016 Plan. The maximum term of an incentive stock option must not exceed 10
years. However, with respect to any participant who owns more than 10% of the voting power of all classes of
outstanding stock of ours or of any parent or subsidiary of ours, the maximum term must not exceed five years and
the per share exercise price must equal at least 110% of the fair market value of a Share on the grant date.
Generally, the fair market value of a Share is the closing sales price of a Share on the relevant date as quoted on
Nasdaq Stock. Options will be exercisable at such times and under such conditions as determined by the
administrator and as set forth in the applicable award agreement. The administrator will determine and specify in
each award agreement, and solely in its discretion, the period of post-termination exercise applicable to each
option. In the absence of such a determination by the administrator, the participant generally will be able to
exercise the vested portion of the option for three months following his or her termination for reasons other than
death or disability, and for 12 months following his or her termination due to disability or death while holding the
option (to the extent vested on the date of death). However, in no event can an option be exercised after the
expiration of the term of the option.
Stock Appreciation Rights. We are able to grant stock appreciation rights under the 2016 Plan. Stock
appreciation rights allow the recipient to receive the appreciation in the fair market value of the underlying Shares
between the exercise date and the date of grant. Each stock appreciation right will be evidenced by an award
agreement that specifies the exercise price, the term of the stock appreciation right, and other terms and
conditions as determined by the administrator, subject to the terms of the 2016 Plan. The per Share exercise price
of a stock appreciation right will be no less than 100% of the fair market value per Share on the date of grant.
Stock appreciation rights will be exercisable at such times and under such conditions as determined by the
administrator and set forth in the applicable award agreement. At the discretion of the administrator, the payment
upon exercise of a stock appreciation right may be paid in cash, Shares, or a combination of both.
Restricted Stock. We are able to grant restricted stock under the 2016 Plan. Restricted stock awards are
grants of Shares that are subject to various restrictions, which may include restrictions on transferability and
forfeiture provisions. Each restricted stock award granted will be evidenced by an award agreement specifying the
number of Shares subject to the award, any period of restriction, and other terms and conditions of the award, as
determined by the administrator, subject to the terms of the 2016 Plan.
Restricted stock awards may (but are not required to) be subject to vesting conditions, as the administrator
specifies (subject to the minimum vesting requirements), and the Shares acquired may not be transferred by the
participant until the vesting conditions (if any) are satisfied. The administrator, in its sole discretion, may accelerate
the time at which any restrictions will lapse or be removed. Recipients of restricted stock awards generally will
have full voting rights, and rights to dividends and other distributions, with respect to such Shares upon grant
without regard to vesting, unless the administrator provides otherwise. Such dividends and other distributions, if
any, that are paid in Shares will be subject to the same restrictions of transferability and forfeitability as the Shares
of restricted stock on which they were paid. Unless otherwise determined by the administrator, a participant
generally will forfeit any Shares of restricted stock as to which the restrictions have not lapsed prior to the
participant’s termination of service.
Restricted Stock Units. We are able to grant RSUs under the 2016 Plan. Each RSU granted is a bookkeeping
entry representing an amount equal to the fair market value of one Share. Each RSU award will be evidenced by
an award agreement that specifies the number of RSUs subject to the award, vesting criteria (which may include
accomplishing specified performance criteria or continued service to us), form of payout, and other terms and
conditions of the award, as determined by the administrator, subject to the terms of the 2016 Plan. RSUs result in
a payment to a participant if the performance goals or other vesting criteria are achieved or the awards otherwise
vest. The administrator, in its sole discretion, may accelerate the time at which any restrictions will lapse or be
removed (subject to the minimum vesting requirements). The administrator determines in its sole discretion
whether an award will be settled in cash, Shares, or a combination of both.
Performance Units and Performance Shares. We are able to grant performance units and performance shares
under the 2016 Plan. Performance units and performance shares are awards that will result in a payment to a
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participant only if performance goals or other vesting criteria established by the administrator are achieved or the
awards otherwise vest. Each award of performance units or performance shares will be evidenced by an award
agreement specifying the number of units or shares (as applicable), the vesting conditions, the performance
period, and other terms and conditions of the award, as determined by the administrator, subject to the terms and
conditions of the 2016 Plan. On or before the date of grant, the administrator will establish an initial dollar value for
each performance unit. Each performance share will have an initial value equal to the fair market value of a Share
on the date of grant. The administrator in its discretion will establish performance goals or other vesting criteria
(which may include continued service), which, depending on the extent to which they are met, will determine the
value or number of performance units or performance shares to be paid out. After the grant of performance units
or performance shares, the administrator, in its sole discretion, may reduce or waive any performance objectives
or other vesting provisions for such performance units or performance shares (subject to the minimum vesting
requirements). The administrator, in its sole discretion, may pay earned performance units or performance shares
in the form of cash, Shares, or in some combination of both.
Non-Transferability of Awards. Unless the administrator provides otherwise, the 2016 Plan generally will not
allow for the transfer of awards, and only the recipient of an award may exercise an award during his or her
lifetime.
Certain Adjustments. In the event of any dividend or other distribution (whether in the form of cash, Shares,
other securities or other property), recapitalization, stock split, reverse stock split, reorganization, reincorporation,
reclassification, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or our
other securities, or other change in our corporate structure affecting Shares, then in order to prevent diminution or
enlargement of the benefits or potential benefits intended to be made available under the 2016 Plan, the
administrator will adjust the number and class of shares that may be delivered under the 2016 Plan and/or the
number, class and price of shares covered by each outstanding award, and the numerical share limits set forth in
the 2016 Plan. In the event of our proposed liquidation or dissolution, the administrator will notify participants as
soon as practicable and all awards will terminate immediately prior to the completion of such proposed transaction.
Merger or Change in Control. The amendment to the 2016 Plan restricts the treatment of awards in the event
of our merger or change of control to the alternatives specified below. The amendment to the 2016 Plan provides
that in the event of our merger or change in control, as defined in the 2016 Plan, each outstanding award will be
treated as the administrator determines, in accordance with the following: (i) the assumption or substitution of the
award by the acquirer or successor corporation or its parent or subsidiary, (ii) termination of the award upon or
immediately prior to the consummation of the merger or change in control following written notice and subject to
the next paragraph, (iii) subject to the next paragraph, (A) termination of the award in exchange for an amount of
cash and/or property in an amount that would have been attained upon exercise or realization of the award as of
the date of the merger or change in control, or (B) replacement of the award with other rights or property, or
(iv) any combination of the above. The administrator will not be required to treat all awards, all awards held by a
participant, or all awards of the same type, similarly.
If outstanding awards (or portion of the awards) are not assumed or substituted for, the awards will fully vest
and become exercisable and all restrictions will lapse, except that with respect to awards subject to performance-
based vesting, performance criteria will be deemed achieved based on actual performance measured through the
last date that the awards remain outstanding (or such earlier date that the administrator may determine), with any
performance period shortened proportionately and applicable performance goals or other vesting criteria adjusted
proportionately to reflect the adjusted performance period (or to the extent applicable, the value of the
consideration to be received by our stockholders in connection with the merger or change in control). In addition, if
an option or stock appreciation right is not assumed or substituted in the event of a merger or change in control,
the administrator will notify the participant that such award will be exercisable for a specified period prior to the
transaction, and such award will terminate upon the expiration of such period.
Plan Amendment; Termination. The administrator has the authority to amend, alter, suspend, or terminate the
2016 Plan at any time, provided such action does not impair the existing rights of any participant unless mutually
agreed in writing. The 2016 Plan will terminate automatically in 2026, unless we terminate it sooner.
Forfeiture of Awards. The 2016 Plan adds grants the administrator authority to specify in an award agreement
that a participant’s rights, payments and benefits with respect to an award granted under the 2016 Plan will be
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subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events. The
2016 Plan also provides that awards granted under the 2016 Plan also will be subject to any Infinera clawback
policy as may be established or amended from time to time. The administrator may require a participant to forfeit,
return or reimburse to Infinera all or a portion of an award and any amounts paid under the award pursuant to the
terms of Infinera’s clawback policy or in order to comply with applicable laws.
Number of Awards Granted to Employees and Directors
The number of awards, and Shares subject thereunder, that an employee, director, or consultant may receive
under the 2016 Plan is in the discretion of the administrator and therefore cannot be determined in advance. The
following table sets forth the aggregate number of shares subject to RSUs and PSUs (at target) granted under the
2016 Plan during fiscal 2018 to each of our NEOs; our NEOs, as a group; directors who are not executive officers,
as a group; and all employees who are not executive officers, as a group. There were no stock options granted to
any employees (including our NEOs) or directors in fiscal 2018.
Name of Individual or Identity of Group and
Principal Position
Dollar
Value
of Award(s)
($)(1)
Number of RSUs and
PSUs Granted
(#)
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,362,442
338,541
Chief Executive Officer
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,351,009
114,583
Chief Financial Officer
David F. Welch, Ph.D.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,351,009
114,583
Chief Innovation Officer
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,783,609
184,583
Chief Operating Officer
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,043,955
88,541
Senior Vice President, Worldwide Sales
9,892,024
All current executive officers as a group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All current directors who are not executive officers as a group . . . . . . . . . . . . . .
1,017,401
All employees (excluding executive officers as a group) . . . . . . . . . . . . . . . . . . . 36,631,467
840,831
109,752
3,316,243
(1) For RSUs, represents the aggregate grant date fair value of each equity award computed in accordance with ASC 718. For
PSUs, represents the aggregate grant date fair value of each equity award at the target payout level computed in
accordance with ASC 718. See Notes 2 and 15 of the notes to our consolidated financial statements contained in our 2018
Annual Report on Form 10-K filed on March 14, 2019, for a discussion of all assumptions made by us in determining the
ASC 718 values of equity awards.
U.S. Federal Income Tax Consequences
The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers
and Infinera of awards granted under the 2016 Plan. Tax consequences for any particular individual may be
different.
Incentive Stock Options. A participant recognizes no taxable income as the result of the grant or exercise of
an incentive stock option qualifying under Section 422 of the Code (unless the participant is subject to the
alternative minimum tax). If the participant exercises the option and then later sells or otherwise disposes of the
Shares acquired through the exercise of the option after both the two-year anniversary of the grant date and the
one-year anniversary of the exercise date, the difference between the sale price and the exercise price will be
taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the
Shares on or before the two- or one-year anniversaries described above (a “disqualifying disposition”), he or she
generally will have ordinary income at the time of the sale equal to the fair market value of the Shares on the
exercise date (or the sale price, if less) minus the exercise price of the option.
Nonstatutory Stock Options. A participant generally recognizes no taxable income on the date of grant of a
nonstatutory stock option with an exercise price equal to the fair market value of the underlying stock on the date
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of grant. Upon the exercise of a nonstatutory stock option, the participant generally will recognize ordinary income
equal to the excess of the fair market value of the Shares on the exercise date over the exercise price of the
option. If the participant is an employee, such ordinary income generally is subject to withholding of income and
employment taxes. Upon the sale of Shares acquired through the exercise of a nonstatutory stock option, any
subsequent gain or loss (generally based on the difference between the sale price and the fair market value on the
exercise date) will be treated as long-term or short-term capital gain or loss, depending on how long the Shares
were held by the participant.
Stock Appreciation Rights. A participant generally recognizes no taxable income on the date of grant of a
stock appreciation right with an exercise price equal to the fair market value of the underlying stock on the date of
grant. Upon exercise of the stock appreciation right, the participant generally will be required to include as ordinary
income an amount equal to the sum of the amount of any cash received and the fair market value of any Shares
received upon the exercise. If the participant is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. Upon the sale of Shares acquired by an exercise of the stock
appreciation right, any gain or loss (generally based on the difference between the sale price and the fair market
value on the exercise date) will be treated as long-term or short-term capital gain or loss, depending on how long
the Shares were held by the participant.
Restricted Stock, Restricted Stock Units, Performance Units and Performance Shares. A participant generally
will not have taxable income at the time an award of restricted stock, RSUs, performance shares, or performance
units is granted. Instead, he or she generally will recognize ordinary income in the first taxable year in which his or
her interest in the Shares underlying the award becomes either (i) freely transferable, or (ii) no longer subject to
substantial risk of forfeiture. If the participant is an employee, such ordinary income generally is subject to
withholding of income and employment taxes. However, the recipient of a restricted stock award may elect to
recognize income at the time he or she receives the award in an amount equal to the fair market value of the
Shares underlying the award (less any cash paid for the Shares) on the date the award is granted.
Section 409A. Section 409A of the Code (“Section 409A”) provides certain requirements for non-qualified
deferred compensation arrangements with respect to an individual’s deferral and distribution elections and
permissible distribution events. Awards granted under the 2016 Plan with a deferral feature will be subject to the
requirements of Section 409A. If an award is subject to and fails to satisfy the requirements of Section 409A, the
recipient of that award may recognize ordinary income on the amounts deferred under the award, to the extent
vested, which may be prior to when the compensation is actually or constructively received. Also, if an award that
is subject to Section 409A fails to comply with Section 409A’s provisions, Section 409A imposes an additional 20%
tax on compensation recognized as ordinary income, as well as interest on such deferred compensation.
Medicare Surtax. In addition, a participant’s annual “net investment income”, as defined in Section 1411 of the
Code, may be subject to a 3.8% federal surtax. Net investment income may include capital gain and/or loss arising
from the disposition of Shares issued pursuant to awards granted under the 2016 Plan. Whether a participant’s net
investment income will be subject to this surtax will depend on the participant’s level of annual income and other
factors.
Tax Effect for Infinera. We generally will be entitled to a tax deduction in connection with an award under the
2016 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant
recognizes such income (for example, the exercise of a nonqualified stock option). However, special rules limit the
deductibility of compensation paid to our CEO and other “covered employees” as determined under
Section 162(m) and applicable guidance. Under Section 162(m), the annual compensation paid to any of these
specified individuals will be deductible only to the extent that it does not exceed $1,000,000. However, under
Section 162(m) as it was in effect during fiscal year 2018, we could preserve the deductibility of certain
compensation in excess of $1,000,000 if the conditions of Section 162(m) were met. These conditions included
(among others) stockholder approval of the 2016 Plan and its material terms, setting certain limits on the number
of Shares subject to awards and, for awards other than options and stock appreciation rights, establishing
performance criteria that must be met before the award actually was vested or paid. As a result of the Tax Cuts
and Jobs Act of 2017, for taxable years beginning on or after January 1, 2018, and except for certain
grandfathered arrangements, under Section 162(m), any compensation over $1,000,000 paid to the covered
employees is not deductible to Infinera.
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THE FOREGOING IS ONLY A SUMMARY OF THE TAX EFFECT OF FEDERAL INCOME TAXATION
UPON PARTICIPANTS AND INFINERA WITH RESPECT TO THE GRANT AND VESTING OR EXERCISE OF
AWARDS UNDER THE 2016 PLAN. IT DOES NOT PURPORT TO BE COMPLETE, AND DOES NOT DISCUSS
THE TAX CONSEQUENCES OF A SERVICE PROVIDER’S DEATH OR THE PROVISIONS OF THE INCOME
TAX LAWS OF ANY MUNICIPALITY, STATE, OR NON-U.S. COUNTRY TO WHICH THE SERVICE PROVIDER
MAY BE SUBJECT.
Summary
The Board believes that it is in the best interests of our company and our stockholders to continue to provide
employees, consultants and directors with the opportunity to acquire an ownership interest in Infinera through the
grant of equity awards under the 2016 Plan and thereby encourage them to remain in our service and more closely
align their interests with those of our stockholders.
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 approval of the amendment to the 2016 Plan to
increase the number of Shares authorized thereunder by 7,300,000 Shares.
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PROPOSAL 3—APPROVAL OF AMENDMENT OF THE INFINERA CORPORATION
2007 EMPLOYEE STOCK PURCHASE PLAN
Reason for the Amendment
At the Annual Meeting, stockholders are being asked to approve an amendment of the 2007 ESPP to
increase the number of Shares authorized for issuance under the 2007 ESPP (the “ESPP Amendment”). This will
allow us to use the 2007 ESPP to assist us in recruiting, retaining and motivating qualified personnel who help us
achieve our business goals, including creating long-term value for stockholders as well as aligning the interest of
our employees with those of our stockholders. Our 2007 ESPP is intended to offer a significant incentive by
allowing employees to purchase Shares. Employees are allowed to purchase Shares under the 2007 ESPP at a
price equal to 85% of the lower of the fair market value of the Share at either the first or last trading day of the
respective offering period.
The Board initially adopted the 2007 ESPP in February 2007 and our stockholders approved the 2007 ESPP
in May 2007. The 2007 ESPP became effective in June 2007. The 2007 ESPP was last amended by our
stockholders in May 2018 to increase the number of Shares authorized for issuance under the 2007 ESPP by
4,500,000 Shares. Other than the ESPP Amendment, we have not made any material amendments to the 2007
ESPP since our stockholders last approved the 2007 ESPP.
As of March 30, 2019, 3,010,525 Shares remained available for issuance under the 2007 ESPP. The ESPP
Amendment to the 2007 ESPP would increase the number of Shares issuable under the 2007 ESPP by
10,500,000 Shares, bringing the total that remains available for issuance under the 2007 ESPP to
13,510,525 Shares, which represents approximately 6.0% of our outstanding Shares as of the Record Date. The
stockholders are asked to approve additional increases to the Share reserve so that we may continue to operate
the 2007 ESPP.
Another relevant factor is the acquisition of Coriant in October 2018, which has nearly doubled the size of
eligible participants in the 2007 ESPP. These new eligible participants will be eligible to participate in the 2007
ESPP for the first time starting with the August 15, 2019 offering period. We believe the 2007 ESPP is a valuable
and important benefit that helps us to achieve our business success.
In considering its recommendation to approve the ESPP Amendment, the Compensation Committee and the
Board analyzed the historical number of Shares purchased under the 2007 ESPP in the past three years and the
motivational and retention value of the program as well as headcount trends versus the required funding of the
2007 ESPP. The number of Shares purchased under the 2007 ESPP in each of fiscal 2016, 2017 and 2018, was
1,368,826, 2,140,207 and 2,188,706, respectively. Although the Compensation Committee and the Board
considered the historical number of purchased Shares, the actual number of Shares that will be purchased under
the 2007 ESPP in any year will depend on a number of factors including, for example, the number of participants,
each participant’s contribution rate and our stock price. Based on usage in 2018 and the additional number of
eligible participants in connection with the Acquisition, we anticipate that the increased Share reserve would meet
our anticipated needs for a period of approximately two years. However, the actual number of Shares that will be
purchased under the 2007 ESPP will vary based on relevant factors, as noted above.
The Compensation Committee and the Board have approved the ESPP Amendment, subject to the approval
of our stockholders at the 2019 Annual Meeting. If stockholders do not approve an increase in the number of
Shares reserved for issuance under the 2007 ESPP, our 2007 ESPP will remain in effect without the ESPP
Amendment, but our goals of recruiting, retaining and motivating talented employees will be more difficult to meet
as we estimate that the remaining shares authorized is expected only to last us through the August 2019 purchase
date. We believe that the approval of the ESPP Amendment is important to our continued success.
Description of the 2007 ESPP
The following paragraphs provide a summary of the principal features of the 2007 ESPP and its operation.
However, this summary is not a complete description of all of the provisions of the 2007 ESPP, and is qualified in
its entirety by the specific language of the 2007 ESPP. A copy of the 2007 ESPP as it is proposed to be amended
is provided as Appendix C to this Proxy Statement.
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Purpose. The purpose of the 2007 ESPP is to provide eligible employees of Infinera and its participating
subsidiaries with the opportunity to purchase Shares through payroll deductions or other contributions as permitted
under the 2007 ESPP. The 2007 ESPP serves as an important tool for us in recruiting, retaining and motivating
talented employees.
The 2007 ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code
(“Section 423”). In addition, the 2007 ESPP authorizes the grant of rights to purchase Shares that are not intended
to qualify under Section 423, pursuant to rules, procedures or sub-plans adopted by the administrator of the
2007 ESPP that generally are designed to achieve desired tax, securities laws, or other objectives.
Eligibility to Participate. Employees of Infinera and its participating subsidiaries who are customarily employed
for at least 20 hours per week and more than five months in a calendar year are eligible to participate in the
2007 ESPP. However, an employee is not eligible if he or she would own, and/or hold outstanding options to
purchase, five percent or more of the total combined voting power or value of all classes of stock of Infinera or of
any parent or subsidiary of Infinera. Also, the administrator of the 2007 ESPP (referred to herein as the
Committee) generally has discretion to exclude employees from participating in the 2007 ESPP, on a uniform and
nondiscretionary basis, if the employee normally is scheduled to work less than or equal to 20 hours per week or
five months per calendar year (or lesser number of hours or period), has continuously worked for Infinera for less
than two years (or lesser period), or is an officer or other highly compensated employee, provided that the
exclusion of employees in these categories is not prohibited under applicable local law. The Committee also may
exclude from participation in the 2007 ESPP employees who are citizens or residents of a non-U.S. jurisdiction if
participation is prohibited by local law or if complying with local law would cause a violation of Section 423. As of
March 30, 2019, approximately 1,856 employees are eligible to participate in the 2007 ESPP.
Number of Shares of Common Stock Available under the 2007 ESPP. Currently, a maximum of 21,056,830
Shares have been approved for issuance pursuant to the 2007 ESPP. As of March 29, 2019, the closing price of
our common stock on The Nasdaq Global Select Market was $4.34 per Share. If stockholders approve the ESPP
Amendment, then the maximum number of Shares issuable under the 2007 ESPP will be 31,556,830 Shares. If
stockholders do not approve the ESPP Amendment, no shares will be added to the total number of Shares
reserved for issuance under the 2007 ESPP and the 2007 ESPP will continue under its existing terms without the
increase in the Share reserve provided by the ESPP Amendment. If stockholders do not approve an increase in
the number of Shares reserved for issuance under the 2007 ESPP, our goals of recruiting, retaining and
motivating talented employees through the 2007 ESPP will be more difficult to meet as the remaining shares
authorized is expected only to last us through the August 2019 purchase date. We believe that the approval of the
ESPP Amendment is important to our continued success.
Administration. The Compensation Committee is the Committee that currently administers the 2007 ESPP.
The members of the Compensation Committee serve as the administrator of the 2007 at the discretion of the
Board. The Board or a committee of the Board designated by the Board may administer the 2007 ESPP. Subject
to the terms of the 2007 ESPP, the Committee has full and exclusive discretionary authority to interpret and apply
the terms of the 2007 ESPP, designate separate offerings under the 2007 ESPP, determine eligibility and
adjudicate all dispute claims under the 2007 ESPP. The Committee also may adopt rules or procedures for the
operation and administration of the 2007 ESPP (including to accommodate requirements of local laws and
procedures for non-US jurisdictions), eligibility, compensation participants may contribute to the 2007 ESPP,
making of contributions to the 2007 ESPP, establishment of bank or trust accounts, interest payments, and
currency conversion, and other rules and procedures. The Committee’s findings, decisions, and interpretations are
final and binding on all persons to the maximum extent permitted by law.
Enrollment and Contributions. Eligible employees voluntarily elect whether or not to enroll in the 2007 ESPP
by completing, signing and submitting to Infinera an enrollment form in a form and manner and by the deadline set
by the Compensation Committee. Each employee who joins the 2007 ESPP is granted an option to purchase
Shares on each enrollment date while participating in the 2007 ESPP and is automatically re-enrolled for additional
rolling six month offering periods; provided, however, that an employee may cancel his or her enrollment at any
time (subject to 2007 ESPP rules). Eligible employees who participate in the 2007 ESPP are referred to as
participants.
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Participants contribute to the 2007 ESPP through payroll deductions or, if payroll withholding is not permitted
or advisable under local laws, through other means specified by the Committee. Participants generally may
contribute up to 15% of their eligible compensation (in whole percentages) through after-tax payroll deductions.
Compensation eligible to be contributed under the 2007 ESPP includes a participant’s base straight time gross
earnings, commissions (to the extent the commissions are an integral, recurring part of compensation), overtime
and shift premium, but exclusive of payments for incentive compensation, bonuses and other compensation. From
time to time, the Committee may change the definition of eligible compensation, limit the nature and number of
contribution rate changes that may be made by participants during an offering period, or change offering periods
including the length of the offering and purchase periods (but in no event may such periods exceed twenty-seven
(27) months). A participant may increase or decrease his or her contribution percentage by following procedures
established by the Committee. During an offering period, participants may decrease but not increase the rate of his
or her contribution with respect to an ongoing offering period.
Purchase of Shares. Currently, Shares are offered under the 2007 ESPP through a series of consecutive
offering periods approximately six months in duration that are scheduled to start on the first trading day on or after
February 15 or August 15 of each year and end on the last trading day on or after August 15 or February 15
approximately six months later. On the last trading day of each offering period, Infinera uses each participant’s
payroll deductions or contributions to purchase Shares for the participant. The price of the Shares purchased will
be 85% of the lower of (1) the per Share closing sales price of our common stock on Nasdaq on the first trading
day of the offering period, or (2) the per Share closing sales price of our common stock on Nasdaq on the last
trading day of the offering period (on which day Shares are purchased for participants), provided that the
Committee may establish in advance a different formula for the purchase price for offering periods under the
2007 ESPP or as permitted by the 2007 ESPP. No participant may purchase Shares under the 2007 ESPP at a
rate of more than $25,000 worth of our common stock (based on the fair market value of the stock at the beginning
of the offering periods) for each calendar year during which the participant’s option to purchase Shares under the
2007 ESPP is outstanding at any time. The Committee also has discretion to set a limit on the number of Shares
that may be purchased during any six-month offering period (which currently is established at 3,000 Shares unless
otherwise determined by the Committee). Further, under certain circumstances whereby the number of Shares to
be purchased in an offering period exceeds the number of Shares available for purchase, the Committee may
make adjustments that result in the purchase of a lesser number of Shares under the offering period. The
Committee also may reduce a participant’s contributions to zero percent to the extent necessary to comply with
Section 423. Until Shares have been purchased and delivered to a participant (as evidenced by the appropriate
entry in the books of Infinera or a duly authorized transfer agent of Infinera), the participant will have no voting,
dividend, or other stockholder rights with respect to the Shares. At least annually, statements of account will be
provided to each participant setting forth certain information regarding his or her participation in the 2007 ESPP,
including the amounts of contributions, purchase price, and number of Shares purchased.
Termination of Participation. Participation in the 2007 ESPP generally terminates when a participating
employee’s employment with Infinera or its subsidiaries ceases for any reason, the employee withdraws from the
2007 ESPP, or Infinera terminates or amends the 2007 ESPP such that the employee no longer is eligible to
participate. An employee may withdraw his or her participation in the 2007 ESPP at any time in accordance with
procedures, and prior to the deadline, specified by the Committee. Upon withdrawal from the 2007 ESPP,
generally the employee will receive all amounts credited to his or her account, without interest (unless otherwise
required by applicable law), and his or her payroll withholdings or contributions under the 2007 ESPP will cease.
Non-transferability. Rights to purchase Shares and any other rights and interests under the 2007 ESPP may
not be assigned, transferred, sold or otherwise disposed of (other than by will, the laws of descent and distribution,
or beneficiary designation in the event of death). Any attempt at such prohibited disposition will be without effect
except that Infinera may treat such act as an election to withdraw participation. During a participant’s lifetime, an
option to purchase Shares granted to the participant under the 2007 ESPP can be exercised only by him or her.
Certain Transactions. In the event of any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the
Company, or other change in Infinera’s corporate structure affecting the Shares, the Committee, in order to
prevent dilution or enlargement of the benefits and potential benefits intended to be made available under the
68
2007 ESPP, will make appropriate adjustments, as it deems equitable, to the number and class of stock reserved
for issuance under the 2007 ESPP and options outstanding under the 2007 ESPP, the purchase price of options
outstanding under the 2007 ESPP, and the numerical limits under the 2007 ESPP. In the event of Infinera’s
proposed dissolution or liquidation, any ongoing offering periods will be shortened and will terminate immediately
before completion of the proposed dissolution or liquidation following the purchase of Shares under the shortened
offering periods, unless provided otherwise by the Committee. In the event of a merger or change in control of
Infinera, each outstanding option under the 2007 ESPP will be assumed or substituted for by the successor. In the
event that the successor does not assume or substitute the options, the offering period will be shortened and end
prior to the merger or change in control but following the purchase of Shares under the shortened offering period.
Amendment and Termination. The Committee or the Board may amend, suspend or terminate the 2007 ESPP
or any part of the 2007 ESPP at any time and for any reason. The 2007 ESPP will continue in effect unless
terminated by the Committee in accordance with its terms. If the Committee determines that the ongoing operation
of the 2007 ESPP may result in unfavorable financial accounting consequences, the Committee may modify,
amend or terminate the 2007 ESPP to reduce or eliminate such accounting consequence. If the 2007 ESPP is
terminated, the Committee in its discretion may terminate all outstanding offering periods either immediately or
after completion of the purchase of Shares under the 2007 ESPP (which may be adjusted to occur sooner than
originally scheduled), or in accordance with their terms. If options are terminated prior to expiration, then all
amounts credited to participants that have not been used to purchase Shares will be returned, without interest
(unless otherwise required by applicable law), as soon as administratively practicable.
Number of Shares Purchased by Certain Individuals and Groups
Participation in the 2007 ESPP is voluntary and dependent on each eligible employee’s election to participate
and his or her determination as to the level of contributions of eligible compensation. Further, the number of
Shares that may be purchased under the 2007 ESPP is determined, in part, by the price of our Shares on the first
and last day of each offering period. Accordingly, the actual number of Shares that may be purchased by any
individual is not determinable. For illustrative purposes only, the following table sets forth (a) the number of Shares
that were purchased during 2018 under the 2007 ESPP, and (b) the weighted average per Share purchase price
paid for such Shares, for each of our NEOs, all current executive officers as a group, and all other employees who
participated in the 2007 ESPP as a group. Our executive officers have an interest in the approval of the ESPP
Amendment by our stockholders because they are eligible to participate in the 2007 ESPP. Non-employee
members of the Board are not eligible to participate in the 2007 ESPP.
New Plan Benefits
2007 Employee Stock Purchase Plan
Name of Individual or Identity of Group and
Position
Number of Shares
Purchased
(#)
Weighted Average
Purchase Price Per Share
($)
Thomas J. Fallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Chief Executive Officer
Brad D. Feller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,604
Chief Financial Officer
David F. Welch, Ph.D. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chief Innovation Officer
David W. Heard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chief Operating Officer
Robert J. Jandro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Vice President, Worldwide Sales
All current executive officers as a group . . . . . . . . . . . . . . . . . . . . . . .
All current directors who are not executive officers as a group(1)
. . .
All other employees (including all current officers who are not
—
—
—
2,604
—
executive officers) as a group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,186,102
(1) Non-employee directors are not eligible to participate in the 2007 ESPP.
69
—
$7.30
—
—
—
$7.30
—
$7.31
U.S. Federal Income Tax Consequences
The following brief summary of the effect of U.S. federal income taxation upon the participant and Infinera with
respect to the Shares purchased under the 2007 ESPP is based on management’s understanding of current U.S.
federal income tax laws, does not purport to be complete, and does not discuss the tax consequences of a
participant’s death or the income tax laws of any state or foreign country in which the participant may reside.
The 2007 ESPP is intended to qualify as an employee stock purchase plan within the meaning of Section 423.
Under an employee stock purchase plan that so qualifies, no taxable income will be recognized by a participant,
and no deductions will be allowable to Infinera, upon either the grant or the exercise of the purchase rights.
Taxable income will not be recognized until there is a sale or other disposition of the Shares acquired under the
2007 ESPP or in the event of the participant’s death while still owning the purchased Shares.
If the participant sells or otherwise disposes of the purchased Shares within two (2) years after the start date
of the offering period in which the Shares were acquired or within one (1) year after the actual purchase date of
those Shares, then the participant generally will recognize ordinary income in the year of sale or disposition equal
to the amount by which the fair market value of the Shares on the purchase date exceeded the purchase price
paid for those Shares, and Infinera will be entitled to an income tax deduction, for the taxable year in which such
disposition occurs equal in amount to such excess. The amount of this ordinary income will be added to the
participant’s basis in the Shares, and any resulting gain or loss recognized upon the sale or disposition will be a
capital gain or loss. If the Shares have been held for more than one (1) year since the date of purchase, the gain
or loss will be long-term.
If the participant sells or disposes of the purchased Shares more than two (2) years after the start date of the
offering period in which the Shares were acquired and more than one (1) year after the actual purchase date of
those Shares, then the participant generally will recognize ordinary income in the year of sale or disposition equal
to the lesser of (a) the amount by which the fair market value of the Shares on the sale or disposition date
exceeded the purchase price paid for those Shares, or (b) 15% of the fair market value of the Shares on the start
date of that offering period. Any additional gain upon the disposition will be taxed as a long-term capital gain.
Alternatively, if the fair market value of the Shares on the date of the sale or disposition is less than the purchase
price, there will be no ordinary income and any loss recognized will be a long-term capital loss. Infinera will not be
entitled to an income tax deduction with respect to such disposition.
In addition, a participant’s annual “net investment income,” as defined in Section 1411 of the Code, may be
subject to a 3.8% federal surtax. Net investment income may include capital gain and/or loss arising from the
disposition of Shares purchased under the 2007 ESPP. Whether a participant’s net investment income will be
subject to this surtax will depend on the participant’s level of annual income and other factors.
If the participant still owns the purchased Shares at the time of death, the lesser of (i) the amount by which the
fair market value of the Shares on the date of death exceeds the purchase price or (ii) 15% of the fair market value
of the Shares on the start date of the offering period in which those Shares were acquired will constitute ordinary
income in the year of death.
Summary
The Board believes that it is in the best interests of our company and our stockholders to continue to provide
eligible employees with the opportunity to purchase Shares through the 2007 ESPP, which constitutes an
important incentive for our employees and helps us in recruiting, retaining and motivating talented employees. We
strongly believe that the 2007 ESPP is essential for us to compete for talent in the labor markets in which we
operate.
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 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.
70
Proposal 3—Recommendation of the Board
The Board unanimously recommends a vote “FOR” the approval of the amendment to the 2007 ESPP to
increase the number of Shares authorized thereunder by 10,500,000 Shares.
71
PROPOSAL 4—ADVISORY APPROVAL OF NAMED EXECUTIVE OFFICER COMPENSATION
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 basis, the compensation of our NEOs 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 NEOs.
As described in the section entitled “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 objectives, including
specific non-GAAP operating margin targets. Please read the “Compensation Discussion and Analysis” section of
this Proxy Statement beginning on page 27 for additional details about our executive compensation programs,
including information about the fiscal 2018 compensation of our NEOs.
The Board is asking our stockholders to indicate their support for the compensation of our NEOs 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 NEOs and the philosophy, policies, practices and objectives described in this Proxy
Statement. Accordingly, the Board recommends that our stockholders vote “FOR” the following resolution at the
Annual Meeting:
“RESOLVED: That the stockholders approve, on an advisory basis, the compensation of the named
executive officers, as disclosed in the Proxy Statement for the 2019 Annual Meeting of Stockholders
pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the
Compensation Discussion and Analysis, the compensation tables, and the accompanying footnotes and
narrative disclosures.”
As an advisory vote, this say-on-pay proposal is not binding upon Infinera, the Board or the Compensation
Committee. However, Infinera, the 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’ feedback in evaluating future compensation options
for our NEOs.
Vote Required
Approval of Proposal 4 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 4—Recommendation of the Board
The Board unanimously recommends a vote “FOR” the approval of the compensation of our NEOs, as
disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the SEC.
72
PROPOSAL 5—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 28, 2019 and has further directed that we
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.
Ratification of appointment of Ernst & Young LLP as our independent registered public accounting firm is not
required pursuant to our Bylaws, our other governing documents or law. However, we are 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.
Independent Registered Public Accounting Firm’s Fees
The following table sets forth the aggregate fees for audit, audit-related, tax and other services provided by
Ernst & Young LLP for the fiscal years ended December 29, 2018 and December 30, 2017. All of the services
described in the following table were approved in conformity with the Audit Committee’s pre-approval processes
and procedures.
2018
2017
Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,619,000 $2,824,000
Audit-Related Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,057,000
485,000
72,000
507,000
27,000
—
Total Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,233,000 $3,358,000
Audit Fees
This category of the table above includes fees for the integrated audit of our annual consolidated financial
statements and internal control over financial reporting, review of the condensed 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 for those fiscal years. This category also includes
statutory audits required by non-U.S. jurisdictions. The preparation of our 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. The increase was due to the debt offering completed in September 2018 and the acquisition of
Coriant in October 2018.
Audit-Related Fees
Audit-related services principally include due diligence in connection with acquisitions, accounting
consultations, audits in connection with proposed or consummated acquisitions and information systems audits.
There were no audit-related fees in fiscal 2017.
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.
73
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 5 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, if any, 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 5—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 28, 2019.
74
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. Gani 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 our 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 our independent registered public accounting firm. 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.
A copy of the Audit Committee charter is available on our website at www.infinera.com.
Our 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 in accordance with generally accepted auditing standards and expressing an
opinion on the effectiveness of our internal control over financial reporting.
The Audit Committee has reviewed and discussed the audited financial statements for the year ended
December 29, 2018 with our management and Ernst & Young LLP. The Audit Committee has also discussed with
Ernst & Young LLP the matters required to be discussed by Auditing Standard No. 1301, “Communications with
Audit Committees” issued by Public Company Accounting Oversight Board (“PCAOB”). The Audit Committee also
has received and reviewed the written disclosures and the letter from Ernst & Young LLP required by applicable
requirements of the PCAOB regarding Ernst & Young LLP’s communications with the Audit Committee concerning
independence, and has 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 our Annual Report on Form 10-K for the year
ended December 29, 2018 for filing with the SEC.
Submitted by the members of the Audit Committee:
Paul J. Milbury (Chair)
Marcel Gani
Kambiz Y. Hooshmand
75
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 the Audit Committee, or other independent members of the Board in the case it is
inappropriate for the 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 the Audit
Committee for review, consideration and approval. All of our directors, executive officers and employees are
required to report to the Audit Committee any such related party transaction. In approving or rejecting the
proposed agreement, the 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. The Audit Committee shall approve only those agreements that, in light of
known circumstances, are, or are not inconsistent with, our best interests, as the Audit Committee determines in
the good faith exercise of its discretion.
In fiscal 2018, Infinera did not engage in any related party transactions.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The members of the 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
2018 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 2018.
76
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 29, 2018 with respect to the shares of our common
stock that may be issued under our existing equity compensation plans.
(a)
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
(b)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(c)
Number of
Securities
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected in
First Column)
Plan Category
Equity compensation plans approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,990,002(1)
$8.09
13,563,679(2)
Equity compensation plans not approved by security
holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
8,990,002
—
—
13,563,679
(1) This amount includes the following:
•
•
•
1,114,785 shares issuable upon the exercise of outstanding stock options granted under the 2007 Plan.
6,746,308 shares subject to RSUs granted under the 2007 Plan and 2016 Plan. Since these awards have no exercise
price, they are not included in the weighted average exercise price calculation in column (b).
1,128,909 shares issuable pursuant to outstanding stock awards that have been granted under the 2007 Plan, but not
yet earned as of December 29, 2018. The number of shares, if any, to be issued pursuant to such outstanding awards
will be determined based on certain performance metrics, as discussed above in the section entitled “Fiscal 2018
Compensation—Long-Term Incentive Compensation” in the Compensation Discussion and Analysis. Since these
awards have no exercise price, they are not included in the weighted average exercise price calculation in column (b).
(2) This amount includes 4,835,326 shares of common stock available for future issuances under the 2007 ESPP.
STOCKHOLDER PROPOSALS FOR 2020 ANNUAL MEETING
To be considered for inclusion in our Proxy Statement for the 2020 Annual Meeting of Stockholders (the “2020
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
December 12, 2019, 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 2020 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 the Board that the stockholder wishes to raise at our 2020 Annual
Meeting. To be timely, the stockholder notice must be received by our Corporate Secretary no later than
February 25, 2020 nor earlier than January 26, 2020, 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 materials or a notice of availability
of proxy materials (whichever is earlier) 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 forth in greater detail in our
Bylaws. In connection with a stockholder nomination of a candidate for the 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 www.infinera.com in the Corporate
Governance section on our Investor Relations page.
Under Rule 14a-8 of the Exchange Act, if the date of the 2020 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.
77
Under our Bylaws, if the date of the 2020 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 2020 Annual Meeting and no later than the close of business on the later of
(i) the 90th day prior to the 2020 Annual Meeting, or (ii) the tenth day following the day on which disclosure in a
press release reported by GlobeNewswire, 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 2020 Annual Meeting is first made.
If we receive notice of a matter to come before the 2020 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 2020 Annual Meeting. If such
matter is brought before the 2020 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 set of 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, California 94089, Attention: 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.
78
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/ BRAD D. FELLER
Brad D. Feller
Chief Financial Officer
Sunnyvale, California
April 10, 2019
79
APPENDIX A—UNAUDITED RECONCILIATIONS FROM GAAP TO NON-GAAP
Infinera Corporation
Unaudited Reconciliations from GAAP to Non-GAAP
(In thousands)
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Reconciliation of Revenue:
U.S. GAAP as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Acquisition-related deferred revenue adjustment
$ 943,379
4,582
$ 740,739
—
$870,135
400
Non-GAAP as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 947,961
$ 740,739
$870,535
Reconciliation of Gross Profit:
U.S. GAAP as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related deferred revenue adjustment
. . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step-up expense . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other related costs . . . . . . . . . . . . . . . . . . . . . .
$ 321,156
6,621
4,582
23,475
5,337
132
2,630
$ 244,000
7,811
—
20,474
—
46
19,141
$393,718
6,463
400
19,715
—
144
—
Non-GAAP as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 363,933
$ 291,472
$420,440
Reconciliation of Gross Margin:
U.S. GAAP as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Acquisition-related deferred revenue adjustment
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step-up expense . . . . . . . . . . . . . .
Restructuring and other related costs . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.0%
0.7%
0.5%
2.4%
0.5%
0.3%
38.4%
32.9%
1.0%
—
2.8%
—
2.6%
39.3%
45.2%
0.7%
0.1%
2.3%
—
—
48.3%
Reconciliation of Operating Income (Loss):
U.S. GAAP as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related deferred revenue adjustment
. . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step-up expense . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other related costs . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset impairment
$(185,679)
43,409
4,582
52,771
5,337
15,660
15,142
—
$(183,087)
45,720
—
26,634
—
368
35,247
252
$ (25,774)
40,533
400
25,904
—
2,013
—
11,295
Non-GAAP as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (48,778)
$ (74,866)
$ 54,371
Reconciliation of Operating Margin:
U.S. GAAP as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related deferred revenue adjustment
. . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step-up expense . . . . . . . . . . . . . .
Acquisition and integration costs . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other related costs . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible asset impairment
Non-GAAP as adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-19.7%
4.6%
0.5%
5.6%
0.6%
1.7%
1.6%
—
-5.1%
-24.7%
6.2%
—
3.6%
—
—
4.8%
—
-10.1%
-3.0%
4.7%
—
3.0%
—
0.2%
—
1.3%
6.2%
A-1
The non-GAAP measures of gross profit, gross margin, operating income (loss) and operating margin exclude
restructuring and other related costs, non-cash stock-based compensation expenses, amortization and impairment
of acquired intangible assets, acquisition and integration costs, and certain purchase accounting adjustments
related to our acquisitions of Coriant and Transmode AB, along with related tax effects. 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.
In addition, these results are the primary indicators management uses as a basis for its planning and forecasting of
future periods. The presentation of this additional information is not meant to be considered in isolation or as a
substitute for net loss, basic and diluted net loss per share, gross margin or operating margin prepared in
accordance with GAAP. Non-GAAP financial measures are not based on a comprehensive set of accounting rules
or principles and are subject to limitations.
A-2
APPENDIX B—INFINERA CORPORATION 2016 EQUITY INCENTIVE PLAN
INFINERA CORPORATION
2016 EQUITY INCENTIVE PLAN
(as amended and restated on May 24, 2018, as amended
, 2019)
1. Purposes of the Plan. The purposes of this Plan are:
•
•
•
to attract and retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants, and
to promote the success of the Company’s business.
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock,
Restricted Stock Units, Stock Appreciation Rights, Performance Units and Performance Shares.
2. Definitions. As used herein, the following definitions will apply:
(a) “Administrator” means the Board or any of its Committees as will be administering the Plan, in
accordance with Section 4 of the Plan.
(b) “Applicable Laws” means the legal and regulatory requirements relating to the administration of
equity-based awards, including but not limited to U.S. federal and state corporate laws, U.S. federal and state
securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted
and the applicable laws of any non-U.S. country or jurisdiction where Awards are, or will be, granted under the
Plan.
(c) “Award” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation
Rights, Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares.
(d) “Award Agreement” means the written or electronic agreement setting forth the terms and provisions
applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of
the Plan.
(e) “Board” means the Board of Directors of the Company.
(f) “Change in Control” means the occurrence of any of the following events:
(i) A change in the ownership of the Company which occurs on the date that any one person, or
more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together
with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock
of the Company; provided, however, that for purposes of this subsection, (A) the acquisition of additional stock by
any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of
the Company will not be considered a Change in Control, and (B) if the stockholders of the Company immediately
before the change in ownership continue to retain, immediately after the change in ownership, in substantially the
same proportions as their ownership of shares of the Company’s voting stock immediately prior to the change in
ownership, the direct or indirect beneficial ownership of fifty percent (50%) or more of the total voting power of the
shares of the Company or of the ultimate parent entity of the Company, such event will not be considered a
Change in Control; or
(ii) A change in the effective control of the Company which occurs on the date that a majority of
members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election
is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For
purposes of this clause (ii), if any Person is considered to be in effective control of the Company, the acquisition of
additional control of the Company by the same Person will not be considered a Change in Control; or
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(iii) A change in the ownership of a substantial portion of the Company’s assets which occurs on the
date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most
recent acquisition by such person or persons) assets from the Company that have a total gross fair market value
equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company
immediately prior to such acquisition or acquisitions. For purposes of this subsection (iii), gross fair market value
means the value of the assets of the Company, or the value of the assets being disposed of, determined without
regard to any liabilities associated with such assets.
For purposes of this definition, persons will be considered to be acting as a group if they are owners
of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business
transaction with the Company.
(iv) Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the
transaction qualifies as a change in control event within the meaning of Section 409A. Further and for the
avoidance of doubt, a transaction will not constitute a Change in Control if: (x) its sole purpose is to change the
jurisdiction of the Company’s incorporation, or (y) its sole purpose is to create a holding company that will be
owned in substantially the same proportions by the persons who held the Company’s securities immediately
before such transaction.
(g) “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the
Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated under
such section, and any comparable provision of any future legislation or regulation amending, supplementing or
superseding such section or regulation.
(h) “Committee” means a committee of Directors or of other individuals satisfying Applicable Laws
appointed by the Board, or a duly authorized committee of the Board, in accordance with Section 4 hereof.
(i) “Common Stock” means the common stock of the Company.
(j) “Company” means Infinera Corporation, a Delaware corporation, or any successor thereto.
(k) “Consultant” means any natural person, including an advisor, engaged by the Company or a Parent or
Subsidiary to render bona fide services to such entity, provided the services (i) are not in connection with the offer
or sale of securities in a capital-raising transaction, and (ii) do not directly promote or maintain a market for the
Company’s securities, in each case, within the meaning of Form S-8 promulgated under the Securities Act, and
provided, further, that a Consultant will include only those persons to whom the issuance of Shares may be
registered under Form S-8 promulgated under the Securities Act.
(l) “Director” means a member of the Board.
(m) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code, provided
that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine
whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards
adopted by the Administrator from time to time.
(n) “Employee” means any person, including Officers and Directors, employed by the Company or any
Parent or Subsidiary of the Company. Neither service as a Director nor payment of a director’s fee by the
Company will be sufficient to constitute “employment” by the Company.
(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(p) “Exchange Program” means a program under which (i) outstanding Awards are surrendered or
cancelled in exchange for awards of the same type (which may have higher or lower exercise prices and different
terms), awards of a different type, and/or cash, (ii) Participants would have the opportunity to transfer any
outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or (iii) the
exercise price of an outstanding Award is increased or reduced. For the avoidance of doubt, as set forth in
Section 5(e), the Administrator may not implement an Exchange Program.
B-2
(q) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system,
including without limitation the New York Stock Exchange, the NASDAQ Global Select Market, the NASDAQ
Global Market or the NASDAQ Capital Market of The NASDAQ Stock Market, its Fair Market Value will be the
closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or
system on the day of determination, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are
not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the
Common Stock on the day of determination (or, if no bids and asks were reported on that date, as applicable, on
the last trading date such bids and asks were reported), as reported in The Wall Street Journal or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value will be
determined in good faith by the Administrator.
Notwithstanding the foregoing under this Section 2(q), for federal, state and local income tax reporting
purposes, fair market value will be determined by the Company (or its delegate) in accordance with uniform and
nondiscriminatory standards adopted by it from time to time.
(r) “Fiscal Year” means the fiscal year of the Company.
(s) “Incentive Stock Option” means an Option that by its terms qualifies and otherwise is intended to
qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(t) “Initial Value” means (i) with respect to any Option or Stock Appreciation Right, the value of such
Option or Stock Appreciation Right calculated in accordance with the Black-Scholes option valuation methodology
on the grant date, and (ii) with respect to any Award other than an Option or Stock Appreciation Right, the product
of (A) the Fair Market Value of one Share on the grant date of the Award and (B) the aggregate number of Shares
subject to the Award, as applicable.
(u) “Inside Director” means a Director who is an Employee.
(v) “Nonstatutory Stock Option” means an Option that by its terms does not qualify or is not intended to
qualify as an Incentive Stock Option.
(w) “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the
Exchange Act and the rules and regulations promulgated thereunder.
(x) “Option” means a stock option granted pursuant to the Plan.
(y) “Outside Director” means a Director who is not an Employee.
(z) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in
Section 424(e) of the Code.
(aa) “Participant” means the holder of an outstanding Award.
(bb) “Performance Goals” means performance goals relating to one or more business criteria, which may
provide for a targeted level or levels of achievement including without limitation: (i) revenue; (ii) gross margin;
(iii) operating margin; (iv) operating income; (v) pre-tax profit; (vi) earnings before stock-based compensation
B-3
expense, interest, taxes and depreciation and amortization; (vii) earnings before interest, taxes and depreciation
and amortization; (viii) earnings before interest and taxes; (ix) net income; (x) expenses; (xi) new product
development; (xii) stock price; (xiii) earnings per share; (xiv) return on stockholder equity; (xv) return on capital;
(xvi) return on net assets; (xvii) economic value added; (xviii) market share; (xix) customer service; (xx) customer
satisfaction; (xxi) sales; (xxii) total stockholder return; (xxiii) free cash flow; (xxiv) net operating income;
(xxv) operating cash flow; (xxvi) return on investment; (xxvii) employee satisfaction; (xxviii) employee retention;
(xxix) balance of cash, cash equivalents and marketable securities; (xxx) product development; (xxxi) research
and development expenses; (xxxii) completion of an identified special project; (xxxiii) completion of a joint venture
or other corporate transaction; (xxxiv) inventory balance; or (xxxv) inventory turnover ratio. Any criteria used may
be measured, as applicable, (A) in absolute terms, (B) in combination with another Performance Goal or Goals (for
example, but not by way of limitation, as a ratio or matrix), (C) in relative terms (including, but not limited to, results
for other periods, passage of time and/or against another company or companies or an index or indices), (D) on a
per-share or per-capita basis, (E) against the performance of the Company as a whole or a segment of the
Company (including, but not limited to, any combination of the Company and any subsidiary, division, business
unit, joint venture and/or other segment), and/or (F) on a pre-tax or after-tax basis. The Performance Goals may
differ from Participant to Participant and from Award to Award. The Administrator will determine whether any
significant element(s) will be included in or excluded from the calculation of any Performance Goal with respect to
any Participant. In all other respects, Performance Goals will be calculated in accordance with the Company’s
financial statements, generally accepted accounting principles, or under a methodology established by the
Administrator prior to the issuance of an Award.
(cc) “Performance Period” means the time period of any Fiscal Year of the Company or such other period
as determined by the Administrator in its sole discretion.
(dd) “Performance Share” means an Award denominated in Shares which may be earned in whole or in
part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine pursuant
to Section 11.
(ee) “Performance Unit” means an Award which may be earned in whole or in part upon attainment of
Performance Goals or other vesting criteria as the Administrator may determine and which may be settled for
cash, Shares or other securities or a combination of the foregoing pursuant to Section 11.
(ff) “Period of Restriction” means the period during which the transfer of Shares of Restricted Stock are
subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may
be based on the passage of time, continued service, the achievement of target levels of performance, the
achievement of Performance Goals, or the occurrence of other events as determined by the Administrator.
(gg) “Plan” means this 2016 Equity Incentive Plan, as may be amended from time to time.
(hh) “Restricted Stock” means Shares issued pursuant to a Restricted Stock award under Section 8 of the
Plan, or issued pursuant to the early exercise of an Option.
(ii) “Restricted Stock Unit” means a bookkeeping entry representing an amount equal to the Fair Market
Value of one Share, granted pursuant to Section 9. Each Restricted Stock Unit represents an unfunded and
unsecured obligation of the Company.
(jj) “Rule 16b-3” means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect
when discretion is being exercised with respect to the Plan.
(kk) “Securities Act” means the Securities Act of 1933, as amended.
(ll) “Section 16(b)” means Section 16(b) of the Exchange Act.
(mm) “Section 409A” means Section 409A of the Code and the final regulations and any guidance
promulgated thereunder, as may be amended from time to time.
B-4
(nn) “Service Provider” means an Employee, Director or Consultant.
(oo) “Share” means a share of the Common Stock, as adjusted in accordance with Section 14 of the
Plan.
(pp) “Stock Appreciation Right” means an Award, granted alone or in connection with an Option, that
pursuant to Section 10 is designated as a Stock Appreciation Right.
(qq) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in
Section 424(f) of the Code.
(rr) “Tax Obligations” means tax, social insurance and social security liability obligations and
requirements in connection with the Awards, including, without limitation, (i) all federal, state, and local income,
employment and any other taxes (including the Participant’s Federal Insurance Contributions Act (FICA)
obligation) that are required to be withheld by the Company (or Company’s Parent or Subsidiary, as applicable),
(ii) the Participant’s and, to the extent required by the Company (or its Parent or Subsidiary, as applicable), the
Company’s (or its Parent’s or Subsidiary’s) fringe benefit tax liability, if any, associated with the grant, vesting, or
exercise of an Award or sale of Shares issued under the Award, and (iii) any other taxes or social insurance or
social security liabilities or premium the responsibility for which the Participant has, or has agreed to bear, with
respect to such Award (or exercise thereof or issuance of Shares or other consideration thereunder).
3. Stock Subject to the Plan.
(a) Stock Subject to the Plan. Subject to the provisions of Section 14 of the Plan, the maximum aggregate
number of Shares that may be issued under the Plan is (i) 22,700,000 Shares, plus (ii) any Shares subject to
awards granted under the Company’s 2007 Equity Incentive Plan (the “Existing Plan”) that, after the effective date
of the Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such
awards were exercisable, and Shares issued pursuant to awards granted under the Existing Plan that, after the
effective date of the Plan, are forfeited to or repurchased by the Company due to failure to vest, with the maximum
number of Shares to be added to the Plan pursuant to clause (ii) equal to 7,700,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock.
(b) Lapsed Awards. Shares that actually have been issued under the Plan under any Award will not be
returned to the Plan and will not become available for future distribution under the Plan (unless repurchased as
specified in this subsection (b) below). If an Option or Stock Appreciation Right Award expires or becomes
unexercisable without having been exercised in full, the unexercised Shares which were subject thereto will
become available for future grant or sale under the Plan (unless the Plan has terminated). If an Award of
Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares (eh, a “Full Value Award”) is
forfeited or repurchased by the Company due to failure to vest, then the forfeited or repurchased Shares subject
thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). With respect
to Stock Appreciation Rights settled in Shares, the gross number of Shares covered by the portion of the Award so
exercised will cease to be available under the Plan. Shares used to pay the exercise or purchase price of an
Award will cease to be available for future grant or sale under the Plan. Shares used to satisfy the Tax Obligations
related to an Option or Stock Appreciation Right will not become available for future grant or sale under the Plan.
Shares used to satisfy the Tax Obligations related to a Full Value Award will be available for future grant or sale
under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment
will not result in reducing the number of Shares available for issuance under the Plan. For purposes of clarification,
no Shares purchased by the Company with proceeds received from the exercise of an Option will become
available for issuance under this Plan or the Existing Plan. Notwithstanding the foregoing and, subject to
adjustment as provided in Section 14, the maximum number of Shares that may be issued upon the exercise of
Incentive Stock Options will equal the aggregate Share number stated in Section 3(a), plus, to the extent allowable
under Section 422 of the Code and the Treasury Regulations promulgated thereunder, any Shares that become
available for issuance under the Plan pursuant to Section 3(b).
(c) Share Reserve. The Company, during the term of this Plan, will at all times reserve and keep available
such number of Shares as will be sufficient to satisfy the requirements of the Plan.
B-5
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. Different Committees with respect to different groups of Service
Providers may administer the Plan.
(ii) Rule 16b-3. To the extent desirable to qualify transactions hereunder as exempt under Rule
16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iii) Other Administration. Other than as provided above, the Plan will be administered by (A) the
Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan, and in the case of a Committee,
subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority,
in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Awards may be granted hereunder;
(iii) to determine the number of Shares to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award
granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times
when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver
of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based
in each case on such factors as the Administrator will determine;
(vi) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and
regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or for qualifying
for favorable tax treatment under applicable foreign laws;
(viii) to modify or amend each Award (subject to Section 5 and Section 19 of the Plan), including but
not limited to the discretionary authority to extend the post-termination exercisability period of Awards;
(ix) to allow Participants to satisfy Tax Obligations in such manner as prescribed in Section 15 of the
Plan;
(x) to authorize any person to execute on behalf of the Company any instrument required to effect
the grant of an Award previously granted by the Administrator;
(xi) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant under an Award; and
(xii) to make all other determinations deemed necessary or advisable for administering the Plan.
(c) Effect of Administrator’s Decision. The Administrator’s decisions, determinations and interpretations
will be final and binding on all Participants and any other holders of Awards and will be given the maximum
deference permitted by law.
B-6
5. Limits.
(a) Share Limits. Subject to Section 14, the limits specified below shall be applicable to Awards issued
under the Plan:
(i) Limits on Options. No Participant shall receive Options during any Fiscal Year covering in excess
of 1,500,000 Shares; provided, however, that in connection with a Participant’s initial service as an Employee, the
Participant may be granted Options covering up to an additional 1,500,000 Shares.
(ii) Limits on Stock Appreciation Rights. No Participant shall receive Stock Appreciation Rights during
any Fiscal Year covering in excess of 1,500,000 Shares; provided, however, that in connection with a Participant’s
initial service as an Employee, the Participant may be granted Stock Appreciation Rights covering up to an
additional 1,500,000 Shares.
(iii) Limits on Restricted Stock. No Participant shall receive Awards of Restricted Stock during any
Fiscal Year covering in excess of 1,500,000 Shares; provided, however, that in connection with a Participant’s
initial service as an Employee, the Participant may be granted an aggregate of up to an additional
1,500,000 Shares of Restricted Stock.
(iv) Limits on Restricted Stock Units. No Participant shall receive Restricted Stock Units during any
Fiscal Year covering in excess of 1,500,000 Shares; provided, however, that in connection with a Participant’s
initial service as an Employee, the Participant may be granted an aggregate of up to an additional
1,500,000 Restricted Stock Units.
(v) Limits on Performance Shares. No Participant shall receive Performance Shares during any
Fiscal Year covering in excess of 1,500,000 Shares; provided, however, that in connection with a Participant’s
initial service as an Employee, the Participant may be granted up to an additional 1,500,000 Performance Shares.
(vi) Limits on Performance Units. No Participant shall receive Performance Units with an aggregate
Initial Value of greater than $7,500,000.
(b) Outside Director Share Limits. No Outside Director may be granted, in any Fiscal Year, Awards (the
value of which will be based on their grant date fair value determined in accordance with U.S. generally accepted
accounting principles) and any other compensation (including without limitation any cash retainers or fees) that, in
the aggregate, exceed $750,000, provided that such amount is increased to $1,000,000 in the Fiscal Year of his or
her initial service as an Outside Director. Any Awards or other compensation provided to an individual for his or
her services as an Employee, or for his or her services as a Consultant other than an Outside Director, will be
excluded for purposes of this Section 5(b).
(c) Vesting Limits.
(i) One-Year Vesting Requirement. Awards granted under the Plan shall vest no earlier than the one
(1) year anniversary of the Award’s date of grant, provided that the Administrator, in its sole discretion, may
provide an Award may accelerate vesting by reason of the Participant’s death, Disability or retirement, or a
termination of the Participant’s service that occurs in connection with a Change in Control, and provided further,
that, notwithstanding the foregoing in this sentence, Awards that result in the issuance of an aggregate of up to 5%
of the Shares reserved for issuance under Section 3(a) may be granted to Service Providers, or outstanding
Awards modified, without regard to such minimum vesting, exercisability and distribution provisions.
(ii) Limited Vesting Acceleration upon a Change in Control. Except (x) as permitted under
Section 5(c)(i) and (y) for any Awards made to Outside Directors, the Administrator shall not be permitted to
accelerate the vesting of an Award upon a Change in Control other than in the event an Award is not assumed or
substituted for as provided for in Section 14(c). For purposes of clarification, the Administrator will be permitted to
provide for the acceleration of an Award in connection with a termination of service upon or in connection with a
Change in Control.
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(d) Incentive Stock Options.
(i) $100,000 Limitation. Notwithstanding any designation of an Option as an Incentive Stock Option,
to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any
Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), the portion of the Options falling within
such limit will be Incentive Stock Options and the excess Options will be treated as Nonstatutory Stock Options.
For these purposes, Incentive Stock Options will be taken into account in the order in which they were granted.
The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is
granted.
(ii) Maximum Option Term. In the case of an Incentive Stock Option, the term of an Option will be ten
(10) years from the date of grant or such shorter term as may be provided by the Administrator and set forth in the
Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock
Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award
Agreement.
(iii) Option Exercise Price. In the case of an Incentive Stock Option granted to an Employee who, at
the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no
less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant. An Incentive
Stock Option granted to any Employee other than an Employee described in immediately preceding sentence, the
per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on
the date of grant. Notwithstanding the foregoing provisions of this subsection (iii), Incentive Stock Options may be
granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant pursuant to a transaction described in, and in a manner consistent with,
Section 424(a) of the Code.
(e) No Exchange Program or Repricing. The Administrator may not implement an Exchange Program.
6. Eligibility. Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,
Performance Shares and Performance Units may be granted to Service Providers. Incentive Stock Options may
be granted only to Employees.
7. Stock Options.
(a) Grant of Options. Subject to the terms and conditions of the Plan, an Option may be granted to
Service Providers at any time and from time to time as will be determined by the Administrator, in its sole
discretion. Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a
Nonstatutory Stock Option.
(b) Number of Shares. The Administrator will have complete discretion to determine the number of
Shares subject to Options granted to any Participant, provided that during any Fiscal Year, no Participant will be
granted Options covering more than 1,500,000 Shares. Notwithstanding the foregoing limitation, in connection with
a Participant’s initial service as an Employee, the Participant may be granted Options covering up to an additional
1,500,000 Shares.
(c) Term of Option. The term of each Option will be determined by the Administrator and stated in the
Award Agreement, but in no event shall the term of an Option be more than ten (10) years from the date of grant.
(d) Option Exercise Price and Consideration.
(i) Exercise Price. The per share exercise price for the Shares to be issued pursuant to exercise of
an Option will be determined by the Administrator, but shall in no event be less than one hundred percent (100%)
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of the Fair Market Value per Share on the date of grant, subject to Section 5. Notwithstanding the foregoing,
Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair
Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent
with, Section 424(a) of the Code.
(ii) Waiting Period and Exercise Dates. At the time an Option is granted, the Administrator will fix the
period within which the Option may be exercised and will determine any conditions that must be satisfied before
the Option may be exercised.
(iii) Form of Consideration. The Administrator will determine the acceptable form of consideration for
exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator
will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of:
(1) cash; (2) check; (3) promissory note, to the extent permitted by Applicable Laws, (4) other Shares, provided
that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option will be exercised and provided that accepting such Shares will not result in any
adverse accounting consequences to the Company, as the Administrator determines in its sole discretion;
(5) consideration received by the Company under a broker-assisted (or other) cashless exercise program (whether
through a broker or otherwise) implemented by the Company in connection with the Plan; (6) by net exercise;
(7) such other consideration and method of payment for the issuance of Shares to the extent permitted by
Applicable Laws; or (8) any combination of the foregoing methods of payment.
(e) Exercise of Option.
(i) Procedure for Exercise; Rights as a Stockholder. Any Option granted hereunder will be
exercisable according to the terms of the Plan and at such times and under such conditions as determined by the
Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.
An Option will be deemed exercised when the Company receives: (i) a notice of exercise (in such
form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and
(ii) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding
taxes). Full payment may consist of any consideration and method of payment authorized by the Administrator and
permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the
name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a
stockholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option.
The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment
will be made for a dividend or other right for which the record date is prior to the date the Shares are issued,
except as provided in Section 14 of the Plan.
Exercising an Option in any manner will decrease the number of Shares thereafter available, both for
purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.
(ii) Termination of Relationship as a Service Provider. If a Participant ceases to be a Service
Provider, other than as the result of the Participant’s death or Disability, the Participant may exercise his or her
Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on
the date of termination of Participant’s status as a Service Provider (but in no event later than the expiration of the
term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award
Agreement, the Option will remain exercisable for three (3) months following the termination of Participant’s status
as a Service Provider, but in no event later than the expiration of the term of such Option as set forth in the Award
Agreement. Unless otherwise provided by the Administrator, if on the date of termination of Participant’s status as
a Service Provider, the Participant is not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option
within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option
will revert to the Plan.
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(iii) Disability of Participant. If a Participant ceases to be a Service Provider as a result of the
Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in
the Award Agreement to the extent the Option is vested on the date of death (but in no event may the Option be
exercised later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence
of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following
termination of Participant’s status as a Service Provider, but in no event later than the expiration of the term of
such Option as set forth in the Award Agreement. Unless otherwise provided by the Administrator, if on the date of
termination of Participant’s status as a Service Provider, the Participant is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant
does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares
covered by such Option will revert to the Plan.
(iv) Death of Participant. If a Participant dies while a Service Provider, the Option may be exercised
following the Participant’s death within such period of time as is specified in the Award Agreement to the extent the
Option is vested on the date of termination of Participant’s status as a Service Provider (but in no event later than
the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time
in the Award Agreement, the Option will remain exercisable for twelve (12) months following termination of
Participant’s status as a Service Provider, but in no event may the Option be exercised later than the expiration of
the term of such Option as set forth in the Award Agreement. Unless otherwise provided by the Administrator, if at
the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified
herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
In the event that the Participant dies while a Service Provider, but before the expiration of the Participant’s
Option as set forth in subsections (iii) or (iv), as applicable, all or part of the Option (to the extent vested) may be
exercised (prior to expiration) by the Participant’s designated beneficiary, provided such beneficiary has been
properly designated prior to Participant’s death in a form acceptable to the Administrator and to the extent
permitted by Applicable Law. In the absence of such designated beneficiary (or to the extent not permitted by
Applicable Law), such Option may be exercised by the personal representative of the Participant’s estate or by the
person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of
descent and distribution.
8. Restricted Stock.
(a) Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Administrator, at any
time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the
Administrator, in its sole discretion, will determine.
(b) Restricted Stock Agreement. Each Award of Restricted Stock will be evidenced by an Award
Agreement that will specify the Period of Restriction (if any), the number of Shares granted, and such other terms
and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines
otherwise, the Company as escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares
have lapsed.
(c) Transferability. Except as provided in this Section 8 or the Award Agreement, Shares of Restricted
Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the
applicable Period of Restriction.
(d) Other Restrictions. The Administrator, in its sole discretion, may impose such other restrictions on
Shares of Restricted Stock as it may deem advisable or appropriate.
(e) Removal of Restrictions. Except as otherwise provided in this Section 8, Shares of Restricted Stock
covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable
after the last day of the Period of Restriction or at such other time as the Administrator may determine. Subject to
the vesting limitations under Section 5, the Administrator, in its discretion, may accelerate the time at which any
restrictions will lapse or be removed.
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(f) Voting Rights. During the Period of Restriction, Service Providers holding Shares of Restricted Stock
granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator
determines otherwise.
(g) Dividends and Other Distributions. During the Period of Restriction, Service Providers holding Shares
of Restricted Stock will be entitled to receive all dividends and other distributions paid with respect to such Shares,
unless the Administrator provides otherwise. If any such dividends or distributions are paid in Shares, the Shares
will be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with
respect to which they were paid.
(h) Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted
Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant
under the Plan.
9. Restricted Stock Units.
(a) Grant. Restricted Stock Units may be granted at any time and from time to time as determined by the
Administrator. Each Restricted Stock Unit grant will be evidenced by an Award Agreement that will specify such
terms and conditions as the Administrator in its sole discretion determines, including all terms, conditions, and
restrictions related to the grant, the number of Restricted Stock Units and the form of payout, which, subject to
Section 9(d), may be left to the discretion of the Administrator.
(b) Vesting Criteria and Other Terms. The Administrator will set vesting criteria in its discretion, which,
depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will
be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of
Company-wide, divisional, business unit, or individual goals (including, but not limited to, continued employment or
service), applicable federal or state securities laws or any other basis determined by the Administrator in its sole
discretion.
(c) Earning Restricted Stock Units. Upon meeting the applicable vesting criteria, the Participant will be
entitled to receive a payout as determined by the Administrator. Notwithstanding the foregoing, subject to the
vesting limitations under Section 5, at any time after the grant of Restricted Stock Units, the Administrator, in its
sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
(d) Form and Timing of Payment. Payment of earned Restricted Stock Units will be made as soon as
practicable after the date(s) determined by the Administrator and set forth in the Award Agreement. The
Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination of
both.
(e) Cancellation. On the date set forth in the Award Agreement, all unearned Restricted Stock Units will
be forfeited to the Company.
10. Stock Appreciation Rights.
(a) Grant of Stock Appreciation Rights. Subject to the terms and conditions of the Plan, a Stock
Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by
the Administrator, in its sole discretion.
(b) Number of Shares. The Administrator will have complete discretion to determine the number of Stock
Appreciation Rights granted to any Service Provider.
(c) Exercise Price and Other Terms. The per share exercise price for the Shares to be issued pursuant to
exercise of a Stock Appreciation Right will be determined by the Administrator and will be no less than one
hundred percent (100%) of the Fair Market Value per Share on the date of grant. Otherwise, the Administrator,
subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock
Appreciation Rights granted under the Plan.
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(d) Stock Appreciation Right Agreement. Each Stock Appreciation Right grant will be evidenced by an
Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of
exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(e) Expiration of Stock Appreciation Rights. A Stock Appreciation Right granted under the Plan will expire
upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement.
Notwithstanding the foregoing, the rules of Section 7(c) relating to the maximum term and Section 7(e) relating to
exercise also will apply to Stock Appreciation Rights.
(f) Payment of Stock Appreciation Right Amount. Upon exercise of a Stock Appreciation Right, a
Participant will be entitled to receive payment from the Company in an amount determined by multiplying:
(i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise
price; times
(ii) The number of Shares with respect to which the Stock Appreciation Right is exercised.
At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in
Shares of equivalent value, or in some combination thereof.
11. Performance Units and Performance Shares.
(a) Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to
Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole
discretion. The Administrator will have complete discretion in determining the number of Performance Units and
Performance Shares granted to each Participant.
(b) Value of Performance Units/Shares. Each Performance Unit will have an initial value that is
established by the Administrator on or before the date of grant. Each Performance Share will have an initial value
equal to the Fair Market Value of a Share on the date of grant.
(c) Performance Objectives and Other Terms. The Administrator will set performance objectives or other
vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which,
depending on the extent to which they are met, will determine the number or value of Performance Units/Shares
that will be paid out to the Participant. Each Award of Performance Units/Shares will be evidenced by an Award
Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in
its sole discretion, will determine. The Administrator may set performance objectives based upon the achievement
of Company-wide, divisional, business unit or individual goals (including, but not limited to, continued employment
or service), applicable federal or state securities laws, or any other basis determined by the Administrator in its
discretion.
(d) Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder
of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares
earned by the Participant over the Performance Period, to be determined as a function of the extent to which the
corresponding performance objectives or other vesting provisions have been achieved. After the grant of a
Performance Unit/Share, subject to the vesting limitations under Section 5, the Administrator, in its sole discretion,
may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.
(e) Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units/
Shares will be made as soon as practicable after the expiration of the applicable Performance Period. The
Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares
(which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the
close of the applicable Performance Period) or in a combination thereof.
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(f) Cancellation of Performance Units/Shares. On the date set forth in the Award Agreement, all unearned
or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under
the Plan.
12. Service Provider Status.
(a) Leaves of Absence/Transfer Between Locations. Unless the Administrator provides otherwise, vesting
of Awards granted hereunder will be suspended during any unpaid leave of absence. A Service Provider will not
cease to be an Employee or Director in the case of (i) any leave of absence approved by the Company or
(ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For
purposes of Incentive Stock Options, no leave of absence may exceed three (3) months, unless reemployment
upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of
absence approved by the Company is not so guaranteed, then six (6) months following the first (1st) day of such
leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and
will be treated for tax purposes as a Nonstatutory Stock Option.
13. Transferability of Awards. Unless determined otherwise by the Administrator, an Award may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the
Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the
Administrator deems appropriate.
14. Adjustments; Dissolution or Liquidation; Merger or Change in Control.
(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, reincorporation,
reclassification, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other
securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs,
the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, will adjust the number and class of Shares that may be delivered under the Plan
and/or the number, class, and price of Shares covered by each outstanding Award, and the numerical Share limits
in Sections 3 and 5 of the Plan.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, the
Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed
transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the
consummation of such proposed action.
(c) Change in Control. In the event of a merger of the Company with or into another corporation or other
entity or a Change in Control, each outstanding Award will be treated as the Administrator determines, in
accordance with the following (i) Awards will be assumed or an equivalent option or right substituted by the
acquiring or succeeding corporation or a Parent or Subsidiary thereof, (ii) upon written notice to a Participant and
subject to the next paragraph, that the Participant’s Awards will terminate upon or immediately prior to the
consummation of such merger or Change in Control; (iii) subject to the next paragraph, (A) the termination of an
Award in exchange for an amount of cash and/or property, if any, equal to the amount that would have been
attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the occurrence
of the transaction (and, for the avoidance of doubt, if as of the date of the occurrence of the transaction the
Administrator determines in good faith that no amount would have been attained upon the exercise of such Award
or realization of the Participant’s rights, then such Award may be terminated by the Company without payment), or
(B) the replacement of such Award with other rights or property selected by the Administrator in its sole discretion;
or (iv) any combination of the foregoing. The Administrator will not be required to treat all Awards, all Awards held
by a Participant, or all Awards of the same type, similarly in the transaction.
In the event that the successor corporation does not assume or substitute for the Award (and for the
avoidance of doubt, notwithstanding the vesting limitations under Section 5) (or portion of the Award), (A) the
Participant will fully vest in and have the right to exercise such outstanding Option and Stock Appreciation Right,
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including Shares as to which such Award would not otherwise be vested or exercisable, (B) all restrictions on such
Restricted Stock and Restricted Stock Units will lapse, and (C) with respect to such Award with performance-
based vesting, all performance goals or other vesting criteria will be deemed achieved based on actual
performance measured through the last date that the Award remains outstanding (or such earlier date, as
determined by the Administrator, in its sole discretion), with any performance period shortened proportionately and
applicable performance goals or other vesting criteria adjusted proportionately to reflect the shortened
performance period (or to the extent applicable, the value of the consideration to be received by the Company’s
stockholders in connection with the merger or Change in Control), as determined by the Administrator, in its sole
discretion. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a
merger or Change in Control, the Administrator will notify the Participant in writing or electronically that the Option
or Stock Appreciation Right will be exercisable for a period of time determined by the Administrator in its sole
discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
For the purposes of this subsection (c), an Award will be considered assumed if, following the merger or
Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award
immediately prior to the merger or Change in Control, the consideration (whether stock, cash, or other securities or
property) received in the merger or Change in Control by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration
received in the merger or Change in Control is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide for the consideration to be received
upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit,
Performance Unit or Performance Share, for each Share subject to such Award, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share consideration received by holders of
Common Stock in the merger or Change in Control.
Notwithstanding anything in this Section 14(c) to the contrary, an Award that vests, is earned or paid-out
upon the satisfaction of one or more performance goals will not be considered assumed if the Company or its
successor modifies any of such performance goals without the Participant’s consent; provided, however, a
modification to such performance goals only to reflect the successor corporation’s post-Change in Control
corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
Notwithstanding anything in this Section 14(c) to the contrary, if a payment under an Award Agreement is
subject to Section 409A and if the change in control definition contained in the Award Agreement does not comply
with the definition of “change in control” for purposes of a distribution under Section 409A, then any payment of an
amount that otherwise is accelerated under this Section will be delayed until the earliest time that such payment
would be permissible under Section 409A without triggering any penalties applicable under Section 409A.
15. Tax.
(a) Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or
exercise thereof) or such earlier time as any Tax Obligations are due, the Company will have the power and the
right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy all Tax
Obligations with respect to such Award (or exercise thereof).
(b) Withholding Arrangements. The Administrator, in its sole discretion and pursuant to such procedures
as it may specify from time to time, may permit a Participant to satisfy such Tax Obligation, in whole or in part by
(without limitation) (a) paying cash, (b) having the Company withhold otherwise deliverable cash or Shares having
a Fair Market Value equal to the minimum statutory amount required to be withheld, (c) delivering to the Company
already-owned Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld,
provided the delivery of such Shares will not result in adverse accounting consequences as the Administrator
determines in its sole discretion, or (d) selling a sufficient number of Shares otherwise deliverable to the
Participant through such means as the Administrator may determine in its sole discretion (whether through a
broker or otherwise) equal to the amount required to be withheld. The Fair Market Value of the Shares to be
withheld or delivered will be determined as of the date that such Shares are withheld or delivered, as applicable.
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(c) Compliance with Section 409A. Awards will be designed and operated in such a manner that they are
either exempt from the application of, or comply with, the requirements of Section 409A such that the grant,
payment, settlement or deferral will not be subject to the additional tax or interest applicable under Section 409A,
except as otherwise determined in the sole discretion of the Administrator. The Plan and each Award Agreement
under the Plan is intended to meet the requirements of Section 409A and will be construed and interpreted in
accordance with such intent, except as otherwise determined in the sole discretion of the Administrator. To the
extent that an Award or payment, or the settlement or deferral thereof, is subject to Section 409A the Award will be
granted, paid, settled or deferred in a manner that will meet the requirements of Section 409A, such that the grant,
payment, settlement or deferral will not be subject to the additional tax or interest applicable under Section 409A.
Notwithstanding the foregoing, in no event will the Company or any Parent, Subsidiary or other affiliate of the
Company have any liability or obligation to reimburse, indemnify, or hold harmless any Participant for any taxes,
interest, or penalties imposed, or other costs incurred, as a result of Section 409A.
16. No Effect on Employment or Service. Neither the Plan nor any Award will confer upon a Participant any
right with respect to continuing the Participant’s relationship as a Service Provider with the Company or any Parent
or Subsidiary, nor will they interfere in any way with the Participant’s right or the right of the Company or any
Parent or Subsidiary, as applicable, to terminate such relationship at any time, with or without cause, to the extent
permitted by Applicable Laws.
17. Date of Grant. The date of grant of an Award will be, for all purposes, the date on which the Administrator
makes the determination granting such Award, or such other later date as is determined by the Administrator.
Notice of the determination will be provided to each Participant within a reasonable time after the date of such
grant.
18. Term of Plan. Subject to Section 23 of the Plan, the Plan will become effective upon approval of the Plan
by the stockholders of the Company. It will continue in effect for a term of ten (10) years from the date of such
stockholder approval, unless terminated earlier under Section 19 of the Plan.
19. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Administrator may at any time amend, alter, suspend or terminate
the Plan.
(b) Stockholder Approval. The Company will obtain stockholder approval of any Plan amendment to the
extent necessary and desirable to comply with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration, suspension or termination of the Plan
will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the
Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of
the Plan will not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to
Awards granted under the Plan prior to the date of such termination.
20. Forfeiture Events. The Administrator may specify in an Award Agreement that the Participant’s rights,
payments, and benefits with respect to an Award will be subject to reduction, cancellation, forfeiture, or
recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or
performance conditions of an Award. Notwithstanding any contrary provisions to the contrary under this Plan, an
Award shall be subject to the Company’s clawback policy as may be established and/or amended from time to
time (the “Clawback Policy”). The Administrator may require a Participant to forfeit, return or reimburse the
Company all or a portion of the Award and any amounts paid thereunder pursuant to the terms of the Clawback
Policy or as necessary or appropriate to comply with Applicable Laws.
21. Conditions upon Issuance of Shares.
(a) Legal Compliance. Shares will not be issued pursuant to the exercise of an Award unless the exercise
of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further
subject to the approval of counsel for the Company with respect to such compliance.
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(b) Investment Representations. As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
22. Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body
having jurisdiction or to complete or comply with the requirements of any registration or other qualification of the
Shares under any state, federal or foreign law or under the rules and regulations of the Securities and Exchange
Commission, the stock exchange on which Shares of the same class are then listed, or any other governmental or
regulatory body, which authority, registration, qualification or rule compliance is deemed by the Company’s
counsel to be necessary or advisable for the issuance and sale of any Shares hereunder, will relieve the Company
of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority, registration,
qualification or rule compliance will not have been obtained.
23. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within
twelve (12) months after the date the Plan is adopted by the Board. Such stockholder approval will be obtained in
the manner and to the degree required under Applicable Laws.
24. Captions. Captions are provided herein for convenience only, and will not serve as a basis for
interpretation or construction of the Plan.
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APPENDIX C—INFINERA CORPORATION 2007 EMPLOYEE STOCK PURCHASE PLAN
INFINERA CORPORATION
2007 EMPLOYEE STOCK PURCHASE PLAN
(as amended and restated on May 24, 2018, as amended
, 2019)
1. Purpose. The purpose of the Plan is to provide employees of the Company and its Designated Companies with
an opportunity to purchase Common Stock through accumulated Contributions. The Company’s intention is to
have the Plan include two components: (i) a Code Section 423 Component (the “Section 423 Component”), which
the Company intends to qualify as an “employee stock purchase plan” under Section 423 of the Code (although
the Company makes no undertaking or representation to maintain such qualification); and (ii) a non-Code
Section 423 Component (the “Non-Section 423 Component”), which the Company does not intend to qualify as an
“employee stock purchase plan” under Section 423 of the Code. The provisions of the Plan, accordingly, will be
construed so as to extend and limit Plan participation consistent with the foregoing intent.
2. Definitions.
(a) “Administrator” means the Board or any Committee designated by the Board to administer the Plan
pursuant to Section 14.
(b) “Applicable Laws” means the requirements relating to the administration of equity-based awards, including
but not limited to the related issuance of shares of Common Stock, under U.S. state corporate laws, U.S. federal
and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed
or quoted and the applicable laws of any non-U.S. country or jurisdiction where options are, or will be, granted
under the Plan.
(c) “Board” means the Board of Directors of the Company.
(d) “Change in Control” means the occurrence of any of the following events:
(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 of the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power represented by the Company’s
then outstanding voting securities; or
(ii) The consummation of the sale or disposition by the Company of all or substantially all of the
Company’s assets; or
(iii) The consummation of a merger or consolidation of the Company with any other corporation, other
than a merger or consolidation which would result in the voting securities of the Company 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 the Company 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 as of the effective date of the Plan, or (B) are elected, or nominated for election, to the
Board with the affirmative votes of at least a majority of the Directors 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 the Company).
(e) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a section of the Code
herein will be a reference to any successor or amended section of the Code.
(f) “Committee” means a committee of the Board appointed in accordance with Section 14 hereof.
(g) “Common Stock” means the common stock of the Company.
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(h) “Company” means Infinera Corporation, a Delaware corporation.
(i) “Compensation” means an Employee’s base straight time gross earnings, commissions (to the extent such
commissions are an integral, recurring part of compensation), overtime and shift premium, but exclusive of
payments for incentive compensation, bonuses and other compensation.
(j) “Contributions” means payroll deductions (to the extent permitted under Applicable Laws) and any other
contributions the Company may allow to be made by a participant to fund the purchase of shares of Common
Stock under the Plan if payroll deductions are not permitted or advisable under Applicable Laws.
(k) “Designated Company” means any Subsidiary that has been designated by the Administrator from time to
time in its sole discretion as eligible to participate in the Plan. At any given time a Subsidiary that is a Designated
Company under the Section 423 Component shall not be a Designated Company under the Non-Section 423
Component. The Committee may provide that any Designated Company shall only be eligible to participate in the
Non-Section 423 Component.
(l) “Director” means a member of the Board.
(m) “Eligible Employee” means any individual who is a common law employee of an Employer and is
customarily employed for at least twenty (20) hours per week and more than five (5) months in any calendar year
by the Employer. For purposes of the Plan, the employment relationship will be treated as continuing intact while
the individual is on sick leave or other leave of absence that the Employer approves or is legally protected under
Applicable Laws. Where the period of leave exceeds three (3) months and the individual’s right to reemployment is
not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on
the date three (3) months and one (1) day following the commencement of such leave. The Administrator, in its
discretion, from time to time may, prior to an Offering Date for all options to be granted on such Offering Date in an
Offering, determine (on a uniform and nondiscriminatory basis) that the definition of Eligible Employee will or will
not include an individual if he or she: (i) has not completed at least two (2) years of service since his or her last
hire date (or such lesser period of time as may be determined by the Administrator in its discretion), (ii) customarily
works not more than twenty (20) hours per week (or such lesser period of time as may be determined by the
Administrator in its discretion), (iii) customarily works not more than five (5) months per calendar year (or such
lesser period of time as may be determined by the Administrator in its discretion), (iv) is a highly compensated
employee within the meaning of Section 414(q) of the Code, or (v) is a highly compensated employee within the
meaning of Section 414(q) of the Code with compensation above a certain level or is an officer or subject to the
disclosure requirements of Section 16(a) of the Exchange Act, provided the exclusion is applied with respect to
each Offering in an identical manner to all highly compensated individuals of the Employer whose Eligible
Employees are participating in that Offering. Each exclusion shall be applied with respect to an Offering in a
manner complying with U.S. Treasury Regulation Section 1.423-2(e)(2)(ii).
(n) “Employer” means any one or all of the Company and its Designated Companies.
(o) “Exchange Act” means the Securities Exchange Act of 1934, as amended, including the rules and
regulations promulgated thereunder.
(p) “Exercise Date” means the first Trading Day on or after February 15 and August 15 of each year.
(q) “Fair Market Value” means, as of any date and unless the Administrator determines otherwise, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system,
including without limitation the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital
Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination, as
reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not
reported, its Fair Market Value will be the mean of the closing bid and asked prices for the Common Stock on
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the date of determination (or if no bids and asks were reported on that date, on the last day such bids and
asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof will be
determined in good faith by the Administrator.
(r) “Fiscal Year” means the fiscal year of the Company.
(s) “New Exercise Date” means a new Exercise Date set by shortening any Offering Period then in progress.
(t) “Non-Section 423 Component” means the part of the Plan that is not intended to meet the requirements set
forth in Section 423 of the Code.
(u) “Offering” means an offer under the Plan of an option that may be exercised during an Offering Period as
further described in Section 4. For purposes of the Plan, the Administrator may designate separate Offerings
under the Plan (the terms of which need not be identical) in which Eligible Employees of one or more Eligible
Employers will participate, even if the dates of the applicable Offering Periods of each such Offering are identical
and the provisions of the Plan will separately apply to each Offering. To the extent permitted by U.S. Treasury
Regulation Section 1.423-2(a)(1), the terms of each Offering need not be identical provided that the terms of the
Plan and an Offering together satisfy U.S. Treasury Regulation Section 1.423-2(a)(2) and (a)(3).
(v) “Offering Date” means the first Trading Day of each Offering Period.
(w) “Offering Periods” means the periods of approximately six (6) months during which an option granted
pursuant to the Plan may be exercised, (i) commencing on the first Trading Day on or after February 15 of each
year and terminating on the first Trading Day on or following August 15, approximately six (6) months later, and
(ii) commencing on the first Trading Day on or after August 15 of each year and terminating on the first Trading
Day on or following February 15, approximately six (6) months later. The duration and timing of Offering Periods
may be changed pursuant to Sections 4 and 20.
(x) “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of
the Code.
(y) “Plan” means this Infinera Corporation 2007 Employee Stock Purchase Plan, as amended from time to
time.
(z) “Purchase Period” means the period during an Offering Period in which shares of Common Stock may be
purchased on a participant’s behalf in accordance with the terms of the Plan. Unless and until the Administrator
provides otherwise, the Purchase Period will have the same duration and coincide with the length of the Offering
Period.
(aa) “Purchase Price” means an amount equal to eighty-five percent (85%) of the Fair Market Value of a share
of Common Stock on the Offering Date or on the Exercise Date, whichever is lower; provided however, that the
Purchase Price may be determined for subsequent Offering Periods by the Administrator subject to compliance
with Section 423 of the Code (or any successor rule or provision or any other Applicable Laws) or pursuant to
Section 20.
(bb) “Section 423 Component” means the part of the Plan, which excludes the Non-Section 423 Component,
pursuant to which options to purchase shares of Common Stock that satisfy the requirements for “employee stock
purchase plans” set forth in Section 423 of the Code may be granted to Eligible Employees.
(cc) “Subsidiary” means a “subsidiary corporation,” whether now or hereafter existing, as defined in
Section 424(f) of the Code.
(dd) “Trading Day” means a day on which the national stock exchange upon which the Common Stock is
listed is open for trading.
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3. Eligibility.
(a) Offering Periods. Any Eligible Employee on a given Offering Date will be eligible to participate in the Plan,
subject to the requirements of Section 5.
(b) Non-U.S. Employees. Eligible Employees who are citizens or residents of a non-U.S. jurisdiction (without
regard to whether they also are citizens or residents of the United States or resident aliens (within the meaning of
Section 7701(b)(1)(A) of the Code)) may be excluded from participation in an Offering under Section 423 of the
Plan if the participation of such Employees is prohibited under the laws of the applicable jurisdiction or if complying
with the laws of the applicable jurisdiction would cause the Offering to violate Section 423 of the Code. Non-U.S.
Employees may participate in an Offering under the Non-Section 423 Component.
(c) Limitations. Any provisions of the Plan to the contrary notwithstanding, no Eligible Employee will be
granted an option under the Plan (i) to the extent that, immediately after the grant, such Eligible Employee (or any
other person whose stock would be attributed to such Eligible Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company or any Parent or Subsidiary of the Company and/or hold outstanding
options to purchase such stock possessing five percent (5%) or more of the total combined voting power or value
of all classes of the capital stock of the Company or of any Parent or Subsidiary of the Company, or (ii) to the
extent that his or her rights to purchase stock under all employee stock purchase plans (as defined in Section 423
of the Code) of the Company or any Parent or Subsidiary of the Company accrues at a rate which exceeds twenty-
five thousand dollars ($25,000) worth of stock (determined at the Fair Market Value of the stock at the time such
option is granted) for each calendar year in which such option is outstanding at any time.
4. Offering Periods. The Plan will be implemented by consecutive Offering Periods with a new Offering Period
commencing on the first Trading Day on or after February 15 and August 15 each year, or on such other date as
the Administrator will determine. The Administrator will have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future Offerings without stockholder approval if such
change is announced prior to the scheduled beginning of the first Offering Period to be affected thereafter;
provided, however, that no Offering Period may last more than twenty-seven (27) months.
5. Participation. An Eligible Employee may participate in the Plan pursuant to Section 3(a) by (i) submitting to the
Company’s payroll office (or its designee), on or before a date prescribed by the Administrator prior to an
applicable Offering Date, a properly completed subscription agreement authorizing Contributions in the form
provided by the Administrator for such purpose, or (ii) following an electronic or other enrollment procedure
prescribed by the Administrator.
6. Contributions.
(a) At the time a participant enrolls in the Plan pursuant to Section 5, he or she will elect to have Contributions
made on each pay day during the Offering Period in an amount not exceeding fifteen percent (15%) of the
Compensation, in whole percentages only, which he or she receives on each pay day during the Offering Period;
provided, however, that should a pay day occur on an Exercise Date, a participant will have the Contributions
made on such day applied to his or her account under the subsequent Purchase or Offering Period. A participant’s
subscription agreement will remain in effect for successive Offering Periods unless terminated as provided in
Section 10 hereof.
(b) Contributions for a participant will commence on the first pay day following the Offering Date and will end
on the last pay day prior to the Exercise Date of such Offering Period to which such authorization is applicable,
unless sooner terminated by the participant as provided in Section 10 hereof.
(c) All Contributions made for a participant will be credited to his or her account under the Plan and will be
withheld in whole percentages only. A participant may not make any additional payments into such account,
unless required by Applicable Laws.
(d) A participant may discontinue his or her participation in the Plan as provided in Section 10, or may
decrease (but not increase) the rate of his or her Contributions during the Offering Period by (i) properly
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completing and submitting to the Company’s payroll office (or its designee), on or before a date prescribed by the
Administrator prior to an applicable Exercise Date, a new subscription agreement authorizing the change in
Contribution rate in the form provided by the Administrator for such purpose, or (ii) following an electronic or other
procedure prescribed by the Administrator; provided, however, that a participant may only make one Contribution
change during each Offering Period. A participant may increase or decrease the rate of his or her Contributions for
future Offering Periods by (x) properly completing and submitting to the Company’s payroll office (or its designee),
on or before a date prescribed by the Administrator prior to an applicable Offering Period, a new subscription
agreement authorizing the change in Contribution rate in the form provided by the Administrator for such purpose,
or (y) following an electronic or other procedure prescribed by the Administrator. If a participant has not followed
such procedures to change the rate of Contributions, the rate of his or her Contributions will continue at the
originally elected rate throughout the Offering Period and future Offering Periods (unless terminated as provided in
Section 10). The Administrator may, in its sole discretion, limit the nature and/or number of Contribution rate
changes that may be made by participants during any Offering Period. Any change in Contribution rate made
pursuant to this Section 6(d) will be effective as of the first full payroll period following five (5) business days after
the date on which the change is made by the participant (unless the Administrator, in its sole discretion, elects to
process a given change in Contribution rate more quickly).
(e) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and
Section 3(c), a participant’s Contributions may be decreased to zero percent (0%) at any time during an Offering
Period. Subject to Section 423(b)(8) of the Code and Section 3(c) hereof, Contributions will recommence at the
rate originally elected by the participant effective as of the beginning of the first Offering Period which is scheduled
to end in the following calendar year, unless terminated by the participant as provided in Section 10.
(f) At the time the option is exercised, in whole or in part, or at the time some or all of the Common Stock
issued under the Plan is disposed of (or any other time that a taxable event related to the Plan occurs), the
participant must make adequate provision for the Company’s or Employer’s federal, state, local, or any other tax
liability payable to any authority including taxes imposed by jurisdictions outside of the U.S., national insurance,
social insurance contributions, social security, payroll tax, fringe benefits tax, payment on account or other tax
withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock
(or any other time that a taxable event related to the Plan occurs). At any time, the Company or the Employer may,
but will not be obligated to, withhold from the participant’s compensation or other payments made to the participant
the amount necessary for the Company or the Employer to meet applicable withholding obligations, including any
withholding required to make available to the Company or the Employer any tax deductions or benefits attributable
to sale or early disposition of Common Stock by the participant. In addition, the Company or the Employer may,
but will not be obligated to, withhold from the proceeds of the sale of Common Stock or any other method of
withholding the Company or the Employer deems appropriate to the extent permitted by U.S. Treasury Regulation
Section 1.423-2(f) for Offerings under the Section 423 Component and Applicable Laws for Offerings under the
Non-Section 423 Component.
7. Grant of Option. On the Offering Date of each Offering Period, each Eligible Employee participating in such
Offering Period will be granted an option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of Common Stock determined by dividing such Eligible
Employee’s Contributions accumulated prior to such Exercise Date and retained in the Eligible Employee’s
account as of the Exercise Date by the applicable Purchase Price; provided that in no event will an Eligible
Employee be permitted to purchase during each Offering Period more than 3,000 shares of the Common Stock
(subject to any adjustment pursuant to Section 19), and provided further that such purchase will be subject to the
limitations set forth in Sections 3(c) and 13. The Eligible Employee may accept the grant of such option by electing
to participate in the Plan in accordance with the requirements of Section 5. The Administrator may, for future
Offering Periods, increase or decrease, in its absolute discretion, the maximum number of shares of Common
Stock that an Eligible Employee may purchase during each Offering Period and/or each Purchase Period of an
Offering Period. Exercise of the option will occur as provided in Section 8, unless the participant has withdrawn
pursuant to Section 10. The option will expire on the last day of the Offering Period.
8. Exercise of Option.
(a) Unless a participant withdraws from the Plan as provided in Section 10, his or her option for the purchase
of shares of Common Stock will be exercised automatically on the Exercise Date, and the maximum number of full
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shares subject to option will be purchased for such participant at the applicable Purchase Price with the
accumulated Contributions in his or her account. No fractional shares of Common Stock will be purchased; any
Contributions accumulated in a participant’s account which are not sufficient to purchase a full share will be
retained in the participant’s account for the subsequent Purchase Period and/or Offering Period, as applicable,
subject to earlier withdrawal by the participant as provided in Section 10. Any other funds left over in a participant’s
account after the Exercise Date will be returned to the participant. During a participant’s lifetime, a participant’s
option to purchase shares hereunder is exercisable only by him or her.
(b) If the Administrator determines that, on a given Exercise Date, the number of shares of Common Stock
with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that
were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of
shares of Common Stock available for sale under the Plan on such Exercise Date, the Administrator may in its
sole discretion provide that the Company will make a pro rata allocation of the shares of Common Stock available
for purchase on such Offering Date or Exercise Date, as applicable, in as uniform a manner as will be practicable
and as it will determine in its sole discretion to be equitable among all participants exercising options to purchase
Common Stock on such Exercise Date, and continue all Offering Periods then in effect or terminate all Offering
Periods then in effect pursuant to Section 20. The Company may make a pro rata allocation of the shares
available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence,
notwithstanding any authorization of additional shares for issuance under the Plan by the Company’s stockholders
subsequent to such Offering Date.
9. Delivery. As soon as reasonably practicable after each Exercise Date on which a purchase of shares of
Common Stock occurs, the Company will arrange the delivery to each participant the shares purchased upon
exercise of his or her option in a form determined by the Administrator (in its sole discretion) and pursuant to rules
established by the Administrator. The Company may permit or require that shares be deposited directly with a
broker designated by the Company or to a trustee or designated agent of the Company, and the Company may
utilize electronic or automated methods of share transfer. The Company may require that shares be retained with
such broker, trustee or agent for a designated period of time and/or may establish other procedures to permit
tracking of disqualifying dispositions or other dispositions of such shares. No participant will have any voting,
dividend, or other stockholder rights with respect to shares of Common Stock subject to any option granted under
the Plan until such shares have been purchased and delivered to the participant as provided in this Section 9.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the Contributions credited to his or her account and not
yet used to exercise his or her option under the Plan at any time by (i) submitting to the Company’s payroll office
(or its designee) a written notice of withdrawal in the form prescribed by the Administrator for such purpose, or
(ii) following an electronic or other withdrawal procedure prescribed by the Administrator. All of the participant’s
Contributions credited to his or her account will be paid to such participant promptly after receipt of notice of
withdrawal and such participant’s option for the Offering Period will be automatically terminated, and no further
Contributions for the purchase of shares will be made for such Offering Period. If a participant withdraws from an
Offering Period, Contributions will not resume at the beginning of the succeeding Offering Period, unless the
participant re-enrolls in the Plan in accordance with the provisions of Section 5.
(b) A participant’s withdrawal from an Offering Period will not have any effect upon his or her eligibility to
participate in any similar plan which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the participant withdraws.
11. Termination of Employment. Unless otherwise required by Applicable Laws, upon a participant’s ceasing to be
an Eligible Employee, for any reason, he or she will be deemed to have elected to withdraw from the Plan and the
Contributions credited to such participant’s account during the Offering Period but not yet used to purchase shares
of Common Stock under the Plan will be returned to such participant or, in the case of his or her death, to the
person or persons entitled thereto under Section 15, and such participant’s option will be automatically terminated.
12. Interest. No interest will accrue on the Contributions of a participant in the Plan, unless otherwise required by
Applicable Laws.
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13. Stock.
(a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 19 hereof, the
maximum number of shares of Common Stock which will be made available for sale under the Plan will be
31,556,830 shares.
(b) Until the shares are issued (as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company), a participant will only have the rights of an unsecured creditor with
respect to such shares, and no right to vote or receive dividends or any other rights as a stockholder will exist with
respect to such shares.
(c) Shares of Common Stock to be delivered to a participant under the Plan will be registered in the name of
the participant or in the name of the participant and his or her spouse.
14. Administration. The Plan will be administered by the Board or a Committee appointed by the Board or a
Committee, which Committee will be constituted to comply with Applicable Laws. The Administrator will have full
and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to designate separate
Offerings under the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every
finding, decision and determination made by the Administrator will, to the full extent permitted by law, be final and
binding upon all parties. Notwithstanding any provision to the contrary in this Plan, the Administrator may adopt
rules or procedures relating to the operation and administration of the Plan to accommodate the specific
requirements of local laws and procedures for jurisdictions outside of the United States. Without limiting the
generality of the foregoing, the Administrator is specifically authorized to adopt rules and procedures regarding
eligibility to participate, the definition of Compensation, making of Contributions to the Plan (including, without
limitation, in forms other than payroll deductions), establishment of bank or trust accounts to hold Contributions,
payment of interest, conversion of local currency, obligations to pay payroll tax, determination of beneficiary
designation requirements, withholding procedures and handling of stock certificates which vary with local
requirements.
15. Designation of Beneficiary.
(a) If authorized by the Administrator, a participant may file a designation of a beneficiary who is to receive
any shares of Common Stock and cash, if any, from the participant’s account under the Plan in the event of such
participant’s death subsequent to an Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, if authorized by the Administrator, a participant may file a
designation of a beneficiary who is to receive any cash from the participant’s account under the Plan in the event
of such participant’s death prior to exercise of the option. If a participant is married and the designated beneficiary
is not the spouse, spousal consent will be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant at any time by notice in a form
determined by the Administrator. In the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such participant’s death, the Company will deliver
such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or
administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no
spouse, dependent or relative is known to the Company, then to such other person as the Company may
designate.
(c) All beneficiary designations will be in such form and manner as the Administrator may designate from time
to time.
16. Transferability. Neither Contributions credited to a participant’s account nor any rights with regard to the
exercise of an option or to receive shares of Common Stock under the Plan may be assigned, transferred, pledged
or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in
Section 15 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition will be
without effect, except that the Company may treat such act as an election to withdraw funds from an Offering
Period in accordance with Section 10 hereof.
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17. Use of Funds. The Company may use all Contributions received or held by it under the Plan for any corporate
purpose, and the Company will not be obligated to segregate such Contributions, unless otherwise required by
Applicable Laws. Until shares of Common Stock are issued, participants will only have the rights of an unsecured
creditor with respect to such shares.
18. Reports. Individual accounts will be maintained for each participant in the Plan. Statements of account will be
given to participants at least annually, which statements will set forth the amounts of Contributions, the Purchase
Price, the number of shares of Common Stock purchased and the remaining cash balance, if any.
19. Adjustments, Dissolution, Liquidation, Merger or Change in Control.
(a) Adjustments. In the event that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of Common Stock or other securities of the
Company, or other change in the corporate structure of the Company affecting the Common Stock occurs, the
Administrator, in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made
available under the Plan, shall, in such manner as it may deem equitable, adjust the number and class of Common
Stock which may be delivered under the Plan, the Purchase Price per share, and class and number of shares of
Common Stock covered by each option under the Plan which has not yet been exercised, and the numerical limits
of Sections 7 and 13.
(b) Dissolution or Liquidation. In the event of the proposed dissolution or liquidation of the Company, any
Offering Period then in progress will be shortened by setting a New Exercise Date, and will terminate immediately
prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the
Administrator. The New Exercise Date will be before the date of the Company’s proposed dissolution or
liquidation. The Administrator will notify each participant in writing or electronically, at least ten (10) business days
prior to the New Exercise Date, that the Exercise Date for the participant’s option has been changed to the New
Exercise Date and that the participant’s option will be exercised automatically on the New Exercise Date, unless
prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof.
(c) Merger or Change in Control. In the event of a merger or Change in Control, each outstanding option will
be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to assume or substitute for the option,
the Offering Period with respect to which such option relates will be shortened by setting a New Exercise Date and
will end on the New Exercise Date. The New Exercise Date will occur before the date of the Company’s proposed
merger or Change in Control. The Administrator will notify each participant in writing or electronically prior to the
New Exercise Date, that the Exercise Date for the participant’s option has been changed to the New Exercise Date
and that the participant’s option will be exercised automatically on the New Exercise Date, unless prior to such
date the participant has withdrawn from the Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Administrator, in its sole discretion, may amend, suspend, or terminate the Plan, or any part thereof,
at any time and for any reason. If the Plan is terminated, the Administrator, in its discretion, may elect to terminate
all outstanding Offering Periods either immediately or upon completion of the purchase of shares of Common
Stock on the next Exercise Date (which may be sooner than originally scheduled if determined by the
Administrator in its discretion), or may elect to permit Offering Periods to expire in accordance with their terms
(and subject to any adjustment pursuant to Section 19). If the Offering Periods are terminated prior to expiration,
all amounts then credited to participants’ accounts which have not been used to purchase shares of Common
Stock will be returned to the participants (without interest thereon, except as otherwise required by Applicable
Laws) as soon as administratively practicable.
(b) Without stockholder consent and without limiting Section 20(a), the Administrator will be entitled to change
the Offering Periods, designate separate Offerings, limit the frequency and/or number of changes in the amount
withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other
than U.S. dollars, permit Contributions in excess of the amount designated by a participant in order to adjust for
C-8
delays or mistakes in the Company’s processing of properly completed Contribution elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each participant properly correspond with Contribution
amounts, and establish such other limitations or procedures as the Administrator determines in its sole discretion
advisable which are consistent with the Plan.
(c) In the event the Administrator determines that the ongoing operation of the Plan may result in unfavorable
financial accounting consequences, the Administrator may, in its discretion and, to the extent necessary or
desirable, modify, amend or terminate the Plan to reduce or eliminate such accounting consequence including, but
not limited to:
(i) amending the Plan to conform with the safe harbor definition under Statement of Financial Accounting
Standards Board Accounting Standards Codification Topic 718 (or any successor thereto), including with
respect to an Offering Period underway at the time;
(ii) altering the Purchase Price for any Offering Period including an Offering Period underway at the time
of the change in Purchase Price;
(iii) shortening any Offering Period by setting a New Exercise Date, including an Offering Period
underway at the time of the Administrator action;
(iv) reducing the maximum percentage of Compensation a participant may elect to set aside as
Contributions; and
(v) reducing the maximum number of Shares a participant may purchase during any Offering Period or
Purchase Period.
Such modifications or amendments will not require stockholder approval or the consent of any Plan
participants.
21. Notices. All notices or other communications by a participant to the Company under or in connection with the
Plan will be deemed to have been duly given when received in the form and manner specified by the Company at
the location, or by the person, designated by the Company for the receipt thereof.
22. Conditions upon Issuance of Shares. Shares of Common Stock will not be issued with respect to an option
unless the exercise of such option and the issuance and delivery of such shares pursuant thereto will comply with
all Applicable Laws, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the
shares may then be listed, and will be further subject to the approval of counsel for the Company with respect to
such compliance.
As a condition to the exercise of an option, the Company may require the person exercising such option to
represent and warrant at the time of any such exercise that the shares are being purchased only for investment
and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company,
such a representation is required by any of the aforementioned applicable provisions of law.
23. Code Section 409A. The Plan is intended to be exempt from the application of Code Section 409A, and to the
extent not exempt, is intended to comply with Code Section 409A and any ambiguities or ambiguous terms herein
will be interpreted to so be exempt from or comply with Code Section 409A. In furtherance of the foregoing and
notwithstanding any provision in the Plan to the contrary, if the Administrator determines that an option granted
under the Plan may be subject to Code Section 409A or that any provision in the Plan would cause an option
under the Plan to be subject to Code Section 409A, the Administrator may amend the terms of the Plan and/or of
an outstanding option granted under the Plan, or take such other action the Administrator determines is necessary
or appropriate, in each case, without the participant’s consent, to exempt any outstanding option or future option
that may be granted under the Plan from or to allow any such options to comply with Code Section 409A, but only
to the extent any such amendments or action by the Administrator would not violate Code Section 409A.
Notwithstanding the foregoing, in no event will the Company or any Parent, Subsidiary or other affiliate of the
Company have any liability or obligation to reimburse, indemnify, or hold harmless a participant or any other party
C-9
if the option to purchase Common Stock under the Plan that is intended to be exempt from or compliant with Code
Section 409A is not so exempt or compliant or for any action taken by the Administrator with respect thereto. The
Company makes no representation that the option to purchase Common Stock under the Plan is exempt from or
compliant with Code Section 409A.
24. Term of Plan. The Plan will become effective upon the earlier to occur of its adoption by the Board or its
approval by the stockholders of the Company. It will continue in effect unless sooner terminated under Section 20.
25. Stockholder Approval. The Plan will be subject to approval by the stockholders of the Company within twelve
(12) months after the date the Plan is adopted by the Board. Such stockholder approval will be obtained in the
manner and to the degree required under Applicable Laws.
26. Governing Law. The Plan will be governed by, and construed in accordance with, the laws of the State of
California (except its choice-of-law provisions).
27. No Right to Employment. Participation in the Plan by a Participant will not be construed as giving a participant
the right to be retained as an employee of the Company or a Subsidiary, as applicable. Furthermore, the Company
or a Subsidiary may dismiss a participant from employment at any time, free from any liability or any claim under
the Plan.
28. Severability. If any provision of the Plan is or becomes or is deemed to be invalid, illegal, or unenforceable for
any reason in any jurisdiction or as to any participant, such invalidity, illegality or unenforceability will not affect the
remaining parts of the Plan, and the Plan will be construed and enforced as to such jurisdiction or participant as if
the invalid, illegal or unenforceable provision had not been included.
29. Compliance with Applicable Laws. The terms of this Plan are intended to comply with all Applicable Laws and
will be construed accordingly.
C-10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
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
Common Stock, $0.001 Par Value
Name of Each Exchange on Which Registered
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
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
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes
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
No
No
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes
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, a smaller reporting
company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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 29,
No
2018, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $921,230,011 (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 March 5, 2019,
177,415,495 shares of the registrant’s common stock, $0.001 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”) are
incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2019 Proxy Statement will be filed with the U.S.
Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
INFINERA CORPORATION
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 29, 2018
Table of Contents
Part I
Item 1.
Business .................................................................................................................................
Item 1A. Risk Factors ............................................................................................................................
Item 1B. Unresolved Staff Comments ....................................................................................................
Item 2.
Properties ................................................................................................................................
Item 3.
Legal Proceedings ...................................................................................................................
Item 4. Mine Safety Disclosures ..........................................................................................................
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ..................................................................................................................
Item 6.
Selected Financial Data ...........................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .....
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....................................................
Item 8.
Financial Statements and Supplementary Data .......................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....
Item 9A. Controls and Procedures .........................................................................................................
Item 9B. Other Information ....................................................................................................................
Part III
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 IV
Item 15. Exhibits, Financial Statement Schedules .................................................................................
Item 16. Form 10-K Summary ...............................................................................................................
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ITEM 1.
BUSINESS
Part I
Infinera Corporation (“we,” “us,” “our” or “Infinera”) is a global supplier of networking solutions comprised of
networking equipment, software and services. Our portfolio of solutions includes optical transport platforms, converged
packet-optical transport platforms, optical line systems and disaggregated router platforms, as well as software-
defined networking (“SDN”), network management and routing software.
Our customers include telecommunications service providers, Internet content providers (“ICPs”), cable
providers, wholesale carriers, research and education institutions, large enterprises and government entities. Our
networking solutions enable our customers to deliver business and consumer communications services. Our
comprehensive portfolio of networking solutions also enable our customers to scale their transport networks as end-
user services and applications demand for network bandwidth continues to grow. These end-user services and
applications include, but are not limited to, high-speed Internet access, business Ethernet services, 4G/5G mobile
broadband, cable high-speed Internet distribution, cloud-based services, high-definition video streaming services,
virtual and augmented reality and the Internet of Things (“IoT”).
Our systems are highly scalable, flexible and designed with open networking principles for ease of
deployment. We build our systems using a combination of internally manufactured and third party components. Our
portfolio includes systems that leverage our innovative optical engine technology, comprised of large-scale photonic
integrated circuits (“PICs”) and digital signal processors (“DSPs”). We optimize the manufacturing process by using
indium phosphide to build our PICs, which enables the integration of hundreds of optical functions onto a set of
semiconductor chips. This large-scale integration of our PICs and advanced DSPs allows us to deliver high-
performance transport networking platforms with features that customers care about the most, including cost per bit,
low power consumption and space savings. In addition, we design our optical engines to increase the capacity and
reach performance of our products by leveraging coherent optical transmission. With the addition of new products to
our portfolio, we plan to integrate our optical engine technology into a broader set of transport platforms in order to
enhance customer value and lower production costs.
Over the past several years, we expanded our portfolio of solutions, evolving from our initial focus on the
long-haul and subsea optical transport markets to offering a more complete suite of packet-optical networking
solutions that address multiple markets within the end-to-end transport infrastructure. These markets include metro
access, metro aggregation and switching, data center interconnect (“DCI”), long-haul and subsea.
We have grown our portfolio through internal development as well as acquisitions. In 2014, we introduced the
Infinera Cloud Xpress to address the emerging DCI market opportunity. In 2015, we entered the metro market with the
acquisition of Transmode AB (“Transmode”), a leader in metro packet-optical applications. On October 1, 2018, we
expanded our product portfolio and customer base through the acquisition of Coriant (the “Acquisition”), a privately-
held global supplier of open network solutions for the largest global network operators. The Acquisition positions us as
one of the largest providers of vertically integrated transport networking solutions in the world, enhances our ability to
serve a global customer base and accelerates delivery of the innovative solutions our customers demand. This
Acquisition also positions us to expand the breadth of customer applications we can address, including metro
aggregation and switching, disaggregated transport and routing, and software-enabled multi-layer network
management and control.
In 2018, the majority of our product revenue was derived from transport systems built on the Infinite Capacity
Engine (ICE), our optical engine technology. Our Infinite Capacity Engine enables different subsystems that can be
customized for a variety of network applications in different transport markets, including the metro, DCI, long-haul and
subsea markets. ICE4, our most recent technology generation, delivers multi-terabit opto-electronic subsystems
powered by our fourth-generation PIC and latest generation FlexCoherent DSP (the combination of which we market
as “ICE4”).
Our products are designed to be managed by a suite of software solutions that enable end-to-end common
network management, multi-layer service orchestration, and automated operations. We also provide software-enabled
programmability that offers differentiated capabilities such as Instant Bandwidth (“IB”). IB, combined with our
differentiated hardware solutions, enables our customers to purchase and activate bandwidth as needed through our
unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives: (1) limit
their initial network startup costs and investments; and (2) instantly activate new bandwidth as their customers’ and
their own network needs evolve.
1
We believe our portfolio of solutions benefits our customers by providing a unique combination of highly
scalable capacity and features that address various applications and ultimately simplify and automate packet-optical
network operations.
We were incorporated in December 2000 and originally operated under the name “Zepton Networks.” 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. “Infinera,” “Infinera DTN-X,” “FlexCoherent,” “Infinera Groove,”
“Infinera mTera,” “Infinera DRX,” “Infinera Aware,” “Infinera Transcend,” “Infinera FlexILS,” “Infinera Instant Bandwidth”
and the Infinera logo, are trademarks or service marks of Infinera Corporation in the United States, certain other
countries and/or the European Union. Any other trademarks or trade names mentioned are the property of their
respective owners.
Industry Background
Optical transport networking equipment carries digital information using light waves over fiber optic cables.
With the advent of wavelength division multiplexing (“WDM”) systems, data is transmitted by using multiple
wavelengths of light using different frequencies or colors over a single optical fiber. Customers deploy WDM systems
to carry information between continents, across countries, between cities and within metropolitan areas, and in some
cases all the way to the end-user. Fiber optic networks are generally capable of carrying most types of
communications traffic. We believe that a number of trends in the communications industry are driving demand for
large amounts of network bandwidth and ultimately will increase demand for packet-optical transport networking
systems and software. These trends include:
•
•
•
•
•
growth of cloud services;
growth of over-the-top services and high-definition video streaming;
growth of mobile broadband services, including 4G and emerging 5G services;
increasing use of connected virtual and augmented reality devices; and
the IoT, which continues to drive massive growth in the number of network-connected devices.
As network traffic grows, customers add transmission capacity to existing optical networks or deploy new
systems to address bandwidth demands and offer expanded services to end-users.
We believe we are in the midst of two significant shifts in transport network architectures that impact the
markets we serve. The first is the bifurcation of the traditional transport market into either a cloud-based model or a
more traditional carrier model. Cloud-based architectures are characterized by transport networks optimized to handle
the massive growth of server-to-server traffic between data center sites, and public Internet user-to-data traffic as
deployed by traditional service providers. To manage server-to-server traffic growth, our customers seek open,
scalable and disaggregated transport solutions designed to accommodate point-to-point, high-capacity traffic patterns.
These customers require solutions that are cost-optimized for low power consumption, reduced footprint and ease of
deployment. In contrast, traditional service providers require high capacity solutions with more integrated network
platforms, which can provide multi-service capabilities and aggregate data flows, and can perform traffic add/drop at
various points across their networks. These customers require protection schemes and a larger variety of interfaces to
address their end customer needs. Our solutions serve both the point-to-point applications driven by increasing data
center traffic and the more traditional mesh-oriented switched transport networks.
A second shift is happening at the edge of the network, where fiber is increasingly being deployed closer to
the end- user. This trend is frequently referred to as “Fiber Deep,” and occurs in primarily two types of access
networks: 4G/5G mobile transport networks and next-generation cable and multiple system operator (“MSO”)
networks. Both of these trends require cost-efficient scalability, higher density and lower power per bit networking
devices with integrated packet switching capabilities.
In all of these transport applications, we believe our customers seek the following solutions to increase their
revenue, expand their service offerings and lower the total cost of operations:
•
•
•
•
high-bandwidth solutions that scale optical transmission capacity to meet increasing bandwidth demand
while providing efficiency through service granularity;
efficient solutions with the right mix of disaggregated and integrated systems that optimize performance
and increase reliability while reducing physical space and power consumption, leading to lower
operational and capital expenses;
easy-to-use solutions that are highly programmable, open, and automated, which help reduce the time
and complexity of deploying new transmission bandwidth;
improved integration between Ethernet or Internet Protocol equipment such as switches or routers, and
optical transport networking equipment; and
2
•
strong encryption at the transport layer processed using hardware at line-rate speeds.
Strategy
Our goal is to be the preeminent provider of end-to-end transport networking solutions in the world by
delivering the highest performance and lowest total cost solutions for our customers. Key aspects of our strategy
include:
•
Leveraging our vertically integrated solutions to deliver lowest total cost network solutions. We will
continue to provide our customers differentiated value by leveraging our vertically integrated optical
engine. This value includes significant cost advantages that our innovative PIC and DSP technology
enable, including service agility, spectral efficiency, optical performance leadership and reliability,
industry-leading optical scalability and high-density and ultra-power efficient platforms. Our strategy is to
continue to evolve our unique optical technology with higher speed and increasingly efficient solutions,
integrating our optical engine across a broader end-to-end portfolio set and extending this innovation to
the edge of the network.
• Driving cost structure optimization and achieving cost advantages of scale. Leveraging scale as part of
our vertical integration strategy, which includes integration of our optical engine across a broader set of
platforms, enables us to achieve cost advantages and cost structure efficiencies that enhance our ability
to continue to invest in research and development in our optical engine and end-to-end portfolio, as well
as drive profitability. In particular, we believe our vertically integrated manufacturing capabilities serve as
a competitive advantage from a technology and supply chain perspective, and financially, enable a lower
cost structure and thus, higher profitability.
• Offering comprehensive networking solutions and expanding our go-to-market reach. We believe a broad
and integrated solutions portfolio spanning multi-layer technologies and optimized for edge-to-core
transport markets is critical to helping our customers most cost effectively provide services with new 5G,
Distributed Access Architecture, DCI, cloud and business services. By expanding our solutions portfolio
and leveraging application-optimized capabilities and disruptive innovation, we are able to expand our
go-to-market reach and address a broader set of our customers’ transport applications, from core
network scalability to packet- and application-optimized metro transport.
• Delivering a superior customer experience. Our success will continue to be driven by our commitment to
providing a superior experience to all customers. In addition to product delivery capability that efficiently
and predictably delivers innovative technology and high-quality products to market, we bring value to our
customers by providing end-to-end solutions with differentiation that includes usage-based bandwidth
provisioning, service agility and ease-of-use that accelerates time-to-revenue. Additionally, our global
customer services team is committed to making our customers successful by providing the highest
quality support services that help our customers deploy, operate and maintain their networks. We believe
our technology leadership combined with our ability to provide the most reliable products and a
differentiated customer experience contribute to customer success and represent major differentiators.
• Utilizing software-driven automation and cognitive networking to deliver differentiated solutions. We
believe we lead the industry in ease of use and automation, both integrated into our system design and
facilitated by our software capabilities. We continue to invest in our differentiated technologies, including
enhancing capabilities of IB offerings and introducing cognitive networking capabilities. In particular, we
believe that our IB offerings offer customers a uniquely positive user experience and also are a key
element of delivering differentiated financial results. We are extending management and control
capabilities across our entire product portfolio with the addition of a new orchestration solution following
the Acquisition. This new solution enables customers to utilize end-to-end network resources and the
automation of multi-layer and multi-vendor networks. Additionally, based on customers’ desire for more
programmable networks, we have added open application programming interfaces (“APIs”) to our
solutions to enable our customers to be more agile and customized automated operations.
Customers
Our customer verticals include:
•
•
•
•
Tier-1 carriers for domestic and international networks;
Tier-2 and Tier-3 carriers;
ICP and data center operators;
cable providers and MSOs;
• wholesale carriers;
3
•
•
•
•
submarine network operators;
large enterprise customers;
research and education; and
government entities.
We sell our products directly to customers who are end-users and to channel partners that sell on our behalf.
We do not have long-term sales commitments from our customers. One customer accounted for approximately 13%
and 18% of our revenue in 2018 and 2017, respectively. This customer completed a merger with another customer in
2017 and these two historically larger customers each individually accounted for approximately 16% and 8% of our
revenue in 2016, respectively. One other customer accounted for approximately 15% of our revenue in 2018. No other
customers accounted for over 10% of our revenue for 2017 or 2016.
Technology
We were founded with a vision of enabling an infinite pool of intelligent bandwidth powered by software-
enabled on-demand service provisioning. We have focused our efforts and capital on developing application-optimized
platforms that enable customers to create rich end-user experiences delivered through efficient, high-bandwidth
packet-optical transport characterized by the following attributes:
•
•
•
Scalable. The proliferation of data centers, rise of cloud computing, increasing consumption of video
and growth in mobile access is fundamentally changing traffic characteristics in operator networks.
We currently deliver terabit class coherent, sliceable super-channels, which allow a massive pool of
bandwidth to be provisioned in a single operation.
Flexible. In addition to providing our customers end-to-end solutions, we offer a mix of integrated
and disaggregated platforms to reduce complexity and enable flexibility as transport network
architectures evolve. There are varying customer preferences as some customers continue to favor
integrated multi-service mesh networks while others, such as ICPs, favor disaggregated platforms
that address point-to-point connections.
Open. Network operators are facing intensifying competition to meet customer demand for
immediate bandwidth and better visibility into the network. Our networking solutions feature highly
programmable platforms with SDN APIs enabling networks to be open; this simplifies end-to-end,
multi-layer service provisioning and network control.
Infinera Optical Engines
We believe our optical engines, with the latest version being ICE4, are key to our value proposition and a
competitive advantage to our system solutions. Technologically, we are able to deliver multi-terabit class coherent
super-channels through PICs in systems that significantly exceed reliability standards. Additionally, our DSPs enable
network operators to utilize coherent technologies to enable higher data capacity transmissions over existing optical
fiber infrastructure. We have integrated advanced coherent technologies onto our FlexCoherent DSP in ICE4, such as
cutting-edge Nyquist subcarriers and soft-decision forward error correction gain sharing techniques. We use third-party
components for specific applications, such as DCI and multi-service packet-optical transport within our metro
platforms. Financially, we believe our technology approach enables improved manufacturing economics for optical
networking, allowing future optical transport cost reductions to be viably sustained on a cost curve defined by volume
manufacturing efficiencies and greater functional integration. These advantages allow us to develop new cost-effective
architectures to allow our customers to solve their business needs.
Infinera Super-Channels and Sliceable Photonics
We offer customers flexibility in deploying WDM by using single or multiple channels simultaneously.
Infinera’s DTN-X and Cloud Xpress Family of products, for example, are designed to support multiple channels, each
up to 200 gigabits per second (“Gb/s”) capacity, in a single line card or unit depending on the platform form factor. This
pool of bandwidth can either be managed as a single super-channel, with up to 1.2 terabits per second (“Tb/s”) that
can be deployed in a single operation, or sliced into smaller increments to allow operators more flexibility. Super-
channels result in competitive advantages leading to lower operational costs and long-term system reliability, as well
as significant reductions in installation time. Our ICE4 technology combines the benefits of super-channels with the
capability of being able to slice capacity into smaller unit increments such as 100 Gb/s. Each increment can be tuned
and routed in multiple separate directions, with each fully tuned to its own flexible grid frequency as well as having its
own coherent modulation profile. This significantly reduces the number of modules required in networks, resulting in
lower total cost of ownership. The Infinera Groove G30 solution, a new addition to our portfolio following the
Acquisition, provides a single-channel transmission solution up to 600 Gb/s. Both the single and super-channel
approaches allow customers to tailor networks to their specific needs.
4
Infinera Instant Bandwidth
Infinera Instant Bandwidth enables customers to license a super-channel pool of bandwidth in smaller
increments such as 100 Gb/s. With IB technology, which is available on the Infinera DTN-X XTC Series, DTN-X XT
Series, DTN-X XTS Series, Cloud Xpress Family and XTM Series platforms, customers can provision additional
transmission capacity on demand without the deployment of any incremental equipment. Our IB technology is uniquely
enabled by our hardware, providing customers the ability to adopt a success-based business model for network
growth.
Infinera CloudWave T Optics
Infinera CloudWave T Optics is a coherent detection interface technology leveraged by the Infinera Groove
G30 that features a flexible sled-based architecture designed to support pay-as-you-grow network scalability. The
CloudWave T Optics solution leverages technologies acquired through the Acquisition and is based on third-party
components that provide rapid go-to-market capabilities for 600 Gb/s transmission. The CloudWave T solution also
enables low initial costs, reduces sparing costs, and supports cost-effective growth as capacity demands increase
over time.
Infinera Aware Technology
Infinera’s Aware technology enables network operators to maximize the capacity of each wavelength while
speeding the activation of new wavelengths, thus allowing our customers to accelerate time to revenue. It does this by
providing the real-time residual margin of each wavelength and generates the valid parameter options enabling the
best options to be automatically selected by the management system. Infinera Aware speeds the activation of new
wavelengths by enabling accurate, real-time wavelength planning in the Infinera Transcend Software Suite with optical
transmission reach and capacity that matches, or even exceeds, that of best-in-class offline planning tools.
Infinera Pluggable Optical Layer
A key enabler of the Infinera Groove G30 open line system and the Infinera 7100 optical layer, our Pluggable
Optical Layer technology enables our customers to mix and match optical layer functions. The solution also enables
our customers to meet and optimize the requirements of their networks in the short term, while providing the ability to
add functionality over time as needs evolve. As a result, customers can minimize capital expense, footprint and power
consumption. This value is provided by collapsing optical layer functions into compact pluggables that address a wide
range of transport applications.
Infinera Disaggregated Routing
Compared to traditional closed and proprietary chassis-based routers, our open and disaggregated routing
technology reduces vendor lock-in, speeds innovation, lowers costs and removes the chassis backplane and number
of slots as barriers to cost-optimized scaling. Our disaggregated router solution is comprised of hardware-independent,
carrier-class routing software, which we market as converged network operating system (“CNOS”), and the Infinera
DRX series of packet switching white boxes that support capacities from 300 Gb/s to 9.6 Tb/s in one or two rack unit
(“RU”) form factor platforms.
Software-enabled Network Automation
Leveraging open network architectures based on SDN principles, the Infinera Transcend Software Suite
provides a platform for advanced network automation that reduces operational costs, optimizes deployed network
assets, speeds time to revenue and maximizes network and service availability. Intent-based automation translates
service requests into optimized multi-layer network configurations while closed loop automation proactively monitors
network state and service performance and, then, when appropriate, takes actions to assure service quality. Additional
highlights include DevOps-style programmability, open interfaces, and graphical user interface-based portals.
Products and Services
Our product portfolio consists of the Infinera DTN-X Family (including the XTC Series, XTS Series and XT
Series), the Infinera hiT 7300 platform, the Infinera mTera Series, the Infinera 7100 Series, the Infinera 7090 Series,
the Infinera XTM Series, the Infinera Cloud Xpress Family, the Infinera Groove G30, the Infinera FlexILS Series, the
Infinera DRX Series and the Infinera 8600 Smart Router Series. Software products include the Infinera Transcend
Software Suite, which includes SDN and network management software, and our CNOS routing software. These
products address the metro, long-haul and subsea network markets from end-to-end. DCI is a subset of these
markets.
5
Product Portfolio
The high-speed transport network infrastructure is comprised of multiple technology layers that require
intelligent interworking and coordination between layers to ensure efficient delivery of end-user services. These
technology layers include Layer 0 (WDM), Layer 1 (OTN, SONET/SDH), Layer 2 (Carrier Ethernet), Layer 2.5 (MPLS-
TP) and Layer 3 (Internet Protocol). Our product portfolio includes solutions that span all of these transport network
layers. Our product portfolio also includes multi-layer network management and automation software that helps
simplify operational tasks and accelerate provisioning of end-user services across multiple transport market domains,
including metro, long-haul and subsea.
Infinera DTN-X Family
The Infinera DTN-X Family of terabit-class transport network platforms comprises the DTN-X XTC Series,
DTN-X XTS Series and the DTN-X XT Series. The DTN-X Family is designed to meet the needs of network operators
seeking to offer high capacity, innovative services with scalability, flexibility and openness. We have designed the
DTN-X Family to integrate our ICE technology for metro, DCI, long-haul and subsea networks.
The Infinera DTN-X XTC Series includes multi-terabit packet optical transport platforms that integrate digital
OTN switching and optical WDM transmission. The DTN-X XTC platforms combine switching with WDM transport
without compromising the performance of either function. These platforms also support a broad range of Ethernet and
OTN client interfaces for flexibility and are designed for metro, long-haul and subsea networks.
The Infinera DTN-X XT Series for terrestrial applications and XTS Series for subsea applications are small-
form-factor, server-like WDM platforms, designed to blend sliceable photonics and muxponder functionality to deliver
up to 2.4 Tb/s capacity and fine-grained granularity. These platforms are designed to power cloud scale network
services over metro, DCI, long-haul and subsea networks.
Infinera hiT 7300
The Infinera hiT 7300 is an SDN-ready coherent optical transport system predominantly for long-haul is
designed to support secure and reliable transmission of 10 x 400 Gb/s per optical channel. With Infinera CloudWave T
Optics technology, the hiT 7300 achieves a total system capacity of up to 38.4 Tb/s per fiber pair and supports
programmable modulation for optimal capacity-reach and simplified evolution to next-generation services.
Infinera mTera Series
The Infinera mTera Universal Transport Platform is a flexible and scalable converged packet-optical transport
platform that delivers unique universal transport capabilities for high-bandwidth applications in metro networks. The
mTera Series includes a compact 8-slot, 4 Tb/s shelf and a higher capacity 14-slot, 7 Tb/s shelf, with paired 14-slot
shelves able to deliver 12 Tb/s of electrical switching. The mTera Series combines SDN-ready, advanced
reconfigurable add-drop multiplexer (“ROADM”) capabilities and support for the universal switching of optical transport
network (“OTN”), packet, and synchronous optical networking and synchronous digital hierarchy (“SONET/SDH”)
traffic at the electrical layer. The solution also includes switching modules that provide the ability to select OTN,
multiprotocol label switching - transport profile (“MPLS-TP”) and Carrier Ethernet for each interface.
Infinera 7100 Series
The Infinera 7100 Series offers flexible and feature-rich packet-optical transport for diverse metro network
applications and enables cost-effective growth while minimizing operational costs. The 7100 Series supports a wide
range of technologies including ROADM, fixed WDM, 10 Gb/s, 100 Gb/s, packet switching, OTN, and SONET/SDH.
The 7100 Series includes the 7100 Nano, a 5 rack unit (5RU) platform optimized for metro transport and the 7100
Pico, a 2 rack unit (2RU) platform that extends services to the metro edge and enables metro access applications. The
7100 Series also includes the PSX-3S, a 1 rack unit (1RU) 376 Gb/s packet switch optimized for aggregation and
access applications.
Infinera 7090 Family
The Infinera 7090 Family includes MPLS-TP and Metro Ethernet Forum (“MEF”) Carrier Ethernet-based
packet transport solutions that address a wide variety of metro and edge applications including business Ethernet,
legacy service migration, cloud access and mobile backhaul. The 7090 Family includes MPLS-TP-based transport
platforms with capacities ranging from 5 Gb/s to 960 Gb/s and CE-based platforms that provide a range of compact
gigabit Ethernet (“GbE”) and 10 GbE Ethernet access devices.
Infinera XTM Series
The Infinera XTM Series packet-optical transport platform enables high-performance metro networks with
service-aware, application-specific capabilities. Supporting integrated packet-optical features, the XTM Series builds
on key design philosophies such as low power, high density and high scalability. It offers advanced capabilities for
mobile infrastructure such as superior sync features for backhaul, WDM in cloud radio access network architecture
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and fronthaul. The platform supports fiber delivery technologies (commonly referred to as “FTTx”) with transparent
delivery of TDM services over a packet-optical network. It provides error correction, OTN transport, MEF Carrier
Ethernet, MPLS - transport profile and optics, all in one terabit-scale packet-optical transport switch solution. This
platform is designed for application-rich packet-optical metro networks providing cable, mobile, broadband and
business services that require 10 Gb/s, 100 Gb/s or 200 Gb/s wavelengths.
Infinera Cloud Xpress Family
The Infinera Cloud Xpress Family is designed to meet the varying needs of ICPs, communication service
providers, Internet exchange service providers, enterprises and other large-scale data center operators. The first
generation of the Cloud Xpress has a 500 Gb/s WDM super-channel output in two data center rack units (2RU). Our
second generation, the Cloud Xpress 2, released in June 2017 leverages the ICE4 optical engine, and has a 1.2 Tb/s
super-channel output in one data center rack unit (1RU). These platforms are designed with a rack-and-stack form
factor and utilize a software approach that enables them to easily plug into existing cloud provisioning systems using
open SDN APIs, an approach similar to the server and storage infrastructure deployed in the cloud.
Infinera Groove G30
The Infinera Groove G30 is a one rack unit (1RU) modular open transport solution designed to deliver
programmable, high speed and secure bandwidth optimized for the growing capacity demands of mobile, video, IoT,
and cloud applications. The Groove G30 can be equipped as a muxponder terminal solution and as an open line
system optical layer solution, and is designed to support disaggregated transport in metro and long-haul applications.
Open APIs ensure rapid introduction and easy integration within any network operating environment. In combination
with CloudWave T Optics, the Groove G30 platform supports ultra-high density and low power consumption optical
transport, as well as transmission of up to 600 Gb/s of capacity per single wavelength.
Infinera FlexILS Open Line System
The Infinera FlexILS open line system platform connects various Infinera and third-party terminal equipment
platforms over long-distance fiber optic cable while providing switching, multiplexing, amplification and management
channels. It is designed to support over 50 Tb/s of fiber capacity when used with the Infinera platforms over extended
C-band and L-band. The platform supports ROADM functionality with a flexible grid architecture and provides
unconstrained optical switching by eliminating the restrictions of fixed wavelengths by port or direction. This platform is
designed to provide open APIs interfacing with SDN control for multi-layer switching when combined with other
platforms featuring WDM, OTN and packet switching.
Infinera DRX Series
The Infinera DRX Series of disaggregated routers is designed to help network operators reduce capital
expenditures and accelerate innovation by minimizing vendor lock-in, while also reducing operating expenses with
open SDN-enabled network automation. The DRX Series includes carrier-class 1RU and 2RU white boxes purpose-
built for disaggregated router applications including 5G backhaul and Fiber Deep. As an open networking solution, the
DRX Series leverages Infinera CNOS routing software as well as third party hardware-independent network operating
systems. While the capacity of individual DRX devices ranges from 300 Gb/s to 9.6 Tb/s, stacking and leaf-spine
architectures enabled by CNOS provide for much larger node capacities. Carrier-class capabilities of the DRX Series
include advanced synchronization, equipment redundancy, and temperature hardened options. We anticipate shipping
the Infinera DRX Series in the first half of 2019.
Infinera 8600 Series
The Infinera 8600 Series of SDN-ready Internet Protocol/MPLS routers provide compact, cost-effective and
power-efficient solutions for cell sites, metro core and aggregation applications. By boosting network performance,
integrating advanced synchronization and enabling new fixed mobile services, the 8600 Series helps network
operators ensure a high-quality user experience in 3G, 4G, fixed mobile convergence and emerging 5G networks.
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Software and Services
Transcend Software Suite
Leveraging open architectures based on SDN principles, the Infinera Transcend Software Suite includes a
multi-domain orchestrator, SDN domain controllers, network managers, and MANO for VNF management. It provides
a platform for automation that reduces operational costs, optimizes network assets, speeds time to revenue, and
maximizes network and service availability. Intent-based automation translates service requests into optimized multi-
layer (L0-L3) network configurations while closed loop automation proactively monitors network state and service
performance and, then, when appropriate, takes actions to assure service quality. Additional highlights include
DevOps-style programmability, open interfaces, and GUI-based portals. Following the Acquisition, Infinera Xceed
software applications and functionality have been integrated into the Transcend Software Suite.
Infinera CNOS
Infinera CNOS is a hardware-independent network operating system that leverages field-proven 8600
Internet Protocol/MPLS software widely deployed by leading Tier-1 carriers. Infinera CNOS is designed to run on the
Infinera DRX platform or on third party packet switching white boxes to provide a scalable disaggregated router
solution. This solution is designed to enable network operators to reduce capital expenses and accelerate innovation
by minimizing vendor lock-in, while also reducing operational expenses with SDN-enabled automation and the ability
to scale cost effectively with stacking and leaf-spine architectures.
Customer Support Services
In connection with our product offerings, we provide a comprehensive range of support services for all
hardware and software products. These support services cover all phases of network ownership, from the initial
installation through day-to-day maintenance activities and professional services. Our support services are designed to
efficiently manage and maintain customer network operations in the face of today's ever-increasing demands for lower
operational costs and minimized downtime.
Our support organization continues to scale and provide world-class services that successfully support
customers around the world. In addition, we continue to expand our services portfolio to meet the evolving needs of
our customers.
Competition
Our current technologies and platforms support the metro, DCI, long-haul and subsea markets. The packet-
optical networking equipment market is highly competitive and competition in the markets we serve is based on any
one or a combination of the following factors:
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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;
power consumption;
heat dissipation;
form factor or density;
installation and operational simplicity;
quality and reliability;
service and support;
security and encryption requirements;
scalability and investment protection; and
product lead times.
Competition in the packet-optical equipment market is intense. In the long-haul market, our main competitors
include WDM systems suppliers such as Ciena, Huawei, Nokia and ZTE. In the metro market, we face the same
competitors as in long-haul, plus Cisco, Adva Optical Networking and ECI. In the DCI market we also face competition
from vendors that are selling optical components directly to customers as opposed to WDM systems. In addition to our
current competitors, other companies have, or may in the future, develop products that are, or could be, competitive
8
with our products. We also may encounter competitor consolidation in the markets in which we compete, which could
lead to a changing competitive landscape, capabilities and market share, and could impact our results of operations.
Some of our competitors have substantially greater name recognition, technical, financial and marketing
resources, and better-established relationships with potential customers than we have. Many of our competitors have
more resources 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 and existing
customers, and have the ability to provide financing to customers and could, therefore, have an inherent advantage in
selling products to those customers.
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 also use distribution or support partners to enter
new markets or when requested by a potential customer. Our sales team has significant experience with the buying
process and sales cycles typical of high-value telecommunications products.
The sales process for our products entails discussions with prospective customers, analyzing their networks
and identifying how they can utilize our systems capabilities within their networks. This process requires developing
strong customer relationships and leveraging our sales force and customer support capabilities.
Over the course of the sales cycle, potential customers often test our products before buying. Prior to
commercial deployment, the customer will generally perform a field trial of our products. Upon successful completion,
the customer 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 prospective customer 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 a sales
presence throughout the United States, as well as in a number of international locations, including Argentina,
Denmark, France, Germany, Hong Kong, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Russia,
Singapore, Spain, Sweden and the United Kingdom. Adding incremental sales headcount in the future is expected to
be success-based and in support of new customer accounts or expansion of existing ones.
Indirect Sales Force. We employ business consultants and resale and logistics partners to assist in our sales
efforts, primarily in new regions for us whereby these partners have deep knowledge of typical business practices and
strong relationships with key local operators. 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 and support of our products.
Marketing and Product Management. Our product management team is responsible for defining the product
features and go-to-market plan required to maximize our success in the marketplace. Product management supports
our sales efforts with product and application expertise. Our corporate 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, as well as Internet programs and other marketing channels.
Research and Development
Continued investment in research and development is critical to our business. To this end, we have a team of
engineers with expertise in various fields, including systems, sub-systems, software and components. Our research
and development efforts are currently focused in Sunnyvale, California; Allentown, Pennsylvania; Bangalore, India;
Kanata, Canada; Stockholm, Sweden; Munich, Germany; Lisbon, Portugal; Shanghai, PRC; Espoo, Finland; and
Naperville, Illinois. We utilize a mix of internal resources and supplement our staffing with development personnel
provided by third parties on a contract basis. We have invested significant time and financial resources into the
enhancement of existing products and the development of new products. We will continue to expand our product
offerings and the capabilities of existing products 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. As part of the integration efforts related to the Acquisition, we are integrating the legacy Infinera and
Coriant products into a seamless end-to-end portfolio; and we are investing in leveraging the vertical integration
capabilities of Infinera into the legacy Coriant platforms. We are also working to develop new generations of optical
engines at a faster cadence than we have historically in order to bring new products to market faster and meet
customer demand. We believe these efforts will enhance our competitiveness in the markets we currently serve and
also allow us to address adjacent markets to fuel our future growth.
9
Employees
As of December 29, 2018, we had 3,876 employees. A total of 2,583 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 processes we use to
produce and package our products. This includes significant investments in personnel, equipment and the facilities
needed to manufacture and package our products in Sunnyvale, California, Berlin, Germany 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 through a combination of trade secrets, patents
and contractual protections. We believe that the investments we have made towards the manufacturing and packaging
of our products provide us with a significant competitive advantage. We also believe that our current manufacturing
facilities, including our fabrication facility for our PICs in Sunnyvale, California, and our module manufacturing facility in
Allentown, Pennsylvania can accommodate an increase in production capacity as our business continues to grow.
We also use contract manufacturers to assemble portions of our products. Each contract manufacturer
procures components necessary to assemble products according to our specifications and bills of material. For
elements of our business where we outsource, we perform rigorous in-house quality control testing to ensure the
reliability of our products. Our supply chain risk mitigation strategies are continuous and institutionalized in our supply
chain design for external manufacturing and for procurement of components. We currently use four contract
manufacturers in several different countries, including Germany, China, Malaysia, Mexico, Sweden, Hungary and
Thailand, and we maintain the capability to redirect manufacturing to U.S. qualified factories of three electronic
manufacturing services partners.
We expect all suppliers to comply with our Supplier Code of Conduct, which addresses the rights of workers to
safe and healthy working conditions, environmental responsibility, and compliance with applicable laws.
Backlog
As of December 29, 2018 and December 30, 2017, our total order backlog was approximately $374.3 million
and $100.9 million, respectively. Our backlog represents purchase orders received from customers for future product
shipments and services to be provided in future periods. More than half of our total order backlog is related to
services, comprised primarily of annual maintenance contracts. The significant increase in backlog at the end of 2018
was primarily due to the inclusion of the Coriant business as a result of the Acquisition. Our backlog is subject to future
events that could cause the amount or timing of the related revenue to change, and, in certain cases, may be canceled
without penalty. Orders in backlog may be fulfilled several quarters following order receipt and may relate to multi-year
support service obligations. As a result, we believe that backlog should not be viewed as an accurate indicator of
future operating results for any particular period. 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.
Intellectual Property
We believe our success 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.
Our optical engine technology, including our PIC, DSP, module and related technologies, are protected
through a combination of patents, trade secrets and contractual protections. However, there can be no assurances
that these protections 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 29 2018, we held 1,071 U.S. patents and 684 international patents expiring between 2019
and 2038, and held 185 U.S. and 177 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 any 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
10
business, and we may not be able to prevent third parties from infringing these patents. Therefore, the impact 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. For example, we are
currently involved in litigation for alleged patent infringement. See 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 or could 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.
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 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.
We incorporate free and open source licensed software into our products. Although we monitor our use of
such 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 addition, non-compliance with open source software
license terms and conditions could subject us to potential liability, including intellectual property infringement and or
contractual claims. 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 in a timely manner, any of which could adversely affect our business, operating results and financial
condition.
Environmental Matters
We are committed to maintaining compliance with all environmental laws and regulations applicable to our
operations, products and services. Our business and operations are subject to various federal, state, local and foreign
laws and regulations that have been adopted with respect to the environment, including the Waste Electrical and
Electronic Equipment (“WEEE”) Directive, Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (“RoHS”), and Registration, Evaluation, Authorization, and Restriction of
Chemicals (“REACH”) regulations adopted by the European Union. Environmental regulation is increasing and we
expect that our operations will be subject to additional environmental compliance requirements, which may expose us
to additional costs. We are also subject to disclosure requirements related to the presence of “conflict minerals” in our
products. 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.
Executive Officers
Our executive officers and their ages and positions as of December 29, 2018, are set forth below:
Name
Thomas J. Fallon ...............
Age
57
Position
Chief Executive Officer and Director
Brad D. Feller ....................
David W. Heard .................
Robert J. Jandro ................
45
50
63
Chief Financial Officer
Chief Operating Officer
Senior Vice President, Worldwide Sales
Thomas J. Fallon has served as our Chief Executive Officer since January 2010 and as a member of our
board of directors since July 2009. Mr. Fallon also served as our President from January 2010 to June 2013, and as
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our Chief Operating Officer from October 2006 to December 2009. From April 2004 to September 2006, Mr. Fallon
served as our Vice President of Engineering and Operations. From August 2003 to March 2004, Mr. Fallon was Vice
President, Corporate Quality and Development Operations at Cisco Systems, Inc., a networking and
telecommunications company. From March 1991 to August 2003, Mr. Fallon served in a variety of functions at Cisco,
including General Manager of the Optical Transport Business Unit and Vice President of Service Provider
Manufacturing. Prior to joining Cisco, Mr. Fallon also served in various manufacturing roles at Sun Microsystems and
Hewlett Packard. Mr. Fallon currently serves on one other public company board, Hercules Capital, Inc., a specialty
finance company. Mr. Fallon also serves on the Engineering Advisory Board of the Cockrell School at the University of
Texas. Mr. Fallon holds B.S.M.E. and M.B.A. degrees from the University of Texas at Austin.
Brad D. Feller was appointed as our Chief Financial Officer in March 2014 after joining us as Senior Vice
President of Finance in January 2014. Prior to joining us, Mr. Feller served as Interim Chief Financial Officer of Marvell
Technology Group Ltd., a fabless semiconductor company, from October 2012 to December 2013, and as Marvell's
Vice President, Corporate Controller, from September 2008 to October 2012. Prior to Marvell, Mr. Feller served as
Corporate Controller for Integrated Device Technology, Inc., a semiconductor company, from April 2005 to September
2008 and Financial Reporting Manager from October 2003 to April 2005. Prior to that, Mr. Feller served in various
roles at Ernst & Young LLP in the technology practice. Mr. Feller is a certified public accountant (inactive) in the State
of California and holds a B.S. degree in Business Administration from San Jose State University.
David W. Heard has served as our Chief Operating Officer since October 2018. Prior to that, Mr. Heard
served as our General Manager, Products and Solutions, since June 2017. Prior to joining us, Mr. Heard served as a
private consultant from 2015 to June 2017. From 2010 to 2015, Mr. Heard served as President of Network and Service
Enablement at JDS Uniphase. From 2007 to 2010, Mr. Heard served as Chief Operating Officer at BigBand Networks
(now part of Arris). From 2004 to 2006, Mr. Heard served as President and Chief Executive Officer at Somera (now
part of Jabil). From 2003 to 2004, Mr. Heard served as President and General Manager Switching Division at Tekelec
(now part of Oracle). From 1995 to 2003, Mr. Heard served in a number of leadership roles at Santera Systems Spatial
Networks and at Lucent Technologies (both now part of Nokia). Mr. Heard holds a B.A. in Production and Operations
Management from Ohio State University, an M.B.A. from the University of Dayton and an M.S. in Management from
Stanford Graduate School of Business, where he was a Sloan Fellow.
Robert J. Jandro has served as our Senior Vice President, Worldwide Sales, since May 2013. Prior to
joining us, Mr. Jandro served as Vice President of Business Development of Openwater Software, Inc., a large data
and analytics cloud company, from January 2008 to August 2012. From February 2004 to November 2006, Mr. Jandro
served as Chief Executive Officer and President of Nsite Software, Inc., an early cloud company acquired by Business
Objects. From March 2000 to August 2002, Mr. Jandro served as Executive Vice President of Global Sales and
Services for ONI Systems, an optical networking company. Prior to that, Mr. Jandro worked at Oracle where he last
served as the Group Vice President of Oracle’s Communications and Utilities Industries. Mr. Jandro holds an M.S. in
Management from Northwestern University’s Kellogg Graduate School of Management and a B.S. in Business from
the University of Missouri-St. Louis.
Available Information
Our website address is http://www.infinera.com. Information contained on our website or any website referred
to in this Form 10-K is not incorporated by reference 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.
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ITEM 1A.
RISK FACTORS
Investing in our securities involves a high degree of risk and a description of the risks and uncertainties
associated with our business is set forth below. You should carefully consider such risks and uncertainties,
together with the other information contained in this Annual Report on Form 10-K and in our other public filings.
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. If any of such risks and uncertainties actually
occurs, our business, financial condition or operating results could differ materially from the plans, projections
and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K and in our
other public filings, which could cause the market price of our common stock to decline, perhaps significantly.
Risks Related to the Acquisition
We may fail to realize the anticipated strategic and financial benefits expected from the Acquisition.
We may fail to realize all of the anticipated benefits of the Acquisition or fail to realize such benefits in
the anticipated time frame after the completion of the Acquisition. Our ability to realize the anticipated strategic
and financial benefits of the Acquisition will depend on, among other things, our ability to combine our business
with Coriant’s business in a manner that facilitates growth, realizes anticipated cost savings and retains Coriant’s
and our customers, suppliers and employees. We must successfully combine our business with the business of
Coriant in a manner that enables these anticipated benefits to be realized and we must achieve the anticipated
growth and cost savings without adversely affecting the combined company's revenue base. Failure to achieve
all of the anticipated strategic and financial benefits in a timely manner may have a material adverse effect on
our business, financial condition and results of operations.
We may be unable to realize the anticipated synergies related to the Acquisition, which could have a
material adverse effect on our business, financial condition and results of operations.
We expect to realize significant synergies from cost savings, including from consolidation of the
combined company's supply chain, operational scale efficiencies throughout the combined company and our
ability to integrate our optical engine into key Coriant products. We also expect to incur material one-time costs
to achieve these synergies. While we believe these synergies are achievable, our ability to achieve such
estimated synergies in the amounts and time frame expected is subject to various assumptions by our
management based on expectations that are subject to a number of risks, which may or may not be realized, as
well as the incurrence of other costs in our operations that may offset all or a portion of such synergies and other
factors outside our control. As a consequence, we may not be able to realize all of these synergies within the
time frame expected or at all, or the amounts of such synergies could be significantly reduced, and we may incur
additional and/or unexpected costs to realize these synergies. In addition, if we fail to achieve the anticipated
cost benefits throughout the supply chain or integrating our optical engine in key Coriant products in a timely
manner, we may be unable realize all the anticipated synergies. Failure to achieve the expected synergies could
significantly reduce the expected benefits associated with the Acquisition and adversely affect our business,
financial condition and results of operations.
We may be unable to successfully integrate Coriant’s business and realize the anticipated benefits of the
Acquisition.
We will be required to devote significant management attention and resources to integrating the
business and operations of Coriant. Potential difficulties we may encounter in the integration process include the
following:
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the loss of customers or suppliers of ours or of Coriant as a result of such parties deciding not to
continue business at the same or similar levels with us after the Acquisition;
challenges associated with operating the combined business in markets and geographies in which
we have not historically operated in;
difficulty integrating our direct sales and distribution channels with Coriant’s to effectively sell the
products and services of the combined company following the closing of the Acquisition;
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the complexities associated with managing our company and integrating personnel from Coriant,
resulting in a significantly larger combined company, while at the same time providing high quality
products to customers;
unanticipated issues in integrating accounting, information technology, communications,
administration and other systems;
challenges with re-negotiating pricing with key suppliers for more favorable terms;
the failure to identify and eliminate redundant and underperforming functions and assets;
difficulty addressing possible differences in corporate culture and management philosophies;
the failure to retain key employees of the combined company;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions
associated with the Acquisition; and
performance shortfalls as a result of the diversion of management’s attention caused by integrating
Coriant’s operations.
An inability to realize the anticipated benefits and cost synergies of the Acquisition, as well as any
delays encountered in the integration process, could have a material adverse effect on the revenue, gross
margin, level of operating expenses and overall results of operations of the combined company, which may
materially adversely affect the value of our stock.
The actual integration may result in additional and unforeseen expenses, and the anticipated benefits of
our plan for integration may not be realized. Actual synergies, if achieved at all, may be lower than what we
expect and may take longer to achieve than anticipated. For example, the elimination of duplicative costs may
not be possible or may take longer than anticipated, or the benefits from the Acquisition may be offset by costs
incurred or delays in integrating the companies. In addition, since Coriant's operations are more widely
distributed around the globe than our current operations, it may take longer to integrate the various functions and
divert management’s time more than anticipated. If we are not able to adequately address these challenges, we
may be unable to successfully integrate Coriant’s operations into our own or, even if we are able to combine the
two business operations successfully, to realize the anticipated benefits of the integration of the two companies.
Although our integration plan involves us making significant cash outlays to transform the business, if the
integration does not generate the returns we anticipate, it could cause us to decrease our cash and investment
position. This may cause customers to lose confidence in our business and make them reluctant to continue to
do business with us.
Our business relationships, those of Coriant or the combined company may be subject to disruption due
to uncertainty associated with the Acquisition.
Parties with which we or Coriant do business may experience uncertainty associated with the
Acquisition, including with respect to current or future product roadmaps of the combined company. Our and
Coriant’s business relationships may be subject to disruption, as customers, distributors, suppliers, vendors, and
others may seek to receive confirmation that their existing business relations with us or Coriant, as the case may
be, will not be adversely impacted as a result of the Acquisition or attempt to negotiate changes in existing
business relationships or consider entering into business relationships with parties other than the combined
company as a result of the Acquisition. For example, a number of Coriant’s customers deferred purchase orders
with Coriant pending announcement of a strategic transaction, and there can be no assurance that all of those
customers will ultimately submit such purchase orders. Any such failure to submit such purchase orders, or any
of these other disruptions could have a material adverse effect on our business, financial condition, or results of
operations and could also have an adverse effect on our ability to realize the anticipated benefits of the
Acquisition. The risks and adverse effects of such disruptions could have a negative effect on our stock price.
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If we are unable to maintain effective internal control over financial reporting for the combined
companies, we may fail to prevent or detect material misstatements in our financial statements, in which
case investors may lose confidence in the accuracy and completeness of our financial statements.
We and Coriant currently maintain separate internal control over financial reporting with different
financial reporting processes and different enterprise resource planning (“ERP”) systems. We plan to integrate
our internal control over financial reporting and move the combined companies to a single ERP system. We may
encounter difficulties and unanticipated issues in combining our respective accounting systems due to the
complexity of the business processes. In addition, Coriant as a private company has not historically had to
comply with Section 404 of the Sarbanes-Oxley Act of 2002 and their accounting systems and processes will
need to be integrated and in compliance in 2019. If we are unable to implement and maintain effective internal
control over financial reporting of the combined company, we may fail to prevent or detect material
misstatements in our financial statements, in which case investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our securities may decline.
Coriant may have liabilities that are not known, probable or estimable at this time.
As a result of the Acquisition, Coriant has become our subsidiary and remains subject to its past,
current and future liabilities (other than indebtedness discharged in connection with the Acquisition). There could
be unasserted claims or assessments against or affecting Coriant, including the failure to comply with applicable
laws, regulations, orders and consent decrees or infringement or misappropriation of third party intellectual
property or other proprietary rights that we failed or were unable to discover or identify in the course of
performing our due diligence investigation of Coriant. In addition, there are liabilities of Coriant that are neither
probable nor estimable at this time that may become probable or estimable in the future, including
indemnification requests received from customers of Coriant relating to claims of infringement or
misappropriation of third party intellectuaal property or other proprietary rights, tax liabilities arising in connection
with ongoing or future tax audits and liabilities in connection with other past, current and future legal claims and
litigation. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our
financial results. We may learn additional information about Coriant that adversely affects us, such as unknown,
unasserted, or contingent liabilities and issues relating to compliance with applicable laws or infringement or
misappropriation of third party intellectual property or other proprietary rights (including related indemnity
requests from customers).
As a result of the Acquisition, Infinera and Coriant may be unable to retain key employees.
Our success after the Acquisition will depend in part upon our ability to retain key employees of ours
and Coriant. Key employees may depart because of a variety of reasons relating to the Acquisition. If we and
Coriant are unable to retain key personnel who are critical to the successful integration and future operations of
the combined company, we could face disruptions in our operations, loss of existing customers, loss of key
information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the
loss of key personnel could diminish the anticipated benefits of the Acquisition.
We may be unable to generate the cash flow necessary to service the 2024 Notes or to make anticipated
capital expenditures.
We may not be able to generate sufficient cash flow to enable us to service the $402.5 million of
2.125% convertible senior notes due September 1, 2024 (the “2024 Notes”) or to make anticipated capital
expenditures. For example, in the first quarter after the Acquisition, the combined company had a net loss and
negative cash flows. In addition, we expect to incur losses over the next few quarters as we integrate the two
companies. Our ability to pay our expenses, satisfy the 2024 Notes and fund planned capital expenditures will
depend on our future performance, which will be affected by general economic, competitive, legislative,
regulatory and other factors beyond our control, and our ability to realize synergies and anticipated cost savings.
If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds in the future to
service the 2024 Notes or to make anticipated capital expenditures, we may be required to sell assets, reduce
capital expenditures or obtain additional financing. For additional risk related to the 2024 Notes, please see “Risk
Related to our 2024 Notes” below.
15
Risks Related to Our Business and Our Common Stock
Our quarterly results may vary significantly from period to period, which could make our future results
difficult to predict and could cause our operating results to fall below investor or analyst expectations.
Our quarterly results, in particular, our revenue, gross margins, operating expenses, operating margins
and net income (loss), have historically varied from period to period and may continue to do so in the future. 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 future revenue and the development efforts
associated with that future revenue. Consequently, if our revenue does not meet projected levels in the short-
term, our inventory levels, cost of goods sold and operating expenses would be high relative to revenue,
resulting in potential operating losses. For example, in each of the prior eight quarters, we have had operating
losses, largely as a result of lower than expected revenue and gross margins.
Factors that may contribute to fluctuations in our quarterly results, many of which are outside our control
and may be difficult to predict, include:
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fluctuations in demand, sales cycles and prices for products and services, including discounts given
in response to competitive pricing pressures, as well as the timing of purchases by our key
customers;
our ability to integrate our operations with Coriant's operations and realize the anticipated synergies
related to the Acquisition;
changes in customers’ budgets for optical transport network purchases and changes or variability in
their purchasing cycles;
fluctuations in our customer, product or geographic mix, including the impact of new customer
deployments, which typically carry lower gross margins, and customer consolidation, which may
affect our ability to grow revenue;
the timing and acceptance of our new product releases and our competitors' new product releases;
how quickly, or whether at all, the markets in which we operate adopt our solutions;
our ability to increase volumes and yields on products manufactured in our internal manufacturing
facilities;
our ability to successfully restructure our operations within our anticipated timeframe and realize
our anticipated savings;
the quality and timing of delivery of key components from suppliers;
order cancellations, reductions or delays in delivery schedules by our customers;
our ability to control costs, including our operating expenses and the costs and availability of
components we purchase for our products;
any significant changes in the competitive dynamics of the markets we serve, including any new
entrants, new technologies, or customer or competitor consolidation;
readiness of customer sites for installation of our products as well as the availability of third party
suppliers to provide contract engineering and installation services for us;
the timing of revenue recognition and revenue deferrals;
any future changes in U.S. generally accepted accounting principles (“U.S. GAAP”) or new
interpretations of existing accounting rules, including Accounting Standards Update No. 2016-02,
“Leases (Topic 842)”;
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the impact of a significant natural disaster, such as an earthquake, severe weather, or tsunami or
other flooding, as well as interruptions or shortages in the supply of utilities such as water and
electricity, in a key location such as our Northern California facilities, which is located near major
earthquake fault lines and in a designated flood zone; 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 and beyond. If our revenue or operating results do not meet the expectations of
investors or securities analysts or fall below any guidance we provide to the market, the price of our common
stock may decline substantially.
Any delays in the development and introduction of our new products or in releasing enhancements to
our existing products may harm our business.
Because our products are based on complex technologies, including, in many cases, the development
of next-generation PICs and specialized ASICs (key components of our optical engines), we may experience
unanticipated delays in developing, improving, manufacturing or deploying these products. The development
process for our optical engines is lengthy, and any modifications entail significant development cost and risks.
At any given time, various new product introductions and enhancements to our existing products are in
the development phase and are not yet ready for commercial manufacturing or deployment. We rely on third
parties, some of which are relatively early stage companies, to develop, manufacture and deliver components for
our next-generation products, which can often require custom development. The development process from
laboratory prototype to customer trials, and subsequently to general availability, involves a significant number of
simultaneous efforts. These efforts often must be completed in a timely and coordinated manner so that they
may be incorporated into the product development cycle for our systems, and include:
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completion of product development, including the development and completion of our next-
generation optical engines, and the completion of associated module development;
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 optical engines as well as intensive software testing are important to the timely introduction of new products
and enhancements to our existing products, and are subject to these development risks. In addition, unexpected
intellectual property disputes, failure of critical design elements, limited or constrained engineering resources,
and a host of other development 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.
Additionally, as a result of the Acquisition, significant development effort is in progress to enhance our
end-to-end product portfolio, including the newly added Coriant products, with network management and network
automation software and features that would enable our current and future potential customers to deploy
networks easily and take advantage of features such as IB. This effort may not bear the expected results and
benefits to our current and future potential customers and we may not realize the financial and strategic benefits
to our business.
As we transition customers to new products, we face significant risk that our new products may not be
accepted by our current or new customers. To the extent that we fail to introduce new and innovative products
that are adopted by customers, we could fail to obtain an adequate return on these investments and could lose
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market share to our competitors, which could be difficult or impossible to regain. Similarly, we may face
decreased revenue, gross margins and profitability due to a rapid decline in sales of current products as
customers hold spending to focus purchases on new product platforms. We could incur significant costs in
completing the transition, including costs of inventory write-downs of the current product as customers transition
to new product platforms. In addition, products or technologies developed by others may render our products
noncompetitive or obsolete and result in significant reduction in orders from our customers and the loss of
existing and prospective customers.
Our ability to increase our revenue will depend upon continued growth of demand by consumers and
businesses for additional network capacity and on the level and timing of capital spending by our
customers.
Our future success depends on factors that increase the amount of data transmitted over
communications networks and the growth of optical transport networks to meet the increased demand for optical
capacity. These factors include the growth of mobile, video and cloud-based services, increased broadband
connectivity and the continuing adoption of high-capacity, revenue-generating services. If demand for such
bandwidth does not continue, or slows down, the market for optical transport networking equipment may not
continue to grow and our product sales would be negatively impacted.
In addition, demand for our products depends on the level and timing of capital spending in optical
networks by service providers as they construct, expand and upgrade the capacity of their optical networks.
Capital spending is cyclical in our industry and spending by customers can change on short notice. Any future
decisions by our customers to reduce capital spending, whether caused by lower customer demand or
weakening economic conditions, changes in government regulations relating to telecommunications and data
networks, customer consolidation or other reasons, could have a material adverse effect on our business, results
of operations and financial condition.
We are dependent on a small number of key customers for a significant portion of our revenue from
period to period 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.
While our revenue and customer base will diversify as part of the Acquisition, today a relatively small
number of customers account for a large percentage of our revenue from period to period. For example, for fiscal
year 2018 our top five customers accounted for approximately 42% of our total revenue. For fiscal year 2017, our
top five customers accounted for approximately 44% of our total revenue. Included in these five customers for
fiscal year 2017 is one customer that completed a merger in late 2017, which was a combination of two of our
historically larger customers. For fiscal year 2016, our top five customers accounted for approximately 46% of
our total revenue. Our business will likely be harmed if any of our key customers are acquired, do not generate
as much revenue as we forecast, stop purchasing from us, delay anticipated product purchases, 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 or do not add new larger customers over time. We continue to expect a
relatively small number of customers to continue to account for a large percentage of revenue from period to
period. However, customer consolidation could reduce the number of key customers that generate a significant
percentage of our revenue and may increase the risks relating to dependence on a small number of 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 competitive new products at competitive prices,
and we may not be successful at doing so. In most cases, our sales are made to these customers pursuant to
standard purchase agreements rather than long-term purchase commitments, and orders may be canceled 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.
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Increased consolidation among our customers and suppliers in the communications networking
industry has and could continue to adversely affect our business and results of operations.
We have seen increased consolidation in the communications networking industry over the past few
years, which has adversely affected our business and results of operations. For example several of our
customers have consolidated, during 2016, Charter Communications completed its acquisition of Time Warner
Cable, Inc. and Altice completed its acquisition of Cablevision, and during 2017, Verizon completed its acquisition
of XO Communications and CenturyLink completed its acquisition of Level 3 Communications. Customer
consolidation has led to changes in buying patterns, slowdowns in spending, redeployment of existing equipment
and re-architecture of parts of existing networks or future networks, as the combined companies evaluate the
needs of the combined business. Moreover, the significant purchasing power of these large companies can
increase pricing and competitive pressures for us, including the potential for decreases in our average selling
prices. If one of our customers is acquired by another company that does not rely on us to provide it with
products or relies on another provider of similar products, we may lose that customer’s business. Such
consolidation may further reduce the number of customers that generate a significant percentage of our revenue
and may exacerbate the risks relating to dependence on a small number of customers. Any of the foregoing
results will adversely affect our business, financial condition and results of operations.
In addition, our suppliers in the communications networking industry have recently begun to
consolidate. For example, in the fourth quarter of 2018, Lumentum completed its acquisition of Oclaro, and II-VI
announced its intention to acquire Finisar. Supplier consolidation may lead to increased prices of components for
our products, deployment delays and/or a disruption in output. In addition, such consolidation may exacerbate
the risks relating to our dependence on a small number of suppliers.
Our gross margin may fluctuate from period to period and may be adversely affected by a number of
factors, some of which are beyond our control.
Our gross margin fluctuates from period to period and varies by customer and by product. Over the past
eight fiscal quarters, our gross margin has ranged from 24.1% to 40.5%. Our gross margin is likely to continue to
fluctuate and will be affected by a number of factors, including:
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the mix of the types of customers purchasing our products as well as the product mix, including
sales of lower margin Coriant products;
the initial products released powered by our next-generation technologies generate lower margin
initially, as per unit production costs for initial units tend to be higher and experience more
variability in production yields;
the pace at which we deploy solutions powered by our next generation technologies, which could
lead to higher excess or obsolete inventory;
significant new deployments to existing and new customers, often with a higher portion of lower
margin common equipment as we deploy network footprint;
aggressive pricing tactics by our competitors;
changes in our manufacturing costs, including fluctuations in yields and production volumes;
pricing and commercial terms designed to secure long-term customer relationships, as well as
commercial deals to transition certain customers to our new products;
consolidation amongst our suppliers, which may increase prices of components for our products;
the volume of IB-enabled solutions sold, and capacity licenses activated;
price discounts negotiated by our customers;
charges for excess or obsolete inventory;
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changes in the price or availability of components for our products, including the possible effect of
new or increased tariffs on the prices of raw materials used in such components; and
changes in warranty related costs.
It is likely that the average unit prices of our products will decrease over time in response to competitive
pricing pressures. In addition, some of our customer contracts contain clauses that require us to annually
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 from our supply partners.
If these efforts are not successful or if we are unable to reduce our costs by more than the reduction in the price
of our products, our 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 this often results in aggressive
business tactics by our competitors, including:
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aggressively pricing their optical transport products and other portfolio products, including offering
significant one-time discounts and guaranteed future price decreases;
offering optical products at a substantial discount or for free when bundled together with broader
technology purchases, such as router or wireless equipment purchases;
providing financing, marketing and advertising assistance to customers; and
influencing customer requirements to emphasize different product capabilities, which better suit
their products.
The level of competition and pricing pressure tend to increase when competing for larger high-profile
opportunities or during periods of economic weakness 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 their aggressive business tactics, including those described above, demand for our products
could decline, we could experience delays or cancellations of customer orders, and/or we could be required to
reduce our prices to compete in the market.
Actions that we are taking to restructure our business to cut costs in order to align our operating
structure with current opportunities may not be as effective as anticipated.
In December 2018, we implemented a restructuring initiative (the “2018 Restructuring Plan”) as part of a
comprehensive review of our operations and ongoing integration synergies in order to optimize resources for
future growth, improve efficiencies and address redundancies following the Acquisition. As part of the 2018
Restructuring Plan, we hope to reduce expenses, streamline the organization, and reallocate resources to align
more closely with our needs going forward. While we expect to realize efficiencies from these actions, these
activities might not produce the full efficiency and cost reduction benefits we expect. Further, such benefits may
be realized later than expected, and the ongoing costs of implementing these measures may be greater than
anticipated. In addition, as a result of the restructuring, our ability to execute on product development, address
key market opportunities and/or meet customer demand, could be materially and adversely affected.
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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 highly trained customer service and
support personnel to ensure that the deployment of our products does 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 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. In addition, as a result of the Acquisition, our current and prospective employees may experience
uncertainty about their futures that may impair our ability to retain, recruit or motivate key management,
engineering, technical and other personnel.
The markets in which we compete are highly competitive and we may not be able to compete effectively.
Competition in the packet-optical equipment market is intense. Our main competitors include WDM
system suppliers, such as Adva, Ciena, Cisco, ECI, Huawei, Nokia and ZTE. In addition, there are several other
companies that offer one or more products that partially compete with our offerings.
Competition in the markets we serve is based on any one or a combination of the following factors:
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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;
power consumption;
heat dissipation;
form factor or density;
installation and operational simplicity;
quality and reliability;
service and support;
security and encryption requirements;
scalability and investment protection; and
product lead times.
In addition to our current competitors, other companies have, or may in the future develop, products that
are or could be competitive with our products. We also could encounter competitor consolidation in the markets
in which we compete, which could lead to a changing competitive landscape, capabilities and market share, and
could impact our results of operations.
Some of our competitors have substantially greater name recognition, technical, financial and marketing
resources, and better established relationships with potential customers than we have. Many of our competitors
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have more resources 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 and existing customers and have the ability to provide financing to customers and could, therefore,
have an inherent advantage in selling products to those customers.
We also compete with low-cost producers 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. In
addition, we may also face increased competition from system and component companies that develop products
based on off-the-shelf hardware that offers the latest commercially 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.
We must respond to rapid technological change and comply with evolving industry standards and
requirements for our products to be successful.
The optical transport 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 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 will continue to improve the
performance of their existing products and 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 anticipate future customer requirements and 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.
The manufacturing process for our PICs and certain components of our products, and the assembly of
our finished products, is very complex. The partial or complete loss of any of our manufacturing
facilities, a reduction in yields of our PICs or an inability to scale capacity to meet customer demands
could harm our business.
The manufacturing process for our PICs and certain components of our products, and the assembly of
our finished products, is very complex. In the event that any of our manufacturing facilities utilized to build these
components and assemble our finished products were fully or partially destroyed, or shut down, as a result of a
natural disaster, work stoppage or otherwise, it would limit our ability to sell our products. Because of the
complex nature of our manufacturing facilities, such loss would take a considerable amount of time to repair or
replace. The partial or complete loss of any of our manufacturing facilities, or an event causing the interruption in
our use of any such facilities, whether as a result of a natural disaster, work stoppage or otherwise, for any
extended period of time would cause our business, financial condition and operating results to be harmed.
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. Lower than expected 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 damage customer relations and cause business reputation problems,
harming our business and operating results.
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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 our customers, our
business and our results of operations.
Our large customers have substantial negotiating leverage, which may cause us to agree to terms and
conditions that result in decreased revenue due to lower average selling prices and potentially increased
cost of sales leading to lower gross margin, all of which would harm our results of operations.
Many of our customers are large service providers that have substantial purchasing power and leverage
in negotiating contractual arrangements with us. In addition, customer consolidation in the past few years has
created combined companies that are even larger and have greater negotiating leverage. Our customers have
and may continue to seek advantageous pricing, payment and other commercial terms. We have and may
continue to agree to unfavorable commercial terms with these customers, including the potential of reducing the
average selling price of our products, increasing cost of sales 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 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 sole or limited sources. In
particular, we rely on our own production of certain components of our products, such as PICs, and on third
parties, including sole source and limited source suppliers, for certain of the components of our products,
including ASICs, field-programmable gate arrays, processors, and other semiconductor and optical components.
We have increased our reliance on third parties to develop and manufacture components for certain products,
some of which require custom development. We purchase most of these components on a purchase order basis
and only have long-term contracts with these sole source or limited source suppliers. If any of our sole source 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. In addition, if our contract
manufacturers do not receive critical components in a timely manner to build our products, then we would not be
able to ship in a timely manner and would, therefore, be unable to meet our prospective customers’ product
delivery requirements. 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, merged with another supplier, or limited their supply of components to us, which may
cause us to experience longer than normal lead times, supply delays and increased prices. 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 problems experienced by our suppliers or contract
manufacturers, strong demand in the industry for such components, or other disruptions in our supply chain. In
addition, disruptions to global macroeconomic conditions may 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. Any failure to meet our customers’ product delivery requirements could harm
our reputation and our customer relationships, either of which would harm our business and operating results.
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If we fail to accurately forecast our manufacturing requirements or customer demand, we could incur
additional costs, including inventory write-downs or equipment write-offs, which would adversely affect
our business and results of operations.
We generate forecasts of future demand for our products several months prior to the scheduled delivery
to our prospective customers. This 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. In addition, we must
manage our inventory to ensure we continue to meet our commitments as we introduce new products or make
enhancements to our existing products.
If we overestimate market demand for our products and, as a result, increase our inventory in
anticipation of customer orders that do not materialize, we will have excess inventory, which could result in
increased risk of obsolescence and significant inventory write-downs. Furthermore, this will result in reduced
production volumes and our fixed costs will be spread across fewer units, increasing 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. In
addition, we may be unable to meet our supply commitments to customers, which could result in a loss of certain
customer opportunities or a breach of our customer agreements resulting in payment of damages.
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 products with high technology content is complicated and often
involves problems with software, hardware, components and manufacturing methods. Complex hardware and
software systems, such as our products, can often contain undetected errors or bugs 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 issues in the past in
connection with our products, including failures due to the receipt of faulty components from our suppliers and
performance issues related to software updates. From time to time we have had to replace certain components,
provide software remedies or other remediation in response to errors or bugs, and we may have to do so again
in the future. In addition, performance issues can be heightened during periods where we are developing and
introducing multiple new products to the market, as any performance issues we encounter in one technology or
product could impact the performance or timing of delivery of other products. Our products may suffer
degradation of performance and reliability over time. Also, as a result of the Acquisition, we will be adding,
augmenting, and modifying significant parts of our combined portfolio with network management and network
automation software and features. These efforts may introduce new software bugs or network level reliability
issues that are not known at this time, which could cause us to lose customers and fail to add new customers.
If reliability, quality, security or network monitoring problems develop, a number of negative effects on
our business could result, including:
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reduced orders from existing customers;
declining interest from potential customers;
delays in our ability to recognize revenue or in collecting accounts receivables;
costs associated with fixing hardware or software defects or replacing products;
high service and warranty expenses;
delays in shipments;
high inventory excess and obsolescence expense;
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high levels of product returns;
diversion of our engineering personnel from our product development efforts; and
payment of liquidated damages, performance guarantees or similar penalties.
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.
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 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 that will guarantee product availability, or the
continuation of particular pricing or payment terms. There are a number of risks associated with our dependence
on contract manufacturers, including:
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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 high demand;
limited warranties on components;
potential misappropriation of our intellectual property; and
potential manufacturing disruptions (including disruptions caused by geopolitical events, military
actions, work stoppages or natural disasters).
Any of these risks could impair our ability to fulfill orders. Any delays by our contract manufacturers may
cause us to be unable to meet the delivery requirements of our customers, which could decrease customer
satisfaction and harm our product sales. In addition, 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 could lose revenue and damage our customer relationships.
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Our sales cycle can be long and unpredictable, which could result in an unexpected revenue shortfall in
any given quarter.
Our products can have a lengthy sales cycle, which can extend from six to twelve months and may take
even longer for larger prospective customers. 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.
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 outside debt or equity financing
as well as cash flow from operations to fund our operations, capital expenditures and expansion. We may require
additional capital from equity financing, debt financing or other financings in the future to fund our operations,
respond to competitive pressures or strategic opportunities or to refinance our existing debt obligations. 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.
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 if 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.
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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 transport networking industry, including our competitors, have extensive patent portfolios with respect
to optical transport networking technology. In addition, patent holding companies seek to monetize patents they
have purchased or otherwise obtained. 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 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 addition, we have had certain patent
licenses with third parties that have not been renewed, and if we cannot successfully renew these licenses, we
could face claims of infringement. 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. For additional information regarding certain of the legal proceedings in which we are involved, see
Item 1, "Legal Proceedings," contained in Part II of this report.
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
or could 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 may also be required to indemnify some customers under our contracts if a third party alleges, or a
court finds, that our products have infringed upon the proprietary rights of other parties. From time to time, we
have agreed to indemnify certain customers for claims made against our products, where such claims allege
infringement of third party intellectual property rights, including, but not limited to, patents, registered trademarks
and/or copyrights. If we are required to make a significant payment under any of our indemnification obligations,
our result of operations may be harmed.
We incorporate free and open source licensed software into our products. Although we monitor our use
of such 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 addition, non-compliance with open
source software license terms and conditions could subject us to potential liability, including intellectual property
infringement and/or contract claims. In such events, we may 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 in a timely manner, any of which could adversely affect our
business, operating results and financial condition.
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. Factors affecting the trading price of our common stock include:
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variations in our operating results;
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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 or business expectations by any securities analysts that elect to
follow our common stock;
• mergers and acquisitions by us (including the Acquisition), by our competitors or by our customers;
• market conditions in our industry, the industries of our customers and the economy as a whole; and
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adoption or modification of regulations, policies, procedures or programs applicable to our
business.
In addition, if the market for technology stocks or the broader stock market experience a 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 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.
Unfavorable macroeconomic and market conditions may adversely affect our industry, business and
financial results.
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.
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.
Challenging economic conditions have from time to time contributed to slowdowns in the
telecommunications industry in which we operate. Such slowdowns may result in:
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reduced demand for our products as a result of constraints on capital spending by our customers;
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 downward pressure on our near term gross profits;
risk of excess or obsolete inventories;
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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.
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 margin and harm
our reputation and our customer relationships, either of which could harm our business and operating results.
Our international sales and operations subject us to additional risks that may harm our operating
results.
Sales of our products into international markets are an important part of our business and will be
increasingly important given Coriant's international revenue mix. During 2018, 2017 and 2016, we derived
approximately 49%, 42% and 38%, respectively, of our revenue from customers outside of the United States. We
expect that significant management attention and financial resources will be required for our international
activities over the foreseeable future as we continue to operate in international markets. In some countries, our
success in selling our products and growing revenue 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. In addition, many of the companies we compete against internationally have greater name
recognition and a more substantial sales and marketing presence.
We have sales and support personnel in numerous countries worldwide. In addition, we have
established development centers in Canada, India and Sweden. There is no assurance that our reliance upon
development resources in international locations will enable us to achieve meaningful cost reductions or greater
resource efficiency. As a result of the Acquisition, we now have sales and support personnel in greater number of
geographical locations throughout Asia (including China) and EMEA (with offices in the Middle East).
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:
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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;
political, social and economic instability, including wars, terrorism, political unrest, boycotts,
curtailment of trade and other business restrictions;
tariff and trade barriers and other regulatory requirements or contractual limitations on our ability to
sell or develop our products in certain foreign markets;
less effective protection of intellectual property than is afforded to us in the United States or other
developed countries;
local laws and practices that favor local companies, including business practices that we are
prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and
regulations;
potentially adverse tax consequences; and
effects of changes in currency exchange rates, particularly relative increases in the exchange rate
of the U.S. dollar versus other currencies that could negatively affect our financial results and cash
flows.
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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.
Our international operations are subject to increasingly complex foreign and U.S. laws and regulations,
including but not limited to anti-corruption laws, such as the Foreign Corrupt Practices Act and the UK Bribery Act
and equivalent laws in other jurisdictions, antitrust or competition laws, and data privacy laws, among others.
Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our
officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products
and services in one or more countries, and could also materially affect our reputation, our international expansion
efforts, our ability to attract and retain employees, our business, and our operating results. Although we have
implemented policies, procedures and training designed to ensure compliance with these laws and regulations,
there can be no complete assurance that any individual employee, contractor or agent will not violate our
policies. Additionally, the costs of complying with these laws (including the costs of investigations, auditing and
monitoring) could also adversely affect our current or future business.
As we continue to expand our business globally, our success will depend, in large part, on our ability to
effectively anticipate and manage these and other risks and expenses associated with our international
operations. For example, political instability and uncertainty in the European Union and, in particular, the United
Kingdom's pending exit from the E.U. (Brexit) as well as other countries potentially choosing to exit the E.U.,
could slow economic growth in the region, affect foreign exchange rates, and could further discourage near-term
economic activity, including our customers delaying purchases of our products. Our failure to manage any of
these risks successfully could harm our international operations and reduce our international sales, and business
generally, adversely affecting our business, financial condition and results of operations.
We may be adversely affected by fluctuations in currency exchange rates.
A portion of our sales and expenses stem from countries outside of the United States, and are in
currencies other than U.S. dollars, and therefore subject to foreign currency fluctuation. Accordingly, fluctuations
in foreign currency rates could have a material impact on our financial results in future periods. We may enter
into other financial contracts to reduce the impact of foreign currency fluctuations. We currently enter into foreign
currency exchange forward contracts to reduce the impact of foreign currency fluctuations on accounts
receivable, and also to reduce the volatility of cash flows primarily related to forecasted foreign currency revenue
and expenses. These forward contracts 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 that could negatively affect our results of operations and financial
condition.
Our effective tax rate may increase or fluctuate, which could increase our income tax expense and
reduce our net income.
Our effective tax rate can be adversely affected by several factors, many of which are outside of our
control, including:
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changes in the valuation of our deferred tax assets and liabilities, and in deferred tax valuation
allowances;
changes in the relative proportions of revenue and income before taxes in the various jurisdictions
in which we operate that have differing statutory tax rates;
changing tax laws, regulations, rates and interpretations in multiple jurisdictions in which we
operate;
changes in accounting and tax treatment of equity-based compensation;
changes to the financial accounting rules for income taxes; and
the resolution of issues arising from tax audits.
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The international tax environment continues to change as a result of both coordinated actions by
governments and unilateral measures designed by individual countries, both intended to tackle concerns over
base erosion and profit shifting (“BEPS”) and perceived international tax avoidance techniques. The
recommendations of the BEPS Project led by the Organization for Economic Cooperation and Development are
involved in much of the coordinated activity, although the timing and methods of implementation vary. In addition,
U.S. tax reform continues to be a priority for the current administration, and changes to the U.S. Tax Cuts and
Jobs Act (the “Tax Act”) could adversely affect our effective tax rate and our results of operations.
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. In
addition, if we are unable to implement key operation controls around pricing, spending and other financial
processes, we may not be able to improve our financial performance.
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, including
most recently the acquisition of Coriant. In order to make acquisitions, we may use cash, issue equity that could
dilute our current stockholders, or incur debt or assume indebtedness. If we are unable to achieve the anticipated
strategic benefits of such acquisitions, it could adversely affect our business, financial condition and results of
operations. In addition, the market price of our common stock could be adversely affected if the integration or the
anticipated financial and strategic benefits of such acquisitions are not realized as rapidly as, or to the extent
anticipated by investors and securities analysts.
Acquisitions can also result in adverse tax consequences, warranty or product liability exposure related
to acquired assets, additional stock-based compensation expense, and write-up of acquired inventory to fair
value. In addition, we may record goodwill and other purchased intangible assets in connection with an
acquisition and incur impairment charges in the future. If our actual results, or the plans and estimates used in
future impairment analyses, are less favorable than the original estimates used to assess the recoverability of
these assets, we could incur additional impairment charges.
Acquisitions also involve numerous risks that could disrupt our ongoing business and distract our
management team, including:
•
•
•
•
•
problems integrating the acquired operations, technologies or products with our own;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering new markets; and
loss of key employees.
Our failure to adequately manage the risks associated with an acquisition could have an adverse effect
on our business, financial condition and operating results.
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 Directive, Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and
Electronic Equipment, and the Registration, Evaluation, Authorization, and Restriction of Chemicals regulations
31
adopted by the European Union. If we experience a problem with complying with these regulations, it could
cause an interruption or delay in our manufacturing operations or it 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 regulations that could adversely affect our business.
We are subject to U.S. and foreign trade control laws that may limit where and to whom we sell our
products. These trade control laws also limit our ability to conduct product development activities in certain
countries and restrict the handling of our U.S. export controlled technology. In addition, various countries regulate
the import of certain technologies and have enacted laws that could limit our ability to distribute our products and
certain product features or could limit our customers’ ability to implement our products in those countries.
Changes in our products or changes in U.S. and foreign 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 impacted 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, or any limitation on our ability to develop, export or
sell our products would adversely affect our business, financial condition and operating results.
Our product or manufacturing standards could also be impacted by new or revised environmental rules
and regulations or other social initiatives. For instance, the SEC has adopted disclosure requirements relating to
the use of conflict minerals originating from the Democratic Republic of Congo and certain other adjoining
countries. Those rules, which require us to report on our processes and supply chain around sourcing these
minerals, could adversely affect our costs, the availability of minerals used in our products and our relationships
with customers and suppliers.
The Federal Communications Commission (“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. In
December 2017, the FCC voted to roll back its 2015 order regulating broadband Internet service providers as
telecommunications service carriers under Title II of the Telecommunications Act. This decision repeals net
neutrality regulations that prohibit blocking, degrading or prioritizing certain types of Internet traffic and restores
the light touch regulatory treatment of broadband service in place prior to 2015. Changes in regulatory
requirements or uncertainty associated with the regulatory environment could delay or impede investment in
network infrastructures by our customers, which could adversely affect the sale of our products and services.
Similarly, changes in regulatory tariff requirements or other regulations relating to pricing or terms of carriage on
communications networks could slow the development or expansion of network infrastructures and adversely
affect our business, operating results, and financial condition.
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 cybersecurity, privacy and data protection, which can affect the market and requirements for
networking and communications equipment. For example, in April 2016, the European Parliament approved the
General Data Protection Regulation (the “GDPR”), which came into effect in May 2018 and supersedes current
EU data protection regulations. The GDPR will impose stringent data handling requirements on companies that
receive or process personal data of residents of the EU, and non-compliance with the GDPR could result in
significant penalties, including data protection audits and heavy fines. Any failure to obtain the required approvals
or comply with such laws and regulations could harm our business and operating results.
32
Natural disasters, terrorist attacks or other catastrophic events could harm our operations.
Our headquarters and the majority of our infrastructure, including our PIC fabrication manufacturing
facility, are located in Northern California, an area that is susceptible to earthquakes, floods and other natural
disasters. Further, a terrorist attack aimed at Northern California or at the United States 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 man-made or natural 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.
Security incidents, such as data breaches and cyber-attacks, could compromise our intellectual property
and proprietary or confidential information and cause significant damage to our business and
reputation.
In the ordinary course of our business, we maintain sensitive data on our networks, including data
related to our intellectual property and data related to our business, customers and business partners, which is
considered proprietary or confidential information. We believe that companies in the technology industry have
been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain
unauthorized access. While the secure maintenance of this information is critical to our business and reputation,
our network and storage applications, and those systems and other business applications maintained by our
third-party providers, may be subject to unauthorized access by hackers or breached due to operator error,
malfeasance or other system disruptions. It may be difficult to anticipate or immediately detect such security
incidents or data breaches and the damage caused as a result. Accordingly, a data breach, cyber-attack, or
unauthorized access or disclosure of our information, could compromise our intellectual property and reveal
proprietary or confidential business information. While we continually work to safeguard our internal network
systems and validate the security of our third party providers to mitigate these potential risks, including through
information security policies and employee awareness and training, there is no assurance that such actions will
be sufficient to prevent cyber-attacks or security breaches. We have been subjected in the past to a range of
incidents including phishing, emails purporting to come from an executive or vendor seeking payment requests,
and communications from look-alike corporate domains. While these have not had a material effect on our
business or our network security to date, security incidents involving access or improper use of our systems,
networks or products could compromise confidential or otherwise protected information, destroy or corrupt data,
or otherwise disrupt our operations. These security incidents could cause us to incur significant remediation
costs and expenses, subject us to regulatory action, disrupt key business operations, open us up to liability, and
divert attention of management and key information technology resources, any of which could cause significant
harm to our business and reputation.
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;
33
•
•
•
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.
Risks Related to our 2024 Notes
Our debt obligations may adversely affect our ability to raise additional capital and will be a burden on our
future cash resources, particularly if we elect to settle these obligations in cash upon conversion or upon
maturity or required repurchase.
In September 2018, we issued the 2024 Notes, which will mature on September 1, 2024, unless earlier
repurchased by us or converted. The degree to which we are leveraged could have important consequences,
including, but not limited to, the following:
•
•
our ability to obtain additional financing in the future for working capital, capital expenditures,
acquisitions, litigation, general corporate or other purposes may be limited; and
a substantial portion of our future cash balance may be dedicated to the payment of the principal of
our indebtedness as we have stated the intention to pay the principal amount of the 2024 Notes in
cash upon conversion or when otherwise due, such that we would not have those funds available for
use in our business.
Our ability to meet our payment obligations under our debt instruments, including the 2024 Notes, depends
on our future cash flow performance. This, to some extent, is subject to general economic, financial, competitive,
legislative and regulatory factors, as well as other factors that may be beyond our control. There can be no assurance
that our business will generate positive cash flow from operations, or that additional capital will be available to us,
in an amount sufficient to enable us to meet our debt payment obligations and to fund other liquidity needs. For
example, in the first quarter after the Acquisition, the combined company had a significant net loss and negative
cash flows. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance
or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we
were unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations.
As a result, we may be more vulnerable to economic downturns, less able to withstand competitive pressures and
less flexible in responding to changing business and economic conditions.
We may issue additional shares of our common stock in connection with conversions of the 2024 Notes,
and thereby dilute our existing stockholders and potentially adversely affect the market price of our common
stock.
In the event that some or all of the 2024 Notes are converted and we elect to deliver shares of common
stock, the ownership interests of existing stockholders will be diluted, and any sales in the public market of any
shares of our common stock issuable upon such conversion could adversely affect the prevailing market price of
our common stock. In addition, the anticipated conversion of the 2024 Notes could depress the market price of our
common stock.
The fundamental change provisions of the 2024 Notes may delay or prevent an otherwise beneficial takeover
attempt of us.
If a fundamental change, such as an acquisition of our company, occurs prior to the maturity of the 2024
Notes, holders of the 2024 Notes will have the right, at their option, to require us to repurchase all or a portion of
their 2024 Notes. In addition, if such fundamental change also constitutes a make-whole fundamental change, the
conversion rate for the 2024 Notes may be increased upon conversion of the 2024 Notes in connection with such
make-whole fundamental change. Any increase in the conversion rate will be determined based on the date on
which the make-whole fundamental change occurs or becomes effective and the price paid (or deemed paid) per
share of our common stock in such transaction. Any such increase will be dilutive to our existing stockholders. Our
obligation to repurchase 2024 Notes or increase the conversion rate upon the occurrence of a make-whole
34
fundamental change may, in certain circumstances, delay or prevent a takeover of us that might otherwise be
beneficial to our stockholders.
The capped call transactions may affect the value of the 2024 Notes and our common stock.
In connection with the issuance of the 2024 Notes, we entered into capped call transactions with the “option
counterparties.” The capped call transactions are expected generally to reduce or offset the potential dilution upon
conversion of the 2024 Notes and/or offset any cash payments we are required to make in excess of the principal
amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap.
From time to time, the option counterparties or their respective affiliates may modify their hedge positions
by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our
common stock or other securities of ours in secondary market transactions prior to the maturity of the 2024 Notes.
This activity could also cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the capped call transactions.
The option counterparties to the capped call transactions are financial institutions, and we will be subject
to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk
of the counterparties will not be secured by any collateral. Past global economic conditions have resulted in the
actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes
subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal
to our exposure at the time under the capped call transactions with such option counterparty. Our exposure will
depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market
price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer
adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We
can provide no assurance as to the financial stability or viability of the option counterparties.
35
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our headquarters are located in Sunnyvale, California, which consist of approximately 321,000 square
feet under lease.
In addition to the leased building in Sunnyvale, we also lease approximately 1,084,000 square feet of
office spaces for research and development centers in the United States, China, Canada, Sweden, Finland,
Germany and for sales, service and support in the United States, China, United Kingdom, Japan, India,
Indonesia, Malaysia, Philippines, Taiwan, Vietnam, Belgium, Finland, Germany, Hungary, Israel, Italy,
Kazakhstan, Poland, Portugal, Russia, Saudi Arabia, Serbia and UAE. All of these leases expire between 2019
and 2028.
In the fourth quarter of 2017, we implemented a restructuring plan. Included in the above square
footage are certain facilities located in Sunnyvale, California, Carrollton, Texas and Stockholm, Sweden, which
we have vacated as part of this restructuring. See Note 9, “Restructuring and Other Related Costs” to the Notes
to Consolidated Financial Statements for more information.
In May 2017, we purchased a 60,000 square-foot module manufacturing facility and the associated land
that we had previously leased in Allentown, Pennsylvania. We believe that our existing facilities are adequate to
meet our business needs through the next 12 months, and that suitable additional or substitute space will be
available as needed to accommodate any expansion of our operations.
ITEM 3.
LEGAL PROCEEDINGS
On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against us in the United
States District Court for the Eastern District of Texas. The complaint asserts U.S. Patent Nos. 6,469,816,
6,476,952, 6,594,055, 7,099,592, 7,620,327 (the "'327 patent"), 8,374,511 (the "'511 patent") and 8,913,898 (the
"'898 patent") (collectively, the asserted patent are referred to herein as the “Oyster Optics patents in suit”). The
complaint seeks unspecified damages and a permanent injunction. We filed our answer to Oyster Optics'
complaint on February 3, 2017. We filed two petitions for Inter Partes Review (“IPR”) of the '898 patent with the
U.S. Patent and Trademark Office ("USPTO"). Other defendants have filed IPR petitions in connection with the
remaining Oyster Optics patents in suit. The USPTO instituted two IPRs of the ‘511 patent and two IPRs of ‘898
patent but denied IPR petitions in connection with the ‘327 patent. A Markman decision was issued on December
5, 2017 and fact discovery closed on December 22, 2017. Oyster Optics dropped the ‘511 and ‘898 patents,
leaving only a few claims in the ‘327 patent at issue in the case. On May 15, 2018, Oyster Optics filed a new
patent infringement complaint in the United States District Court for the Eastern District of Texas, naming us as a
defendant. In its new complaint, Oyster Optics alleges infringement of the ‘327 patent, U.S. Patent No. 9,749,040
and the ‘898 patent. On June 8, 2018, the court granted the parties’ joint motion to sever and consolidate the
first-filed lawsuit with the later filed case. We filed our answer to the new complaint on July 16, 2018. A case
management conference was held on September 11, 2018, and the court set a trial date for November 4, 2019.
On October 26, 2018, we filed an amended answer to include a license defense. On November 29, 2018, we
filed a motion for summary judgment based on the license defense. We are currently unable to predict the
outcome of this litigation and therefore cannot reasonably estimate the possible loss or range of loss, if any,
arising from this matter.
On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against us in the
United States District Court for the Central District of California. The complaint asserts U.S. Patent No. 6,782,211
(the “Core Optical patent in suit”). The complaint seeks unspecified damages and a permanent injunction. We
believe that we do not infringe any valid and enforceable claim of the Core Optical patent in suit, and intend to
defend this action vigorously. We filed our answer to Core Optical's complaint on September 25, 2017. A
Markman hearing was held on May 9, 2018 and the court has set a trial for March 2019. On June 14, 2018, we
filed a petition for IPR of the Core Optical patent in suit in the USPTO. Core Optical contacted us on July 19,
2018 to propose that the case be stayed pending the IPR. We agreed to Core Optical’s proposal, and the parties
filed a joint motion to stay, which the court granted on July 31, 2018. On October 17, 2018, Core Optical filed a
response to our IPR petition. On January 14, 2019, the USPTO denied our IPR petition, and on February 13,
2019, we filed a request for rehearing in the USPTO requesting reconsideration of the dismissal of our IPR
36
petition. We are unable to predict the outcome of this litigation at this time and therefore cannot reasonably
estimate the possible loss or range of loss, if any, arising from this matter.
On June 8, 2017, a Civil Investigative Demand was issued to Coriant pursuant to a False Claims Act
investigation by the U.S. government as to whether there has been any violation of 31 U.S.C. §3729. Coriant
provided documents and other responses to the U.S. government, and we will continue to cooperate in the
ongoing investigation.
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.
37
PP
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELA
AA
AND ISSUER PURCHASES OF EQUITY SECURITIES
Y
YY
TED ST
OCKHOLDER MATTERS
AA
Our common stock is listed on the Nasdaq Global Select Market under the symbol “INFN.” As of March
5, 2019, there were 93 registered holders of record of our common stock. A substantially greater number of
holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers
and other financial institutions.
A
We have not paid any cash dividends on our common stock and do not intend to pay any cash
dividends on our common stock in the near future.
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative five-year total return provided stockholders on our
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, if any) is assumed to have
TT
been made in our common stock and in each of the indexes on December 28, 2013 and its relative performance
TT
is tracked through December 29, 2018. 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
TT
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, as amended (the “Exchange
Act”), 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, as amended, or the Exchange Act.
TT
COMPARISON OF FIVE
PP
YEAR CUMULATIVE T
AA
OTALTT
RETURN*
Among Infinera Corporation, the Nasdaq Composite Index,
and the Nasdaq Telecommunications Index
TT
350
300
250
200
150
100
50
0
12/13
12/14
1215
12/16
12/17
12/18
Infinera Corporation
Nasdaq Composite
Nasdaq Telecommunications
*$100 invested on December 28, 2013 in our common stock or December 31, 2013 in the Nasdaq Composite
Index and the Nasdaq Telecommunications Index, with reinvestment of all dividends, if any
on month-end basis.
. Indexes calculated
TT
38
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.
We derived the statements of operations data for the years ended December 29, 2018, December 30,
2017 and December 31, 2016 and the balance sheet data as of December 29, 2018 and December 30, 2017
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 26,
2015 and December 27, 2014 and the balance sheet data as of December 31, 2016, December 26, 2015, and
December 27, 2014 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.
December 29,
2018(1)
December 30,
2017
December 31,
2016
December 26,
2015
December 27,
2014
Years Ended
Revenue ................................ $
Gross profit ............................ $
Net income (loss) .................. $
Net income (loss) attributable
to Infinera Corporation ........... $
Net income (loss) per
common share attributable to
Infinera Corporation:
Basic .............................. $
Diluted ............................ $
Weighted average number of
shares used in computing
basic and diluted net income
(loss) per common share:
Basic ..............................
Diluted ............................
Total cash and cash
equivalents, investments and
restricted cash ....................... $
Intangible assets, net ............ $
Goodwill ................................ $
Total assets ........................... $
Short-term debt ..................... $
Long-term debt, net ............... $
Long-term financing lease
obligation ............................... $
Common stock and
additional paid-in capital ........ $
Infinera stockholders' equity .. $
Noncontrolling interest ........... $
Total stockholders’ equity ...... $
(In thousands, except per share data)
943,379
321,156
$
$
740,739
244,000
$
$
870,135
393,718
$
$
886,714
403,477
(214,295) $
(194,506) $
(24,430) $
50,950
(214,295) $
(194,506) $
(23,927) $
51,413
(1.36) $
(1.36) $
(1.32) $
(1.32) $
(0.17) $
(0.17) $
0.39
0.36
157,748
157,748
147,878
147,878
142,989
142,989
133,259
143,171
268,848
233,119
227,231
1,801,270
$
$
$
$
305,211
92,188
195,615
1,117,670
— $
144,928
$
$
$
$
$
367,056
108,475
176,760
1,198,583
$
$
$
$
370,979
156,319
191,560
1,226,294
— $
— $
—
— $
133,586
$
125,440
$
116,894
— $
— $
— $
—
266,929
193,538
1,686,091
703,821
$
$
$
$
1,417,192
665,365
$
$
1,354,227
762,328
$
$
1,300,441
762,151
— $
— $
— $
14,910
703,821
$
665,365
$
762,328
$
777,061
39
$
$
$
$
$
$
$
$
$
$
668,079
288,304
13,659
13,659
0.11
0.11
123,672
128,565
405,316
361
—
818,016
$
$
$
$
1,077,351
481,907
—
481,907
(1) Effective December 31, 2017, we adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with
Customers (Topic 606)” (“Topic 606”), using the modified retrospective method applied to those contracts that were not
completed as of December 31, 2017. Results for the reporting periods after December 31, 2017 are presented under
Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical
accounting under Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition” (“Topic 605”).
40
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 our expectations regarding revenue, gross margin, expenses, cash flows and other financial
items; any statements of the plans, strategies and objectives of management for future operations and
personnel; expectations related to the Acquisition; factors that may affect our future operating results; anticipated
customer activity; statements about the benefits of our products and product features; statements concerning
new products or services, including new product features and delivery dates; statements related to capital
expenditures; statements related to future economic conditions, performance, market growth or our sales cycle;
statements related to the 2024 Notes; statements related to the effects of litigation on our financial position,
results of operations or cash flows; statements related to the timing and impact of transfer pricing reserves or our
effective tax rate; statements regarding the Tax Act; statements regarding our restructuring plans; 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 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 Financial Data” included in Item 6 of this Annual Report
on Form 10-K and consolidated financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.
Overview
We are a global supplier of networking solutions comprised of networking equipment, software and
services. Our portfolio of solutions includes optical transport platforms, converged packet-optical transport
platforms, optical line systems and disaggregated router platforms, as well as SDN, network management and
routing software.
Our customers include telecommunications service providers, ICPs, cable providers, wholesale carriers,
research and education institutions, large enterprises and government entities. Our networking solutions enable
our customers to deliver business and consumer communications services. Our comprehensive portfolio of
networking solutions also enable our customers to scale their transport networks as end-user services and
applications demand for network bandwidth continues to grow. These end-user services and applications
include, but are not limited to, high-speed Internet access, business Ethernet services, 4G/5G mobile broadband,
cable high-speed Internet distribution, cloud-based services, high-definition video streaming services, virtual and
augmented reality and the Internet of Things (“IoT”).
Our systems are highly scalable, flexible and designed with open networking principles for ease of
deployment. We build our systems using a combination of internally manufactured and third party components.
Our portfolio includes systems that leverage our innovative optical engine technology comprised of large-scale
PICs and DSPs. We optimize the manufacturing process by using indium phosphide to build our PICs, which
enables the integration of hundreds of optical functions onto a set of semiconductor chips. This large-scale
integration of our PICs and advanced DSPs allows us to deliver high-performance transport networking platforms
with features that customers care about the most, including cost per bit, low power consumption and space
savings. In addition, we design our optical engines to increase the capacity and reach performance of our
products by leveraging coherent optical transmission. With the addition of new products to our portfolio, we plan
to integrate our optical engine technology into a broader set of transport platforms in order to enhance customer
value and lower production costs.
41
Over the past several years, we expanded our portfolio of solutions, evolving from our initial focus on
the long-haul and subsea optical transport markets to offering a more complete suite of packet-optical networking
solutions that address multiple markets within the end-to-end transport infrastructure. These markets include
metro access, metro aggregation and switching, data center interconnect (“DCI”), long-haul and subsea.
We have grown our portfolio through internal development as well as acquisitions. In 2014, we
introduced the Infinera Cloud Xpress to address the emerging DCI market opportunity. In 2015, we entered the
metro market with the acquisition of Transmode, a leader in metro packet-optical applications. In 2018, we
expanded our product portfolio and customer base through the Acquisition. The Acquisition positions us as one
of the largest vertically integrated transport networking solutions providers in the world, enables us to strengthen
our ability to serve a global customer base and accelerates delivery of innovative solutions our customers
demand. This Acquisition also positions us to expand the breadth of customer applications we can address,
including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-
layer network management and control.
In 2018, the majority of our product revenue was derived from transport systems built on the Infinite
Capacity Engine (ICE), our optical engine technology. Our Infinite Capacity Engine enables different subsystems
that can be customized for a variety of network applications in different transport markets, including the metro,
DCI, long-haul and subsea. ICE4, our most recent technology generation, delivers multi-terabit opto-electronic
subsystems powered by our fourth-generation PIC and latest generation FlexCoherent DSP (the combination of
which we market as “ICE4”).
Our products are designed to be managed by a suite of software solutions that enable end-to-end
common network management, multi-layer service orchestration, and automated operations. We also provide
software-enabled programmability that offers differentiated capabilities such as IB. IB, combined with our
differentiated hardware solutions, enables our customers to purchase and activate bandwidth as needed through
our unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives:
(1) limit their initial network startup costs and investments; and (2) instantly activate new bandwidth as their
customers’ and their own network needs evolve.
We believe our portfolio of solutions benefits our customers by providing a unique combination of highly
scalable capacity and features that address various applications and ultimately simplify and automate packet-
optical network operations.
Financial and Business Highlights
Total revenue was $943.4 million in 2018 as compared to $740.7 million in 2017. The key driver of this
increase was the addition of Coriant, whose results were included in the fourth quarter of 2018 following the
close of the Acquisition. Prior to the fourth quarter of 2018, our revenue through the first three quarters of 2018
was $611.3 million, up by 12.2% compared to $544.9 million in the same period of 2017. This increase was
primarily due to the strength of our next-generation ICE4 products and strong first half spending from our largest
cable customer. In 2019, we see a number of prospective opportunities to grow revenue driven by continued
adoption of our new products, traditional Coriant customers returning to more normal spend patterns, and
opportunities with new and existing customers enabled by our end-to-end capabilities. Our results will depend on
overall market conditions and, as is typical, quarter-over-quarter revenue could be volatile, affected by customer
buying patterns and the timing of customer network deployments.
Gross margin improved to 34.0% in 2018 from 32.9% in 2017. This improvement was primarily
attributable to benefits of our vertically-integrated operating model, driven by higher revenue spread across our
largely fixed cost structure and improved cost structure of our ICE4 technology due to the increased levels of
integration. Additionally, in 2018, compared to 2017, we incurred substantially less costs related to bridging
customers to our new ICE4 technology and from initially higher costs of early production units from our new ICE4
products. The increased gross margin in 2018 was offset by lower margins from the Coriant business and
increased amortization of intangible assets.
In 2019, we expect to further benefit from the plans we began to implement at the end of 2018 to reduce
our fixed cost structure including headcount reductions and out-sourcing of certain service and manufacturing
capabilities. In addition, we are undergoing cost renegotiations with many of our global suppliers in order to align
our costs to the opportunity of the new Infinera moving forward.
42
Operating expenses in 2018 grew by 19% to $506.8 million from $427.1 million in 2017 primarily due to
the inclusion of Coriant's operating expenses subsequent to the closing of the Acquisition, along with significant
costs related to integration, restructuring, and other acquisition-related costs incurred in the fourth quarter of
2018 to begin to transform the business. These costs were partially offset by the impacts of our restructuring
efforts over the course of the first nine months of 2018. Our on-going operating expense levels should continue
to improve as we execute on our synergy targets over the course of 2019.
Over a longer period of time, particularly with the larger scale that Coriant provides, we believe that we
can further leverage our vertically-integrated manufacturing model to significantly improve gross margins from
where they are today. This, combined with the ability to continue to sell incremental bandwidth capacity into
deployed networks and expense management, can result in returning to consistently delivering profitability and
positive cash flow.
One customer accounted for approximately 13% and 18% of our revenue in 2018 and 2017,
respectively. This customer completed a merger with another customer in 2017 and these two historically larger
customers each individually accounted for approximately 16% and 8% of our revenue in 2016, respectively. One
other customer accounted for approximately 15% of our revenue in 2018. No other customers accounted for over
10% of our revenue for 2017 or 2016.
We primarily sell our products through our direct sales force, with a small portion sold indirectly through
channel partners. We derived 89%, 94% and 93% of our revenue from direct sales to customers for 2018, 2017
and 2016, respectively. We expect to continue generating the substantial majority of our revenue from direct
sales in the future.
We are headquartered in Sunnyvale, California, with employees located throughout the Americas,
Europe, Middle East and Africa (“EMEA”), and the Asia Pacific regions.
Results of Operations
The results of operations for 2018 reflect the inclusion of the Coriant business from the period
subsequent to the close of the Acquisition on October 1, 2018. The following sets forth, for the periods
presented, certain consolidated statements of operations information (in thousands, except percentages):
Years Ended
December 29,
2018
% of total
revenue
December 30,
2017
% of total
revenue
Change
% Change
Revenue:
Product ........................ $
Services .......................
763,555
179,824
81% $
610,535
82% $ 153,020
19%
130,204
18%
49,620
Total revenue .......... $
943,379
100% $
740,739
100% $ 202,640
Cost of revenue:
Product(1) ..................... $
Services .......................
Amortization of
intangible assets(1) .......
Restructuring and
related ..........................
Total cost of
revenue ................. $
517,765
78,353
23,475
55% $
406,644
55% $ 111,121
8%
3%
50,480
20,474
7%
3%
27,873
3,001
2,630
—%
19,141
3%
(16,511)
(86)%
25 %
38 %
27 %
27 %
55 %
15 %
25 %
32 %
622,223
66% $
496,739
67% $ 125,484
Gross profit ........... $
321,156
34.0% $
244,000
32.9% $ 77,156
43
(19)%
9 %
(15)%
(2)%
17 %
4 %
4 %
(38)%
Years Ended
December 30,
2017
% of total
revenue
December 31,
2016
% of total
revenue
Change
% Change
Revenue:
Product ........................ $
Services .......................
610,535
130,204
82% $
751,167
86% $ (140,632)
18%
118,968
14%
11,236
Total revenue ........ $
740,739
100% $
870,135
100% $ (129,396)
Cost of revenue:
Product(1) ..................... $
Services .......................
Amortization of
intangible assets(1) .......
Restructuring and
related ..........................
Total cost of
revenue ................. $
406,644
50,480
20,474
19,141
55% $
413,551
48% $
(6,907)
43,151
19,715
5%
2%
7,329
759
7%
3%
3%
—
—%
19,141
100 %
Gross profit ........... $
244,000
32.9% $
393,718
45.2% $ (149,718)
496,739
67% $
476,417
55% $ 20,322
(1) Prior periods have been adjusted to conform with the current period's presentation. See Note 1, “Organization and Basis
of Presentation” to the Notes to Consolidated Financial Statements for additional information.
Revenue
2018 Compared to 2017. Product revenue increased by $153.0 million, or 25%, in 2018 from 2017,
primarily driven by the inclusion of Coriant’s revenue since the Acquisition, increased demand for our next-
generation ICE4 products and strong spending from our largest cable customer. In 2018, we experienced growth
from all of our major customer verticals: Tier-1, ICPs and cable. Additionally, our product revenue benefited by
$10.7 million from the adoption of Topic 606 during 2018.
Services revenue increased by $49.6 million, or 38%, in 2018 from 2017, primarily attributable to the
inclusion of Coriant's services revenue since the Acquisition, and partially offset by the negative impact of $3.9
million from the adoption of Topic 606 during 2018. In 2018, we continued to experience growth in on-going
maintenance services due to our growing installed base of customer networks.
2017 Compared to 2016. Product revenue decreased by $140.6 million, or 19%, in 2017 from 2016,
primarily attributable to effects of customer consolidation, impacts from our product transition as well as
customers shifting spend to other parts of their networks.
Services revenue increased by $11.2 million, or 9%, in 2017 from 2016, primarily attributable to
continued growth in on-going maintenance services as a result of our growing installed base of customer
networks.
We currently expect that revenue in the first quarter of 2019 will decline relative to the fourth quarter of
2018. The first quarter in our industry tends to be negatively impacted by seasonality as it takes time for
customers to finalize their capital expenditure plans. In addition, the fact that one of our largest customers plans
to change their buying patterns from predominantly early in the year to more evenly spread throughout the year
will negatively impact our revenue in the first quarter of 2019.
44
Revenue by geographic region is based on the shipping address of the customer. The following table
summarizes our revenue by geography and sales channel for the periods presented (in thousands, except
percentages):
Years Ended
December 29,
2018
% of total
revenue
December 30,
2017
% of total
revenue
Change
% Change
Total revenue by geography
Domestic ........................... $
International ......................
476,784
466,595
51% $
428,592
58% $ 48,192
49%
312,147
42% 154,448
$
943,379
100% $
740,739
100% $ 202,640
Total revenue by sales channel
Direct ................................. $
Indirect ..............................
838,931
104,448
89% $
693,472
94% $ 145,459
11%
47,267
6%
57,181
$
943,379
100% $
740,739
100% $ 202,640
11%
49%
27%
21%
121%
27%
Years Ended
December 30,
2017
% of total
revenue
December 31,
2016
% of total
revenue
Change
% Change
Total revenue by geography
Domestic ........................... $
428,592
58% $
541,889
62% $(113,297)
International ......................
312,147
42%
328,246
38%
(16,099)
$
740,739
100% $
870,135
100% $(129,396)
Total revenue by sales channel
Direct ................................. $
693,472
94% $
809,681
93% $(116,209)
Indirect ..............................
47,267
6%
60,454
7%
(13,187)
$
740,739
100% $
870,135
100% $(129,396)
(21)%
(5)%
(15)%
(14)%
(22)%
(15)%
2018 Compared to 2017. Domestic revenue increased by $48.2 million, or 11%, in 2018 compared to
2017, primarily due to a significant increase in spending from cable operators for the first half of 2018, success
with our ICE4 platform and the inclusion of Coriant's revenue since the Acquisition.
International revenue increased by $154.4 million, or 49%, in 2018 compared to 2017. The inclusion of
Coriant's revenue was a key driver of this growth. Additionally, we also benefited from increased ICE4 sales and
U.S.-based ICPs network deployments in both EMEA and Asia Pacific and Japan regions.
2017 Compared to 2016. Domestic revenue decreased by $113.3 million, or 21%, in 2017 compared to
2016, primarily attributable to the effects of customer consolidation, and changes in certain large customers’
buying patterns as we transition to our next-generation of products. The majority of the decrease in 2017
occurred in the first half of the year, as the revenue during the second half of the year was up by 8% as
compared to the corresponding period in 2016, primarily driven by improved spending from cable customers.
International revenue decreased by $16.1 million, or 5%, in 2017 compared to 2016, primarily
attributable to lower sales from our Other Americas region, where we continued to be challenged by slower
spending from our largest customer in the region due to political conditions. We had a small decline in our EMEA
region attributable to product transitions and a challenging pricing environment.
45
Cost of Revenue and Gross Margin
2018 Compared to 2017. Gross margin increased to 34.0% in 2018 from 32.9% in 2017. This
improvement was primarily attributable to benefits of our vertically-integrated operating model, driven by higher
revenue spread across our largely fixed cost structure and improved cost structure of our new ICE4 technology
due to the increased levels of integration. Additionally, in 2018, we incurred substantially less costs related to
bridging customers to our new ICE4 technology and from initially higher costs of early production units from our
new ICE4 products. The increased gross margin in 2018 was offset by lower margins from the Coriant business
and increased amortization of intangible assets.
2017 Compared to 2016. Gross margin decreased to 32.9% in 2017 from 45.2% in 2016. This decline
was driven primarily by the high early manufacturing costs from initial units of our new ICE-based products, and
with changes in customer mix and strategic investments to win and preserve business as we brought our new
products to market. Lower overall manufacturing levels during 2017 compared to 2016 also reduced the benefits
of our vertically-integrated operating model. Gross margin in 2017 was also impacted by restructuring and other
related costs of $19.1 million, which consisted of $13.6 million of inventory write-downs, $4.0 million of
manufacturing asset impairments as a result of our product rationalization efforts, and $1.5 million of employee-
related costs for eliminated roles.
In any given quarter, gross margins can fluctuate based on a number of factors, including the mix of
footprint versus fill, product mix, customer mix and overall volume.
We currently expect that gross margin in the first quarter of 2019 will decline slightly relative to the
fourth quarter of 2018 largely due to lower revenue expectations and our relatively fixed cost structure for costs
of goods sold. We took significant actions late in the fourth quarter of 2018 to lower our cost structure by
reducing our workforce and overall costs, and improving terms with suppliers. We expect to see benefits from
these actions gradually over the course of 2019.
Operating Expenses
The following table summarizes our operating expenses for the periods presented (in thousands, except
percentages):
Years Ended
December 29,
2018
% of total
revenue
December 30,
2017
% of total
revenue
Change
% Change
Research and development(1).. $
Sales and marketing(1) .............
General and administrative(1)...
Amortization of intangible
assets(1) ...................................
Acquisition and integration
costs(1) .....................................
Restructuring and related ........
244,302
124,238
80,957
29,296
15,530
12,512
13%
9%
3%
2%
1%
26% $
224,368
30% $ 19,934
109,511
70,620
15%
10%
14,727
10,337
6,160
1%
23,136
NMF*
322
16,106
—%
2%
15,208
(3,594)
9 %
13 %
15 %
NMF*
(22)%
19 %
Total operating expenses . $
506,835
54% $
427,087
58% $ 79,748
46
Years Ended
December 30,
2017
% of total
revenue
December 31,
2016
% of total
revenue
Change
% Change
Research and development(1).. $
Sales and marketing(1) .............
General and administrative(1)...
Amortization of intangible
assets(1) ...................................
Acquisition and integration
costs(1) .....................................
Restructuring and related ........
224,368
109,511
70,620
6,160
322
16,106
30% $
232,143
27% $ (7,775)
15%
10%
1%
—%
2%
111,678
67,612
6,189
1,870
—
13%
8%
1%
—%
—%
(2,167)
3,008
(1,548)
16,106
Total operating expenses . $
427,087
58% $
419,492
49% $ 7,595
(3)%
(2)%
4 %
(83)%
100 %
2 %
(29)
— %
*NMF - not meaningful
(1) Prior periods have been adjusted to conform with the current period's presentation. See Note 1, “Organization and Basis
of Presentation” to Notes to Consolidated Financial Statements.
The following table summarizes the stock-based compensation expense included in our operating
expenses for the periods presented (in thousands):
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Research and development ................................................... $
16,270
$
15,845
$
Sales and marketing ..............................................................
General and administration ....................................................
10,869
9,649
11,288
10,776
Total
............................................................................... $
36,788
$
37,909
$
13,732
11,043
9,295
34,070
Research and Development Expenses
2018 Compared to 2017. Research and development expenses increased by $19.9 million, or 9%, in
2018 from 2017, primarily due to the inclusion of incremental headcount from the Acquisition. Excluding the
additional expenses from the Coriant business, research and development costs would have decreased due to
lower headcount costs and reduced spending in equipment and materials, in conjunction with company-wide cost
reduction efforts.
2017 Compared to 2016. Research and development expenses decreased by $7.8 million, or 3%, in
2017 from 2016, with the biggest driver being an $11.3 million impairment charge recorded in 2016, resulting
from our decision to stop development on certain technologies that were in-process at the time of the Transmode
acquisition. We also incurred lower spending in development and manufacturing expenses of $8.6 million, as we
drove efficiencies in our development and manufacturing business over the course of the year. These decreases
were offset by an increase of $10.9 million in personnel expenses. During the year, we balanced investments
around bringing our next-generation solutions to market and enacting a faster technology development cadence,
with prudent expense management, particularly given our overall revenue decrease.
Sales and Marketing Expenses
2018 Compared to 2017. Sales and marketing expenses increased by $14.7 million, or 13%, in 2018
from 2017 primarily due to the inclusion of the Coriant business and an increase in recruiting and relocation
expenses. Excluding the additional expenses from the Coriant business, sales expenses would have been
slightly higher due to increased commissions expenses relative to revenue growth in 2018. Marketing expenses
would have been a slight decrease as a result of a reduction in personnel-related costs due to reduced
headcount and lower program spend in conjunction with company-wide cost reduction efforts.
47
2017 Compared to 2016. Sales and marketing expenses decreased by $2.2 million, or 2%, in 2017 from
2016 as we tightly managed expenses, such as outside professional services and travel during the year. In 2017,
outside professional services declined by $1.6 million, and travel and entertainment declined by $1.1 million.
Overall personnel costs were effectively flat in 2017.
General and Administrative Expenses
2018 Compared to 2017. General and administrative expenses increased by $10.3 million, or 15%, in
2018 from 2017 primarily due to the inclusion of the Coriant business offset by a decrease in personnel-related
costs due to lower headcount attributable to company-wide cost reduction efforts.
2017 Compared to 2016. General and administrative expenses increased by $3.0 million, or 4%, in
2017 from 2016 primarily due to increased depreciation expenses of $1.6 million and personnel costs of $1.5
million. These expenses were offset by a $1.6 million decrease in travel, equipment and facilities, and lower
consulting services of $0.5 million.
Amortization of Intangible Assets
2018 Compared to 2017. Amortization of intangible assets increased by $23.1 million in 2018 from 2017
as a result of the Acquisition.
2017 Compared to 2016. Amortization of intangible assets were flat in 2017 compared to 2016 due to
normal amortization of intangible assets for acquired intangible assets related to our acquisition of Transmode.
Acquisition and Integration Costs
2018 Compared to 2017. Acquisition and integration costs increased by $15.2 million in 2018 from 2017
as a result of the Acquisition. Acquisition and integration costs consist of legal, financial, employee-related costs
and other professional fees.
See Note 6, “Business Combination” to the Notes to Consolidated Financial Statements for more
information on the Acquisition.
2017 Compared to 2016. Acquisition and integration costs decreased by $1.5 million in 2017 from 2016
reflecting reduced costs associated with our acquisition of Transmode.
Restructuring and Related
2018 Compared to 2017. In 2018, within operating expenses, we incurred $12.5 million in restructuring
and other related costs, including $10.4 million of severance and related costs and $2.6 million of an impairment
for a software license, offset by a credit of $0.5 million to adjust the sublease of impaired facilities. We expect to
complete the majority of the actions related to the 2018 Restructuring Plan by the end of 2019.
2017 Compared to 2016. In 2017, within operating expenses, we incurred $16.1 million in restructuring
and other related costs, including $7.9 million of severance related costs, $7.3 million of facilities impairment
costs and test equipment impairments of $0.9 million. We implemented the majority of these actions related to a
restructuring plan in late 2017, with some remaining payments in the first half of 2018.
See Note 9, “Restructuring and Other Related Costs” to the Notes to Consolidated Financial Statements
for more information on our restructuring plans.
Other Income (Expense), Net
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
(In thousands)
Interest income ...................................................................... $
2,428
$
3,328
$
2,478
Interest expense ....................................................................
Other gain (loss), net .............................................................
(22,049)
(9,650)
(14,017)
(2,160)
Total other income (expense), net ................................... $
(29,271) $
(12,849) $
(12,887)
7,002
(3,407)
48
2018 Compared to 2017. Interest income decreased $0.9 million in 2018 from 2017 primarily due to a
lower average investment balance, partially offset by a higher return on investments. Interest expense for 2018
increased $8.0 million due to $6.6 million related to financing lease obligations, which we assumed in connection
with the Acquisition, $0.5 million of interest accrual on cash collateral from a third-party institution and $0.9
million of higher amortization related to the 2024 Notes. Other gain (loss), net, primarily consisted of a $5.1
million impairment charge related to our non-marketable equity investment, $3.0 million loss primarily related to
foreign exchange related transactions and a $2.5 million acquisition funding commitment fee related to the
Acquisition. This was offset by a $1.1 million gain on the sale of non-marketable equity investments.
2017 Compared to 2016. Interest income increased $0.8 million primarily due to a higher return on
investments. Interest expense for 2017 increased $1.1 million due to an increase in amortization of discount and
issuance costs related to the $150.0 million in aggregate principal amount of its 1.75% convertible senior notes
due June 1, 2018 (the “2018 Notes”). The change in other gain (loss), net, was primarily due to a $1.9 million
impairment charge on our non-marketable equity investment in 2017 compared to a $9.0 million gain on the sale
of a cost-method investment in 2016.
Benefit From Income Taxes
On December 22, 2017, the Tax Act was signed into law and significantly revised the U.S. corporate
income tax regime by, among other things, lowering corporate income tax rate from 35% to 21% effective
January 1, 2018, while also imposing a repatriation tax on deemed repatriated earnings of our foreign
subsidiaries in 2017, and implementing a quasi-territorial tax system on future foreign earnings.
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, “Income Tax Accounting
Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which addresses the application of U.S. GAAP in
situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. We
determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance,
was needed. The adjustment resulted in no tax expense impact in connection with the re-measurement of certain
deferred tax assets and liabilities from 35% to 21%. Additionally, we provisionally recorded no tax expense in
connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an
aggregate tax loss of our foreign subsidiaries for the year ended December 30, 2017. We finalized our
accounting for the re-measurement of deferred tax balances and transition tax with no adjustment to income tax
expense for the year ended December 29, 2018.
The impact of the Tax Act was minimal for the year ended December 29, 2018. We had sufficient
current year domestic and foreign subsidiary losses, as well as net operating loss carryforwards that were
generated prior to the Tax Act to fully offset taxable income. The Tax Act also introduces a Base Erosion Anti-
Abuse Tax (“BEAT”), which is a minimum tax potentially accruable on certain intercompany payments to our
foreign subsidiaries. Uncertainty regarding these provisions remain and are subject to further technical
guidance. However, we believe that any tax accruable for the BEAT will be nominal in the near-term, based upon
our current estimates and our corporate structure.
We recognized an income tax benefit of $0.7 million on a loss before income taxes of $215.0 million, an
income tax benefit of $1.4 million on a loss before income taxes of $195.9 million, and an income tax benefit of
$4.8 million on a loss before income taxes of $29.2 million in 2018, 2017 and 2016, respectively. The resulting
effective tax rates were (0.3)%, (0.7)% and (16.3)% for 2018, 2017 and 2016, respectively. The 2018 and 2017
effective tax rates differ from the expected statutory rate of 21% and 35%, respectively, based on our ability to
benefit U.S. loss carryforwards, offset by state income taxes, non-deductible stock-based compensation
expenses and foreign taxes provided on foreign subsidiary earnings. The lower 2018 income tax benefit
compared to 2017 primarily relates to the lower corporate income tax rate under the Tax Act and lower stock-
based compensations as a result of the Acquisition. The lower 2017 income tax benefit compared to 2016
primarily relates to lower acquisition related amortization expenses and lower state income taxes offset by an
increase in tax reserves, and an increase in taxable foreign profits in certain jurisdictions.
Because of our U.S. operating loss in 2018, our significant loss carryforward position, and
corresponding valuation allowance in all years, we have not been subject to federal or state tax on our U.S.
income. If these losses and other tax attributes become fully utilized, our taxes will increase significantly to a
more normalized, expected rate on U.S. earnings. The release of transfer pricing reserves in the future will have
a beneficial impact to tax expense, but the timing of the impact depends on factors such as expiration of the
49
statute of limitations or settlements with tax authorities. No significant releases are expected in the near future
based on information available at this time.
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.
Liquidity and Capital Resources
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
(In thousands)
Net cash flow provided by (used in):
Operating activities ......................................................... $
Investing activities .......................................................... $
Financing activities ......................................................... $
(99,083) $
(21,925) $
38,377
12,624
207,889
$
$
(54,849) $
16,486
$
(8,031)
(2,780)
Years Ended
December 29,
2018
December 30,
2017
Cash and cash equivalents ............................................................................... $
Investments ......................................................................................................
Restricted cash .................................................................................................
(In thousands)
202,954
$
116,345
26,511
39,383
183,725
5,141
$
268,848
$
305,211
Cash, cash equivalents and short-term investments consist of highly-liquid investments in certificates of
deposits, money market funds, commercial paper, U.S. agency notes, corporate bonds and U.S. treasuries.
Long-term investments primarily consist of certificates of deposits, commercial paper, U.S. agency notes,
corporate bonds and U.S. treasuries. Our restricted cash balance amounts are primarily pledged as collateral for
certain standby letters of credit related to customer performance guarantees, value added tax licenses and
property leases. Additionally, our restricted cash balance included funds in escrow related to the cash
consideration associated with the Acquisition.
Operating Activities
Net cash used in operating activities was $99.1 million for 2018, as compared to net cash used in
operating activities of $21.9 million for 2017 and net cash provided by operating activities of $38.4 million for
2016.
Net loss for 2018 was $214.3 million, which included non-cash charges of $172.4 million, compared to a
net loss for 2017 of $194.5 million, which included non-cash charges of $154.9 million. Net loss for 2016 was
$24.4 million, which included non-cash charges of $116.3 million.
Net cash used in working capital was $57.2 million for 2018. Accounts receivables increased by $21.1
million attributable to higher revenue levels during 2018 and timing of invoicing and collections. Inventory levels
increased by $8.6 million to address strong customer demand for our next-generation ICE4 products, while
inventory levels of our prior generation products decreased. Accounts payable decreased by $0.5 million
primarily due to the timing of payments and inventory purchases. Accrued liabilities and other expenses
decreased by $21.5 million primarily due to reduced levels of compensation-related accruals. Additionally, this
decrease was attributable to the reduction of customer right of returns, net of an increase in customer
prepayments due to our adoption of Topic 606. Deferred revenue increased by $8.0 million due to maintenance
50
renewals on our growing installed base, which are typically contracted on an annual or multi-year basis, net of
adjustments related to our adoption of Topic 606.
Net cash provided by working capital was $17.6 million for 2017. Accounts receivables decreased by
$25.8 million attributable to lower revenue levels during 2017. Inventory levels decreased by $2.7 million
reflecting inventory reduction and product rationalization efforts. Accounts payable decreased by $4.8 million
primarily due to reduced inventory purchases and timing of payments. Accrued liabilities and other expenses
decreased $14.4 million primarily due to reduced levels of compensation-related accruals and decreased
accrued warranty primarily due to changes in estimated repair and replacement costs, along with improved
failure rates. Deferred revenue increased $16.4 million attributable to commercial arrangements with customers
to transition to new products and continued growth in on-going support services for our installed base, which are
typically contracted on an annual or multi-year basis.
Net cash used in working capital was $53.5 million for 2016. Accounts receivables decreased by $33.9
million as our revenue levels decreased significantly during the second half of 2016. Inventory levels increased
by $64.1 million as a result of stocking more components due to longer lead times with component suppliers,
building up our PIC die bank inventory for our current generation of products to allow us to shift manufacturing
capacity to our next generation PICs, building up new product inventory, as well as lower shipment volumes.
Accounts payable decreased by $28.3 million primarily due to lower business volume during 2016. Deferred
revenue increased $21.4 million primarily due to higher ongoing support services as we continued to grow our
installed base.
Investing Activities
Net cash provided by investing activities for 2018 was $12.6 million. Investing activities during 2018
included the net payment of $102.9 million in connection with the Acquisition, and net proceeds of $152.2 million
associated with sales, maturities and purchases of investments during the year. In addition, we spent $37.7
million on capital expenditures and received additional proceeds on the sale of our non-marketable equity
investments of $1.1 million.
Net cash used in investing activities for 2017 was $54.8 million, including $58.0 million of capital
expenditures, of which $12.4 million was due to our purchase of our module manufacturing facility in
Pennsylvania in May 2017. Partially offsetting those spend activities were net proceeds of $3.2 million associated
with purchases, sales, maturities and calls of investments during the year.
Net cash used in investing activities for 2016 was $8.0 million, including $43.3 million of capital
expenditures and $7.0 million invested in a cost-method investment. Partially offsetting those spend activities
were proceeds from the sale of a cost-method investment of $23.5 million and net proceeds of $18.8 million
associated with purchases and maturities of investments during the year.
Financing Activities
Net cash provided by financing activities was $207.9 million and $16.5 million for 2018 and 2017,
respectively, and net cash used by financing activities was $2.8 million for 2016. Financing activities in 2018
included proceeds from the issuance of the 2024 Notes of $391.4 million, offset by the payment for capped call
transactions related to the 2024 Notes of $48.9 million. Financing activities during 2018 also included $150.0
million for the repayment of the 2018 Notes, which matured on June 1, 2018. Additionally, the Company made
principal payments on capital lease obligations of $1.2 million during the period. The period also included net
proceeds from the issuance of shares under our 2007 Employee Stock Purchase Plan (“ESPP”) and the exercise
of stock options. These proceeds were offset by the minimum tax withholdings paid on behalf of certain
employees for net share settlements of restricted stock units (“RSUs”).
Financing activities in 2017 included $18.0 million in net proceeds from the issuance of shares under
our ESPP and the exercise of stock options. Proceeds were offset by the minimum tax withholdings paid on
behalf of certain employees for net share settlements of RSUs. Additionally, during 2017, in association with the
compulsory acquisition proceedings in accordance with Swedish law, we paid $0.5 million to the minority
shareholders of Transmode based on the final determination of the arbitration tribunal.
Financing activities in 2016 included $16.8 million related to the purchase of the noncontrolling interest
upon award of advance title to acquire the remaining 4.2% of Transmode shares related to the Transmode
acquisition. Additionally, financing activities in 2016 included net proceeds from the exercise of stock options and
51
the issuance of shares under our ESPP. These proceeds were offset by the minimum tax withholdings paid on
behalf of certain employees for net share settlements of RSUs.
Liquidity
As described above, we utilized a significant amount of cash to close the Acquisition and began to
implement the restructuring of the business. We expect to continue utilizing cash during the first three quarters of
2019 as we continue to execute on our integration plan. We believe that our current cash, cash equivalents and
investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures,
and the cash required as part of the integration of Coriant. If these sources of cash are insufficient to satisfy our
liquidity requirements during the year or beyond 12 months, we may require additional capital from equity
financing, debt financing or other financings to fund our operations, including integration and restructuring efforts,
and 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 financings 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.
In September 2018, we issued the 2024 Notes, which will mature on September 1, 2024, unless earlier
repurchased, redeemed or converted. Interest is payable semi-annually in arrears on March 1 and September 1
of each year, commencing March 1, 2019. The net proceeds from the 2024 Notes issuance were approximately
$391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions. We
also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the
Acquisition, including fees and expenses relating thereto, and intend to use the remaining net proceeds for
general corporate purposes.
Upon conversion, it is our intention to pay cash equal to the lesser of the aggregate principal amount or
the conversion value of the 2024 Notes. For any remaining conversion obligation, we intend to pay or deliver, as
the case may be, either cash, shares of our common stock, or a combination of cash and shares of our common
stock, at our election. As of December 29, 2018, long-term debt, net, was $266.9 million, which represents the
liability component of the $402.5 million principal balance, net of $135.6 million of unamortized debt discount and
debt issuance costs. The debt discount and debt issuance costs are currently being amortized over the
remaining term until maturity of the 2024 Notes on September 1, 2024. To the extent that the holders of the 2024
Notes request conversion during an early conversion window, we may require funds for repayment of such 2024
Notes prior to their maturity date.
As of December 29, 2018, contractual obligations related to the 2024 Notes are payments of $8.3
million due in 2019, $8.6 million due each year from 2020 through 2023, and $411.1 million due in 2024. These
amounts represent principal and interest cash payments over the term of the 2024 Notes. Any future redemption
or conversion of the Notes could impact the amount or timing of our cash payments.
For more information regarding the 2024 Notes and the financing lease obligations, see Note 12, “Debt
and Financing Lease Obligations” to the Notes to Consolidated Financial Statements.
As of December 29, 2018, we had $229.5 million of cash, cash equivalents, and short-term
investments, including $89.8 million of cash and cash equivalents held by our foreign subsidiaries.
Notwithstanding the effects of the Act in changing the taxation of foreign earnings from a worldwide to a
territorial-based system and requirement of a mandatory one-time transition tax on cumulative foreign
subsidiaries earnings and profits, we continue to assert that the earnings certain foreign subsidiaries’ operations
will be indefinitely reinvested outside of the United States, and accordingly, we have not provided for potential
foreign withholding taxes that may otherwise be accruable.
52
Contractual Obligations
The following is a summary of our contractual obligations as of December 29, 2018:
Payments Due by Period
Total
Less than
1 year
1 - 3
years
3 - 5
years
More than
5 years
Purchase obligations(1) .................................. $ 203,546
Operating leases(2) ........................................
69,421
Convertible senior notes, including interest ...
Financing lease obligations(3) ........................
51,409
Total contractual obligations(4)(5) ............ $ 777,957
453,581
(In thousands)
$ 200,939
$
1,350
$
1,257
$
—
18,352
8,316
9,346
21,935
17,106
16,120
10,831
17,106
10,193
18,303
411,053
15,750
$ 236,953
$
56,511
$
39,387
$ 445,106
(1)
(2)
(3)
(4)
(5)
We have service agreements with our major production suppliers under which we are committed to purchase certain
parts.
We lease facilities under non-cancelable operating lease agreements. These leases have varying terms that range from
one to 10 years, and contain leasehold improvement incentives, rent holidays and escalation clauses. 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 one to 10 years. See Note 13, "Commitments and Contingencies" to the Notes to
Consolidated Financial Statements for more information.
We lease two facilities that were assumed with the Acquisition. As a result of purchase accounting, these financing lease
obligations were recorded at the present value of the remaining lease payments and expected value of the facility at the
end of the occupancy period. The financing lease obligations will continue to be amortized and payments due will be
made over the remaining period of the lease terms, which range from seven to 10 years. See Note 12, "Debt and
Financing Lease Obligations" to the Notes to Consolidated Financial Statements for more information.
Tax liabilities of $3.4 million related to uncertain tax positions are not included in the table because we cannot reliably
estimate the timing and amount of future payments, if any.
In 2019, we expect to make contributions of $2.7 million to cover benefit payments to plan participants. Expected future
payments to our pension and post employment plan are excluded from the contractual obligation table because they do
not represent contractual cash outflow as they are dependent on various factors. See Note 18, "Employee Benefit and
Pension Plans" to the Notes to Consolidated Financial Statements for more information.
We had $30.0 million of standby letters of credit and bank guarantees outstanding as of December 29,
2018. These consisted of $23.4 million related to customer performance guarantees, $2.9 million related to
property leases, $1.8 million related to Coriant pre-acquisition restructuring plans, $1.4 million of value-added tax
and customs' licenses and $0.5 million related to credit cards. Of the aforementioned standby letters of credit and
bank guarantees outstanding, $13.4 million was backed by cash collateral from a third-party institution, and we
accrued 5% annual interest on the outstanding cash collateral.
We had $4.2 million of standby letters of credit and bank guarantees outstanding as of December 30,
2017. These consisted of $2.2 million related to customer performance guarantees, $1.3 million value added tax
and customs' licenses, and $0.7 million related to property leases.
Off-Balance Sheet Arrangements
As of December 29, 2018, 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
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting
principles require us 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.
See Note 2, “Significant Accounting Policies” to the Notes to Consolidated Financial Statements, which in
included in Item 8. Financial Statements and Supplementary Data, which describes our significant accounting
policies and methods used in preparation of our consolidated financial statements. Management believes that
the estimates, assumptions 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, our consolidated financial statements will be affected.
We believe our critical accounting policies and estimates are those related to revenue recognition,
stock-based compensation, employee benefit and pension plans, accounting for income taxes, inventory
valuation, accrued warranty, business combination, amortization of intangible assets, and impairment of
intangibles and goodwill. Management considers these policies critical because they are both important to the
portrayal of our financial condition and results of operations, and they require management to make judgments
and estimates about inherently uncertain matters.
Revenue Recognition
Effective December 31, 2017, we adopted Topic 606, using the modified retrospective method applied
to those contracts that were not completed as of December 31, 2017. Results for the reporting periods after
December 31, 2017 are presented under Topic 606, while prior period amounts are not adjusted and continue to
be reported in accordance with our historical accounting under Topic 605.
We recognize revenue when control of the promised goods or services is transferred to our customers,
in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
We determine revenue recognition by applying the following five-step approach:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, we satisfy a performance obligation.
Many of our product sales are sold in combination with installation and deployment services along with
initial hardware and software support. Our product sales are also sold at times with spares management, on-site
hardware replacement services, network operations management, software subscription services, extended
hardware warranty and training. Initial software and hardware support services are generally delivered over a
one-year period in connection with the initial purchase. Software warranty provides customers with maintenance
releases during the warranty support period and hardware warranty provides replacement or repair of equipment
that fails to perform in line with specifications. Software subscription services include software warranty and
additionally provides customers with rights to receive unspecified software product upgrades released during the
support 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. Network operations management
includes the day-to-day operation of a customer's network. These services are generally delivered on an annual
basis. We evaluate each promised good and service in a contract to determine whether it represents a distinct
performance obligation or should be accounted for as a combined performance obligation.
Services revenue includes software subscription services, installation and deployment services, spares
management, on-site hardware replacement services, network operations management, extended hardware
warranty and training. Revenue from software subscription services, spares management, on-site hardware
replacement services, network operations management and extended hardware warranty contracts is deferred
and is recognized ratably over the contractual support period, which is generally one year, as services are
54
provided over the course of the entire period. Revenue related to training and installation and deployment
services is recognized upon completion of the services.
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. We typically satisfy our performance obligations upon shipment or delivery of
product depending on the contractual terms. Payment terms to customers generally range from net 30 to 120
days from invoice, which are considered to be standard payment terms. We assess our ability to collect from our
customers based primarily on the creditworthiness and past payment history of the customer.
Customer product returns are generally 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
recorded as a reduction to revenue.
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.
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.
Customer Purchase Commitments
We sell software licenses that provide customers the ability to purchase incremental bandwidth capacity
on an already-deployed piece of hardware. IB-enabled systems generally include a specific initial capacity and
incremental capacity can be added by the purchase of IB licenses. IB licenses are considered distinct
performance obligations because customers can provision additional transmission capacity on demand without
the deployment of any incremental equipment.
Some contracts commit the customer to purchase incremental IB licenses within a specified time frame
from the initial shipment of the IB enabled hardware. The time frame varies by customer and generally ranges
between 12 to 24 months. If the customer does not purchase the additional capacity within the time frame as
stated in the contract, we have the right to deliver and invoice such IB licenses to the customer. Under Topic 605,
the additional incremental licenses were not included as an element of the initial arrangement because fees for
the future purchases were not fixed. Under Topic 606, future committed licenses are considered to be additional
performance obligations when a minimum purchase obligation is present, as evidenced by enforceable rights
and obligations. As such, we are required to estimate the variable consideration for future IB licenses as part of
determining the contract transaction price.
Contract Termination Rights
The contract term is determined on the basis of the period over which the parties to the contract have
present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause
that allows the customer to terminate services without penalty, upon advance notification. For such contracts, the
service duration is limited to the non-cancellable portion of the contract.
Variable Consideration
The consideration associated with customer contracts is generally fixed. Variable consideration includes
discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration
that can vary is not a substantial portion of total consideration.
Variable consideration estimates are re-assessed at each reporting period until a final outcome is
determined. The changes to the original transaction price due to a change in estimated variable consideration will
be applied on a retrospective basis, with the adjustment recorded in the period in which the change occurs.
55
Stand-alone Selling Price
Stand-alone selling price is the price at which an entity would sell a good or service on a stand-alone (or
separate) basis at contract inception. Under this model, the observable price of a good or service sold separately
provides the best evidence of stand-alone selling price. However, in certain situations, stand-alone selling prices
will not be readily observable and the entity must estimate the stand-alone selling price.
When allocating on a relative stand-alone selling price basis, any discount provided in the contract is
generally allocated proportionately to all of the performance obligations in the contract.
The majority of products and services offered by us have readily observable selling prices. For products
and services that do not, we generally estimate stand-alone selling price using the market assessment approach
based on expected selling price and adjust those prices as necessary to reflect our costs and margins. As part of
our stand-alone selling price policy, we review product pricing on a periodic basis to identify any significant changes
and revise our expected stand-alone selling price assumptions as appropriate.
Capitalization of Costs to Obtain a Contract
We have assessed the treatment of costs to obtain or fulfill a contract with a customer. Sales
commissions have historically been expensed as incurred. Under Topic 606, we capitalize sales commissions
related to multi-year service contracts, which are paid for upfront and amortize the asset over the period of
benefit, which is the service period. Sales commissions paid on service contract renewals, are commensurate
with the sales commissions paid on the initial contracts.
Transaction Price Allocated to the Remaining Performance Obligation
Our remaining performance obligations represent the transaction price allocated to performance
obligations that are unsatisfied or partially satisfied, as of period end, consisting of deferred revenue and
backlog. Our backlog represents purchase orders received from customers for future product shipments and
services that are unsatisfied or partially satisfied as of period end. Our backlog is subject to future events that
could cause the amount or timing of the related revenue to change, and, in certain cases, may be canceled
without penalty. Orders in backlog may be fulfilled several quarters following receipt or may relate to multi-year
support service obligations.
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 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 required judgment, and to the extent actual forfeitures differed from expectations, changes in
estimate are recorded as an adjustment in the period when such estimates are revised. We historically recorded
stock-based compensation expense by applying the forfeiture rates and adjusted estimated forfeiture rates to
actual. During the third fiscal quarter beginning on June 26, 2016, we elected to early adopt ASU 2016-09 and
elected to change our accounting policy to account for forfeitures when they occur on a modified retrospective
basis.
We make a number of estimates and assumptions in determining stock-based compensation related to
stock options including the following:
•
•
The expected term represents the weighted-average period that the stock options are expected to
be outstanding prior to being exercised. The expected term is estimated based on our historical
data on employee exercise patterns and post vesting termination behavior to estimate expected
exercises over the contractual term of grants.
Expected volatility of our stock is based on the weighted-average implied and historical volatility of
Infinera.
We estimate the fair value of the rights to acquire stock under the ESPP using the Black-Scholes option
pricing formula. The ESPP provides for consecutive six-month offering periods and we use our own historical
volatility data in the valuation of shares that are purchased under the ESPP.
56
We account for the fair value of 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 or four years.
We granted performance stock units (“PSUs”) to our executive officers and senior management in 2016,
2017 and 2018 as part of our annual refresh grant process. These PSUs entitle our executive officers and senior
management to receive a number of shares of our common stock based on our stock price performance
compared to a specified target composite index for the same period. These PSUs vest over the span of one year,
two years and three years, and the number of shares to be issued upon vesting ranges from zero to two times
the number of PSUs granted depending on the relative performance of our common stock price compared to the
targeted composite index. This performance metric is classified as a market condition.
We use a Monte Carlo simulation model to determine the fair value of PSUs on the date of grant. 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 the target composite index. The use of the Monte
Carlo simulation model requires the input of a number of assumptions including expected volatility of the our
stock price, expected volatility of target composite index, correlation between changes in our stock price and
changes in the target composite index, risk-free interest rate, and expected dividends as applicable. Expected
volatility of our stock is based on the weighted-average historical volatility of our stock. Expected volatility of
target composite index is based on the historical and implied data. Correlation is based on the historical
relationship between our stock price and the target composite index 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
the target composite index is the annual dividend yield expressed as a percentage of the composite average of
the target composite index on the grant date.
In addition, we have granted other PSUs to certain employees that only vest upon the achievement of
specific operational performance criteria. We assess the achievement status of these PSUs on a quarterly basis
and record the related stock-based compensation expenses based on the estimated achievement payout.
Employee Benefit and Pension Plans
We operate a number of post-employment plans in Germany, as well as smaller post-employment plans
in other countries, including both defined contribution and defined benefit plans. Benefit cost obligations
pertaining to these plans are based on assumptions for the discount rate, expected return on plan assets,
mortality rates, expected salary increases, health care cost trend rates and attrition rates. The discount rate
assumption is based on current investment yields of high-quality fixed-income securities with maturities similar to
the expected benefits payment period. Mortality rates help predict the expected life of plan participants. The
expected increase in the compensation levels assumption reflects our actual experience and future expectations.
The expected long-term return on plan assets is determined based on asset allocations, historical portfolio
results, historical asset correlations and management’s expected returns for each asset class. We evaluate our
expected return assumptions annually including reviewing current capital market assumptions to assess the
reasonableness of the expected long-term return on plan assets. We update the expected long-term return on
assets when we observe a sufficient level of evidence that would suggest the long-term expected return has
changed.
Accounting for Income Taxes
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. We
determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance,
was needed. The adjustment resulted in no tax expense impact in connection with the re-measurement of certain
deferred tax assets and liabilities from 35% to 21%. Additionally, we provisionally recorded no tax expense in
connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an
aggregate tax loss of our foreign subsidiaries for the year ended December 30, 2017. We finalized our
accounting for the re-measurement of deferred tax balances and transition tax with no adjustment to income tax
expense for the year ended December 29, 2018.
57
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 its net
deferred tax assets. In evaluating the need for a full or partial valuation allowance, all positive and negative
evidence must be considered, including our forecasts of taxable income over the applicable carryforward
periods, our current financial performance, our market environment, and other factors. Based on the available
objective evidence, at December 29, 2018, management believes it is not more likely than not that the domestic
net deferred tax assets will be realizable in the foreseeable future. Accordingly, the domestic net deferred tax
assets are subject to a full valuation allowance. To the extent that we determine that deferred tax assets are
realizable on a more likely than not basis, and an adjustment is needed, that adjustment will be recorded in the
period that the determination is made.
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 or net realizable value. Costs are recognized utilizing the first-in,
first-out method. Net realizable 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. In valuing our
inventory costs and deferred inventory costs, we considered whether the net realizable value of inventory
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 net realizable value of inventory 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 net realizable value, whichever is lower, thereby recognizing the cost of the reduction in net realizable value of
inventory 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 actual
cost or net realizable value.
We consider whether we should accrue losses on firm purchase commitments related to inventory
items. Given that the net realizable value of common equipment is below contractual purchase price, 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.
58
Accrued Warranty
In our contracts with our customers, we warrant that our products will operate substantially in conformity
with product specifications. 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 our sole option and expense. Our hardware warranty periods
generally range from one to five years from date of acceptance for hardware and our software warranty is 90
days. Upon delivery of our products, we provide for the estimated cost to repair or replace products that may be
returned under warranty. The hardware warranty accrual is based on actual estimated future returns and cost of
repair rates and the application of those estimated rates to our in-warranty installed base. The provision for
warranty claims fluctuates depending upon the installed base of products and the failure rates and costs of repair
associated with these products under warranty. Furthermore, our costs of repair vary based on repair volume
and our ability to repair, rather than replace, defective units, as well as our ability to utilize used units to fulfill
warranty obligations. In the event that actual product failure rates and costs to repair differ from our estimates,
revisions to the warranty provision are required. In addition, from time to time, specific hardware warranty
accruals may be made if unforeseen technical problems arise with specific products. We regularly assess the
adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
Business Combination
Accounting for acquisitions requires management to estimate the fair value of the assets and liabilities
assumed, which requires management to make significant estimates, judgments, and assumptions that could
materially affect the timing or amounts recognized in its financial statements. These assumptions and estimates
include our use of the asset and the appropriate discount rates. Our significant estimates can include, but are not
limited to, the future cash flows, the appropriate weighted cost of capital, and discount rates, as well as the
estimated useful life of intangible assets, deferred tax assets and liabilities, uncertain tax positions, and tax-
related valuation allowance, which are initially estimated as of the acquisition date. While we use our best
estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date,
the estimates are inherently uncertain and subject to refinement. In addition, unanticipated events and
circumstances may occur that may affect the accuracy or validity of such estimates. As a result, during the
measurement period, which may be up to one year following the acquisition date, if new information is obtained
about facts and circumstances that existed as of the acquisition date, we may record adjustments to the fair
value of these assets and liabilities, with the corresponding offset to goodwill.
Amortization of Intangible Assets
Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is
computed over the estimated useful lives of the respective assets. In-process research and development
represents the fair value of incomplete research and development projects that have not reached technological
feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Once projects have
been completed they are transferred to developed technology, which are subject to amortization, while assets
related to projects that have been abandoned are impaired and expensed to research and development.
Impairment of Intangible Assets and Goodwill
Goodwill is evaluated for impairment on an annual basis in the fourth quarter of our fiscal year, and
whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.
We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair
value of its single reporting unit is less than its carrying amount. If we determine that it is more likely than not that
the fair value of its single reporting unit is less than its carrying amount, then the two-step goodwill impairment
test will be performed. The first step, identifying a potential impairment, compares the fair value of its single
reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be
performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares
the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying
amount over the implied fair value is recognized as an impairment loss. We evaluate events and changes in
circumstances that could indicate carrying amounts of purchased intangible assets may not be recoverable.
When such events or changes in circumstances occur, we assess the recoverability of these assets by
determining whether or not the carrying amount will be recovered through undiscounted expected future cash
59
flows. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, we record an
impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
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.
60
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We operate in international markets, which expose us to market risk associated with foreign currency
exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which
are the euro and Swedish kronor (“SEK”). Historically, the majority of our revenue contracts are denominated in
U.S. dollars, with the most significant exception being in Europe, where we invoice primarily in euros and SEK.
Additionally, a portion of our expenses, primarily the cost of personnel for research and development, sales and
sales support to deliver technical support on our products and professional services, and the cost to
manufacture, are denominated in foreign currencies, primarily the Indian rupee, the euro, SEK and the British
pound. As a result of the Acquisition, we have increased exposure to a broader set of currencies. Revenue
resulting from selling in local currencies and costs incurred in local currencies are exposed to foreign currency
exchange rate fluctuations that can affect our operating income. As exchange rates vary, operating income may
differ from expectations.
We currently enter into foreign currency exchange forward contracts to 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 that could negatively affect our
results of operations and financial condition.
We enter into foreign currency exchange forward contracts to reduce the impact of foreign currency
fluctuations on accounts receivable and restricted cash denominated in euros and British pounds. 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 and restricted cash in the near-term. Gains and losses on these contracts are
intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency
denominated accounts receivables and restricted cash. Accordingly, the effect of an immediate 10% adverse
change in foreign exchange rates on these transactions during 2018 would not be material to our results of
operations.
During 2018, we also entered into foreign currency exchange contracts to reduce the volatility of cash
flows primarily related to forecasted revenues and expenses denominated in euros, British pounds and SEK. The
contracts are generally settled for U.S. dollars, euros and British pounds at maturity under an average rate
method agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are
recorded to the consolidated statement of operations line item, in the current period, to which the item that is
being economically hedged is recorded. The effect of an immediate 10% adverse change in foreign exchange
rates on these transactions during 2018 would not be material to our results of operations.
Interest Rate Sensitivity
We had cash and cash equivalents, investments, and restricted cash totaling $268.8 million and $305.2
million as of December 29, 2018 and December 30, 2017, respectively. As of December 29, 2018, we have
invested in certificates of deposit, money market funds, commercial paper, U.S. agency notes, corporate bonds
and U.S. treasuries. The unrestricted cash and cash equivalents are held for working capital purposes. We do
not enter into investments for speculative purposes. We do not believe that we 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 2018 and 2017, our interest income would have
declined approximately $0.2 million and $0.3 million, respectively, assuming consistent investment levels.
Market Risk and Market Interest Risk
Holders may convert the 2024 Notes prior to maturity upon the occurrence of certain circumstances.
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination
of cash and shares of our common stock, at our election. If our common stock price is above the initial
conversion price of $9.87 upon conversion or at maturity, the amount of cash or shares of common stock
required to pay the conversion premium is not fixed and would increase if our common stock price increases.
As of December 29, 2018, the fair value of the 2024 Notes was $289.0 million. The fair value was
determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on December 28,
2018. The 2024 Notes are classified as Level 2 of the fair value hierarchy. The fair value of the 2024 Notes is
subject to interest rate risk, market risk and other factors due to the convertible feature. The fair value of the
61
2024 Notes will generally increase as interest rates fall and decrease as interest rates rise. In addition, the fair
value of the 2024 Notes will generally increase as our common stock price increases and will generally decrease
as our common stock price declines in value. The interest and market value changes affect the fair value of the
2024 Notes but do not impact our financial position, cash flows or results of operations due to the fixed nature of
the debt obligation. Additionally, we do not carry the 2024 Notes at fair value. We present the fair value of the
2024 Notes for required disclosure purposes only.
See Note 12, “Debt and Financing Lease Obligations” to the Notes to Consolidated Financial Statements
for further information.
62
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 Comprehensive Income (Loss) ......................................................................
Consolidated Statements of Stockholders’ Equity ......................................................................................
Consolidated Statements of Cash Flows ....................................................................................................
Notes to Consolidated Financial Statements ..............................................................................................
Page
64
67
68
69
70
72
74
63
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Infinera Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Infinera Corporation (the Company) as of
December 29, 2018 and December 30, 2017, the related consolidated statements of operations, comprehensive
income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 29,
2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a) (collectively
referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company at December 29, 2018 and
December 30, 2017, and the results of its operations and its cash flows for each of the three years in the period
ended December 29, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Company's internal control over financial reporting as of December 29, 2018,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) and our report dated March 14, 2019 expressed
an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company changed its method of
accounting for revenue recognition in the year ended December 29, 2018 due to the adoption of ASU No.
2014-09, Revenue from Contracts with Customers (Topic 606).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ ERNST & YOUNG LLP
We have served as the Company’s auditor since 2001.
San Jose, California
March 14, 2019
64
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Infinera Corporation
Opinion on Internal Control over Financial Reporting
We have audited Infinera Corporation’s internal control over financial reporting as of December 29, 2018, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Infinera
Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting
as of December 29, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated balance sheets as of December 29, 2018 and December 30, 2017,
the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity and cash
flows for each of the three years in the period ended December 29, 2018, and the related notes and the financial
statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial
statements”) of the Company and our report dated March 14, 2019 expressed an unqualified opinion thereon.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did
not include the internal controls of Telecom Holding Parent LLC (“Coriant”), which is included in the 2018
consolidated financial statements of the Company and constituted approximately 15% of consolidated net
revenue for the year ended December 29, 2018 and approximately 44% of consolidated total assets and 36% of
consolidated net assets (excluding goodwill and acquired intangibles) as of December 29, 2018. Our audit of
internal control over financial reporting of the Company also did not include an evaluation of the internal control
over financial reporting of Coriant.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that
a material weakness exists, 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
65
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ ERNST & YOUNG LLP
San Jose, California
March 14, 2019
66
INFINERA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
December 29,
2018
December 30,
2017
ASSETS
Current assets:
Cash and cash equivalents ......................................................................... $
Short-term investments ...............................................................................
Short-term restricted cash ...........................................................................
Accounts receivable, net of allowance for doubtful accounts of $5,084 in
2018 and $892 in 2017 ...............................................................................
Inventory .....................................................................................................
Prepaid expenses and other current assets ................................................
Total current assets ..............................................................................
Property, plant and equipment, net .....................................................................
Intangible assets ................................................................................................
Goodwill
.............................................................................................................
Long-term investments .......................................................................................
Long-term restricted cash ...................................................................................
Other non-current assets ....................................................................................
Total assets .......................................................................................... $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ........................................................................................ $
Accrued expenses .......................................................................................
Accrued compensation and related benefits ................................................
...........................................................................................
Short-term debt
Accrued warranty ........................................................................................
Deferred revenue ........................................................................................
Total current liabilities ...........................................................................
Long-term debt, net .....................................................................................
Long-term financing lease obligation ...........................................................
Accrued warranty, non-current
....................................................................
Deferred revenue, non-current ....................................................................
Deferred tax liability, non-current .................................................................
Other long-term liabilities .............................................................................
$
202,954
26,511
13,229
116,345
147,596
544
$
$
317,115
311,888
85,400
957,097
342,820
233,119
227,231
—
26,154
14,849
1,801,270
191,187
131,891
71,152
—
20,103
88,534
502,867
266,929
193,538
20,918
31,768
13,347
68,082
126,152
214,704
42,596
647,937
135,942
92,188
195,615
36,129
4,597
5,262
1,117,670
58,124
39,782
45,751
144,928
13,670
72,421
374,676
—
—
17,239
22,502
21,609
16,279
Commitments and contingencies (Note 13)
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 2018 and 2017
Issued and outstanding shares—175,452 in 2018 and 149,471 in 2017 ..
.............................................................................
Additional paid-in capital
Accumulated other comprehensive income (loss) .......................................
Accumulated deficit
.....................................................................................
Total stockholders' equity ............................................................................
Total liabilities and stockholders’ equity ................................................ $
—
—
175
1,685,916
(25,300)
(956,970)
703,821
1,801,270
$
149
1,417,043
6,254
(758,081)
665,365
1,117,670
The accompanying notes are an integral part of these consolidated financial statements.
67
INFINERA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Revenue:
Product ........................................................................... $
Services .........................................................................
Total revenue .................................................
$
763,555
179,824
943,379
$
610,535
130,204
740,739
Cost of revenue:
Cost of product ...............................................................
Cost of services ..............................................................
Amortization of intangible assets ....................................
Restructuring and related ...............................................
Total cost of revenue ......................................
Gross profit ............................................................................
Operating expenses:
Research and development ............................................
Sales and marketing .......................................................
General and administrative .............................................
Amortization of intangible assets ....................................
Acquisition and integration costs ....................................
Restructuring and related ...............................................
Total operating expenses ...............................
Loss from operations .............................................................
Other income (expense), net:
Interest income ...............................................................
Interest expense .............................................................
Other gain (loss), net ......................................................
Total other income (expense), net ..................
Loss before income taxes ......................................................
Benefit from income taxes .....................................................
Net loss .................................................................................
Less: Loss attributable to noncontrolling interest ............
Net loss attributable to Infinera Corporation ........................... $
Net loss per common share attributable to Infinera
Corporation:
517,765
78,353
23,475
2,630
622,223
321,156
244,302
124,238
80,957
29,296
15,530
12,512
406,644
50,480
20,474
19,141
496,739
244,000
224,368
109,511
70,620
6,160
322
16,106
506,835
(185,679)
427,087
(183,087)
2,428
(22,049)
(9,650)
(29,271)
(214,950)
(655)
(214,295)
—
3,328
(14,017)
(2,160)
(12,849)
(195,936)
(1,430)
(194,506)
—
(214,295) $
(194,506) $
751,167
118,968
870,135
413,551
43,151
19,715
—
476,417
393,718
232,143
111,678
67,612
6,189
1,870
—
419,492
(25,774)
2,478
(12,887)
7,002
(3,407)
(29,181)
(4,751)
(24,430)
(503)
(23,927)
Basic .............................................................................. $
Diluted ............................................................................ $
(1.36) $
(1.36) $
(1.32) $
(1.32) $
(0.17)
(0.17)
Weighted average shares used in computing net loss per
common share:
Basic ..............................................................................
Diluted ............................................................................
157,748
157,748
147,878
147,878
142,989
142,989
The accompanying notes are an integral part of these consolidated financial statements.
68
INFINERA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Net loss ...................................................................................... $
Other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale investments .....
Foreign currency translation adjustment ..............................
Tax effect on items related to available-for-sale
investments .........................................................................
Actuarial loss on pension liabilities ......................................
Net change in accumulated other comprehensive income (loss)
Less: Comprehensive loss attributable to noncontrolling
interest
.......................................................................................
(214,295) $
(194,506) $
(24,430)
327
(26,483)
(85)
(5,313)
(31,554)
(209)
34,787
297
(29,625)
—
—
(119)
—
34,578
(29,447)
—
—
(503)
Comprehensive loss attributable to Infinera Corporation ............ $
(245,849) $
(159,928) $
(53,374)
The accompanying notes are an integral part of these consolidated financial statements.
69
INFINERA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2016, December 30, 2017 and December 29, 2018
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders'
Equity
Noncontrolling
Interest
Total
Balance at December 26,
2015.................................
140,197
$
140
$1,300,301
$
1,123
$ (539,413) $
762,151
$
14,910
$ 777,061
Stock options
exercised ...................
ESPP shares issued..
Shares withheld for
tax obligations ...........
Restricted stock units
released.....................
Issuance of common
stock related to
acquisition .................
Stock-based
compensation ............
Noncontrolling
interest investment ....
Squeeze-out
Proceedings ..............
Cumulative-effect
adjustment from
adoption of ASU
2016-09 .....................
Other comprehensive
loss ............................
Net loss .....................
Balance at December 31,
2016.................................
Stock options
exercised ...................
ESPP shares issued..
Shares withheld for
tax obligations ...........
Restricted stock units
released.....................
Stock-based
compensation ............
Other comprehensive
income.......................
Net loss .....................
Balance at December 30,
2017.................................
825
1,369
(287)
2,917
—
—
—
—
—
—
—
1
1
—
3
—
—
—
—
—
—
—
4,094
13,607
(3,657)
(3)
—
42,552
—
(2,812)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,095
13,608
(3,657)
—
—
42,552
—
—
—
—
—
—
4,095
13,608
(3,657)
—
—
42,552
—
(14,407)
(14,407)
(2,812)
—
(2,812)
(235)
(235)
(29,447)
—
—
(23,927)
(29,447)
(23,927)
—
—
(235)
(29,447)
(503)
(24,430)
145,021
$
145
$1,354,082
$
(28,324) $ (563,575) $
762,328
$
— $ 762,328
196
2,140
(110)
2,224
—
—
—
—
2
—
2
—
—
—
1,525
16,409
(1,034)
(2)
46,063
—
—
—
—
—
—
—
34,578
—
—
—
—
—
—
1,525
16,411
(1,034)
—
46,063
34,578
—
—
—
—
—
—
1,525
16,411
(1,034)
—
46,063
34,578
—
(194,506)
(194,506)
— (194,506)
149,471
$
149
$1,417,043
$
6,254
$ (758,081) $
665,365
$
— $ 665,365
The accompanying notes are an integral part of these consolidated financial statements.
70
INFINERA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2016, December 30, 2017 and December 29, 2018 - (Continued)
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders'
Equity
Noncontrolling
Interest
Total
Balance at December 30, 2017
149,471
$
149
$1,417,043
$
6,254
$ (758,081) $
665,365
$
— $665,365
Stock options exercised .....
ESPP shares issued ..........
Shares withheld for tax
obligations ..........................
Restricted stock units
released .............................
229
2,189
(109)
2,697
Issuance of common stock
related to acquisition ..........
20,975
Stock-based compensation
Conversion option related
to convertible senior notes,
net of allocated costs .........
Cumulative-effect
adjustment from adoption
of Topic 606........................
Purchase of capped call
transactions........................
Other comprehensive loss .
Net loss ..............................
—
—
—
—
—
—
—
2
—
3
21
—
1,701
15,990
(1,144)
(3)
129,607
42,905
—
128,726
—
—
—
—
—
(48,909)
—
—
—
—
—
—
—
—
—
—
—
(31,554)
—
—
—
—
—
—
—
1,701
15,992
(1,144)
—
129,628
42,905
—
—
—
—
1,701
15,992
(1,144)
—
— 129,628
—
42,905
128,726
— 128,726
15,406
15,406
—
—
(48,909)
(31,554)
—
—
—
15,406
(48,909)
(31,554)
—
(214,295)
(214,295)
— (214,295)
Balance at December 29, 2018
175,452
$
175
$1,685,916
$
(25,300) $ (956,970) $
703,821
$
— $703,821
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:
(214,295) $
(194,506) $
(24,430)
December 29,
2018
Years Ended
December 30,
2017
December 31,
2016
Depreciation and amortization ......................................................................
100,494
Non-cash restructuring and other related credits .........................................
Amortization of debt discount and issuance costs ........................................
Interest accretion related to financing lease obligation .................................
Impairment of intangible assets ....................................................................
Realized gain on sale of non-marketable equity investments.......................
Impairment of non-marketable equity investment .........................................
Stock-based compensation expense ............................................................
Other loss .....................................................................................................
Changes in assets and liabilities:
Accounts receivable .............................................................................
Inventory ..............................................................................................
Prepaid expenses and other assets .....................................................
Accounts payable ................................................................................
Accrued liabilities and other expenses .................................................
Deferred revenue .................................................................................
Net cash provided by (used in) operating activities ..................
Cash Flows from Investing Activities:
Purchase of available-for-sale investments ..................................................
Proceeds from sales of available-for-sale investments ................................
Proceeds from maturities and calls of investments ......................................
Acquisition of business, net of cash acquired ...............................................
Purchase of non-marketable equity investments ..........................................
Proceeds from sale of non-marketable equity investments ..........................
Purchase of property and equipment ...........................................................
Net cash provided by (used in) investing activities ...................
Cash Flows from Financing Activities:
Proceeds from issuance of debt, net ............................................................
Purchase of capped call transactions ...........................................................
Repayment of debt .......................................................................................
Principal payments on financing lease obligations .......................................
Acquisition of noncontrolling interest ............................................................
Proceeds from issuance of common stock ...................................................
Minimum tax withholding paid on behalf of employees for net share
settlement .....................................................................................................
Net cash provided by (used in) financing activities ...................
Effect of exchange rate changes on cash ....................................................
Net change in cash and cash equivalents ....................................................
Cash, cash equivalents and restricted cash at beginning of period..............
Cash, cash equivalents and restricted cash at end of period(1) .................... $
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds .................................................. $
Cash paid for interest ................................................................................... $
Supplemental schedule of non-cash investing and financing activities:
7,291
11,161
4,694
—
(1,050)
5,110
43,410
1,304
(21,111)
(8,617)
(13,458)
(520)
(21,490)
7,994
(99,083)
(2,986)
53,039
102,112
(102,899)
—
1,050
(37,692)
12,624
391,431
(48,880)
(150,000)
(1,211)
—
17,693
(1,144)
207,889
(579)
120,851
121,486
242,337
6,692
3,554
Transfer of inventory to fixed assets ............................................................. $
Common stock issued in connection with acquisition ................................... $
3,787
129,628
$
$
$
$
$
65,997
29,237
11,342
—
252
—
1,890
45,720
503
25,849
2,727
(8,194)
(4,763)
(14,395)
16,416
(21,925)
61,489
—
10,260
—
11,295
(8,983)
—
40,533
1,741
33,895
(64,095)
(5,501)
(28,254)
(11,012)
21,439
38,377
(160,215)
(124,077)
10,531
152,876
—
—
—
(58,041)
(54,849)
—
—
—
—
(471)
17,991
(1,034)
16,486
4,194
(56,094)
177,580
121,486
5,690
2,639
$
$
$
4,950
$
— $
—
142,898
—
(7,000)
23,483
(43,335)
(8,031)
—
—
—
—
(16,771)
17,648
(3,657)
(2,780)
(4,397)
23,169
154,411
177,580
6,625
2,776
5,597
—
72
(1)
Reconciliation of cash, cash equivalents and restricted cash to the consolidated balance sheets:
December 29,
2018
December 30,
2017
December 31,
2016
(In thousands)
Cash and cash equivalents ................................................................................ $
202,954
$
116,345
$
162,641
Short-term restricted cash ..................................................................................
Long-term restricted cash ..................................................................................
13,229
26,154
544
4,597
8,490
6,449
Total cash, cash equivalents and restricted cash ...................................... $
242,337
$
121,486
$
177,580
The accompanying notes are an integral part of these consolidated financial statements.
73
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 is a global supplier of networking solutions
comprised of networking equipment, software and services. The Company's portfolio of solutions includes optical
transport platforms, converged packet-optical transport platforms, optical line systems and disaggregated router
platforms, as well as software-defined networking, network management and routing software.
During the fourth quarter of 2018, the Company completed the acquisition of all the outstanding limited
liability company interests (the “Units”) of Telecom Holding Parent LLC (“Coriant”), a Delaware limited liability
company and wholly-owned subsidiary of Coriant Investor LLC, a Delaware limited liability company (“Seller”),
pursuant to the Unit Purchase Agreement (the “Purchase Agreement”) by and among the Company, Seller and
Oaktree Optical Holdings, L.P., a Delaware limited partnership (“Lender”) (the “Acquisition”). The Acquisition was
accounted for as a business combination, and accordingly, the Company has consolidated the financial results of
Coriant with its financial results for the period from October 1, 2018, the date the acquisition closed (the
“Acquisition Date”) through December 31, 2018.
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 years 2018 and 2017 were 52-week years that ended
on December 29, 2018 and December 30, 2017, respectively. Fiscal year 2016 was a 53-week year that ended
on December 31, 2016. The next 53-week year will end on December 31, 2022.
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. Effective in the fourth
quarter of 2018, the Company elected to present amortization of intangible assets as separate line items within
cost of revenue and operating expenses. Additionally, the Company elected to present acquisition and integration
costs as a separate line item within operating expenses. As a result, the costs previously reflected in cost of
revenue and operating expenses were reclassified to “Amortization of intangible assets” and “Acquisition and
integration costs” within total cost of revenue and total operating expenses. Prior period amounts have been
revised to conform to the current period presentation. This change in presentation does not affect the Company's
total cost of revenue or total operating expenses.
74
The following table shows reclassified amounts to conform to the current period's presentation:
Years Ended
December 30, 2017
Change in
Presentation
Reclassification
Previously
Reported
Current
Presentation
Previously
Reported
December 31, 2016
Change in
Presentation
Reclassification
Current
Presentation
Cost of revenue:
Cost of product..... $ 427,118
Cost of services ...
50,480
$
(20,474) $ 406,644
$ 433,266
$
(19,715) $ 413,551
—
50,480
43,151
—
43,151
Amortization of
intangible
assets(1)................
Restructuring and
related ..................
19,141
Total ................... $ 496,739
Operating
expenses:
Research and
development ........ $ 224,299
Sales and
marketing .............
116,057
N/A
20,474
20,474
—
19,141
N/A
—
19,715
19,715
—
—
$
$
— $ 496,739
$ 476,417
$
— $ 476,417
69
$ 224,368
$ 232,291
$
(148) $ 232,143
(6,546)
109,511
118,858
(7,180)
111,678
General and
administrative .......
70,625
(5)
70,620
68,343
(731)
67,612
Amortization of
intangible
assets(1)................
Acquisition and
integration costs(1)
Restructuring and
related ..................
16,106
Total ................ $ 427,087
N/A
N/A
6,160
6,160
322
322
—
16,106
N/A
N/A
—
6,189
6,189
1,870
1,870
—
—
$
— $ 427,087
$ 419,492
$
— $ 419,492
(1)
2.
These lines were not previously reported in the consolidated statements of operations.
Significant Accounting Policies
Use of Estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (“U.S. 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, accrued warranty, business combinations and accounting for income taxes. Other estimates,
assumptions and judgments made by management include restructuring and other related costs, allowances for
sales returns, allowances for doubtful accounts, pension, useful life of acquired intangibles and recoverability of
property, plant and equipment, fair value measurement of the liability component of the convertible senior notes,
non-marketable equity investments and derivative instruments. Management believes that the estimates,
assumptions 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.
75
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition
Effective December 31, 2017, the Company adopted Accounting Standards Update No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)” (“Topic 606”), using the modified retrospective method
applied to those contracts that were not completed as of December 31, 2017. Results for the reporting periods
after December 31, 2017 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with the Company’s historical accounting under Accounting Standards
Codification (“ASC”) Topic 605, “Revenue Recognition” (“Topic 605”).
The Company recognizes revenue when control of the promised goods or services is transferred to its
customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for
those goods or services.
The Company determines revenue recognition by applying the following five-step approach:
•
•
•
•
•
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, the Company satisfies a performance obligation.
Many of the Company's product sales are sold in combination with installation and deployment services
along with initial hardware and software support. The Company's product sales are also sold at times with spares
management, on-site hardware replacement services, network operations management, software subscription
services, extended hardware warranty and training. Initial software and hardware support services are generally
delivered over a one-year period in connection with the initial purchase. Software warranty provides customers
with maintenance releases during the warranty support period and hardware warranty provides replacement or
repair of equipment that fails to perform in line with specifications. Software subscription services include
software warranty and additionally provides customers with rights to receive unspecified software product
upgrades released during the support 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. Network operations management
includes the day-to-day operation of a customer's network. These services are generally delivered on an annual
basis. The Company evaluates each promised good and service in a contract to determine whether it represents
a distinct performance obligation or should be accounted for as a combined performance obligation.
Services revenue includes software subscription services, installation and deployment services, spares
management, on-site hardware replacement services, network operations management, extended hardware
warranty and training. Revenue from software subscription services, spares management, on-site hardware
replacement services, network operations management and extended hardware warranty contracts is deferred
and is recognized ratably over the contractual support period, which is generally one year, as services are
provided over the course of the entire period. Revenue related to training and installation and deployment
services is recognized upon completion of the services.
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. The Company typically satisfies its performance obligations upon shipment or
delivery of product depending on the contractual terms. Payment terms to customers generally range from net 30
to 120 days from invoice, which are considered to be standard payment terms. The Company assesses its ability
to collect from its customers based primarily on the creditworthiness and past payment history of the customer.
Customer product returns are generally 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
recorded as a reduction to revenue.
76
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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.
Customer Purchase Commitments
The Company sells software licenses that provide customers the ability to purchase incremental
bandwidth capacity on an already-deployed piece of hardware. Infinera Instant Bandwidth (“IB”) enabled systems
generally include a specific initial capacity and incremental capacity can be added by the purchase of IB
licenses. IB licenses are considered distinct performance obligations because customers can provision additional
transmission capacity on demand without the deployment of any incremental equipment.
Some contracts commit the customer to purchase incremental IB licenses within a specified time frame
from the initial shipment of the IB enabled hardware. The time frame varies by customer and generally ranges
between 12 to 24 months. If the customer does not purchase the additional capacity within the time frame as
stated in the contract, the Company has the right to deliver and invoice such IB licenses to the customer. Under
ASC 605, the additional incremental licenses were not included as an element of the initial arrangement because
fees for the future purchases were not fixed. Under Topic 606, future committed licenses are considered to be
additional performance obligations when a minimum purchase obligation is present, as evidenced by enforceable
rights and obligations. As such, the Company is required to estimate the variable consideration for future IB
licenses as part of determining the contract transaction price.
Contract Termination Rights
The contract term is determined on the basis of the period over which the parties to the contract have
present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause
that allows the customer to terminate services without penalty, upon advance notification. For such contracts, the
service duration is limited to the non-cancellable portion of the contract.
Variable Consideration
The consideration associated with customer contracts is generally fixed. Variable consideration includes
discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration
that can vary is not a substantial portion of total consideration.
Variable consideration estimates are re-assessed at each reporting period until a final outcome is
determined. The changes to the original transaction price due to a change in estimated variable consideration will
be applied on a retrospective basis, with the adjustment recorded in the period in which the change occurs.
Stand-alone Selling Price
Stand-alone selling price is the price at which an entity would sell a good or service on a stand-alone (or
separate) basis at contract inception. Under this model, the observable price of a good or service sold separately
provides the best evidence of stand-alone selling price. However, in certain situations, stand-alone selling prices
will not be readily observable and the entity must estimate the stand-alone selling price.
When allocating on a relative stand-alone selling price basis, any discount provided in the contract is
generally allocated proportionately to all of the performance obligations in the contract.
The majority of products and services offered by the Company have readily observable selling prices. For
products and services that do not, the Company generally estimates stand-alone selling price using the market
assessment approach based on expected selling price and adjust those prices as necessary to reflect the Company’s
costs and margins. As part of its stand-alone selling price policy, the Company reviews product pricing on a periodic
basis to identify any significant changes and revise its expected stand-alone selling price assumptions as appropriate.
77
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shipping and Handling
The Company treats shipping and handling activities as costs to fulfill the Company's promise to
transfer products. Shipping and handling fees billed to customers are recorded as a reduction to cost of product.
Capitalization of Costs to Obtain a Contract
The Company has assessed the treatment of costs to obtain or fulfill a contract with a customer. Sales
commissions have historically been expensed as incurred. Under Topic 606, the Company capitalizes sales
commissions related to multi-year service contracts, which are paid for upfront, and amortizes the asset over the
period of benefit, which is the service period. Sales commissions paid on service contract renewals, are
commensurate with the sales commissions paid on the initial contracts.
Transaction Price Allocated to the Remaining Performance Obligation
The Company’s remaining performance obligations represent the transaction price allocated to
performance obligations that are unsatisfied or partially satisfied as of period end, consisting of deferred revenue
and backlog. The Company’s backlog represents purchase orders received from customers for future product
shipments and services that are unsatisfied or partially satisfied as of period end. The Company’s backlog is
subject to future events that could cause the amount or timing of the related revenue to change, and, in certain
cases, may be canceled without penalty. Orders in backlog may be fulfilled several quarters following receipt or
may relate to multi-year support service obligations.
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 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 required judgment, and to the extent actual forfeitures differed from expectations, changes in
estimate are recorded as an adjustment in the period when such estimates are revised. The Company
historically recorded stock-based compensation expense by applying the forfeiture rates and adjusted estimated
forfeiture rates to actual. During the third fiscal quarter beginning on June 26, 2016, the Company elected to
early adopt ASU 2016-09 and elected to change its accounting policy to account for forfeitures when they occur
on a modified retrospective basis.
The Company makes a number of estimates and assumptions in determining stock-based
compensation related to stock options including the following:
•
•
The expected term represents the weighted-average period that the stock options are expected to
be outstanding prior to being exercised. The expected term is estimated based on the Company’s
historical data on employee exercise patterns and post vesting termination behavior to estimate
expected exercises over the contractual term of grants.
Expected volatility of the Company’s stock is based on the weighted-average implied and historical
volatility of the Company.
The Company estimates the fair value of the rights to acquire stock under its 2007 Employee Stock
Purchase Plan (the “ESPP”) using the Black-Scholes option pricing formula. The ESPP provides for consecutive
six-month offering periods and the Company uses its own historical volatility data in the valuation of shares that
are purchased under the ESPP.
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 or four years.
The Company granted performance stock units (“PSUs”) to its executive officers and senior
management in 2016, 2017 and 2018 as part of the Company's annual refresh grant process. These PSUs
78
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
entitle the Company's executive officers and senior management to receive a number of shares of the
Company's common stock based on its stock price performance compared to a specified target composite index
for the same period. These PSUs vest over the span of one year, two years and three years, and the number of
shares to be issued upon vesting ranges from zero to two times the number of PSUs granted depending on the
relative performance of the Company's common stock price compared to the targeted composite index. This
performance metric is classified as a market condition.
The Company uses a Monte Carlo simulation model to determine the fair value of PSUs on the date of
grant. 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 the target composite index. 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 target composite index, correlation between changes in the
Company's stock price and changes in the target composite index, risk-free interest rate, and expected dividends
as applicable. Expected volatility of the Company's stock is based on the weighted-average historical volatility of
its stock. Expected volatility of target composite index is based on the historical and implied data. Correlation is
based on the historical relationship between the Company's stock price and the target composite index 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 the target composite index is the annual dividend yield expressed as a
percentage of the composite average of the target composite index on the grant date.
In addition, the Company has granted other PSUs to certain employees that only vest upon the
achievement of specific operational performance criteria. The Company assesses the achievement status of
these PSUs on a quarterly basis and records the related stock-based compensation expenses based on the
estimated achievement payout.
Employee Benefit and Pension Plans
The Company operates a number of post-employment plans in Germany, as well as smaller post-
employment plans in other countries, including both defined contribution and defined benefit plans. Benefit cost
and obligations pertaining to these plans are based on assumptions for the discount rate, expected return on
plan assets, mortality rates, expected salary increases, health care cost trend rates and attrition rates. The
discount rate assumption is based on current investment yields of high-quality fixed-income securities with
maturities similar to the expected benefits payment period. Mortality rates help predict the expected life of plan
participants. The expected increase in the compensation levels assumption reflects the Company's actual
experience and future expectations. The expected long-term return on plan assets is determined based on asset
allocations, historical portfolio results, historical asset correlations and management’s expected returns for each
asset class. The Company evaluates its expected return assumptions annually including reviewing current
capital market assumptions to assess the reasonableness of the expected long-term return on plan assets. The
Company updates the expected long-term return on assets when the Company observes a sufficient level of
evidence that would suggest the long-term expected return has changed.
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.
Advertising
All advertising costs are expensed as incurred. Advertising expenses in 2018, 2017 and 2016 were $0.9
million, $1.8 million and $1.9 million, respectively.
79
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting for Income Taxes
On December 22, 2017, the Securities and Exchange Commission (the “SEC”) staff issued Staff
Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”) to
address the application of U.S. GAAP in situations when a registrant does not have the necessary information
available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for
certain income tax effects of the U.S. Tax Cuts and Jobs Act (the “Tax Act”). The Company determined an
adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance, was needed.
The adjustment resulted in no tax expense impact in connection with the re-measurement of certain deferred tax
assets and liabilities from 35% to 21%. Additionally, the Company provisionally recorded no tax expense in
connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an
aggregate tax loss of its foreign subsidiaries for the year ended December 30, 2017. The Company finalized its
accounting for the re-measurement of deferred tax balances and transition tax with no adjustment to income tax
expense for the year ended December 29, 2018.
As part of the process of preparing the Company's consolidated financial statements, it is required to
estimate its taxes in each of the jurisdictions in which it operates. The Company estimates 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 its consolidated balance sheets. In general, deferred tax assets represent
future tax benefits to be received when certain expenses previously recognized in its consolidated statements of
operations become deductible expenses under applicable income tax laws or loss, or credit carryforwards are
utilized. Accordingly, realization of the Company's 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.
The Company must assess the likelihood that some portion or all of its deferred tax assets will be
recovered from future taxable income within the respective jurisdictions, and to the extent the Company believes
that recovery does not meet the “more-likely-than-not” standard, it 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 its provision for income taxes, its deferred tax assets and liabilities and any valuation allowance
recorded against its net deferred tax assets. In evaluating the need for a full or partial valuation allowance, all
positive and negative evidence must be considered, including the Company's forecasts of taxable income over
the applicable carryforward periods, its current financial performance, its market environment, and other factors.
Based on the available objective evidence, at December 29, 2018, management believes it is not more likely
than not that the domestic net deferred tax assets will be realizable in the foreseeable future. Accordingly, the
domestic net deferred tax assets are subject to a full valuation allowance. To the extent that the Company
determines that deferred tax assets are realizable on a more likely than not basis, and an adjustment is needed,
that adjustment will be recorded in the period that the determination is made.
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 accumulated other comprehensive income (loss) 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 exchange transactions
recorded in 2018, 2017 and 2016 were losses of $2.5 million, $0.3 million and $1.8 million, respectively.
The Company enters into foreign currency exchange forward contracts to reduce the impact of foreign
exchange fluctuations on earnings from accounts receivable balances denominated in euros and British pounds,
and restricted cash denominated in euros.
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The Company also enters into foreign currency exchange contracts to reduce the volatility of cash flows
primarily related to forecasted revenues and expenses denominated in euros, British pounds and Swedish kronor
(“SEK”). The contracts are generally settled for U.S. dollars, euros and British pounds at maturity under an
average rate method agreed to at inception of the contracts. The gains and losses on these foreign currency
derivatives are recorded to the consolidated statement of operations line item, in the current period, to which the
item that is being economically hedged is recorded.
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, commercial
paper and U.S. treasuries. The Company also maintains a portion of its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Cash, cash equivalents and short-term investments consist of highly-liquid investments in certificates of
deposits, money market funds, commercial paper, U.S. agency notes, corporate bonds and U.S. treasuries.
Long-term investments primarily consist of certificates of deposits, commercial paper, U.S. agency notes,
corporate bonds and U.S. treasuries. 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 income (loss) in the Company’s consolidated balance sheets. The
Company evaluates its available-for-sale marketable debt securities for other-than-temporary impairments 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.
Fair Value Measurement
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair
value is defined as the price that would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at fair value, the Company
considers the principal or most advantageous market in which it would transact and it considers assumptions that
market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs.
Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s assumptions about market participant assumptions based on the 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, foreign currency exchange forward contracts, and debt
securities at fair value and classifies its securities in accordance with the fair value hierarchy on a recurring
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basis. 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 the following assets 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.
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.
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.
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. If 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.
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.
Pension
As a result of the Acquisition, the Company acquired a number of post-employment plans in Germany,
as well as a number of smaller post-employment plans in other countries, including both defined contribution and
defined benefit plans. The defined benefit plans expose the Company to actuarial risks such as investment risk,
interest rate risk, life expectancy risk and salary risk. The characteristics of the defined benefit plans and the
risks associated with them vary depending on legal, fiscal, and economic requirements.
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The Company classifies the following assets and liabilities within Level 3 of the fair value hierarchy and
applies fair value accounting on a non-recurring basis, only if impairment is indicated:
Facilities-related Charges
The Company estimates the fair value of its facilities-related charges associated with the 2017
Restructuring Plan (as defined in Note 9, “Restructuring and Other Related Costs” to the Notes to Consolidated
Financial Statements), based on estimated future discounted cash flows and unobservable inputs, which
included the amount and timing of estimated sublease rental receipts that the Company could reasonably obtain
over the remaining lease term and the discount rate.
Non-marketable Equity Investment
Beginning the first quarter of 2018, the Company adopted Accounting Standards Update No. 2016-01,
“Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial
Liabilities” (“ASU 2016-01”), which requires equity investments to be measured at fair value with changes in fair
value recognized in net income. As a result of adopting this new standard, the Company's non-marketable equity
securities formerly classified as cost-method investments are now measured and recorded using the
measurement alternative. Equity securities measured and recorded using the measurement alternative are
recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price
changes. Adjustments resulting from impairments and qualifying observable price changes are recorded in other
income (expense), net, in the accompanying consolidated statements of operations. No initial adoption
adjustment was recorded for these instruments since the standard was required to be applied prospectively for
securities measured using the measurement alternative. These analyses require management to make
assumptions and estimates regarding industry and economic factors, future operating results and discount rates.
The Company regularly evaluates the carrying value of its equity investment for impairment. When a
qualitative assessment indicates that impairment exists, the Company measures the investment at fair value.
Accounts Receivable and Allowances for Doubtful Accounts
Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company
reviews its aging by category to identify significant customers or invoices with known dispute or collectability
issues. The Company makes judgments as to its ability to collect outstanding receivables based on various
factors including ongoing customer credit evaluations and historical collection experience. The Company
provides an allowance for receivable amounts that are potentially uncollectible and when receivables are
determined to be uncollectible, amounts are written off.
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. At December 29, 2018, December 30, 2017 and December 31, 2016, revenue was
reduced for estimated sales returns by $4.3 million, $0.9 million and $0.6 million, respectively.
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 and accounts receivable. Investment policies have
been implemented that limit investments to investment-grade securities.
The risk with respect to accounts receivable is mitigated by ongoing credit evaluations that the
Company performs on its customers. As the Company continues to expand 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.
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As of December 29, 2018, no customers accounted for over 10% of the Company's net accounts
receivable balance. As of December 30, 2017, two customers accounted for over 10% of the Company's net
accounts receivable balance. One customer accounted for approximately 11% of the Company's net accounts
receivable balance, and another customer, which completed a merger in late 2017, was a combination of two of
the Company's historically larger customers, accounted for approximately 16% of the Company's net accounts
receivable balance.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue. One
customer accounted for approximately 15% of the Company's revenue in 2018. One other customer, which
completed a merger in late 2017 as mentioned above, was a combination of two of the Company's historically
larger customers who merged in 2017 and accounted for approximately 13% and 18% of the Company's revenue
in 2018 and 2017, respectively. These two historically larger customers each individually accounted for
approximately 16% and 8% of the Company's revenue in 2016, respectively. No other customers accounted for
over 10% of the Company's revenue for 2017 or 2016.
The Company depends on sole source or limited source suppliers for several key components and raw
materials. The Company generally purchases these sole source or limited source components and raw 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 raw materials,
the Company’s business and results of operations could be adversely affected if any of its sole source or limited
source suppliers suffer from capacity constraints, lower than expected yields, deployment delays, work
stoppages or any other reduction or disruption in output.
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 parties consistently. The
Company’s objective is to offset gains and losses resulting from these exposures with gains and losses 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.
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 and British pound denominated
receivables and euro denominated restricted cash balance amounts that are pledged as collateral for certain
standby 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 Company also enters into
foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues
and expenses denominated in euros, British pounds and SEK. These contracts are generally settled for U.S.
dollars, euros and British pounds at maturity under an average rate method agreed to at inception of the
contracts. The forward contracts are with one high-quality institution and the Company consistently monitors the
creditworthiness of the counterparty.
The Company has entered into factoring agreements, to sell certain receivables to unrelated third-party
financial institutions. These transactions are accounted for in accordance with Accounting Standards Codification
Topic 860, “Transfers and Servicing” (“ASC 860”). ASC 860 and result in a reduction in accounts receivable
because the agreements transfer effective control over and risk related to the receivables to the buyers. The
Company's factoring agreements do not allow for recourse in the event of uncollectibility, and the Company does
not retain any interest in the underlying accounts receivable once sold.
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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 or net realizable value. Costs are recognized utilizing the first-in,
first-out method. Net realizable 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 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. In
valuing its inventory costs and deferred inventory costs, the Company considered whether the net realizable
value of inventory 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 net realizable value of
inventory 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 net realizable value, whichever is lower, thereby recognizing the
cost of the reduction in net realizable value of inventory 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 actual cost or net realizable value.
The Company considers whether it should accrue losses on firm purchase commitments related to
inventory items. Given that the net realizable value of common equipment is below contractual purchase price,
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. This includes enterprise-level business software that
the Company customizes to meet 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:
Building .......................................................................................................................
Laboratory and manufacturing equipment ...................................................................
Furniture and fixtures ..................................................................................................
Computer hardware and software ...............................................................................
Leasehold and building improvements ........................................................................
Estimated Useful Lives
20 to 41 years
1.5 to 10 years
3 to 10 years
1.5 to 7 years
1 to 10 years
The Company 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.
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Accrued Warranty
The Company warrants that its products will operate substantially in conformity with product
specifications. 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's hardware warranty
periods generally range from one to five years from date of acceptance for hardware and the Company's
software warranty is 90 days. Upon delivery of the Company's products, the Company provides for the estimated
cost to repair or replace products that may be returned under warranty. The hardware warranty accrual is based
on actual historical returns and cost of repair experience and the application of those historical rates to the
Company's in-warranty installed base. The provision for warranty claims fluctuates depending upon the installed
base of products and the failure rates and costs of repair associated with these products under warranty.
Furthermore, the Company's costs of repair vary based on repair volume and its ability to repair, rather than
replace, defective units. In the event that actual product failure rates and costs to repair differ from the
Company's estimates, revisions to the warranty provision are required. In addition, from time to time, specific
hardware warranty accruals may be made if unforeseen technical problems arise with specific products. The
Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as
necessary.
Business Combination
Accounting for acquisitions requires the Company's management to estimate the fair value of the assets
and liabilities assumed, which requires management to make significant estimates, judgments, and assumptions
that could materially affect the timing or amounts recognized in its financial statements. These assumptions and
estimates include the Company’s use of the asset and the appropriate discount rates. The Company’s significant
estimates can include, but are not limited to, the future cash flows, the appropriate weighted cost of capital, and
discount rates, as well as the estimated useful life of intangible assets, deferred tax assets and liabilities,
uncertain tax positions, and tax-related valuation allowance, which are initially estimated as of the acquisition
date. While the Company uses its best estimates and assumptions to accurately value assets acquired and
liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. In
addition, unanticipated events and circumstances may occur that may affect the accuracy or validity of such
estimates. As a result, during the measurement period, which may be up to one year following the acquisition
date, if new information is obtained about facts and circumstances that existed as of the acquisition date, the
Company may record adjustments to the fair value of these assets and liabilities, with the corresponding offset to
goodwill.
Amortization of Intangible Assets
Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is
computed over the estimated useful lives of the respective assets. In-process research and development
represents the fair value of incomplete research and development projects that have not reached technological
feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Once projects have
been completed they are transferred to developed technology, which are subject to amortization, while assets
related to projects that have been abandoned are impaired and expensed to research and development.
Impairment of Intangible Assets and Goodwill
Goodwill is evaluated for impairment on an annual basis in the fourth quarter of the Company's fiscal
year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be
recoverable. The Company has elected to first assess qualitative factors to determine whether it is more likely
than not that the fair value of its single reporting unit is less than its carrying amount. If the Company determines
that it is more likely than not that the fair value of its single reporting unit is less than its carrying amount, then the
two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares
the fair value of its single reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the
second step will be performed; otherwise, no further step is required. The second step, measuring the
impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any
excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss. The
Company evaluates events and changes in circumstances that could indicate carrying amounts of purchased
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intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company
assesses the recoverability of these assets by determining whether or not the carrying amount will be recovered
through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than
the carrying amount of an asset, the Company records an impairment loss for the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Restructuring and Other Related Costs
The Company records costs associated with exit activities related to restructuring plans in accordance
with ASC 420, “Exit or Disposal Cost Obligations.” Liabilities for costs associated with an exit or disposal activity
are recognized in the period in which the liability is incurred. The timing of the associated cash payments is
dependent upon the type of exit cost and extends over an approximately four-year period. The Company records
restructuring cost liabilities in “Accrued Expenses” and "Other Long-term Liabilities" in the Consolidated Balance
Sheet.
Restructuring costs include termination costs, facility consolidation and closure costs, equipment write-
downs and inventory write-downs. One-time termination benefits are recognized as a liability at estimated fair
value when the approved plan of termination has been communicated to employees, unless employees must
provide future service, in which case the benefits are recognized ratably over the future service period. Ongoing
termination benefits arrangements are recognized as a liability at estimated fair value when the amount of such
benefits becomes estimable and payment is probable. For the facility-related restructuring costs, the Company
recognizes a liability upon exiting all or a portion of a leased facility and meeting cease-use and other
requirements. The amount of restructuring costs is based on the fair value of the lease obligation for the
abandoned space, which includes a sublease assumption that could be reasonably obtained.
Restructuring charges require significant estimates and assumptions, including sublease income and
expenses for severance and other employee separation costs. Management estimates involve a number of risks
and uncertainties, some of which are beyond control, including future real estate market conditions and the
Company's ability to successfully enter into subleases or termination agreements with terms as favorable as
those assumed when arriving at its estimates. The Company monitors these estimates and assumptions on at
least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are
recorded in its statement of operations in the period when such changes are known.
Recent Accounting Pronouncements
In December 2017, the SEC staff issued SAB 118, which allowed the Company to record provisional
amounts during a measurement period not to extend beyond one year of the enactment date. In March 2018, the
Financial Accounting Standards Board (the “FASB”) issued ASU 2018-05, “Amendments to SEC Paragraphs
Pursuant to SAB 118” and added such SEC guidance to Accounting Standards Codification 740, “Income Taxes,
codified under the title: Income Tax Accounting Implications of the Tax Cuts and Jobs Act.” The Company
determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation allowance,
was needed. The adjustment resulted in no tax expense impact in connection with the re-measurement of certain
deferred tax assets and liabilities from 35% to 21%. Additionally, we provisionally recorded no tax expense in
connection with the transition tax on the mandatory deemed repatriation of foreign earnings, based upon an
aggregate tax loss of our foreign subsidiaries for the year ended December 30, 2017. The Company finalized its
accounting for the re-measurement of deferred tax balances and transition tax with no adjustment to income tax
expense for the year ended December 29, 2018.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation - Stock
Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of
modification accounting for share-based payment arrangements, and provides guidance on the types of changes
to the terms or conditions of share-based payment awards to which an entity would be required to apply
modification accounting under Topic 718. The Company's adoption of ASU 2017-09 during its first quarter of
2018 had no impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows
explain the change during the period in the total of cash, cash equivalents and amounts generally described as
restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents should be
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included with cash and cash equivalents when reconciling the beginning-of-period and ending-of-period total
amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 during the first quarter of
fiscal 2018, using the retrospective transition approach. Restricted cash in the prior period has been included
with cash and cash equivalents when reconciling the beginning and ending total amounts on the statement of
cash flows for the year ended December 30, 2017 and December 31, 2016, to conform to the current period
presentation. The adoption of ASU 2016-18 did not have a material impact on the cash flow activity presented on
the Company's consolidated statements of cash flows. See the consolidated statements of cash flows for a
reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that
sum to the total of the same such amounts on the consolidated statements of cash flows.
In May 2016, the FASB issued Accounting Standards Update No. 2016-11, “Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting
Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
(SEC Update)” (“ASU 2016-11”), which rescinds various standards codified as part of Topic 605, Revenue
Recognition in relation to the adoption of Topic 606. These rescissions include changes to topics pertaining to
revenue and expense recognition for freight services in process, accounting for shipping and handling fees and
costs, and accounting for consideration given by a vendor to a customer. The Company adopted ASU 2016-11
during the first quarter of 2018. See Note 3, “Revenue Recognition” to the Notes to Consolidated Financial
Statements for more information.
On December 31, 2017, the Company adopted Topic 606, which provides guidance for revenue
recognition that superseded the revenue recognition requirements in Topic 605 and most industry specific
guidance. Under Topic 606, revenue is recognized when promised goods or services are transferred to
customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange
for those goods or services. The Company adopted Topic 606 under the modified retrospective transition
method, applying the amendments to prospective reporting periods and applied to those contracts that were not
completed as of December 31, 2017. Results for reporting periods beginning after December 31, 2017 are
presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in
accordance with the historic accounting under Topic 605. See Note 3, “Revenue Recognition” to the Notes to
Consolidated Financial Statements for more information.
In January 2016, the FASB issued ASU 2016-01, which requires equity investments to be measured at
fair value with changes in fair value recognized in the income statement and simplifies the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment
to identify impairment. The Company adopted ASU 2016-01 during its first quarter of 2018 and the adoption did
not have a material impact on its consolidated financial statements. See Note 4, “Fair Value Measurements” to
the Notes to Consolidated Financial Statements for more information.
Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 (“ASU 2018-15”),
“Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract.” The update provides guidance for determining if a cloud computing arrangement is within the scope of
internal-use software guidance, and would require capitalization of certain implementation costs. ASU 2018-15 is
effective for the Company in its first quarter of 2020, with early adoption permitted. The Company is currently
evaluating the impact the adoption of ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (“ASU 2018-14”),
"Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure
Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." The update eliminates, adds,
and modifies certain disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans. ASU 2018-14 is effective for the Company in its first quarter of 2021, with early adoption
permitted. The Company is currently evaluating the impact the adoption of ASU 2018-14 will have on its
consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (“ASU 2018-13”), “Fair
Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement.” The update eliminates, adds, and modifies certain disclosure requirements for fair value
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measurements. ASU 2018-13 is effective for the Company in its first quarter of 2020 and early adoption is
permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. The
Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its consolidated financial
statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Non-
employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based
payments granted to non-employees for goods and services. Under ASU 2018-07, certain guidance on such
payments to non-employees would be aligned with the requirements for share-based payments granted to
employees. The guidance will be effective for the Company's first quarter of 2019 and early adoption is
permitted. As the Company does not have material non-employee awards, it does not expect the adoption of
ASU 2018-07 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Simplifying the Test for
Goodwill Impairment” (“ASU 2017-04”). The guidance eliminates Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a
reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same
one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative
carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or
negative carrying amounts. ASU 2017-04 will be effective for the Company's annual or any interim goodwill
impairment tests in its first quarter of fiscal 2020. The Company is currently evaluating the impact the adoption of
ASU 2017-04 will have on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments -
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which
requires measurement and recognition of expected credit losses for financial assets held. This guidance is
effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is
currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU
2016-02”), which amends the existing accounting standards for leases. The new standard requires lessees to
record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-
term leases). For lessees, leases will continue to be classified as either operating or financing in the income
statement. This guidance is effective for the Company in its first quarter of fiscal 2019. ASU 2016-02 is required
to be applied with a modified retrospective approach and requires application of the new standard at the
beginning of the earliest comparative period presented. In July 2018, the FASB issued Accounting Standards
Update 2018-11 “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”), which provides lessees an
additional (and optional) transition method to apply the new leasing standard to all open leases at the adoption
date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. In December 2018, the FASB issued Accounting Standards Update 2018-20, “Narrow-Scope
Improvements for Lessors,” which contains certain narrow scope improvements to the guidance issued in ASU
2016-02. The Company is currently evaluating the other possible impacts the adoption of ASU 2016-02, ASU
2018-11 and ASU 2018-20 will have on its consolidated financial statements.
3.
Revenue Recognition
Topic 606 Adoption
The Company recorded a net reduction to the opening balance of its accumulated deficit of $15.4
million as of December 31, 2017 due to the cumulative impact of adopting Topic 606, with the impact primarily
related to its services revenue. The impact to revenue for the year ended December 29, 2018 was an increase of
$6.7 million as a result of applying Topic 606. The details of the significant changes and quantitative impact of the
Company’s adoption of Topic 606 are set out below.
89
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Capitalization of Costs to Obtain a Contract
As of December 29, 2018, the ending balance of the Company’s capitalized costs to obtain a contract
was $0.4 million. The Company's amortization expense was not material for the year ended December 29, 2018.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
Product
............................................................................... $
763,555
$
610,535
$
Services ..............................................................................
179,824
130,204
Total revenue ............................................................... $
943,379
$
740,739
$
751,167
118,968
870,135
Years Ended
December 29,
2018
December 30,
2017(1)
December 31,
2016(1)
(1)
Prior period amounts have not been adjusted under the modified retrospective method of adopting Topic
606.
The Company sells its products directly to customers who are predominantly service providers and to
channel partners that sell on its behalf. The following tables present the Company's revenue disaggregated by
geography, based on the shipping address of the customer and by sales channel (in thousands):
Years Ended
December 29,
2018
December 30,
2017(1)
December 31,
2016(1)
United States ...................................................................... $
Other Americas ...................................................................
Europe, Middle East and Africa ...........................................
Asia Pacific .........................................................................
476,784
$
428,592
$
541,889
44,581
309,989
112,025
20,070
234,972
57,105
40,036
243,783
44,427
Total revenue ................................................................. $
943,379
$
740,739
$
870,135
Direct
.................................................................................. $
838,931
$
693,472
$
809,681
Indirect ................................................................................
104,448
47,267
60,454
Total revenue ................................................................. $
943,379
$
740,739
$
870,135
Years Ended
December 29,
2018
December 30,
2017(1)
December 31,
2016(1)
(1) Prior period amounts have not been adjusted under the modified retrospective method of adopting Topic 606.
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from
contracts with customers (in thousands):
............................................................................ $
Accounts receivable, net
Contract assets .......................................................................................... $
Deferred revenue ....................................................................................... $
317,115
24,981
120,302
$
$
$
135,245
2,825
75,458
December 29,
2018
At Adoption
90
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue recognized for the year ended December 29, 2018 that was included in the deferred revenue
balance at the beginning of the reporting period was $44.4 million. Changes in the contract asset and liability
balances during the year ended December 29, 2018 were primarily impacted by the Acquisition during the fourth
quarter of 2018.
Transaction Price Allocated to the Remaining Performance Obligation
The following table includes estimated revenue expected to be recognized in the future related to
performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period (in
thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Revenue expected to be
recognized in the future as
of December 29, 2018 .......
$ 375,707
$ 53,258
$ 18,904
$ 6,434
$ 2,716
$
1,193
$ 458,212
Impacts on Financial Statements
The following tables summarize the impact of adopting Topic 606 on the Company's consolidated
statement of operations for the year ended December 29, 2018 and the Company's consolidated balance sheet
as of December 31, 2017 (in thousands):
Year Ended December 29, 2018
As Reported
Adjustments
Balances Without
Adoption of Topic
606
Income Statement
Revenue
Product ......................................................... $
Services ........................................................
763,555
$
(10,680) $
179,824
3,946
$
943,379
$
(6,734) $
Costs and expenses
Cost of revenue ............................................ $
Net loss ............................................................ $
Net loss per share - basic and diluted ........... $
622,223
$
(214,295) $
(1.36) $
1,687
$
(8,421) $
(0.05) $
752,875
183,770
936,645
623,910
(222,716)
(1.41)
The increase in revenue from the adoption of Topic 606 was primarily related to an increase in product
revenue for certain customers as a result of recognition upon transfer of control in advance of milestone
invoicing. The adoption of Topic 606 did not have a material impact to the Company's consolidated financial
statements for the year ended December 29, 2018.
91
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Balance at
December 30, 2017
Adjustments due
to Topic 606
As Adjusted
Balance at
December 31, 2017
Balance Sheet
Assets
Accounts receivable, net .............................. $
Inventory ...................................................... $
Prepaid expenses and other assets ............. $
126,152
214,704
43,339
Liabilities
Accrued expenses ....................................... $
Deferred revenue ......................................... $
39,782
94,923
$
$
$
$
$
9,093
$
(239) $
2,731
$
135,245
214,465
46,070
15,645
$
(19,465) $
55,427
75,458
Equity
Accumulated deficit ...................................... $
(758,081) $
15,406
$
(742,675)
4.
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):
As of December 29, 2018
As of December 30, 2017
Fair Value Measured Using
Fair Value Measured Using
Level 1
Level 2
Total
Level 1
Level 2
Total
Assets
Money market funds .................................. $10,347
Certificates of deposit ................................
—
Commercial paper .....................................
Corporate bonds ........................................
U.S. agency notes .....................................
—
—
—
U.S. treasuries ...........................................
23,987
Total assets ........................................ $34,334
$
— $ 10,347
$20,371
$
— $ 20,371
—
—
—
—
23,512
2,999
23,512
2,999
—
—
240
240
26,912
26,912
— 118,558
118,558
—
5,480
5,480
35,408
—
23,987
35,408
—
$ 26,511
$ 60,845
$55,779
$151,190
$206,969
Liabilities
Foreign currency exchange forward
contracts .................................................... $
— $
(91) $
(91) $
— $
(204) $
(204)
During 2018 and 2017, there were no transfers of assets or liabilities between Level 1 and Level 2. As
of December 29, 2018 and December 30, 2017, none of the Company’s existing securities were classified as
Level 3 securities.
The Company classifies its equity investments and certain facilities-related charges within Level 3 of the
fair value hierarchy and applies fair value accounting on a nonrecurring basis when impairment indicators exist or
upon the existence of observable fair values. The fair values are classified as Level 3 measurements due to the
significance of unobservable inputs. These analyses require management to make assumptions and estimates
regarding industry and economic factors, future operating results and discount rates.
Equity Investments
In 2016, the Company invested $7.0 million in a privately-held company. As of December 29, 2018 and
December 30, 2017, the Company's equity investment balance was zero and $5.1 million, respectively.
92
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2017, the Company recorded impairment charges of $1.9 million to adjust the carrying value of its
investment to estimated fair value. During the fourth quarter of 2018, this privately-held company had ceased
operations and was undergoing liquidation as of December 29, 2018. As a result, the Company determined that
the fair value of its investment was zero and wrote off the remaining carrying value of $5.1 million in 2018.
In addition, in 2016, the Company recognized a gain of $9.0 million from the sale of an existing non-
marketable equity investment.
The Company used the guideline public company method and the guideline transaction method of the
market approach to determine the implied total equity value on a minority interest basis.
Facilities-related Charges
In connection with the 2017 Restructuring Plan, the Company calculated the fair value of the $7.3
million in facilities-related charges based on estimated future discounted cash flows and classified the fair value
as a Level 3 measurement due to the significance of unobservable inputs, which included the amount and timing
of estimated sublease rental receipts that the Company could reasonably obtain over the remaining lease term
and the discount rate. See Note 9, “Restructuring and Other Related Costs” to the Notes to Consolidated
Financial Statements for more information on the 2017 Restructuring Plan.
Cash and Cash Equivalents
Cash, cash equivalents and investments were as follows (in thousands):
December 29, 2018
Adjusted
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
168,620
$
— $
— $
168,620
—
1
1
—
—
—
—
10,347
23,987
$
— $
202,954
(1)
(91)
2,999
23,512
26,511
— $
(92) $
1
$
(92) $
229,465
Cash ............................................................ $
Money market funds .....................................
U.S. treasuries .............................................
10,347
23,986
Total cash and cash equivalents.............. $
202,953
$
U.S. agency notes ........................................
Corporate bonds ..........................................
Total short-term investments ................... $
Total cash, cash equivalents and
investments ........................................... $
3,000
23,603
26,603
229,556
$
$
93
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 30, 2017
Adjusted
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Cash ............................................................ $
Money market funds ....................................
U.S. treasuries .............................................
87,991
$
— $
— $
20,371
7,984
—
—
—
(1)
Fair Value
87,991
20,371
7,983
Total cash and cash equivalents ............. $
116,346
$
— $
(1) $
116,345
Certificates of deposit ..................................
Commercial paper .......................................
Corporate bonds ..........................................
U.S. agency notes .......................................
U.S. treasuries .............................................
240
26,924
90,685
2,500
27,495
—
—
—
—
—
—
(12)
(155)
(11)
(70)
240
26,912
90,530
2,489
27,425
Total short-term investments ................... $
147,844
$
— $
(248) $
147,596
Corporate bonds ..........................................
U.S. agency notes .......................................
Total long-term investments .................... $
Total cash, cash equivalents and
investments .......................................... $
28,186
3,002
31,188
295,378
$
$
—
—
(158)
(11)
— $
(169) $
28,028
2,991
31,019
— $
(418) $
294,960
As of December 29, 2018, the Company’s available-for-sale investments have a contractual maturity
term of up to 9 months. Gross realized gains and losses on short-term and long-term investments were
insignificant for all periods. The specific identification method is used to account for gains and losses on
available-for-sale investments.
As of December 29, 2018, the Company had $229.5 million of cash, cash equivalents and short-term
investments, including $89.8 million of cash and cash equivalents held by its foreign subsidiaries. The
Company's cash in foreign locations is used for operational and investing activities in those locations, and the
Company does not currently have the need or the intent to repatriate those funds to the United States.
5.
Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company transacts business in various foreign currencies and has international sales, cost of
sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary
assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency
risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of
reported earnings. The Company utilizes foreign currency forward contracts, primarily short term in nature.
Historically, the Company enters into foreign currency exchange forward contracts to manage its
exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated
receivables and restricted cash balances. Gains and losses on these contracts are intended to offset the impact
of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and
restricted cash, and therefore, do not subject the Company to material balance sheet risk.
The Company also enters into foreign currency exchange contracts to reduce the volatility of cash flows
primarily related to forecasted revenues and expenses denominated in euros, British pounds and SEK. The
contracts are generally settled for U.S. dollars, euros and British pounds at maturity under an average rate
method agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are
recorded to the consolidated statement of operations line item, in the current period, to which the item that is
being economically hedged is recorded.
94
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 29, 2018, the Company posted $0.9 million of collateral on its derivative instruments to
cover potential credit risk exposure. This amount is classified as other long-term restricted cash on the
accompanying consolidated balance sheets.
The before-tax effect of foreign currency exchange forward contracts was a gain of $0.7 million for
2018, a loss of $3.5 million for 2017 and a loss of $0.9 million in 2016, included in other gain (loss), net, in the
consolidated statements of operations. In each of these periods, the impact of the gross gains and losses were
offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of December 29, 2018, the Company did not designate foreign currency exchange forward contracts
as hedges for accounting purposes and accordingly, changes in the fair value are recorded in the accompanying
consolidated statements of operations. These contracts were with one high-quality institution and the Company
consistently monitors the creditworthiness of the counterparties.
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 29, 2018
As of December 30, 2017
Gross
Notional
(1)
Prepaid
Expenses
and Other
Assets
Other
Accrued
Liabilities
Gross
Notional
(1)
Prepaid
Expenses
and Other
Assets
Other
Accrued
Liabilities
Foreign currency exchange
forward contracts ...................
Related to euro
denominated
receivables ..................... $
Related to British pound
denominated
receivables .....................
Related to euro
denominated restricted
cash ............................... $
Total ........................
40,068
$
— $
(52) $
24,794
$
— $
(202)
6,412
—
(38)
—
—
—
240
$
$
— $
— $
(1) $
252
(91)
$
$
— $
— $
(2)
(204)
(1) Represents the face amounts of forward contracts that were outstanding as of the period noted.
Accounts Receivable Factoring
The Company sells certain designated trade account receivables based on factoring arrangements to a
large international banking institution. Pursuant to the terms of the arrangements, the Company accounts for
these transactions in accordance with ASC 860. The Company's factor purchases trade accounts receivables on
a non-recourse basis and without any further obligations. Trade accounts receivables balances sold are removed
from the consolidated balance sheets and cash received are reflected as cash provided by operating activities in
the consolidated statements of cash flow. The difference between the fair value of the Company's trade
receivables and the proceeds received is recorded as interest expense in the Company's consolidated
statements of operations, and for the year ended December 29, 2018, the Company's recognized factoring
related interest expense was approximately $0.1 million. The gross amount of trade accounts receivables sold
for the year ended December 29, 2018 totaled approximately $12.6 million. Prior to the Acquisition, the Company
had not entered into any factoring arrangements.
95
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6.
Business Combination
On the Acquisition Date, the Company acquired 100% ownership of Coriant. The Acquisition positions the
Company as one of the largest providers of vertically integrated transport networking solutions in the world, enhances
the Company's ability to serve a global customer base and accelerates delivery of the innovative solutions its
customers demand. This Acquisition also positions the Company to expand the breadth of customer applications it can
address, including metro aggregation and switching, disaggregated transport and routing, and software-enabled multi-
layer network management and control. The Acquisition was accounted for under the acquisition method of accounting
in accordance with ASC Topic 805, “Business Combinations” and consisted of the following (in thousands, except
shares):
Cash ................................................................................................................................ $
Equity consideration(1)
.....................................................................................................
Total
......................................................................................................................... $
154,192
129,628
283,820
(1) Based on the closing price of the Company's common stock of $6.18 on October 1, 2018, the $129.6 million
equity consideration represents the fair value of 21 million shares of the Company's common stock issued to
Coriant shareholders in accordance with the Purchase Agreement.
The Company financed the cash portion of the purchase price of the Acquisition with the net proceeds from
its offering of the $402.5 million of 2.125% convertible senior notes due September 1, 2024 (the “2024 Notes”). See
Note 12, “Debt and Financing Lease Obligations” to the Notes to Consolidated Financial Statements for more
information.
In 2018, the Company expensed acquisition-related costs in the amount of $8.3 million in operating
expenses.
The Company allocated the fair value of the purchase price of the acquisition to the tangible and intangible
assets acquired as well as liabilities assumed, based on their estimated fair values. The excess of the purchase
price over the fair values of these identifiable assets and liabilities was recorded as goodwill. The following table
summarizes the Company’s preliminary allocation of the purchase consideration based on the fair value of assets
acquired and liabilities assumed at the Acquisition Date (in thousands):
Cash and cash equivalents ............................................................................................. $
Restricted cash ...............................................................................................................
Accounts receivable ........................................................................................................
Inventory .........................................................................................................................
Property, plant and equipment, net ..................................................................................
Other assets ....................................................................................................................
Intangible assets, net
......................................................................................................
Goodwill
..........................................................................................................................
Financing lease obligation ...............................................................................................
Deferred revenue ............................................................................................................
Other liabilities ................................................................................................................
Total net assets .......................................................................................................... $
15,549
25,743
170,466
96,067
217,991
39,145
200,700
48,235
(194,700)
(43,502)
(291,874)
283,820
The Company expects to finalize the allocation of the purchase consideration as soon as practicable, pending
finalization of income taxes and any other adjustments related to acquired assets or liabilities, but no later than 12
months from the Acquisition Date.
The following table presents details of the identifiable assets acquired at the Acquisition Date (in thousands):
96
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Customer relationships and backlog ....................................... $
Developed technology ............................................................
In-process technology .............................................................
Trade name ............................................................................
Total
................................................................................... $
111,400
70,550
17,750
1,000
200,700
8
5
n/a
1
Fair Value
Estimated Useful Life
(Years)
Goodwill generated from this business combination is primarily attributable to the synergies from combining
the operations of Coriant with that of the Company, which resulted in strengthening the Company's ability to serve a
global customer base and accelerate delivery of product solutions. The goodwill recorded in the Acquisition is not
expected to be deductible for income tax purposes.
The amounts of revenue and net loss of Coriant included in the Company's consolidated statement of
operations from the Acquisition Date to December 29, 2018 was $139.6 million and $71.8 million, respectively.
The following table presents the unaudited pro forma financial information for the years ended December 29,
2018 and December 30, 2017 as though the companies were combined as of January 1, 2017 (in millions):
Years Ended
December 29,
2018
December 30,
2017
Revenue ................................................................................................................. $
Net loss ................................................................................................................... $
1,441
$
(421) $
1,488
(370)
The pro forma financial information for the years ended December 29, 2018 and December 30, 2017 has
been calculated after applying the Company's accounting policies and adjusting the results of Coriant to reflect the
acquisition costs incurred and the additional amortization that would have been charged assuming the fair value
adjustments to tangible and intangible assets had been applied on January 1, 2017, together with the consequential
tax effects. The pro forma financial information is for informational purposes only and is not indicative of the results of
the operations that would have been achieved if the Acquisition had taken place at the beginning of the Company's
fiscal year 2017.
7.
Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible
and identified intangible assets acquired.
The following table presents details of the Company’s goodwill for the year ended December 29, 2018
(in thousands):
Balance as of December 30, 2017 ............................................................................................. $
Goodwill acquired ......................................................................................................................
Foreign currency translation adjustments ..................................................................................
Accumulated impairment loss ....................................................................................................
195,615
48,235
(16,619)
—
Balance as of December 29, 2018 ............................................................................................. $
227,231
The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as
a portion of these assets are denominated in foreign currency.
97
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
The following table presents details of the Company’s intangible assets as of December 29, 2018 and
December 30, 2017 (in thousands):
December 29, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted
Average
Remaining
Useful Life
(In Years)
1,000
$
(250) $
750
NMF*
158,110
(42,478)
115,632
Intangible assets with finite lives:
Trade names ................................................................ $
Customer relationships and backlog ............................
Developed technology .................................................
166,355
Total intangible assets with finite lives .............................. $ 325,465
Acquired in-process technology ........................................
17,750
Total intangible assets ...................................................... $ 343,215
(67,368)
98,987
(110,096) $ 215,369
—
17,750
(110,096) $ 233,119
$
$
*NMF = Not meaningful
Intangible assets with finite lives:
December 30, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
51,050
$ (15,007) $
36,043
(48,563)
56,145
$ (63,570) $
92,188
Customer relationships ................................................ $
Developed technology .................................................
104,708
Total intangible assets with finite lives .............................. $ 155,758
In connection with the Acquisition, the Company acquired intangible assets for a total of $200.7 million,
which is included in the gross carrying amount of intangible assets as of December 29, 2018. See Note 6,
"Business Combination" to the Notes to Consolidated Financial Statements for more information.
The gross carrying amount of intangible assets and the related amortization expense of intangible
assets may change due to the effects of foreign currency fluctuations as a portion of these assets are
denominated in foreign currency. Amortization expense was $52.8 million and $26.6 million for the years ended
December 29, 2018 and December 30, 2017, respectively.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are
recorded to the appropriate cost and expense categories. During 2017, the Company recorded an impairment
charge to research and development expenses of $0.3 million related to other intangible assets, which the
Company has determined that the carrying value will not be recoverable. During the first quarter of 2017, the
Company transferred $0.3 million of its in-process technology to developed technology, which is being amortized
over a useful life of five years.
98
3.5
1.7
5.2
Weighted
Average
Remaining
Useful Life
(In Years)
5.6
2.7
3.9
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the Company’s estimated future amortization expense of intangible
assets with finite lives as of December 29, 2018 (in thousands):
Total
2019
2020
2021
2022
2023 and
Thereafter
Fiscal Years
Total future amortization expense ..... $ 215,369
$ 60,512
$ 44,979
$ 32,044
$ 29,497
$
48,337
8.
Balance Sheet Details
Restricted Cash
The Company’s restricted cash balance is primarily comprised of certificates of deposit and money
market funds, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts
primarily collateralize the Company’s issuances of standby letters of credit and bank guarantees. Additionally, the
Company held $10.0 million in escrow related to the cash consideration associated with the Acquisition.
The following table provides details of selected balance sheet items (in thousands):
December 29,
2018
December 30,
2017
Inventory:
Raw materials ............................................................................................ $
Work in process .........................................................................................
Finished goods ..........................................................................................
74,435
$
57,232
180,221
27,568
59,662
127,474
Total
................................................................................................... $
311,888
$
214,704
Property, plant and equipment, net:
Computer hardware ................................................................................... $
Computer software(1)
.................................................................................
Laboratory and manufacturing equipment .................................................
Land and building ......................................................................................
Furniture and fixtures .................................................................................
Leasehold and building improvements .......................................................
Construction in progress ............................................................................
15,633
$
40,923
304,889
187,184
2,587
46,038
32,997
13,881
32,521
246,380
12,347
2,474
43,475
34,816
Subtotal
.............................................................................................. $
630,251
$
385,894
Less accumulated depreciation and amortization(2) ...................................
(287,431)
(249,952)
Total
................................................................................................... $
342,820
$
135,942
99
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 29,
2018
December 30,
2017
Accrued expenses:
Loss contingency related to non-cancelable purchase commitments......... $
Professional and other consulting fees ......................................................
Taxes payable ...........................................................................................
Accrued rebate and customer prepay liability ............................................
Restructuring accrual .................................................................................
Acquisition-related funds in escrow ...........................................................
Short-term financing lease obligation .........................................................
Other accrued expenses ............................................................................
26,042
$
10,442
23,249
14,301
13,097
10,000
4,718
30,042
Total
................................................................................................... $
131,891
$
6,379
5,305
3,707
3,406
5,490
—
—
15,495
39,782
(1)
Included in computer software at December 29, 2018 and December 30, 2017 were $13.1 million and $11.4 million,
respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized
ERP costs at December 29, 2018 and December 30, 2017 were $3.9 million and $4.7 million, respectively.
(2) Depreciation expense was $47.7 million, $39.4 million and $35.5 million (which includes depreciation of capitalized ERP
costs of $2.2 million, $1.7 million and $1.2 million, respectively) for 2018, 2017 and 2016, respectively.
9.
Restructuring and Other Related Costs
In December of 2018, the Company implemented a restructuring initiative (the “2018 Restructuring
Plan”) as part of a comprehensive review of the Company's operations and ongoing integration activities in order
to optimize resources for future growth, improve efficiencies and address redundancies following the Acquisition.
As part of the 2018 Restructuring Plan, the Company hopes to reduce expenses, streamline the organization,
and eliminate fixed costs to align more closely with its needs going forward. The Company expects to be
complete with activities related to the 2018 Restructuring Plan by the end of 2019.
In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations
(the “2017 Restructuring Plan”) in order to reduce expenses and establish a more cost-effective structure that
better aligns the Company's operations with its long-term strategies. As part of the 2017 Restructuring Plan, the
Company is making several changes it believes will help its research and development efficiency, with
consolidation of its development sites, including closure of its Beijing, China design center, process changes to
more broadly leverage the Company's engineering resources across regions and product line development, and
prioritization of research and development initiatives. Outside of engineering, the Company has also made
changes to allow it to operate more efficiently as it scales the business, including reducing the Company's
facilities footprint and writing off certain equipment that will not be utilized in the future. Finally, the Company
realigned its inventory levels to match its new technology cadence and go to market strategies. As of December
30, 2017, the 2017 Restructuring Plan had been substantially completed, with some remaining payments in the
first half of 2018.
In connection with the Acquisition, the Company assumed restructuring liabilities associated with
Coriant's previous restructuring and reorganization plans consisting of termination benefits primarily comprised of
severance payments. These costs are recorded at estimated fair value.
The following table presents restructuring and other related costs included in cost of revenue and
operating expenses in the accompanying consolidated statements of operations under the 2018 Restructuring
Plan, Coriant's previous restructuring and reorganization plans, and the 2017 Restructuring Plan (in thousands):
100
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Severance and related expenses ..................................................................... $
Facilities ...........................................................................................................
Asset impairment
..............................................................................................
Total
........................................................................................................... $
2,630
$
Year Ended
December 29, 2018
Cost of
Revenue
Operating
Expenses
2,630
$
10,413
—
—
(544)
2,643
12,512
Year Ended
December 30, 2017
Cost of
Revenue
Operating
Expenses
Severance and related expenses ..................................................................... $
Facilities ...........................................................................................................
Asset impairment
..............................................................................................
Inventory write-downs .......................................................................................
1,510
$
—
4,004
13,627
7,931
7,300
875
—
Total
........................................................................................................... $
19,141
$
16,106
Restructuring liabilities are reported within accrued expenses and other long-term liabilities in the
accompanying consolidated balance sheets (in thousands):
December 30,
2017
Assumed
Liabilities
from the
Acquisition
Charges
Cash
Non-cash
Settlements
and Other
December 29,
2018
Severance and
related expenses ...... $
Facilities ...................
Asset impairment......
3,672
6,947
—
14,748
$
13,043
$
(11,172) $
(449) $
—
—
(544)
2,643
(2,062)
—
(75)
(2,400)
19,842
4,266
243
Total .................. $
10,619
$
14,748
$
15,142
$
(13,234) $
(2,924) $
24,351
As of December 29, 2018, the Company's restructuring liability was comprised of $19.8 million of
severance and related expenses, of which $13.9 million is related to assumed restructuring liabilities associated
with Coriant's previous restructuring and reorganization plans and is expected to be paid by 2022. The remaining
$5.9 million is primarily related to the 2018 Restructuring Plan and is expected to be substantially paid by the end
of 2019. The Company's restructuring liability as of December 29, 2018 also comprised of $4.3 million related to
facility closures, with leases through January 2022, and $0.2 million related term license agreements that were
determined to have no future use. The Company expects the payments related to these term license agreements
to be fully paid by the third quarter of 2019.
101
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes certain changes in equity that are excluded
from net income (loss). The following table sets forth the changes by component for the periods presented (in
thousands):
Unrealized
Gain
(Loss) on
Available-
for-Sale
Securities
Foreign
Currency
Translation
Accumulated
Tax Effect
Actuarial
Gain
(Loss) on
Pension
Total
Balance at December 26, 2015 ..................... $
(506) $
2,389
$
(760) $
— $ 1,123
Other comprehensive income (loss)
before reclassifications ..........................
Amounts reclassified from accumulated
other comprehensive loss ......................
Net current-period other comprehensive
income (loss) ................................................
297
(29,625)
(119)
— (29,447)
—
—
—
—
—
297
(29,625)
(119)
— (29,447)
Balance at December 31, 2016 ..................... $
(209) $ (27,236) $
(879) $
— $ (28,324)
Other comprehensive income (loss)
before reclassifications ..........................
Amounts reclassified from accumulated
other comprehensive loss ......................
Net current-period other comprehensive
income (loss) ................................................
(209)
34,787
—
—
(209)
34,787
—
—
—
—
—
—
34,578
—
34,578
Balance at December 30, 2017 ..................... $
(418) $
7,551
$
(879) $
— $ 6,254
Other comprehensive income (loss)
before reclassifications ..........................
Amounts reclassified from accumulated
other comprehensive loss ......................
Net current-period other comprehensive
income (loss) ................................................
327
(26,483)
(85)
(5,547)
(31,788)
—
—
—
234
234
327
(26,483)
(85)
(5,313)
(31,554)
Balance at December 29, 2018 ..................... $
(91) $ (18,932) $
(964) $
(5,313) $ (25,300)
11.
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
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 release of outstanding RSUs and PSUs, and assumed issuance of common stock under
the ESPP using the treasury stock method. Potentially dilutive common shares also include the assumed
conversion of the 2024 Notes from the conversion spread (as further discussed in Note 12, “Debt and Financing
Lease Obligations” to the Notes to Consolidated Financial Statements), and $150.0 million in aggregate principal
amount of its 1.75% convertible senior notes due June 1, 2018 (the “2018 Notes”) from the conversion spread
(as further discussed in Note 11, “Convertible Senior Notes” to the Notes to Consolidated Financial Statements
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017). The
Company would include the dilutive effects of the 2024 Notes in the calculation of diluted net income per
common share if the average market price is above the conversion price. Upon conversion of the 2024 Notes, it
is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion
value of the 2024 Notes being converted, therefore, only the conversion spread relating to the 2024 Notes would
be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive. The
Company includes the common shares underlying PSUs in the calculation of diluted net income per common
share only when they become contingently issuable.
102
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the computation of net loss per common share (in thousands, except per
share amounts):
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Net loss ................................................................................. $
Weighted average common shares outstanding - basic and
diluted ....................................................................................
(214,295) $
(194,506) $
(23,927)
157,748
147,878
142,989
Net loss per common share - basic and diluted ..................... $
(1.36) $
(1.32) $
(0.17)
The Company incurred net losses during 2018, 2017 and 2016, and as a result, potential common
shares from stock options, RSUs, PSUs and the assumed release of outstanding shares under the ESPP were
not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-
dilutive. Additionally, due to the net loss position during these periods, the Company excluded the potential
shares issuable upon conversion of the 2024 Notes and the 2018 Notes in the calculation of diluted earnings per
share, as their inclusion would have been anti-dilutive.
The following table sets forth the potentially dilutive shares excluded from the computation of the diluted
net loss per share because their effect was anti-dilutive (in thousands):
As of
December 29,
2018
December 30,
2017
December 31,
2016
Stock options outstanding ......................................................
Restricted stock units ............................................................
Performance stock units ........................................................
Employee stock purchase plan shares ..................................
1,134
7,792
1,284
940
1,461
6,856
1,420
810
Total
....................................................................................
11,150
10,547
2,042
5,302
896
1,010
9,250
12.
Debt and Financing Lease Obligations
2.125% Convertible Senior Notes due September 1, 2024
In September 2018, the Company issued the 2024 Notes due on September 1, 2024, unless earlier
repurchased, redeemed or converted. The 2024 Notes are governed by a base indenture dated as of September
11, 2018 and a first supplemental indenture dated as of September 11, 2018 (together, the “Indenture”), between
the Company and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured, and the Indenture
does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior
debt or other indebtedness, or the issuance or repurchase of the Company's other securities by the Company.
Interest is payable semi-annually in arrears on March 1 and September 1 of each year, commencing
March 1, 2019. The net proceeds to the Company were approximately $391.4 million, of which approximately
$48.9 million was used to pay the cost of the capped call transactions with certain financial institutions (“Capped
Calls”). The Company also used a portion of the remaining net proceeds to fund the cash portion of the purchase
price of the Acquisition (as discussed in Note 6, “Business Combination” to the Notes to Consolidated Financial
Statements), including fees and expenses relating thereto, and intends to use the remaining net proceeds for
general corporate purposes.
The Capped Calls have an initial strike price of $9.87 per share, subject to certain adjustments, which
corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have initial cap prices of $15.19
per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 40.8
million shares of common stock. The capped call transactions are expected generally to reduce or offset potential
dilution to the Company's common stock upon any conversion of the 2024 Notes and/or offset any cash
payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the
case may be, with such reduction and/or offset subject to a cap. The Capped Calls expire on various dates
103
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
between July 5, 2024 and August 29, 2024. The Capped Calls were recorded as a reduction of the Company’s
stockholders' equity in the accompanying consolidated balance sheets.
Upon conversion, it is the Company's intention to pay cash equal to the lesser of the aggregate principal
amount or the conversion value of the 2024 Notes. For any remaining conversion obligation, the Company
intends to pay or deliver, as the case may be, either cash, shares of its common stock, or a combination of cash
and shares of its common stock, at the Company’s election. The initial conversion rate is 101.2812 shares of
common stock per $1,000 principal amount of 2024 Notes, subject to anti-dilution adjustments, which is
equivalent to a conversion price of approximately $9.87 per share of common stock.
Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of
certain events, including for any cash dividends. Holders of the 2024 Notes will not receive any cash payment
representing accrued and unpaid interest upon conversion of a 2024 Note. Accrued but unpaid interest will be
deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Prior to June 1, 2024,
holders may convert their 2024 Notes under the following circumstances:
•
•
•
•
•
during any fiscal quarter commencing after the fiscal quarter ended on December 29, 2018 (and
only during such fiscal quarter) if the last reported sale price of the common stock for at least 20
trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on
the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of
the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period (the
“measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for
each trading day of the measurement period was less than 98% of the product of the last reported
sale price of the Company’s common stock and the conversion rate on each such trading day;
if the Company calls the 2024 Notes for redemption, at any time prior to the close of business on
the scheduled trading day immediately preceding the redemption date;
upon the occurrence of specified corporate events described under the Indenture, such as a
consolidation, merger or binding share exchange; or
at any time on or after June 1, 2024 until the close of business on the second scheduled trading
day immediately preceding the maturity date, holders may convert their 2024 Notes at any time,
regardless of the foregoing circumstances.
If the Company undergoes a fundamental change as defined in the Indenture governing the 2024
Notes, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes at a
repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and
unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a
“make-whole fundamental change” (as defined in the Indenture), the Company may, in certain circumstances, be
required to increase the conversion rate by a number of additional shares for a holder that elects to convert its
2024 Notes in connection with such make-whole fundamental change.
The net carrying amounts of the debt obligation were as follows (in thousands):
........................................................................................................................... $
Principal
Unamortized discount (1)
...................................................................................................
Unamortized issuance cost (1) ...........................................................................................
Net carrying amount
....................................................................................................... $
402,500
(127,264)
(8,307)
266,929
December 29, 2018
(1)
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the 2024 Notes,
which is approximately 69 months.
104
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of December 29, 2018, the carrying amount of the equity component of the 2024 Notes was $128.7
million.
In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability
and equity components. The carrying amount of the liability component was calculated by measuring the fair
value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of
the equity component representing the conversion option was determined by deducting the fair value of the
liability component from the par value of the 2024 Notes. The equity component is not re-measured as long as it
continues to meet the conditions for equity classification. The excess of the principal amount of the liability
component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 2024
Notes.
The Company allocated the total issuance costs incurred to the liability and equity components of the
2024 Notes based on their relative values. Issuance costs attributable to the liability component were recorded
as a reduction to the liability portion of the Notes and will be amortized as interest expense over the term of the
2024 Notes. The issuance costs attributable to the equity component were netted with the equity component in
stockholders’ equity.
The Company recorded a deferred tax liability of $30.9 million in connection with the issuance of the
2024 Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to
stockholders' equity.
The Company determined that the embedded conversion option in the 2024 Notes does not require
separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock
and would be classified in stockholder’s equity if freestanding.
The following table sets forth total interest expense recognized related to the 2024 Notes (in
thousands):
Year Ended
December 29, 2018
Contractual interest expense ................................................................................................. $
Amortization of debt issuance costs ......................................................................................
Amortization of debt discount
................................................................................................
Total interest expense ............................................................................................................ $
2,613
5,716
373
8,702
For the year ended December 29, 2018, the debt discount and debt issuance costs were amortized,
using an annual effective interest rate of 10.07%, to interest expense over the term of the 2024 Notes.
As of December 29, 2018, the fair value of the 2024 Notes was $289.0 million. The fair value was
determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on December 28,
2018. The 2024 Notes are classified as Level 2 of the fair value hierarchy.
Based on the closing price of the Company’s common stock of $3.92 on December 28, 2018, the if-
converted value of the Notes did not exceed their principal amount.
1.75% Convertible Senior Notes due June 1, 2018
In May 2013, the Company issued the 2018 Notes, which matured on June 1, 2018. Upon maturity of
the 2018 Notes, the Company repaid in full all $150.0 million in aggregate principal amount and the final coupon
interest of $1.3 million.
The net carrying amount of the debt obligation as of December 30, 2017 was as follows (in thousands):
105
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Principal
................................................................................................................................ $
Unamortized discount
............................................................................................................
Unamortized issuance cost
...................................................................................................
Net carrying amount
............................................................................................................ $
150,000
(4,670)
(402)
144,928
As of December 30, 2017, the carrying amount of the equity component of the 2018 Notes was $43.3
million.
The following table sets forth total interest expense recognized related to the 2018 Notes (in
thousands):
Years Ended
December 29,
2018
December 30,
2017
Contractual interest expense ................................................................ $
Amortization of debt issuance costs ......................................................
Amortization of debt discount ................................................................
1,094
$
402
4,671
Total interest expense ........................................................................... $
6,167
$
2,625
898
10,444
13,967
The coupon rate was 1.75%. For the year ended December 29, 2018 and the year ended December 30,
2017, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of
10.23%, to interest expense over the term of the 2018 Notes.
Financing Lease Obligations
The Company evaluated two sale-leaseback transactions that were executed by Coriant in the past and
assumed by Infinera in the Acquisition. It was determined that these transactions did not qualify for sale-
leaseback accounting under ASC 840-40, “Leases - Sale-Leaseback Transactions.”
The Company leases a facility (land and all attached real property) in Naperville, Illinois that was sold to
a third party and subsequently leased back. This was determined to be a failed sale-leaseback due to a $31.5
million imposition reimbursement payment to be made over 10 years, which was linked to the total building
income generated each year. As a result of purchase accounting, the financing lease obligation was recorded at
the present value of the remaining lease payments and expected value of the facility at the end of the occupancy
period. The financing lease obligation will continue to be amortized over the remaining period of the lease term.
The assets will continue to be depreciated over their remaining useful lives.
Additionally, the Company leases a facility (land and all attached real property) in Finland, which was
sold to a third party and subsequently leased back. The lease was determined to be a failed sale-leaseback due
to the deposit being considered a form of collateral. The amount of the deposit was equal to one year of rental
payments, whereas typical deposits are approximately two to three months of rental payments. As a result of
purchase accounting, the financing lease obligation was recorded at the present value of the remaining lease
payments and expected value of the facility at the end of the occupancy period. The financing lease obligation
will continue to be amortized over the remaining period of the lease term. The assets will continue to be
depreciated over their remaining useful lives.
The amount recognized for interest and depreciation expense going forward will substantially exceed
the Company's periodic rental payments. The average discount rate for the year ended December 29, 2018 was
7.0%. During the year ended December 29, 2018, depreciation expense and interest expense related to these
failed sale-leaseback transactions were $1.0 million and $6.5 million, respectively. The Company's rental
payments during the year ended December 29, 2018 were $2.3 million.
106
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
13.
Commitments and Contingencies
Operating Leases
The Company leases facilities under non-cancelable operating lease agreements. These leases have
varying terms that range from one to 10 years, and contain leasehold improvement incentives, rent holidays and
escalation clauses. In addition, some of these leases have renewal options for up to five years. The Company
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, the Company records 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 $5.4 million and $3.5 million as of December 29, 2018
and December 30, 2017, respectively. These obligations are classified as other long-term liabilities on the
accompanying consolidated balance sheets.
The Company recognizes rent expense on a straight-line basis over the lease period factoring in
leasehold improvement incentives, rent holidays and escalation clauses. Rent expense for all leases was $12.1
million, $12.0 million and $11.0 million for 2018, 2017 and 2016, respectively. The Company recorded sublease
rental income of $0.9 million in 2018. The Company did not have any sublease rental income for 2017 and 2016.
Future annual minimum operating lease payments at December 29, 2018 were as follows (in
thousands):
Operating lease
payments ......... $
2019
2020
2021
2022
2023
Thereafter
Total
18,352
$
14,047
$
7,888
$
5,926
$
4,905
$
18,303
$
69,421
In the fourth quarter of 2017, the Company implemented the 2017 Restructuring Plan, which included
vacating certain leased facilities. See Note 9, "Restructuring and Other Related Costs" to the Notes to
Consolidated Financial Statements for more information.
Financing Lease Obligations
The Company leases two facilities that were assumed with the Acquisition. As a result of purchase
accounting, these financing lease obligations were recorded at the present value of the remaining lease
payments and expected value of the facility at the end of the occupancy period. The financing lease obligations
will continue to be amortized over the remaining period of the lease terms, which range from seven to 10 years.
See Note 12, "Debt and Financing Lease Obligations" to the Notes to Consolidated Financial Statements for
more information.
Future annual minimum financing lease payments at December 29, 2018 were as follows (in
thousands):
Financing
lease
obligations ....... $
2019
2020
2021
2022
2023
Thereafter
Total
9,346
$
9,454
$
6,666
$
5,728
$
4,465
$
15,750
$
51,409
Purchase Commitments
The Company has agreements with its major production suppliers, where the Company is committed to
purchase certain parts. As of December 29, 2018, December 30, 2017 and December 31, 2016, these non-
cancelable purchase commitments were $203.5 million, $96.1 million and $111.9 million, respectively. The
significant increase of purchase commitments in 2018 was due to the Acquisition.
107
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future purchase commitments at December 29, 2018 were as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Purchase
obligations ....... $ 200,939
$
751
$
599
$
500
$
757
$
— $ 203,546
The contractual obligation tables above exclude tax liabilities of $3.4 million related to uncertain tax
positions because the Company cannot reliably estimate the timing and amount of future payments, if any.
Legal Matters
On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against the Company in
the United States District Court for the Eastern District of Texas. The complaint asserts U.S. Patent Nos.
6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327 (the “’327 patent”), 8,374,511 (the “‘511 patent”) and
8,913,898 (the “’898 patent”) (collectively, the “Oyster Optics patents in suit”). The complaint seeks unspecified
damages and a permanent injunction. The Company filed its answer to Oyster Optics' complaint on February 3,
2017. The Company filed two petitions for Inter Partes Review (“IPR”) of the '898 patent with the U.S Patent and
Trademark Office ("USPTO"). Other defendants have filed IPR petitions in connection with the remaining Oyster
Optics patents in suit. The USPTO instituted two IPRs of the ‘511 patent and two IPRs of ‘898 patent but denied
IPR petitions in connection with the ‘327 patent. A Markman decision was issued on December 5, 2017 and fact
discovery closed on December 22, 2017. Oyster Optics dropped the ‘511 and ‘898 patents, leaving only a few
claims in the ‘327 patent at issue in the case. On May 15, 2018, Oyster Optics filed a new patent infringement
complaint in the United States District Court for the Eastern District of Texas, naming the Company as a
defendant. In its new complaint, Oyster Optics alleges infringement of the ‘327 patent, U.S. Patent No. 9,749,040
and the ‘898 patent. On June 8, 2018, the court granted the parties’ joint motion to sever and consolidate the
first-filed lawsuit with the later filed case. The Company filed its answer to the new complaint on July 16, 2018. A
case management conference was held on September 11, 2018, and the court set a trial date for November 4,
2019. On October 26, 2018, the Company filed an amended answer to include a license defense. On November
29, 2018, the Company filed a motion for summary judgment based on the license defense. The Company is
currently unable to predict the outcome of this litigation and therefore cannot reasonably estimate the possible
loss or range of loss, if any, arising from this matter.
On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against the
Company in the United States District Court for the Central District of California. The complaint asserts U.S.
Patent No. 6,782,211 (the “Core Optical patent in suit”). The complaint seeks unspecified damages and a
permanent injunction. The Company believes that it does not infringe any valid and enforceable claim of the Core
Optical patent in suit, and intends to defend this action vigorously. The Company filed its answer to Core
Optical's complaint on September 25, 2017. A Markman hearing was held on May 9, 2018 and the court has set
a trial for March 2019. On June 14, 2018, the Company filed a petition for IPR of the Core Optical patent in suit in
the USPTO. Core Optical contacted the Company on July 19, 2018 to propose that the case be stayed pending
the IPR. The Company agreed to Core Optical’s proposal, and the parties filed a joint motion to stay, which the
court granted on July 31, 2018. On October 17, 2018, Core Optical filed a response to the Company's IPR
petition. On January 14, 2019, the USPTO denied the Company's IPR petition, and on February 13, 2019, the
Company filed a request for rehearing in the USPTO requesting reconsideration of the dismissal of the
Company's IPR petition. The Company is unable to predict the outcome of this litigation at this time and therefore
cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.
On June 8, 2017, a Civil Investigative Demand was issued to Coriant pursuant to a False Claims Act
investigation by the U.S. government as to whether there has been any violation of 31 U.S.C. §3729. Coriant
provided documents and other responses to the U.S. government, and the Company will continue to cooperate
in the ongoing investigation.
In addition to the matters described above, the Company is subject to various legal proceedings, claims
and litigation arising in the ordinary course of business. While the outcome of these matters is currently not
determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material
effect on its consolidated financial position, results of operations or cash flows.
108
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the 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 29, 2018 and
December 30, 2017, the Company has accrued the estimated liabilities associated with certain loss
contingencies.
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. The terms of such indemnification obligations vary. These contracts
may 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; and (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.
In addition, the Company has agreed to indemnify certain customers for claims made against the
Company’s products, where such claims allege infringement of third party intellectual property rights, including,
but not limited to, patents, registered trademarks, and/or copyrights. Under the aforementioned intellectual
property indemnification clauses, the Company may be obligated to defend the customer and pay for the
damages awarded against the customer under an infringement claim as well as the customer’s attorneys’ fees
and costs. These indemnification obligations generally do not expire after termination or expiration of the
agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the
Company’s potential liability for indemnification. The Company cannot estimate the amount of potential future
payments, if any, that it might be required to make as a result of these agreements. The maximum potential
amount of any future payments that the Company could be required to make under these indemnification
obligations could be significant.
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. The term of the indemnification
period is for the officer’s or director’s lifetime for certain events or occurrences while the officer or director is, or
was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements could be significant; 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.
109
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
14.
Guarantees
Product Warranties
Activity related to product warranty was as follows (in thousands):
Beginning balance ............................................................................................ $
Charges to operations ......................................................................................
Utilization ..........................................................................................................
Change in estimate(1)
Balance at the end of the period ....................................................................... $
........................................................................................
30,909
$
28,685
(18,028)
(545)
40,342
18,283
(14,985)
(12,731)
41,021
$
30,909
December 29,
2018
December 30,
2017
(1) The Company records product warranty liabilities based on the latest quality and cost information available as of the date
the revenue is recorded. The changes in estimate shown here are due to changes in overall actual failure rates, the mix of
new versus used units related to replacement of failed units, and changes in the estimated cost of repair. As the
Company's products mature over time, failure rates and repair costs generally decline leading to favorable changes in
warranty reserves. In addition, during 2017, due to product quality improvements, the Company revised certain estimates
used in calculating its product warranties that resulted in a one-time reduction to the warranty accrual of $2.2 million.
Letters of Credit and Bank Guarantees
The Company had $30.0 million of standby letters of credit and bank guarantees outstanding as of
December 29, 2018. These consisted of $23.4 million related to customer performance guarantees, $1.4 million
of value-added tax and customs' licenses, $2.9 million related to property leases, $1.8 million related to Coriant
pre-acquisition restructuring plans and $0.5 million related to credit cards.
Of the aforementioned standby letters of credit and bank guarantees outstanding, $13.4 million was
backed by cash collateral from a third-party institution, and the Company accrues 5% annual servicing fee on the
outstanding cash collateral. The Company had $4.2 million of standby letters of credit and bank guarantees
outstanding as of December 30, 2017. These consisted of $0.7 million related to property leases, $2.2 million
related to customer performance guarantees, and $1.3 million related to a value added tax and customs
authorities' licenses.
As of December 29, 2018 and December 30, 2017, the Company has a line of credit for approximately
$1.6 million to support the issuance of letters of credit, of which zero had been issued and outstanding, for both
periods. The Company has pledged approximately $4.9 million and $5.2 million of assets of a subsidiary to
secure this line of credit and other obligations as of December 29, 2018 and December 30, 2017, respectively.
110
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15.
Stockholders’ Equity
2007 Equity Incentive Plan, 2016 Equity Incentive Plan and Employee Stock Purchase Plan
In February 2007, the Company’s board of directors adopted the 2007 Equity Incentive Plan (the “2007
Plan”) and the Company’s stockholders approved the 2007 Plan in May 2007. The Company reserved a total of
46.8 million shares of common stock for issuance under the 2007 Plan. Upon stockholder approval of the 2016
Equity Incentive Plan (the “2016 Plan”), the Company has ceased granting equity awards under the 2007 Plan,
however the 2007 Plan will continue to govern the terms and conditions of the outstanding options and awards
previously granted under the 2007 Plan. As of December 29, 2018, options to purchase 1.1 million shares of the
Company's common stock were outstanding and 1 million RSUs were outstanding under the 2007 Plan.
In February 2016, the Company's board of directors adopted the 2016 Plan and the Company's
stockholders approved the 2016 Plan in May 2016. In May 2018, the Company's stockholders approved an
amendment to the 2016 Plan to increase the number of shares authorized for issuance under the 2016 Plan by
1.5 million shares. As of December 29, 2018, the Company reserved a total of 15.4 million shares of common
stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of
the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under
the 2007 Plan that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without
having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards
granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the
Company due to failure to vest. The 2016 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.
The ESPP was adopted by the board of directors in February 2007 and approved by the stockholders in
May 2007. The ESPP was last amended by the stockholders in May 2018 to increase the shares authorized
under the ESPP to a total of approximately 21.1 million shares of common stock. The ESPP has a 20-year term.
Eligible employees may purchase the Company’s common stock through payroll deductions at a price equal to
85% of the lower of the fair market values of the stock as of the beginning or the end of six-month offering
periods. An employee’s payroll deductions under the ESPP are limited to 15% of the employee’s compensation
and employees may not purchase more than $25,000 of stock during any calendar year.
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 .................................................
December 29,
2018
8,990
8,728
4,835
22,553
111
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-based Compensation Plans
The Company has stock-based compensation plans pursuant to which the Company has granted stock
options, RSUs and PSUs. The Company also has an ESPP for all eligible employees. The following tables
summarize the Company’s equity award activity and related information (in thousands, except per share data):
Number of
Options
Weighted-Average
Exercise Price
Per Share
Aggregate
Intrinsic
Value
Outstanding at December 26, 2015 ..................................
Options granted ...........................................................
Options exercised ........................................................
Options canceled .........................................................
Outstanding at December 31, 2016 ..................................
Options granted ...........................................................
Options exercised ........................................................
Options canceled .........................................................
Outstanding at December 30, 2017 ..................................
Options granted ...........................................................
Options exercised ........................................................
Options canceled .........................................................
Outstanding at December 29, 2018 ..................................
Exercisable at December 29, 2018 ...................................
2,511
$
— $
(825) $
(31) $
1,655
$
— $
(196) $
(62) $
1,397
$
— $
(229) $
(53) $
1,115
1,115
$
$
7.26
$
28,288
—
4.97
$
4,433
12.46
8.30
$
—
7.78
$
14.11
8.11
$
—
965
373
1
7.43
$
496
11.57
8.09
8.09
$
$
—
—
Number of
Restricted
Stock Units
Weighted-Average
Grant Date
Fair Value
Per Share
Aggregate
Intrinsic
Value
Outstanding at December 26, 2015 ..................................
RSUs granted ..............................................................
RSUs released .............................................................
RSUs canceled ............................................................
Outstanding at December 31, 2016 ..................................
RSUs granted ..............................................................
RSUs released .............................................................
RSUs canceled ............................................................
Outstanding at December 30, 2017 ..................................
RSUs granted ..............................................................
RSUs released .............................................................
RSUs canceled ............................................................
Outstanding at December 29, 2018 ..................................
4,932
2,992
$
$
(2,303) $
(328) $
5,293
4,281
$
$
(2,198) $
(585) $
6,791
3,756
$
$
(2,642) $
(1,159) $
6,746
$
12.76
$
91,285
13.94
11.06
$
26,407
13.90
14.10
$
44,939
9.66
13.56
$
20,791
13.24
11.55
$
42,988
10.52
12.12
$
26,457
11.12
10.83
$
26,446
112
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Number of
Performance
Stock Units
Weighted-Average
Grant Date
Fair Value Per Share
Aggregate
Intrinsic
Value
Outstanding at December 26, 2015 .............................
PSUs granted ..........................................................
PSU performance earned(1) .....................................
PSUs released ........................................................
PSUs canceled .......................................................
Outstanding at December 31, 2016 .............................
PSUs granted ..........................................................
PSUs released ........................................................
PSUs canceled .......................................................
Outstanding at December 30, 2017 .............................
PSUs granted ..........................................................
PSUs released ........................................................
PSUs canceled .......................................................
Outstanding at December 29, 2018 .............................
Expected to vest as of December 29, 2018.................
731
647
234
$
$
$
(614) $
(94) $
904
916
$
$
(26) $
(427) $
1,367
521
$
$
(55) $
(704) $
1,129
$
17
12.35
$
13,540
15.28
12.28
11.34
$
8,077
15.18
14.13
$
7,672
10.88
11.83
$
225
12.20
16.28
$
8,651
9.79
15.93
$
411
16.01
16.10
$
$
4,425
65
(1)
Represents the additional PSUs awarded resulting from the achievement of performance goals above the
performance targets established at grant.
The aggregate intrinsic value of unexercised options is calculated as the difference between the closing
price of the Company’s common stock of $3.92 at December 28, 2018 and the exercise prices of the underlying
stock options. The aggregate intrinsic value of the options which have been exercised is calculated as the
difference between the fair market value of the common stock at the date of exercise and the exercise price of
the underlying stock options. The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is
calculated using the closing price of the Company's common stock of $3.92 at December 28, 2018. The
aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common
stock at the date of release.
The following table presents total stock-based compensation cost for instruments granted but not yet
amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of December 29, 2018.
These costs are expected to be amortized on a straight-line basis over the following weighted-average periods
(in thousands, except for weighted-average period):
RSUs .................................................................................................... $
PSUs .................................................................................................... $
54,006
6,649
2.48
1.41
Unrecognized
Compensation
Expense, Net
Weighted-
Average Period
(in years)
113
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about options outstanding at December 29, 2018.
Options Outstanding
Number of
Shares
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise
Price
(In thousands)
(In years)
Vested and Exercisable
Options
Weighted-
Average
Exercise
Price
Number of
Shares
(In thousands)
183
185
192
485
70
1,115
0.72
0.94
1.48
2.12
1.60
1.55
$
$
$
$
$
$
7.01
7.47
8.08
8.58
9.19
8.09
183
185
192
485
70
1,115
$
$
$
$
$
$
7.01
7.47
8.08
8.58
9.19
8.09
Exercise Price
$6.71 - $ 7.25 ...............
$7.45 - $ 7.53 ...............
$7.68 - $ 8.19 ...............
$ 8.58 ...........................
$9.02 - $9.28 ................
Employee Stock Options
The Company did not grant any stock options during 2018, 2017 or 2016. Stock option exercises are
settled with newly issued shares of common stock approved by stockholders for inclusion under the 2007 Plan.
Amortization of stock-based compensation expense related to stock options in 2018, 2017 and 2016 was
insignificant.
Employee Stock Purchase Plan
The fair value of the ESPP shares was estimated at the date of grant using the following assumptions:
December 29,
2018
Years Ended
December 30,
2017
December 31,
2016
Volatility .....................................................................
48% - 62%
47% - 51%
56% - 67%
Risk-free interest rate .................................................
1.90% - 2.31%
0.81% - 1.16%
0.51% - 0.52%
Expected life ..............................................................
0.5 years
0.5 years
0.5 years
Estimated fair value ...................................................
$2.47 - $3.13
$2.44 - $3.46
$3.16 - $4.53
The Company’s ESPP activity for the following periods was as follows (in thousands):
Stock-based compensation expense ............................... $
Employee contributions ................................................... $
Shares purchased ...........................................................
$
$
5,478
15,992
2,189
$
$
6,049
16,410
2,140
6,094
13,609
1,369
December 29,
2018
Years Ended
December 30,
2017
December 31,
2016
Restricted Stock Units
The Company granted RSUs to employees and members of the Company’s board of directors to
receive shares of the Company’s common stock. All RSUs awarded are subject to each individual's continued
service to the Company through each applicable vesting date. The Company accounted for the fair value of the
RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of stock-
based compensation expense related to RSUs in 2018, 2017 and 2016 was approximately $29.2 million, $30.5
million and $29.6 million, respectively.
114
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Performance Stock Units
Pursuant to the 2007 Plan, the Company has granted PSUs to certain of the Company’s executive
officers, senior management and certain employees. All PSUs awarded are subject to each individual's continued
service to the Company through each applicable vesting date and if the performance metrics are not met within
the time limits specified in the award agreements, the PSUs will be canceled.
A number of PSUs granted to the Company’s executive officers and senior management are based on
the total shareholder return of the Company's common stock price as compared to the total shareholder return of
the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) over the span of one year, two
years and three years. The number of shares to be issued upon vesting of these PSUs range from zero to two
times the target number of PSUs granted depending on the Company’s performance against the SPGIIPTR.
The ranges of estimated values of the PSUs granted that are compared to the SPGIIPTR, as well as the
assumptions used in calculating these values were based on estimates as follows:
Index volatility ..................................
2018
33%
Infinera volatility ...............................
58% - 59%
2017
33% - 34%
55% - 56%
2016
18%
55%
Risk-free interest rate ......................
Correlation with index ......................
Estimated fair value .........................
2.37% - 2.40%
1.41% - 1.63%
0.95% - 1.07%
0.04 - 0.48
0.10 - 0.49
0.58 - 0.59
$14.99 - $19.46
$15.23 - $17.35
$10.31 - $16.62
In addition, the Company has granted other PSUs to certain employees that only vest upon the
achievement of specific operational performance criteria.
The following table summarizes by grant year, the Company’s PSU activity for the year ended
December 29, 2018 (in thousands):
Total Number of
Performance Stock
Units
2015
2016
2017
2018
Grant Year
Outstanding at December 30, 2017 ..........
PSUs granted ..............................................
PSUs released ............................................
PSUs canceled ............................................
Outstanding at December 29, 2018 ..........
1,367
521
(55)
(704)
1,129
77
—
—
(77)
—
420
—
—
(210)
210
869
—
—
(388)
481
—
521
(55)
(29)
437
(1)
Represents the additional PSUs awarded resulting from the achievement of performance goals above
the performance targets established at grant since the original grants were at 100% of target amounts.
Amortization of stock-based compensation expense related to PSUs in 2018, 2017 and 2016 was
approximately $8.2 million, $9.5 million and $6.6 million, respectively.
115
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):
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Stock-based compensation effects in inventory ....................... $
4,750
$
5,255
$
4,911
Stock-based compensation effects in net loss before
income taxes
Cost of revenue ....................................................................... $
Research and development .....................................................
Sales and marketing ................................................................
General and administrative ......................................................
1,635
$
3,065
$
16,270
10,869
9,649
15,845
11,288
10,776
Cost of revenue—amortization from balance sheet (1) ..............
Total stock-based compensation expense ................................ $
4,986
4,746
43,409
$
45,720
$
$
38,423
$
40,974
$
2,966
13,732
11,043
9,295
37,036
3,497
40,533
(1) Represents stock-based compensation expense deferred to inventory in prior periods and recognized in the
current period.
16.
Income Taxes
The following is a geographic breakdown of the benefit from income taxes (in thousands):
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Current:
Federal ........................................................................... $
State ...............................................................................
Foreign ...........................................................................
— $
— $
186
6,832
69
4,679
Total current ............................................................ $
7,018
$
4,748
$
Deferred:
Federal ........................................................................... $
State ...............................................................................
Foreign ...........................................................................
Total deferred .......................................................... $
Total benefit from income taxes ............................................. $
(546) $
—
(7,127)
(7,673) $
(655) $
— $
—
(6,178)
(6,178) $
(1,430) $
32
861
2,288
3,181
—
—
(7,932)
(7,932)
(4,751)
Loss before provision for income taxes from international operations was $135.5 million, $22.6 million
and $23.1 million for the years ended December 29, 2018, December 30, 2017 and December 31, 2016,
respectively.
116
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The provisions for (benefit from) income taxes differ from the amount computed by applying the
statutory federal income tax rates as follows:
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
Expected tax (benefit) at federal statutory rate ......................
(21.0)%
(35.0)%
(35.0)%
State taxes, net of federal benefit ..........................................
Research credits ....................................................................
Stock-based compensation ...................................................
Change in valuation allowance ..............................................
Foreign rate differential ..........................................................
Other .....................................................................................
Effective tax rate .............................................................
0.1 %
(1.8)%
0.8 %
18.1 %
2.9 %
0.6 %
(0.3)%
— %
(1.8)%
6.0 %
26.8 %
3.3 %
— %
(0.7)%
2.2 %
(8.9)%
22.3 %
(5.9)%
9.4 %
(0.4)%
(16.3)%
The Company recognized an income tax benefit of $0.7 million on a loss before income taxes of $215.0
million, an income tax benefit of $1.4 million on a loss before income taxes of $195.9 million and an income tax
benefit of $4.8 million on a loss before income taxes of $29.2 million in fiscal years 2018, 2017 and 2016,
respectively. The resulting effective tax rates were (0.3)%, (0.7)% and (16.3)% for 2018, 2017 and 2016,
respectively. The 2018 and 2017 effective tax rates differ from the expected statutory rate of 21% based on the
Company's ability to benefit U.S. loss carryforwards, offset by state income taxes, non-deductible stock-based
compensation expenses and foreign taxes provided on foreign subsidiary earnings. The lower 2018 income tax
benefit compared to 2017 primarily relates to lower corporate income tax rate due to the Tax Act and lower stock-
based compensation as a result of the Acquisition of Coriant. The lower 2017 income tax benefit compared to
2016 primarily relates to lower acquisition related amortization expenses and lower state income taxes offset by
an increase in tax reserves, and an increase in taxable foreign profits in certain jurisdictions. Because of the
Company's U.S. operating loss in 2018, significant loss carryforward position, and corresponding valuation
allowance in all years, the Company has not been subject to federal or state tax on the Company's U.S. income
because of the availability of loss carryforwards. If these losses and other tax attributes become fully utilized, the
Company's taxes will increase significantly to a more normalized, expected rate on U.S. earnings. The release of
transfer pricing reserves in the future will have a beneficial impact to tax expense, but the timing of the impact
depends on factors such as expiration of the statute of limitations or settlements with tax authorities.
On December 22, 2017, the Tax Act was signed into law. The Tax Act significantly revises the U.S.
corporate income tax regime by, among other things, lowering the federal corporate income tax rate from 35% to
21% effective January 1, 2018, while also imposing a repatriation tax on deemed repatriated earnings of the
Company's foreign subsidiaries in 2017, and implementing a quasi-territorial tax system on future foreign
earnings.
The Tax Act created the global intangible low-taxed income (“GILTI”) provision, beginning in 2018. The
GILTI provision requires that certain income earned by foreign subsidiaries must be included currently in the
gross income of the foreign subsidiaries U.S. shareholder. Under U.S. GAAP, the Company is allowed to make
an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to
GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a
company’s measurement of its deferred taxes (the “deferred method”). The Company has elected to account for
the tax using the period cost method. The Company had no GILTI impacts for 2018 given the foreign
subsidiaries' losses.
On December 22, 2017, SAB 118 was issued to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The
Company determined an adjustment to deferred tax assets, along with a corresponding adjustment to valuation
allowance, was needed. The adjustment resulted in no tax expense impact in connection with the re-
measurement of certain deferred tax assets and liabilities from 35% to 21%. Additionally, the Company
provisionally recorded no tax expense in connection with the transition tax on the mandatory deemed repatriation
117
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
of foreign earnings, based upon an aggregate tax loss of its foreign subsidiaries for the year ended December
30, 2017. The Company finalized its accounting for the re-measurement of deferred tax balances and transition
tax with no adjustment to income tax expense for the year ended December 29, 2018.
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, reduced by the effects of the change in the
U.S. corporate tax rate from 35% to 21%, as applicable (in thousands):
Years Ended
December 29,
2018
December 30,
2017
Deferred tax assets:
Net operating losses .................................................................................. $
Research and foreign tax credits ...............................................................
257,928
$
221,943
Nondeductible accruals .............................................................................
Inventory valuation ....................................................................................
Property, plant and equipment ...................................................................
Intangible assets ........................................................................................
Stock-based compensation .......................................................................
50,312
39,430
2,591
—
4,825
66,122
74,434
28,801
29,197
1,919
3
6,325
Total deferred tax assets .................................................................... $
577,029
$
206,801
Valuation allowance ..........................................................................................
(493,157)
(205,241)
Net deferred tax assets ...................................................................... $
83,872
$
1,560
Deferred tax liabilities:
Accrual and reverse - lease .......................................................................
Depreciation ..............................................................................................
Accruals, reserves and prepaid expenses .................................................
Acquired intangible assets .........................................................................
Convertible senior notes ............................................................................
(16,802)
(199)
(784)
(49,406)
(29,419)
Total deferred tax liabilities ................................................................. $
Net deferred tax liabilities ................................................................................. $
(96,610) $
(12,738) $
—
(67)
(1,154)
(20,348)
(1,191)
(22,760)
(21,200)
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. The Company must
consider all positive and negative evidence, including the Company's forecasts of taxable income over the
applicable carryforward periods, its current financial performance, its market environment, and other factors in
evaluating the need for a full or partial valuation allowance against its net U.S. deferred tax assets. Based on the
available objective evidence, management believes it is not more likely than not that the domestic net deferred
tax assets will be realizable in the foreseeable future. Accordingly, the Company has provided a full valuation
allowance against its domestic deferred tax assets, net of deferred tax liabilities, as of December 29, 2018 and
December 30, 2017. To the extent that the Company determines that deferred tax assets are realizable on a
more likely than not basis, and an adjustment is needed, that adjustment will be recorded in the period that the
determination is made and would generally decrease the valuation allowance and record a corresponding benefit
to earnings.
As of December 29, 2018, the Company has net operating loss carryforwards of approximately $592.7
million for federal tax purposes, $356.0 million for Luxembourg tax purposes, $57.4 million for Finland tax
purposes, $495.0 million for other state tax purposes, with material state net operating loss carryforwards being
$111.6 million for California tax purposes and $55.6 million for Illinois. The carryforward balance reflects
118
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
expected generation of both federal and state net operating losses for the year ended December 29, 2018.
Federal net operating loss carryforwards generated before 2018 will begin to expire in 2027 while certain
unutilized California losses have expired in 2017. Additionally, the Company has federal research and
development, foreign tax credits, and federal low income housing credit, and California research and
development credits available to reduce future income taxes payable of approximately $179.6 million and $60.3
million, respectively, as of December 29, 2018. Infinera Canada Inc., an indirect wholly owned subsidiary, has
Scientific Research and Experimental Development Expenditures (“SRED”) credits available of $2.3 million to
offset future Canadian income tax payable as of December 29, 2018. Coriant Portugal has research and
investment tax credits so-called, SIFIDE, of $5.3 million to offset future Portugal's income tax payable as of
December 29, 2018. Federal credits will begin to expire in the year 2022 if not utilized and California research
credits have no expiration date. Canadian SRED credits will begin to expire in the year 2032 if not fully utilized.
Portugal SIFIDE credits will begin to expire in the year 2021.
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 29,
2018, the Company had determined that while ownership changes had occurred in the past, the resulting
limitations were not significant enough to impact the utilization of the tax attributes against its taxable profits
earned to date.
Prior to the enactment of the Tax Act, the Company’s policy with respect to undistributed foreign
subsidiaries’ earnings was to consider those earnings to be indefinitely reinvested. Under the Tax Act,
undistributed earnings of foreign subsidiaries are deemed to be repatriated for U.S. corporate tax purposes and a
one-time toll tax at a reduced U.S. corporate tax rate was applicable in 2017. However, because of the
aggregated net tax loss of the Company's foreign subsidiaries, no tax was accruable in 2017. If and when funds
are actually distributed in the form of dividends or otherwise, foreign withholding taxes may be applicable in
some jurisdictions. The Company's policy with respect to certain undistributed foreign subsidiaries’ earnings is to
continue to consider those earnings to be indefinitely reinvested and therefore the Company has not accrued
such withholding taxes.
The aggregate changes in the balance of gross unrecognized tax benefits were as follows (in
thousands):
December 29,
2018
December 30,
2017
December 31,
2016
Beginning balance ................................................................. $
Tax position related to current year ........................................
19,786
$
22,282
$
19,130
Additions ........................................................................
2,296
2,234
2,548
Tax positions related to prior years ........................................
Additions ........................................................................
Reductions .....................................................................
Lapses of statute of limitations .......................................
2,981
(40)
(406)
—
(4,728)
(2)
1,292
—
(688)
Ending balance ...................................................................... $
24,617
$
19,786
$
22,282
As of December 29, 2018, the cumulative unrecognized tax benefit was $24.6 million, of which $21.3
million was netted against deferred tax assets that would have otherwise been subjected with a full valuation
allowance. Of the total unrecognized tax benefit as of December 29, 2018, approximately $3.3 million, if
recognized, would impact the Company’s effective tax rate.
As of December 29, 2018, December 30, 2017 and December 31, 2016, the Company had $1.2 million,
$0.7 million and $0.5 million, respectively, of accrued interest or penalties related to unrecognized tax benefits, of
which less than $0.2 million was included in the Company’s provision for income taxes in each of the years
ended December 29, 2018, December 30, 2017 and December 31, 2016, respectively. The Company’s policy is
119
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2002 and forward.
The Company has received assessments of tax resulting from transfer pricing examinations in India for
most years in the range of fiscal years ending March 2005 through March 2015. While some of the assessment
years have been settled with no change from the original tax return position, the Company intends to appeal all
remaining assessment years, and does not expect a significant adjustment to unrecognized tax benefits as a
result of these inquiries. The Company believes that the resolution of these disputed issues will not have a
material impact on its financial statements.
Included in the balance of income tax liabilities, accrued interest and penalties at December 28, 2018 is
$0.2 million related to tax positions for which it is reasonably possible that the statute of limitations will expire in
various jurisdictions within the next twelve months.
17.
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 (“CEO”). The Company’s CEO 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 as a provider of optical transport networking equipment, software and services. Accordingly, the
Company is considered to be in a single reporting segment and operating unit structure.
Revenue by geographic region is based on the shipping address of the customer. The following tables
set forth long-lived assets by geographic region (in thousands):
Property, plant and equipment, net
United States .................................................................................................... $
Other Americas .................................................................................................
Europe, Middle East and Africa .........................................................................
Asia Pacific and Japan .....................................................................................
288,614
$
128,582
2,370
38,273
13,563
661
3,527
3,172
Total property, plant and equipment, net .................................................... $
342,820
$
135,942
December 29,
2018
December 30,
2017
18.
Employee Benefit and Pension Plans
Defined Contribution Plans
The Company has established a savings plan under Section 401(k) of the Internal Revenue Code (the
“401(k) Plan”). As allowed under Section 401(k) of the Internal Revenue Code, the 401(k) 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. The Company made voluntary cash
contributions and matched a portion of employee contributions of $2.3 million, $2.2 million and $2.1 million for
2018, 2017 and 2016, respectively. Expenses related to the 401(k) Plan were insignificant for each of the years
2018, 2017 and 2016.
120
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In connection with the Company's acquisition of Transmode during the third quarter of 2015, the
Company has an ITP pension plan covering its Swedish employees. Commitments for old-age and survivors'
pension for salaried employees in Sweden are vested through an insurance policy. Expenses related to the ITP
pension plan were $2.8 million for 2018, $3.3 million for 2017 and $2.6 million for 2016.
The Company also provides defined contribution plans in certain foreign countries where required by
local statute or at the Company's discretion. For the year ended December 29, 2018, the Company had $2.5
million related to post-retirement costs.
Pension Plans
Pension and Post-Retirement Benefit Plans
As a result of the Acquisition during the fourth quarter of 2018, the Company acquired a number of post-
employment plans in Germany, as well as a number of smaller post-employment plans in other countries,
including both defined contribution and defined benefit plans. The defined benefit plans expose the Company to
actuarial risks such as, investment risk, interest rate risk, life expectancy risk and salary risk. The characteristics
of the defined benefit plans and the risks associated with them vary depending on legal, fiscal, and economic
requirements.
Obligations and Funded Status
The following table sets forth the changes in benefits obligations and the fair value of plan assets of the
Company's benefit plans (in thousands):
December 29,
2018
Benefit obligation as of Acquisition Date ................................................................................ $
106,474
Service cost
............................................................................................................................
Interest cost
............................................................................................................................
Benefits paid ...........................................................................................................................
Actuarial loss ..........................................................................................................................
Foreign currency exchange rate changes ...............................................................................
Benefit obligation at December 29, 2018(1) ............................................................................... $
Fair value of plan assets as of Acquisition Date ..................................................................... $
Actual return on plan assets ....................................................................................................
Actuarial loss ..........................................................................................................................
Foreign currency exchange rate changes ...............................................................................
Fair value of plan assets at December 29, 2018 ...................................................................... $
Net liability recognized .............................................................................................................. $
466
512
(194)
236
(2,870)
104,624
69,614
653
(5,319)
(1,884)
63,064
41,560
(1) The Company's accumulated benefit obligation was $100.2 million at December 29, 2018.
The net liability is included in the line item other long-term liabilities in the Company's consolidated
balance sheets.
121
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents net amounts of non-current assets and current and non-current liabilities
for the Company's pension and other post-retirement benefit plans recognized on its consolidated balance sheet
(in thousands):
December 29,
2018
Other non-current assets ............................................................................................................. $
Current liabilities ..........................................................................................................................
Other long-term liabilities .............................................................................................................
Net liability recognized ................................................................................................................. $
63,064
(901)
(103,723)
(41,560)
Components of Net Periodic Benefit Cost
Net periodic benefit cost for the Company's pension and other post-retirement benefit plans for the
Acquisition Date through December 29, 2018 consisted of the following (in thousands):
Service cost
Interest cost
................................................................................................................................. $
.................................................................................................................................
Expected return on plan assets ...................................................................................................
Amortization of actuarial loss .......................................................................................................
Total net periodic benefit cost
...................................................................................................... $
466
512
(653)
234
559
Actuarial gains and losses are amortized using a corridor approach. The gain/loss corridor is equal to
10% of the greater of the pension benefit obligation and the market-related value of assets. Gains and losses in
excess of the corridor are generally amortized over the average future working lifetime of the pension plan
participants. All components of net periodic benefit cost are recorded in operating expense of the Company's
consolidated statements of operations.
The following table sets forth the changes in accumulated other comprehensive income for the
Company's benefit plans (pre-tax) (in thousands):
Beginning balance as of Acquisition Date ................................................................................... $
Net actuarial loss arising in current year
.....................................................................................
Amortization of net actuarial loss(1) ..............................................................................................
Foreign currency translation gain ................................................................................................
—
(5,562)
234
15
Ending balance ........................................................................................................................... $
(5,313)
December 29,
2018
(1) The actuarial loss in for the year ended December 29, 2018 was caused primarily by the change in the discount rate.
Amounts in accumulated other comprehensive income expected to be recognized as components of net periodic pension
cost during fiscal year 2019 is $1.7 million (pre-tax).
122
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assumptions
Certain weighted-average assumptions used in computing the benefit obligations are as follows:
Discount rate ...............................................................................................................................
Salary growth rate .......................................................................................................................
Pension growth rate ....................................................................................................................
December 29,
2018
2.07%
2.25%
2.00%
Assumptions regarding future mortality are set based on actuarial advice in accordance with published
German statistics and experience. These assumptions translate into an average remaining life expectancy in
years for a pensioner retiring at age 65:
Retiring at the end of the reporting period ...................................................................................
Male ............................................................................................................................................
Female ........................................................................................................................................
2019 Life
Expectancy
20.5
20.0
23.6
Investment Policy
The financial position of the Company’s funded status is the difference between the fair value of plan
assets and projected benefit obligations. Volatility in funded status occurs when asset values change differently
from liability values and can result in fluctuations in costs in financial reporting. The Company’s investment
policies and strategies are designed to increase the rate of assets to plan liabilities at an appropriate level of
funded status volatility. Asset allocation decisions are recommended by the trustees for the specific plan and
agreed to by the Company's management. Investment objectives are designed to generate returns that will
enable the plan to meet its future obligations. The Company's management reviews the investment strategy and
performance semi-annually and discuss alternatives to manage volatility.
Basis for Expected Long-Term Rate of Return on Plan Assets
The expected long-term rate of return on plan assets reflects the expected returns for each major asset
class in which the plan invests and the weight of each asset class in the target mix. Expected asset returns
reflect the current yield on government bonds, risk premiums for each asset class and expected real returns
which considers each country’s specific inflation outlook. The expected return is set using a low to medium risk
profile and to meet the market expectations over a longer period of time to meet the obligations in the future.
123
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value of Plan Assets
The following tables present the fair value of plan assets for pension and other benefit plans by major
asset category as of December 29, 2018 (in thousands).
As of December 29, 2018
Fair Value Measured Using
Level 1
Level 2
Total
Cash .......................................................................................... $
Equity fund ................................................................................
Insurance contracts ...................................................................
Mixed fund .................................................................................
Pension fund .............................................................................
686
$
— $
—
—
—
—
32,513
24,852
4,114
899
686
32,513
24,852
4,114
899
Total plan assets at fair value .................................................... $
686
$
62,378
$
63,064
Valuation Techniques
The following describes the valuation techniques used to measure the fair value of the assets shown in
the table above. Equity funds are invested in traded securities and are recorded at market value as of the
balance sheet date. Insurance contracts are recorded at cash surrender value of the policies. Mixed fund and
pension fund are valued at the amounts as provided by the insurance companies who manage the funds and
represent fair market value at the date of the balance sheet.
Transfers Between Levels
Any transfers between levels in the fair value hierarchy are recognized as of the end of the reporting
period. No material transfers between levels occurred from the Acquisition Date through December 29, 2018.
Future Contributions
In fiscal year 2019, the Company does not expect to make any contributions to its pension and post-
retirement benefit plans.
Cash Flows
Estimated future benefit payments under the Company's pension plans as of December 29, 2018 are as
follows (in thousands):
2019 ........................................................................................................................................... $
2020 ........................................................................................................................................... $
2021 ........................................................................................................................................... $
2022 ........................................................................................................................................... $
2023 ........................................................................................................................................... $
2024 to 2027 ............................................................................................................................... $
2,660
2,579
3,911
4,284
3,667
20,954
124
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
19.
Financial Information by Quarter (Unaudited)
The following table sets forth the Company’s unaudited quarterly consolidated statements of operations
data for 2018 and 2017. The data has been prepared on the same basis as the audited consolidated financial
statements and related notes included in this report. The table includes all necessary adjustments, consisting
only of normal recurring adjustments that the Company considers necessary for a fair presentation of this data.
For the Three Months Ended (Unaudited)
2018
2017
Dec. 29
Sep. 29
Jun. 30
Mar. 31
Dec. 30
Sep. 30
Jul. 1
Apr. 1
(In thousands, except per share data)
Revenue:
Product ........................... $ 249,608
Services ..........................
82,450
$167,030
$175,288
$171,629
$160,543
$159,579
$143,360
$147,053
33,383
32,939
31,052
35,273
33,001
33,461
28,469
Total revenue ..................
332,058
200,413
208,227
202,681
195,816
192,580
176,821
175,522
Cost of revenue:
Cost of product(1).............
197,251
112,276
105,914
102,324
110,512
106,413
Cost of services ..............
39,409
13,075
13,039
12,831
13,708
12,951
95,267
11,687
94,452
12,134
Amortization of intangible
assets(1) ..........................
Restructuring and related
8,315
2,580
4,876
4,943
5,341
5,169
5,390
5,035
4,880
7
26
17
19,141
—
—
—
Total cost of revenue ............
247,555
130,234
123,922
120,513
148,530
124,754
111,989
111,466
Gross profit ..........................
84,503
70,179
84,305
82,168
47,286
67,826
64,832
64,056
Operating expenses .............
198,728
95,337
105,924
106,846
117,793
102,074
105,337
101,883
Loss from operations............
(114,225)
(25,158)
(21,619)
(24,678)
(70,507)
(34,248)
(40,505)
(37,827)
Other income (expense), net
(19,231)
(7,317)
(443)
(2,280)
(4,449)
(2,772)
(2,846)
(2,782)
Loss before income taxes ....
(133,456)
(32,475)
(22,062)
(26,958)
(74,956)
(37,020)
(43,351)
(40,609)
Provision for (benefit from)
income taxes ........................
(124)
(158)
Net loss ................................ $(133,468) $ (32,610) $ (21,938) $ (26,280) $ (73,985) $ (37,231) $ (42,839) $ (40,451)
Net loss per common share
(971)
(678)
(512)
211
135
12
Basic ............................... $
(0.76) $
(0.21) $
Diluted ............................ $
(0.76) $
(0.21) $
(0.14) $
(0.14) $
(0.17) $
(0.50) $
(0.25) $
(0.29) $
(0.17) $
(0.50) $
(0.25) $
(0.29) $
(0.28)
(0.28)
(1) Prior periods have been adjusted to conform with the current period's presentation. See Note 1, “Organization and Basis
of Presentation” to the Notes to Consolidated Financial Statements for additional information.
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 years 2018 and 2017 were 52-week years that ended
on December 29, 2018 and December 30, 2017, respectively. Fiscal year 2016 was a 53-week year that ended
on December 31, 2016. The quarters for fiscal years 2018 and 2017 were 13-week quarters, and the quarters for
fiscal year 2016 were 13-week quarters, except the last quarter was a 14-week quarter.
Effective December 31, 2017, the Company adopted Topic 606, using the modified retrospective
method applied to those contracts that were not completed as of December 31, 2017. Results for the reporting
periods after December 31, 2017 are presented under Topic 606, while prior period amounts are not adjusted
and continue to be reported in accordance with the Company’s historical accounting under Topic 605.
As a result of the 2017 Restructuring Plan implemented during the fourth quarter of 2017, the Company
incurred charges of $19.1 million within cost of revenue, including inventory write-downs of $13.6 million,
manufacturing equipment impairments of $4.0 million, and severance related charges of $1.5 million. Within
125
INFINERA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
operating expenses, the Company recorded charges of $16.1 million, including $7.9 million of severance related
costs, $7.3 million of facilities impairment costs and test equipment impairments of $0.9 million.
During the fourth quarter of 2017, the carrying amount of the Company's non-marketable equity
securities exceeded its fair value and the decline in value was determined to be other-than-temporary. As a
result, the Company recorded an impairment charge of $1.9 million during this period.
During the third and fourth quarters of 2018, the Company determined that its non-marketable equity
securities were impaired, resulting in impairment charges of $4.3 million and $0.8 million, respectively, to adjust
the carrying value to estimated fair value.
During the fourth quarter of 2018, the Company completed the Acquisition, which was accounted for as
a business combination, and accordingly, the Company has consolidated the financial results of Coriant with its
financial results for the period from the Acquisition Date through December 31, 2018. For more information, see
Note 6, “Business Combination” to the Notes to Consolidated Financial Statements.
As a result of the 2018 Restructuring Plan implemented during the fourth quarter of 2018, the Company
incurred charges of $1.6 million within cost of revenue associated with severance-related costs. Within operating
expenses, the Company recorded restructuring charges of $10.8 million, including $8.6 million of severance-
related costs, $1.9 million of asset impairment costs and $0.3 million of facilities-related costs. For more
information on the Company's restructuring plans, see Note 9, “Restructuring and Other Related Costs” to the
Notes to Consolidated Financial Statements.
Additionally, during the fourth quarter of 2018, the Company incurred charges of $1.0 million within cost
of revenue associated with severance-related costs related to Coriant's previous restructuring and reorganization
plans, which the Company assumed with the Acquisition.
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 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
An evaluation was performed by our management, with the participation of our CEO and our CFO, of
the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d -15(e) under
the Exchange Act). Disclosure controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated
and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure. Based on this evaluation, our CEO and CFO concluded that, as of December 29,
2018, our disclosure controls and procedures are effective.
126
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure controls or our
internal controls over financial reporting will prevent or detect all errors and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. The design of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of
any system of controls is based in part on 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. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks.
Over time, controls may become inadequate because of changes in business conditions or deterioration in the
degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the fourth quarter of fiscal 2018, we made changes to internal control over financial reporting
related to the valuation of used service and support inventory as well as the reserve methodology for excess
service and support inventory. These changes included updates to our service inventory reserve methodology
and the addition of a new internal control related to the valuation of used service inventory.
Management’s Report on Internal Control Over Financial Reporting
Our management, with the participation of our CEO and CFO, is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-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. GAAP.
Management assessed the effectiveness of our internal control over financial reporting as of December
29, 2018, the end of our fiscal year. Management based its assessment on the framework established in the
2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“2013 COSO framework”). Management’s assessment included evaluation of 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 utilizing the 2013 COSO framework.
As discussed in Note 6, "Business Combination" to the Notes to Consolidated Financial Statements, we
completed the business combination of Coriant on October 1, 2018. We have excluded Coriant from our
assessment of the effectiveness of our internal control over financial reporting as of December 29, 2018. In
accordance with guidance issued by the SEC, companies are permitted to exclude business combinations from
their final assessment of internal control over financial reporting during the year of acquisition while integrating
the acquired operations. The acquired business represented approximately 15% of consolidated net revenue for
the year ended December 29, 2018, approximately 44% of consolidated total assets and 36% of consolidated
net assets (excluding goodwill and acquired intangibles) as of December 29, 2018.
Based on our assessment, management has concluded that our internal control over financial reporting
was effective as of the end of our fiscal year 2018 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. GAAP.
The effectiveness of our internal control over financial reporting as of the end of fiscal year 2018 has
been audited by Ernst & Young, LLP, an independent registered public accounting firm, as stated in their report,
which is included elsewhere herein.
ITEM 9B.
OTHER INFORMATION
None.
127
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information responsive to this item is incorporated herein by reference to our definitive proxy statement
with respect to our 2019 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. For information pertaining to our executive offers,
refer to the section entitled “Executive Officers” in 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 2019 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 2019 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 2019 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 2019 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.
128
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements
PART IV
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 Statement of Comprehensive Income (Loss) .....................................................................
Consolidated Statements of Stockholders’ Equity ...................................................................................
Consolidated Statements of Cash Flows .................................................................................................
Notes to Consolidated Financial Statements ...........................................................................................
Page
64
67
68
69
70
72
74
(a)(2) Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
Years Ended
December 29,
2018
December 30,
2017
December 31,
2016
(In thousands)
Deferred tax asset, valuation allowance
Beginning balance ................................................................. $
Additions ...............................................................................
Reductions ............................................................................
Ending balance ...................................................................... $
Allowance for doubtful accounts
Beginning balance ................................................................. $
Additions ...............................................................................
Additions due to the Acquisition .............................................
Reductions ............................................................................
205,241
$
200,476
$
169,240
355,166
(67,250)
31,759
(26,994)
31,913
(677)
493,157
$
205,241
$
200,476
$
892
929
3,263
—
$
772
138
—
(18)
630
772
—
(630)
772
Ending balance ...................................................................... $
5,084
$
892
$
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.
ITEM 16.
FORM 10-K SUMMARY
None.
129
Exhibit No.
2.1
3.1
3.2
4.1
4.2
4.3
4.4
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
Description
INDEX TO EXHIBITS
Unit Purchase Agreement by and among Infinera Corporation, Coriant Investor LLC and Oaktree
Optical Holdings, L.P., dated July 23, 2018, incorporated by reference to Exhibit 2.1 of the
Registrant’s Current Report on Form 8-K/A (No. 001-33486), filed with the SEC on July 27, 2018.
Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit
3.1 of the Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on
June 12, 2007.
Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.1 of the
Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on February 29,
2016.
Form of Common Stock Certificate, incorporated herein by reference to Exhibit 4.1 of the
Registrant’s Form S-1/A (No. 333-140876), filed with the SEC on April 27, 2007.
Base Indenture, dated as of September 11, 2018, by and between Infinera Corporation and U.S.
Bank National Association, incorporated herein by reference to Exhibit 4.1 of the Registrant’s
Current Report on Form 8-K (No. 001-33486), filed with the SEC on September 12, 2018.
First Supplemental Indenture, dated as of September 11, 2018, by and between Infinera
Corporation and U.S. Bank National Association, incorporated herein by reference to Exhibit 4.2
of the Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on
September 12, 2018.
Form of 2.125% Convertible Senior Notes due 2024 (included in Exhibit 4.3 hereto).
Form of Indemnification Agreement between Registrant and each of its directors and executive
officers, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form S-1
(No. 333-140876), filed with the SEC on February 26, 2007.
2007 Equity Incentive Plan, incorporated herein by reference to Exhibit 10.3 of the Registrant’s
Annual Report on Form 10-K (No. 001-33486), filed with the SEC on February 18, 2015.
Infinera Corporation Amended and Restated 2007 Employee Stock Purchase Plan, incorporated
herein by reference to Exhibit 10.1 of the Registrant's Form S-8 (No. 333-225887), filed with the
SEC on June 26, 2018.
Form of Amended and Restated 2007 Employee Stock Purchase Plan Global Subscription
Agreement, incorporated herein by reference to Exhibit 10.2 of the Registrant's Form S-8 (No.
333-225887), filed with the SEC on June 26, 2018.
Bonus Plan, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report
on 8-K (No. 001-33486), filed with the SEC on February 14, 2011.
Form of Section 16 Officer Restricted Stock Unit Agreement under the 2007 Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.7 of the Registrant’s Annual Report on Form
10-K (No. 001-33486), filed with the SEC on February 18, 2015.
Form of Section 16 Officer Performance Share Agreement under the 2007 Equity Incentive Plan,
incorporated herein by reference to Exhibit 10.8 of the Registrant’s Annual Report on Form 10-K
(No. 001-33486), filed with the SEC on February 18, 2015.
Form of Director Restricted Stock Unit Agreement under the 2007 Equity Incentive Plan,
incorporated herein by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K
(No. 001-33486), filed with the SEC on February 18, 2015.
Form of Stock Option Agreement under the 2007 Equity Incentive Plan, incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Quarterly Report on Form 10-Q (No. 001-33486),
filed with the SEC on May 5, 2010.
Form of Chief Executive Officer Amended and Restated Change of Control Severance
Agreement, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report
on Form 8-K (No. 001-33486), filed with the SEC on February 22, 2018.
Form of Section 16 Officer Amended and Restated Change of Control Severance Agreement,
incorporated herein by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K
(No. 001-33486), filed with the SEC on February 22, 2018.
Executive Clawback Policy, incorporated herein by reference to Exhibit 10.2 of the Registrant’s
Current Report on Form 8-K (No. 001-33486), filed with the SEC on January 17, 2013.
Executive Severance Policy, incorporated herein by reference to Exhibit 10.19 of the Registrant’s
Annual Report on Form 10-K (No. 001-33486), filed with the SEC on February 18, 2015.
130
Exhibit No.
10.14*
10.15*
10.16*
10.17*
10.18
10.19
21.1
23.1
31.1
31.2
32.1**
32.2**
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
Description
Infinera Corporation Amended and Restated 2016 Equity Incentive Plan, incorporated herein by
reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (No. 001-33486), filed
with the SEC on May 31, 2018.
Form of Notice of Grant of Restricted Stock Units under the Amended and Restated 2016 Equity
Incentive Plan, incorporated herein by reference to Exhibit 10.4 of the Registrant’s Form S-8 (No.
333-225887), filed with the SEC on June 26, 2018.
Form of Notice of Grant of Restricted Stock Units for Directors under the 2016 Equity Incentive
Plan, incorporated herein by reference to Exhibit 10.3 of the Registrant’s Current Report on Form
8-K (No. 001-33486), filed with the SEC on May 17, 2016.
Form of Notice of Grant of Performance Shares under the 2016 Equity Incentive Plan,
incorporated herein by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K
(No. 001-33486), filed with the SEC on May 17, 2016.
Underwriting Agreement, dated as of September 6, 2018, by and between Infinera Corporation
and Morgan Stanley & Co. LLC, as manager of the underwriter named therein, incorporated
herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (No.
001-33486), filed with the SEC on September 12, 2018.
Form of Capped Call Confirmation, incorporated herein by reference to Exhibit 10.2 of the
Registrant’s Current Report on Form 8-K (No. 001-33486), filed with the SEC on September 12,
2018.
Subsidiaries.
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.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
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.
131
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.
SIGNATURES
Dated: March 14, 2019
Infinera Corporation
By:
/s/ BRAD D. FELLER
Brad D. Feller
Chief Financial Officer
Principal Financial and Accounting Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Thomas J. Fallon and Brad D. Feller, and each of them individually, his or her attorneys-
in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to
this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
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.
Name and Signature
Title
Date
/s/ THOMAS J. FALLON
Thomas J. Fallon
Chief Executive Officer, Principal
Executive Officer and Director
/s/ BRAD D. FELLER
Brad D. Feller
Chief Financial Officer, Principal
Financial and
Accounting Officer
/s/ DAVID F. WELCH, PH.D. Co-founder, Chief Innovation Officer
and Director
March 14, 2019
March 14, 2019
March 14, 2019
David F. Welch, Ph.D.
/s/ KAMBIZ Y. HOOSHMAND
Kambiz Y. Hooshmand
/s/ JOHN P. DAANE
John P. Daane
/s/ GREG P. DOUGHERTY
Greg P. Dougherty
/s/ MARCEL GANI
Marcel Gani
/s/ PAUL J. MILBURY
Paul J. Milbury
/s/ RAJAL M. PATEL
Rajal M. Patel
/s/ MARK A. WEGLEITNER
Mark A. Wegleitner
Chairman of the Board
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
March 14, 2019
Director
Director
Director
Director
Director
Director
132
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 31.1
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 14, 2019
By:
/s/ THOMAS J. FALLON
Thomas J. Fallon
Chief Executive Officer
(Principal Executive Officer)
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, Brad D. Feller, 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 14, 2019
By:
/s/ BRAD D. FELLER
Brad D. Feller
Chief Financial Officer
(Principal Financial and Accounting Officer)
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)
(b)
the Annual Report on Form 10-K of Infinera Corporation for the year ended December 29,
2018 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
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 14, 2019
/s/ THOMAS J. FALLON
Thomas J. Fallon
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.
INFINERA CORPORATION
Written Statement of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
I, Brad D. Feller, 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)
(b)
that the Annual Report on Form 10-K of Infinera Corporation for the year ended December 29,
2018 (the “Annual Report”) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
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 14, 2019
/s/ BRAD D. FELLER
Brad D. Feller
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.