Edgar Filing: INFINERA Corp

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018



o	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		77-0560433
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



140 Caspian Court Sunnyvale, CA		94089
(Address of principal executive offices)		(Zip Code)

(408) 572-5200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer x		Accelerated filer o
Non-accelerated filer o		Smaller reporting company o
Emerging growth company o

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 ¨ No x

As of August 3, 2018, 152,990,398 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

Table of Contents

INFINERA CORPORATION

QUARTERLY REPORT ON FORM 10-Q2

FOR THE FISCAL QUARTER ENDED June 30, 2018

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets – As of June 30, 2018 and December 30, 2017	3

	Condensed Consolidated Statements of Operations – Three and six months ended June 30, 2018 and July 1, 2017	4

	Condensed Consolidated Statements of Comprehensive Loss – Three and six months ended June 30, 2018 and July 1, 2017	5

	Condensed Consolidated Statements of Cash Flows – Six months ended June 30, 2018 and July 1, 2017	6

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40

Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	43

Item 6.	Exhibits	63

	Signature Page	64

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PART I. FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements (Unaudited)

INFINERA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	June 30, 2018			December 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	63,308		$	116,345
Short-term investments	58,860			147,596
Accounts receivable, net of allowance for doubtful accounts of $869 in 2018 and $892 in 2017	148,026			126,152
Inventory	219,343			214,704
Prepaid expenses and other current assets	46,102			43,140
Total current assets	535,639			647,937
Property, plant and equipment, net	136,769			135,942
Intangible assets	71,795			92,188
Goodwill	179,165			195,615
Long-term investments	6,586			36,129
Other non-current assets	11,026			9,859
Total assets	$	940,980		$	1,117,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	80,345		$	58,124
Accrued expenses	48,180			39,782
Accrued compensation and related benefits	44,352			45,751
Short-term debt, net	—			144,928
Accrued warranty	13,670			13,670
Deferred revenue	54,556			72,421
Total current liabilities	241,103			374,676
Accrued warranty, non-current	16,567			17,239
Deferred revenue, non-current	14,932			22,502
Deferred tax liability	16,247			21,609
Other long-term liabilities	14,719			16,279
Commitments and contingencies (Note 16)
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 as of June 30, 2018 and December 30, 2017
Issued and outstanding shares – 152,940 as of June 30, 2018 and 149,471 as of December 30, 2017	153			149
Additional paid-in capital	1,450,136			1,417,043
Accumulated other comprehensive income (loss)	(21,984		)	6,254
Accumulated deficit	(790,893		)	(758,081		)
Total stockholders' equity	637,412			665,365
Total liabilities and stockholders’ equity	$	940,980		$	1,117,670

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Revenue:
Product	$	175,288		$	143,360		$	346,917		$	290,413
Services	32,939			33,461			63,991			61,930
Total revenue	208,227			176,821			410,908			352,343
Cost of revenue:
Cost of product	110,857			100,302			218,522			199,634
Cost of services	13,039			11,687			25,870			23,821
Restructuring and related	26			—			43			—
Total cost of revenue	123,922			111,989			244,435			223,455
Gross profit	84,305			64,832			166,473			128,888
Operating expenses:
Research and development	56,158			57,377			114,839			112,460
Sales and marketing	29,721			29,397			60,213			58,838
General and administrative	18,365			18,563			36,201			35,922
Restructuring and related	1,680			—			1,517			—
Total operating expenses	105,924			105,337			212,770			207,220
Loss from operations	(21,619		)	(40,505		)	(46,297		)	(78,332		)
Other income (expense), net:
Interest income	629			862			1,526			1,613
Interest expense	(2,501		)	(3,456		)	(6,184		)	(6,859		)
Other gain (loss), net	1,429			(252		)	1,935			(382		)
Total other income (expense), net	(443		)	(2,846		)	(2,723		)	(5,628		)
Loss before income taxes	(22,062		)	(43,351		)	(49,020		)	(83,960		)
Benefit from income taxes	(124		)	(512		)	(802		)	(670		)
Net loss	(21,938		)	(42,839		)	(48,218		)	(83,290		)
Net loss per common share:
Basic	$	(0.14	)	$	(0.29	)	$	(0.32	)	$	(0.57	)
Diluted	$	(0.14	)	$	(0.29	)	$	(0.32	)	$	(0.57	)
Weighted average shares used in computing net loss per common share:
Basic	152,259			147,538			151,296			146,662
Diluted	152,259			147,538			151,296			146,662

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net loss	$	(21,938	)	$	(42,839	)	$	(48,218	)	$	(83,290	)
Other comprehensive income (loss), net of tax:
Unrealized loss on available-for-sale investments	224			22			99			(60		)
Foreign currency translation adjustment	(23,495		)	18,426			(28,311		)	24,643
Tax related to available-for-sale investment	(26		)	—			(26		)	—
Net change in accumulated other comprehensive income (loss)	(23,297		)	18,448			(28,238		)	24,583
Comprehensive loss	$	(45,235	)	$	(24,391	)	$	(76,456	)	$	(58,707	)

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended
	June 30, 2018			July 1, 2017
Cash Flows from Operating Activities:
Net loss	$	(48,218	)	$	(83,290	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	33,250			32,623
Non-cash restructuring and related credits	(81		)	—
Amortization of debt discount and issuance costs	5,072			5,529
Impairment of intangible assets	—			252
Stock-based compensation expense	23,027			23,257
Other loss	167			320
Changes in assets and liabilities:
Accounts receivable	(22,015		)	27,629
Inventory	(8,703		)	(12,700		)
Prepaid expenses and other assets	(1,809		)	(8,127		)
Accounts payable	24,458			16,927
Accrued liabilities and other expenses	(14,617		)	(12,503		)
Deferred revenue	2,351			10,065
Net cash used in operating activities	(7,118		)	(18		)
Cash Flows from Investing Activities:
Purchase of available-for-sale investments	(2,986		)	(107,854		)
Proceeds from sales of available-for-sale investments	23,114			3,998
Proceeds from maturities of investments	98,112			79,003
Purchase of property and equipment	(21,503		)	(39,200		)
Net cash provided by (used in) investing activities	96,737			(64,053		)
Cash Flows from Financing Activities:
Acquisition of noncontrolling interest	—			(471		)
Repayment of debt	(150,000		)	—
Proceeds from issuance of common stock	11,066			11,115
Minimum tax withholding paid on behalf of employees for net share settlement	(964		)	(823		)
Net cash provided by (used in) financing activities	(139,898		)	9,821
Effect of exchange rate changes on cash and restricted cash	(2,218		)	2,943
Net change in cash, cash equivalents and restricted cash	(52,497		)	(51,307		)
Cash, cash equivalents and restricted cash at beginning of period	121,486			177,580
Cash, cash equivalents and restricted cash at end of period⁽¹⁾	$	68,989		$	126,273
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	2,210		$	2,683
Cash paid for interest	$	1,328		$	1,316
Supplemental schedule of non-cash investing activities:
Transfer of inventory to fixed assets	$	1,684		$	2,087

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⁽¹⁾ Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:



	June 30, 2018		July 1, 2017

	(In thousands)
Cash and cash equivalents	$	63,308	$	119,820
Short-term restricted cash	308		1,423
Long-term restricted cash	5,373		5,030
Total cash, cash equivalents and restricted cash	$	68,989	$	126,273

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

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INFINERA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation

Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

The Company has made 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 condensed 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, fair value measurement of investments and accounting for income taxes. Other estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of intangible assets, and property, plant and equipment. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s condensed consolidated financial statements will be affected.

The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.

To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended June 30, 2018, two customers individually accounted for 23% and 13% of the Company's total revenue and for the corresponding period in 2017, three customers individually accounted for 17%, 10% and 10% of the Company's total revenue. For the six months ended June 30, 2018, two customers individually accounted for 26% and 12% of the Company's total revenue and for the corresponding period in 2017, one customer individually accounted for 18% of the Company's total revenue.

There have been no material changes in the Company’s significant accounting policies for the six months ended June 30, 2018 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017, with the exception of the Company's revenue recognition policy. Effective December 31, 2017, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). See Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements for discussion on the impact of the adoption of these standards on the Company's policy for revenue recognition.

The Company adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“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 six months ended July 1, 2017, 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 condensed consolidated statement of cash flows.


2.	Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the U.S. Tax Cuts and

Jobs Act (the “Tax Act”) was passed in December 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, the Company considers the accounting of the transition tax and deferred tax re-measurements to be incomplete due to the forthcoming guidance and the ongoing analysis of final year-end data and tax positions. The Company expects to complete the analysis within the measurement period in accordance with SAB 118. 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.”

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 condensed 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 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. See the condensed consolidated statements of cash flows for a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts on the condensed 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 future 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 Condensed Consolidated Financial Statements for more information.

In May 2014, the FASB issued ASC 606, which creates a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with U.S. GAAP. Under ASC 606, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards update 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of ASC 606 by one year with early adoption permitted beginning after December 15, 2016. The updated standard is effective for interim and annual periods beginning after December 15, 2017. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued Accounting Standards Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to increase stakeholders' awareness of the proposals and to expedite improvements to ASC 606. ASC 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs - Contracts with Customers,” which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to ASC 606 and Subtopic 340-40 as “ASC 606.” The Company adopted ASC 606 as of December 31, 2017 using the modified retrospective transition method applied to those contracts that were not completed as of December 31, 2017. See Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements for more information.

In January 2016, the FASB issued 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 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 condensed consolidated financial statements. See Note 4, “Fair Value Measurements” to the Notes to Condensed Consolidated Financial Statements for more information.

Accounting Pronouncements Not Yet Effective

In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under ASU 2018-07, certain guidance on such payments to nonemployees 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 nonemployee 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 and early adoption is permitted. 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 ASU 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. The Company is currently evaluating the impact the adoption of ASU 2016-02 and ASU 2018-11 will have on its consolidated financial statements and expects to have increases in the assets and liabilities of its consolidated balance sheets.


3.	Revenue Recognition

Effective December 31, 2017, the Company adopted ASC 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 ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under 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 with spares management, on-site hardware replacement services, network management operations, software subscription, extended hardware warranty or 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 service includes 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 services and training. Revenue from software subscription, 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 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 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.

ASC 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 ASC 606, with the impact primarily related to its services revenue. The impact to revenue for the three and six months ended June 30, 2018 was an increase of $1.6 million and a decrease of $1.6 million, respectively, as a result of applying ASC 606. The details of the significant changes and quantitative impact of the Company’s adoption of ASC 606 are set out below.

Customer Purchase Commitments

The Company makes available software licenses that are non-essential to the functionality of the hardware by providing customers the ability to purchase incremental bandwidth capacity. Line modules generally include a specific initial capacity and incremental capacity can be added by the purchase of Infinera Instant Bandwidth (“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 line module shipment. The time frame varies by customer and 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 purchase were not fixed. Under ASC 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. The Company concluded that the duration of support contracts do not extend beyond 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 will be 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. Changes to variable consideration will be tracked and material changes disclosed.

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 the 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 adjusts 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 selling price assumptions as appropriate.

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 ASC 606, the Company capitalizes sales commissions related to multi-year service contracts and amortizes the asset over the period of benefit, which is the service period. Sales commissions paid on contract renewals, including service contract renewals, is commensurate with the sales commissions paid on the initial contracts.

The Company elected ASC 606's practical expedient to expense sales commissions as incurred when the amortization period of the related contract term is one year or less. These costs are recorded as sales and marketing expense and included on the balance sheet as accrued compensation and related benefits until paid.

As of June 30, 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 three and six months ended June 30, 2018.

Disaggregation of Revenue

The following table presents the Company's revenue disaggregated by revenue source (in thousands):



	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Product	$	175,288	$	143,360	$	346,917	$	290,413
Services	32,939		33,461		63,991		61,930
Total revenue	$	208,227	$	176,821	$	410,908	$	352,343

The following tables present the Company's revenue disaggregated by geography, based on the shipping address of the customer and by customer channel (in thousands):



	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017⁽¹⁾		June 30, 2018		July 1, 2017⁽¹⁾
United States	$	120,987	$	112,196	$	250,012	$	211,976
Other Americas	4,877		2,971		10,092		9,006
Europe, Middle East and Africa	62,162		47,910		121,361		105,323
Asia Pacific	20,201		13,744		29,443		26,038
Total revenue	$	208,227	$	176,821	$	410,908	$	352,343



	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017⁽¹⁾		June 30, 2018		July 1, 2017⁽¹⁾
Direct	$	195,624	$	166,826	$	384,086	$	332,772
Indirect	12,603		9,995		26,822		19,571
Total revenue	$	208,227	$	176,821	$	410,908	$	352,343


⁽¹⁾	Prior period amounts have not been adjusted under the modified retrospective method.

Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):



	June 30, 2018		At Adoption
Accounts receivable, net	$	148,026	$	135,245
Contract assets	$	2,644	$	2,825
Deferred revenue	$	69,488	$	75,458

Revenue recognized for the six months ended June 30, 2018 that was included in the deferred revenue balance at the beginning of the reporting period was $26.9 million. Changes in the contract asset and liability balances during the three and six months ended June 30, 2018 were not materially impacted by other factors.

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, consisting of deferred revenue and backlog. The Company’s backlog represents purchase orders received from customers for future product shipments and services. 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.

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):



	Remainder of 2018		2019		2020		2021		2022		Thereafter		Total
Revenue expected to be recognized in the future as of June 30, 2018	$	145,741	$	23,591	$	15,966	$	3,555	$	2,235	$	2,042	$	193,130

Impacts on Financial Statements

The following tables summarize the impacts of adopting ASC 606 on the Company's condensed consolidated statement of operations for the three and six months ended June 30, 2018 and the Company's condensed consolidated balance sheet as of December 31, 2017 (in thousands):



	Three Months Ended June 30, 2018
	As Reported			Adjustments			Balances Without Adoption of ASC 606
Income Statement
Revenue
Product	$	175,288		$	(2,839	)	$	172,449
Services	32,939			1,198			34,137
	$	208,227		$	(1,641	)	$	206,586
Costs and expenses
Cost of revenue	$	123,922		$	712		$	124,634
Net loss	$	(21,938	)	$	(2,353	)	$	(24,291	)
Net loss per share - basic and diluted	$	(0.14	)	$	(0.02	)	$	(0.16	)



	Six Months Ended June 30, 2018
	As Reported			Adjustments			Balances Without Adoption of ASC 606
Income Statement
Revenue
Product	$	346,917		$	(895	)	$	346,022
Services	63,991			2,480			66,471
	$	410,908		$	1,585		$	412,493
Costs and expenses
Cost of revenue	$	244,435		$	1,240		$	245,675
Net loss	$	(48,218	)	$	345		$	(47,873	)
Net loss per share - basic and diluted	$	(0.32	)	$	—		$	(0.32	)



	Balance at December 30, 2017			Adjustments due to ASC 606			As Adjusted Balance at December 31, 2017
Balance Sheet
Assets
Accounts receivable, net	$	126,152		$	9,093		$	135,245
Inventory	$	214,704		$	(239	)	$	214,465
Prepaid expenses and other assets	$	43,339		$	2,731		$	46,070

Liabilities
Accrued expenses	$	39,782		$	15,645		$	55,427
Deferred revenue	$	94,923		$	(19,465	)	$	75,458

Equity
Accumulated deficit	$	(758,081	)	$	15,406		$	(742,675	)


4.	Fair Value Measurements

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on 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 marketable debt securities at fair value and classifies its investments in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.

The Company classifies its certificates of deposit, commercial paper, U.S. agency notes, corporate bonds and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:

Certificates of Deposit

The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data.

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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 Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.

The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):



	As of June 30, 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	$	231	$	—		$	231		$	20,371	$	—		$	20,371
Certificates of deposit	—		—			—			—		240			240
Commercial paper	—		—			—			—		26,912			26,912
Corporate bonds	—		46,881			46,881			—		118,558			118,558
U.S. agency notes	—		5,485			5,485			—		5,480			5,480
U.S. treasuries	7,970		—			7,970			35,408		—			35,408
Total assets	$	8,201	$	52,366		$	60,567		$	55,779	$	151,190		$	206,969
Liabilities
Foreign currency exchange forward contracts	$	—	$	(167	)	$	(167	)	$	—	$	(204	)	$	(204	)

During the three and six months ended June 30, 2018, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of June 30, 2018 and December 30, 2017, none of the Company’s existing securities were classified as Level 3 securities.

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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 nonrecurring basis when impairment indicators exist or upon the existence of observable fair values:

Equity Investment

In 2016, the Company invested $7.0 million in a privately-held company. As of June 30, 2018, and December 30, 2017, the Company's equity investment balance was $5.1 million.

Beginning the first quarter of 2018, the Company adopted 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 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 the income statement. 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.

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. Adjustments resulting from impairments are recorded in other income (expense), net, in the accompanying condensed consolidated statements of operations.

As of December 30, 2017, the Company determined that its non-marketable equity securities formerly classified as a cost-method investment was impaired, resulting in an impairment charge of $1.9 million to adjust the carrying value to estimated fair value. During the three and six months ended June 30, 2018 and July 1, 2017, no impairment charges were recorded.

Facilities-related Charges

In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (the “2017 Restructuring Plan”). As a result of the plan, the Company calculated the fair value of its facilities-related charges of $7.3 million, 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. During the first quarter of 2018, the Company revised the estimates to its facilities-related accruals. See Note 8, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.

Cash, cash equivalents and investments were as follows (in thousands):



	June 30, 2018
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	63,077	$	—	$	—		$	63,077
Money market funds	231		—		—			231
Total cash and cash equivalents	$	63,308	$	—	$	—		$	63,308
Corporate bonds	45,663		—		(258		)	45,405
U.S. agency notes	5,500		—		(15		)	5,485
U.S. treasuries	7,996		—		(26		)	7,970
Total short-term investments	$	59,159	$	—	$	(299	)	$	58,860
Corporate bonds	1,496		—		(20		)	1,476
Total long-term investments	$	1,496	$	—	$	(20	)	$	1,476
Total cash, cash equivalents and investments	$	123,963	$	—	$	(319	)	$	123,644

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	December 30, 2017
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	87,991	$	—	$	—		$	87,991
Money market funds	20,371		—		—			20,371
U.S. treasuries	7,984		—		(1		)	7,983
Total cash and cash equivalents	$	116,346	$	—	$	(1	)	$	116,345
Certificates of deposit	240		—		—			240
Commercial paper	26,924		—		(12		)	26,912
Corporate bonds	90,685		—		(155		)	90,530
U.S. agency notes	2,500		—		(11		)	2,489
U.S. treasuries	27,495		—		(70		)	27,425
Total short-term investments	$	147,844	$	—	$	(248	)	$	147,596
Corporate bonds	28,186		—		(158		)	28,028
U.S. agency notes	3,002		—		(11		)	2,991
Total long-term investments	$	31,188	$	—	$	(169	)	$	31,019
Total cash, cash equivalents and investments	$	295,378	$	—	$	(418	)	$	294,960

As of June 30, 2018, the Company’s available-for-sale investments have contractual maturity terms of up to 15 months. Gross realized gains and losses on investments were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.

As of June 30, 2018, the Company had $122.2 million of cash, cash equivalents and short-term investments, including $32.6 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 exchange forward contracts, primarily short term in nature.

The Company periodically 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 forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and Swedish kronor (“SEK”). The contracts are settled at maturity and at rates 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.

During the first quarter of 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 condensed consolidated balance sheets.

For the three months ended June 30, 2018 and July 1, 2017, the before-tax effect of the foreign currency exchange forward contracts were a gain of $1.2 million and a loss $1.5 million, respectively, and for the six months ended June 30, 2018 and July 1, 2017, the before-tax effect of the foreign currency exchange forward contracts were a gain of $0.5 million and a loss of $1.8 million, respectively. 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 June 30, 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 condensed consolidated statements of operations. These contracts were entered into 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 condensed consolidated balance sheets was as follows (in thousands):



	As of June 30, 2018					As of December 30, 2017
	Gross Notional⁽¹⁾		Other Accrued Liabilities			Gross Notional⁽¹⁾		Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables	$	16,157	$	(165	)	$	24,794	$	(202	)
Related to euro denominated restricted cash	$	245	(2		)	$	252	(2		)
			$	(167	)			$	(204	)


⁽¹⁾	Represents the face amounts of forward contracts that were outstanding as of the period noted.


6.	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 during the six months ended June 30, 2018 (in thousands):



Balance as of December 30, 2017	$	195,615
Foreign currency translation adjustments	(16,450		)
Balance as of June 30, 2018	$	179,165

The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK. To date, the Company has zero accumulated impairment loss on goodwill.

Intangible Assets

The following tables present details of the Company’s intangible assets as of June 30, 2018 and December 30, 2017 (in thousands, except for weighted-average):



	June 30, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Customer relationships	$	46,754	$	(16,666	)	$	30,088	5.1
Developed technology	95,895		(54,188		)	41,707		2.2
Total intangible assets	$	142,649	$	(70,854	)	$	71,795	3.4



	December 30, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Customer relationships	$	51,050	$	(15,007	)	$	36,043	5.6
Developed technology	104,708		(48,563		)	56,145		2.7
Total intangible assets	$	155,758	$	(63,570	)	$	92,188	3.9

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 these assets are denominated in SEK. Amortization expense was $6.5 million and $13.4 million for the three and six months ended June 30, 2018, respectively, and was $6.6 million and $12.9 million, respectively, for the corresponding periods in 2017.

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 for certain 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.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of June 30, 2018 (in thousands):



			Fiscal Years
	Total		Remainder of 2018		2019		2020		2021		2022		2023 and Thereafter
Total future amortization expense	$	71,795	$	12,634	$	24,699	$	18,024	$	6,589	$	6,016	$	3,833


7.	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's restricted cash balance includes amounts pledged as collateral on its derivative instruments.

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The following table provides details of selected balance sheet items (in thousands):



	June 30, 2018			December 30, 2017
Inventory
Raw materials	$	30,503		$	27,568
Work in process	61,648			59,662
Finished goods	127,192			127,474
Total inventory	$	219,343		$	214,704
Property, plant and equipment, net
Computer hardware	$	14,703		$	13,881
Computer software⁽¹⁾	32,835			32,521
Laboratory and manufacturing equipment	259,756			246,380
Land and building	12,347			12,347
Furniture and fixtures	2,517			2,474
Leasehold and building improvements	43,163			43,475
Construction in progress	33,431			34,816
Subtotal	$	398,752		$	385,894
Less accumulated depreciation and amortization	(261,983		)	(249,952		)
Total property, plant and equipment, net	$	136,769		$	135,942
Accrued expenses
Loss contingency related to non-cancelable purchase commitments	$	7,017		$	6,379
Professional and other consulting fees	5,451			5,305
Taxes payable	3,589			3,707
Royalties	5,526			5,404
Restructuring accrual	3,425			5,490
Right of return	11,427			—
Other accrued expenses	11,745			13,497
Total accrued expenses	$	48,180		$	39,782


⁽¹⁾	Included in computer software at June 30, 2018 and December 30, 2017 were $11.4 million related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at June 30, 2018 and December 30, 2017 were $3.8 million and $4.7 million, respectively.


8.	Restructuring and Related Costs

In the fourth quarter of 2017, the Company implemented 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 implemented several changes that 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 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 and the Company does not expect to record significant future charges under this plan in 2018. During the six months ended June 30, 2018, the Company revised the estimates to its facilities-related and severance expenses, and recorded an impairment on term license agreements, as described further below.

The following table presents restructuring and related costs (credits) included in cost of revenue and operating expenses in the accompanying consolidated statements of operations under the 2017 Restructuring Plan (in thousands):

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	Three Months Ended					Six Months Ended
	June 30, 2018					June 30, 2018
	Cost of Revenue		Operating Expenses			Cost of Revenue		Operating Expenses
Severance and related expenses	$	26	$	900		$	43	$	1,845
Facilities	—		47			—		(1,037		)
Asset impairment	—		(50		)	—		(74		)
License impairment	—		783			—		783
Total	$	26	$	1,680		$	43	$	1,517

Restructuring liabilities are reported within accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets (in thousands):



	December 30, 2017		Charges (Credits)			Cash			Non-cash Settlements and Other			June 30, 2018
	December 30, 2017		Charges (Credits)			Cash			Non-cash Settlements and Other			June 30, 2018
Severance and related expenses	$	3,672	$	1,888		$	(4,029	)	$	—		$	1,531
Facilities	6,947		(1,037		)	(998		)	(40		)	4,872
Asset impairment	—		(74		)	—			74			—
License impairment	—		783			—			(96		)	687
Total	$	10,619	$	1,560		$	(5,027	)	$	(62	)	$	7,090

During the first half of 2018, the Company revised its estimates related to its facilities closures due to the sublease of two restructured facilities and also recorded severance costs for additional impacted employees. Additionally, the Company recorded an impairment of $0.8 million related to 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. As of June 30, 2018, the Company's restructuring liability was comprised of $4.9 million related to facility closures, with leases through January 2022, and $1.5 million of severance and related expenses, which are expected to be substantially paid by the second quarter of 2019.


9.	Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive income (loss) by component for the six months ended June 30, 2018 (in thousands):



	Unrealized Loss on Other Available-for-Sale Securities			Foreign Currency Translation			Accumulated Tax Effect			Total
Balance at December 30, 2017	$	(418	)	$	7,551		$	(879	)	$	6,254
Net current-period other comprehensive loss	99			(28,311		)	(26		)	(28,238		)
Balance at June 30, 2018	$	(319	)	$	(20,760	)	$	(905	)	$	(21,984	)

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10.	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 restricted stock units (“RSUs”) and performance stock units (“PSUs”), and assumed issuance of common stock under the Company's Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of the $150.0 million in aggregate principal amount of 1.75% convertible senior notes due June 1, 2018 (the “Notes”) from the conversion spread (as further discussed in Note 11, “Convertible Senior Notes” to the Notes to Condensed Consolidated Financial Statements disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017). The Company includes the common shares underlying PSUs in the calculation of diluted net income per share only when they become contingently issuable.

The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):



	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Net loss	$	(21,938	)	$	(42,839	)	$	(48,218	)	$	(83,290	)
Weighted average common shares outstanding - basic and diluted	152,259			147,538			151,296			146,662
Net loss per common share - basic and diluted	$	(0.14	)	$	(0.29	)	$	(0.32	)	$	(0.57	)

The Company incurred net losses during the three and six months ended June 30, 2018 and July 1, 2017, and as a result, potential common shares from stock options, RSUs, PSUs, assumed release of outstanding shares under the ESPP and assumed conversion of the Notes from the conversion spread were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive.

The following 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):



	Three Months Ended		Six Months Ended
	June 30, 2018	July 1, 2017	June 30, 2018	July 1, 2017
Stock options	1,118	1,407	1,153	1,521
RSUs	7,579	6,500	8,509	7,137
PSUs	1,242	1,464	1,394	1,439
ESPP shares	—	892	1,124	923
Total	9,939	10,263	12,180	11,020


11.	Convertible Senior Notes

In May 2013, the Company issued the Notes, which matured on June 1, 2018. Upon maturity of the 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):

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Principal	$	150,000
Unamortized discount	(4,670		)
Unamortized issuance cost	(402		)
Net carrying amount	$	144,928

As of December 30, 2017, the carrying amount of the equity component of the Notes was $43.3 million.

The following table sets forth total interest expense recognized related to the Notes (in thousands):



	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Contractual interest expense	$	438	$	656	$	1,094	$	1,313
Amortization of debt issuance costs	163		222		402		437
Amortization of debt discount	1,892		2,577		4,671		5,091
Total interest expense	$	2,493	$	3,455	$	6,167	$	6,841

The coupon rate was 1.75%. For the three and six months ended June 30, 2018 and July 1, 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 Notes.


12.	Stockholders’ Equity

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.

In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan (“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 June 30, 2018, the Company has 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 Company’s 2007 Equity Incentive Plan (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 2007 Plan was canceled; however, it continues to govern outstanding grants under the 2007 Plan.

The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data):



	Number of Stock Options		Weighted-Average Exercise Price Per Share		Aggregate Intrinsic Value
Outstanding at December 30, 2017	1,397		$	8.11	$	1
Stock options granted	—		$	—
Stock options exercised	(226	)	$	7.44	$	489
Stock options canceled	(53	)	$	11.57
Outstanding at June 30, 2018	1,118		$	8.08	$	2,062
Exercisable at June 30, 2018	1,118		$	8.08	$	2,062

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	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 30, 2017	6,791		$	11.55	$	42,988
RSUs granted	3,344		$	10.92
RSUs released	(2,021	)	$	13.12	$	22,849
RSUs canceled	(535	)	$	11.32
Outstanding at June 30, 2018	7,579		$	10.87	$	75,257



	Number of Performance Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 30, 2017	1,367		$	16.28	$	8,651
PSUs granted	505		$	15.87
PSUs released	(28	)	$	15.93	$	273
PSUs canceled	(602	)	$	15.98
Outstanding at June 30, 2018	1,242		$	16.26	$	12,334
Expected to vest at June 30, 2018	1,054				$	10,466

The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $9.93 at June 29, 2018 (the last trading day of the fiscal quarter) and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that 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 $9.93 at June 29, 2018 (the last trading day of the fiscal quarter). 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 June 30, 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):



	Unrecognized Compensation Expense, Net		Weighted- Average Period (in years)
RSUs	$	71,263	2.8
PSUs	$	11,423	1.7

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Employee Stock Options

The Company did not grant any stock options during the three and six months ended June 30, 2018. Amortization of stock-based compensation related to stock options in the three and six months ended June 30, 2018 and the corresponding periods in 2017 was insignificant.

Employee Stock Purchase Plan

The fair value of the shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):



	Three Months Ended		Six Months Ended
Employee Stock Purchase Plan	June 30, 2018	July 1, 2017	June 30, 2018	July 1, 2017
Volatility	62%	51%	62%	51%
Risk-free interest rate	1.90%	0.81%	1.90%	0.81%
Expected life	0.5 years	0.5 years	0.5 years	0.5 years
Estimated fair value	$3.13	$3.46	$3.13	$3.46
Total stock-based compensation expense	$1,337	$1,392	$2,892	$3,073

Restricted Stock Units

During the three and six months ended June 30, 2018, the Company granted RSUs to employees and members of the Company's board of directors to receive 0.2 million shares and 3.3 million shares of the Company’s common stock, respectively. 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 related to RSUs in the three and six months ended June 30, 2018 was approximately $8.0 million and $15.4 million, respectively, and was $8.4 million and $16.0 million in the corresponding periods of 2017, respectively.

Performance Stock Units

Pursuant to the 2007 Plan and the 2016 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and other 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.

PSUs granted to the Company’s executive officers and senior management under the 2007 Plan during 2016 are based on the total stockholder return (“TSR”) of the Company's common stock price as compared to the TSR 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.

PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during 2017 and the first half of 2018 are based on the TSR of the Company's common stock price relative to the TSR of the individual companies listed in the 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 individual companies listed in the SPGIIPTR.

The ranges of estimated values of the PSUs granted that are compared to the index, as well as the assumptions used in calculating these values were based on estimates as follows:



	2018	2017	2016
Index	SPGIIPTR	SPGIIPTR	SPGIIPTR
Index volatility	33%	33% - 34%	18%
Infinera volatility	58% - 59%	55% - 56%	55%
Risk-free interest rate	2.37% - 2.40%	1.41% - 1.63%	0.95% - 1.07%
Correlation with index/index component	0.04 - 0.48	0.10 - 0.49	0.58 - 0.59
Estimated fair value	$14.99 - $19.46	$15.23 - $17.35	$10.31 - $16.62

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In addition, certain other PSUs granted to the Company’s executive officers, senior management and certain other employees will only vest upon the achievement of specific financial or operational performance criteria.

The following table summarizes by grant year, the Company’s PSU activity for the six months ended June 30, 2018 (in thousands):



			Grant Year
	Total Number of Performance Stock Units		2015		2016		2017		2018
Outstanding at December 30, 2017	1,367		77		420		869		—
PSUs granted	505		—		—		—		505
PSUs released	(28	)	—		(28	)	—		—
PSUs canceled	(602	)	(77	)	(194	)	(331	)	—
Outstanding at June 30, 2018	1,242		—		198		538		505

Amortization of stock-based compensation related to PSUs in the three and six months ended June 30, 2018 was approximately $2.6 million and $4.7 million, respectively, and was $2.8 million and $4.6 million in the corresponding periods of 2017, respectively.

Stock-Based Compensation

The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):



	June 30, 2018		December 30, 2017
Stock-based compensation effects in inventory	$	5,222	$	5,255



	Three Months Ended				Six Months Ended
	June 30, 2018		July 1, 2017		June 30, 2018		July 1, 2017
Stock-based compensation effects included in net loss before income taxes
Cost of revenue	$	624	$	834	$	502	$	1,558
Research and development	4,192		4,184		8,516		7,964
Sales and marketing	3,046		3,273		5,944		5,999
General and administration	2,767		2,852		5,534		5,392
	$	10,629	$	11,143	$	20,496	$	20,913
Cost of revenue – amortization from balance sheet ⁽¹⁾	1,415		1,237		2,531		2,344
Total stock-based compensation expense	$	12,044	$	12,380	$	23,027	$	23,257


⁽¹⁾	Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.


13.	Income Taxes

Benefit from income taxes for the three and six months ended June 30, 2018 were $0.1 million and $0.8 million, respectively, on pre-tax losses of $22.1 million and $49.0 million, respectively. This compared to a benefit from income taxes of $0.5 million and $0.7 million, respectively, on pre-tax losses of $43.4 million and $84.0 million for the three and six months ended July 1, 2017, respectively. Benefit from income taxes decreased by approximately $0.4 million in the three months ended June 30, 2018 as a result of higher foreign tax expense, as compared to the corresponding period in 2017. Benefit from income taxes increased by $0.1 million relating to higher forecasted tax expense incurred ratably through the six months ended June 30, 2018, offset by the release of tax reserves due to statute of limitations expiration. Due to the Company’s current operating losses and tax loss carryforwards in the United States and cost-plus international structures outside of Sweden, the tax expense or benefit is less sensitive to pretax income or loss than would otherwise be expected, compared to the statutory tax rate.

In all periods, the tax expense and benefit projected in the Company's effective tax rate assumptions primarily represents foreign taxes of the Company's overseas subsidiaries compensated on a cost-plus basis, as well as the results of the Company's Swedish operations, inclusive of purchase accounting amortization and other charges for the three and six months ended June 30, 2018.

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. In the past, the Company established a valuation allowance against its deferred tax assets as it determined that its ability to recover the value of these assets did not meet the “more-likely-than-not” standard. 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 on an on-going basis to determine whether it needs to maintain the valuation allowance recorded against its net deferred tax assets. The Company must consider all positive and negative evidence, including its 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 valuation allowance against its net U.S. deferred tax assets. At June 30, 2018, the Company does not believe that it is more-likely-than-not that it would be able to utilize its domestic deferred tax assets in the foreseeable future. Accordingly, the domestic net deferred tax assets continued to be fully reserved with a valuation allowance. To the extent that the Company determines that deferred tax assets are realizable on a more-likely-than-not basis, and 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.

The Company reasonably estimated the impact of the Tax Act on its income tax provision for the year ended December 30, 2017, based on its understanding of the Tax Act and guidance at that time. The estimates are subject to adjustment during a measurement period not to extend beyond one year from the enactment date of the Tax Act, or by December 22, 2018. During the three and six months ended June 30, 2018, no adjustments to prior year estimates were made. Adjustments may be made during the measurement period subject to refinement of the Company's analysis and further technical guidance.


14.	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.

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The following table sets forth long-lived assets by geographic region (in thousands):



	June 30, 2018		December 30, 2017
United States	$	129,632	$	128,582
Other Americas	1,237		661
Europe, Middle East and Africa	3,235		3,527
Asia Pacific	2,665		3,172
Total property, plant and equipment, net	$	136,769	$	135,942

For information regarding revenue disaggregated by geography, see Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements.


15.	Guarantees

Product Warranties

Activity related to product warranty was as follows (in thousands):



	Three Months Ended						Six Months Ended
	June 30, 2018			July 1, 2017			June 30, 2018			July 1, 2017
Beginning balance	$	30,848		$	35,980		$	30,909		$	40,342
Charges to operations	5,166			5,022			9,523			9,681
Utilization	(4,067		)	(3,901		)	(8,505		)	(7,289		)
Change in estimate⁽¹⁾	(1,710		)	(4,701		)	(1,690		)	(10,334		)
Balance at the end of the period	$	30,237		$	32,400		$	30,237		$	32,400

⁽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 the first quarter of 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 $3.8 million of standby letters of credit and bank guarantees outstanding as of June 30, 2018 that consisted of $1.9 million related to customer performance guarantees, $1.2 million related to value added tax and customs' licenses, and $0.7 million related to property leases. The Company had $4.2 million of standby letters of credit and bank guarantees outstanding as of December 30, 2017 that consisted of $2.2 million related to customer performance guarantees, $1.3 million related to a value added tax license and $0.7 million related to property leases.

As of June 30, 2018 and December 30, 2017, the Company had a line of credit for approximately $1.6 million and $1.6 million, respectively, to support the issuance of letters of credit, of which zero and zero had been issued and outstanding, respectively. The Company has pledged approximately $5.0 million and $5.2 million of assets of a subsidiary to secure this line of credit and other obligations as of June 30, 2018 and December 30, 2017, respectively.

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16.	Litigation and Contingencies

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”) (colle