UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED JUNE 30, 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: 000-30684
OCLARO, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-1303994 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
225 Charcot Avenue, San Jose, California 95131
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, Par Value $0.01 Per Share | NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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 the 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 | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | 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 ¨ No x
The aggregate market value of the common stock held by non-affiliates of the registrant was $1,118,267,127 based on the last reported sale price of the registrant’s common stock on December 29, 2017 as reported by the NASDAQ Global Select Market ($6.74 per share). As of August 13, 2018, there were 170,687,418 shares of common stock outstanding.
OCLARO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2018
TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (the “Annual Report”) and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our future expectations, plans or prospects and our business. You can identify these statements by the fact that they do not relate strictly to historical or current events, and contain words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “intend,” “plan,” “believe,” “will,” “should,” “outlook,” “could,” “target,” “model,” "objective," and other words of similar meaning in connection with discussion of future operating or financial performance. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. There are a number of important factors that could cause our actual results or events to differ materially from those indicated by such forward-looking statements, including (i) the risk that our pending merger with Lumentum Holdings Inc. does not close, due to the failure of one or more conditions to closing, (ii) disruption from the merger making it more difficult to maintain our customer, supplier, key personnel and other strategic relationships, (iii) uncertainty as to the market value of the Lumentum merger consideration to be paid in the merger, (iv) the risk that required governmental approvals of the merger (including China antitrust approval) will not be obtained or that such approvals will be delayed beyond current expectations, (v) the risk of litigation in respect of either Oclaro or Lumentum or the merger, (vi) our dependence on a limited number of customers for a significant percentage of our revenues, (vii) competition and pricing pressure, (viii) our ability to effectively manage our inventory, (ix) the absence of long-term purchase commitments from many of our long-term customers, (x) our ability to meet or exceed our gross margin expectations, (xi) the effects of fluctuations in foreign currency exchange rates, (xii) our ability to obtain governmental licenses and approvals for international trading activities or technology transfers, including export licenses, (xiii) our ability to timely develop, commercialize and ramp the production of new products to customer required volumes, (xiv) our ability to respond to evolving technologies, customer requirements and demands, and product design challenges, (xv) the effect of tariffs or other restrictions on trade between the U.S. and China, (xvi) our dependence on a limited number of suppliers and key contract manufacturers, (xvii) our ability to grow our revenues in the future by increasing the percentage of sales associated with new products, (xviii) our manufacturing yields, (xix) our ability to conclude agreements with our customers on favorable terms, (xx) the impact of additional restructuring charges we may take in the future, (xxi) our ability to maintain effective internal controls over financial reporting, (xxii) the risks associated with delays, disruptions or quality control problems in manufacturing, (xxiii) fluctuations in our revenues, growth rates and operating results, (xxiv) changes in our effective tax rates or outcomes of tax audits or similar proceedings, (xxv) the impact of financial market and general economic conditions in the industries in which we operate and any resulting reduction in demand for our products, (xxvi) potential operating or reporting disruptions that could result from the implementation of our new enterprise resource planning system, and (xxvii) other factors described under the caption "Risk Factors" and elsewhere in the documents we periodically file with the SEC. We cannot guarantee any future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements, except as required by law. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in forward-looking statements are identified in the sections captioned "Business," "Risk Factors," and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K and the documents incorporated herein by reference.
As used herein, “Oclaro,” “we,” “our,” and similar terms include Oclaro, Inc. and its subsidiaries, unless the context indicates otherwise.
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PART I
Item 1. Business
Overview of Oclaro
During our fiscal year 2018, we were one of the leading providers of optical components and modules for the long-haul, metro and data center markets. Leveraging more than three decades of laser technology innovation and photonics integration, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
Corporate Information
We were incorporated in Delaware in June 2004. On September 10, 2004, we became the publicly traded parent company of the Oclaro Technology Ltd (formerly Bookham Technology plc) group of companies, including Oclaro Technology Ltd, a limited company incorporated under the laws of England and Wales whose stock was previously traded on the London Stock Exchange and the NASDAQ National Market under the Bookham name. Effective January 3, 2011, our common stock was traded on the NASDAQ Global Select Market under the symbol “OCLR.”
Our principal executive offices are located at 225 Charcot Avenue, San Jose, California 95131, and our telephone number at that location is (408) 383-1400. We maintain a web site with the address www.oclaro.com. Our website includes links to our Code of Business Conduct and Ethics and our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee charters. We did not waive any provisions of our Code of Business Conduct and Ethics during the year ended June 30, 2018. We are not including the information contained in our website or any information that may be accessed through our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after such material is electronically filed with, or furnished to, the Securities and Exchange Commission ("SEC"). Any document we file with the SEC, may be inspected, without charge, at the SEC’s public reference room at 100 F Street NE, Washington, DC 20549 or may be obtained by calling the SEC at 1-800-SEC-0330 or at the SEC’s internet address at http://www.sec.gov (the information contained in the SEC’s website is not intended to be a part of this filing).
Our Business
We are a supplier of core optical network technology to leading telecommunications and data communications ("datacom") equipment companies and to data center and network operators worldwide. We primarily target communications equipment manufacturers that integrate our optical technology into the switching, routing and transport systems they offer to the global service and content providers that are building, upgrading and operating high-performance optical networks. Service and content providers are increasingly demanding greater levels of network capacity from their communications equipment suppliers, our primary customers, in order to meet their rapidly growing network bandwidth requirements. This capacity need is being driven by bandwidth intensive applications and devices that are at the access or edge of the network, such as all forms of mobile devices, streaming video, social media and cloud computing.
The optical communications market has started to expand beyond a small number of very large service providers, and is now transitioning to a variety of open and captive networks created solely for in house use by large video services, search engines and companies offering a variety of cloud computing services. We believe that the trend toward an increase in demand for optical solutions, which increase network capacity, is in response to growing bandwidth demand driven by increased transmission of video, voice and data over optical communications networks. Service providers also seek to decrease the total cost of ownership of their networks. Many of our advanced optical solutions are implemented in emerging network architectures, helping to provide a level of flexibility and responsiveness that enables savings in both operational and capital expenses. The rapid development of network infrastructure underway in developing countries is also driving growth in demand for optical solutions. Increasingly, internet content providers with their own wide area networks have similar requirements and are also becoming customers for our optical network products. We design, manufacture and market optical components and modules that generate, modulate and detect light signals in optical communications networks. During fiscal year 2018, we were a leading supplier of optical products at the component level, including fixed and tunable lasers, external modulators, integrated lasers and modulators and receivers. During fiscal year 2018, we were also a leading supplier of products at the module level, including transceivers. Many of our products enable increased flexibility in optical communications networks, making the networks more dynamic in nature. We supply transmission products at the component level and the module level into 10 gigabits per second ("Gb/s"), 100 Gb/s, 200 Gb/s and 400 Gb/s optical communications solutions.
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Additionally, in datacom, enterprises and institutions such as data centers have grown in complexity as they manage the rapidly escalating demands for increased bandwidth and diverse types of data driven through the consumerization of information technology and the transition to Software as a Service ("SaaS") services. These next generation architectures, such as hyperscale data centers, require very high speed interconnects to support intensive data traffic within and between data centers. The providers of hyperscale data centers are upgrading and deploying their own high speed local, storage and wide-area networks, also called LANs, SANs and WANs, respectively. These deployments increase the ability to utilize high-bandwidth applications that are growing in importance to their organizations and also increase utilization across telecommunications networks as this traffic leaves the LANs, SANs and WANs and travels over the network service providers’ edge and core networks. We are a leading supplier of client-side and short reach optical transceivers and lasers operating over single-mode fiber at 10 Gb/s, 25 Gb/s and 100-400 Gb/s into datacom and enterprise solutions.
Furthermore, the increasing need for bandwidth to the home, particularly in the Multi Service Operators (cable) ("MSO") networks globally, requires a network architecture shift away from analog to a digital infrastructure. Remote Phy is seen as an efficient way to enable MSO’s to offer new and differentiated high bandwidth services. Our tunable transceivers provide significant operational savings to cable operators as they transition to a digital architecture.
Demand for mobile connectivity is increasing rapidly across a growing range of devices, from phones to tablet computers. Mobile infrastructure providers wishing to enable consumers to use bandwidth intensive applications such as video streaming must implement optical solutions from the mast head to a remote terminal and/or central office. We are a supplier of optical transceivers at speeds up to 100 Gb/s into the wireless 3G, 4G and fronthaul and backhaul markets, as well as supplying transceivers for initial field trials and deployment of 5G networks.
For the years ended June 30, 2018, July 1, 2017 and July 2, 2016, our revenues were $543.2 million, $601.0 million and $407.9 million, respectively. We had net income of $62.5 million, $127.9 million and $8.6 million for the years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively. As of June 30, 2018, July 1, 2017 and July 2, 2016, our total assets were $720.8 million, $665.1 million and $359.0 million, respectively.
Merger
On March 11, 2018, Lumentum Holdings Inc., a Delaware corporation (“Lumentum”), Oclaro, Prota Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Lumentum (“Merger Sub”), and Prota Merger, LLC, a Delaware limited liability company and a wholly owned subsidiary of Lumentum (“Merger Sub LLC”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, the acquisition of Oclaro will be accomplished through a merger of Merger Sub with and into Oclaro (the “First Step Merger”) with Oclaro surviving the First Step Merger. As soon as reasonably practicable following the First Step Merger, Oclaro will merge with and into Merger Sub LLC with Merger Sub LLC continuing as the surviving entity and a wholly owned subsidiary of Lumentum (the “Second Step Merger,” and taken together with the First Step Merger, the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the terms and conditions set forth therein, at the effective time of the First Step Merger (the “Effective Time”), each share of the common stock of Oclaro (the “Oclaro Common Stock”) issued and outstanding immediately prior to the Effective Time (other than (x) shares of Oclaro Common Stock owned by Lumentum, Oclaro, or any direct or indirect wholly owned subsidiary of Lumentum or Oclaro or (y) shares of Oclaro Common Stock owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law, in each case immediately prior to the Effective Time, will be cancelled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):
(A) $5.60 in cash, without interest (the “Cash Consideration”), plus
(B) 0.0636 of a validly issued, fully paid and nonassessable share of the common stock of Lumentum, par value $0.001 per share (“Lumentum Common Stock”) (such ratio, the “Exchange Ratio”).
With regard to the Merger Consideration, if the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all Lumentum Common Stock which may be issued in the future pursuant to the conversion of Oclaro Options, Oclaro Restricted Stock Units, or Oclaro Restricted Stock (as defined below) would exceed 19.9 percent of the Lumentum Common Stock issued and outstanding immediately prior to the Effective Time (the “Stock Threshold”), (A) the Exchange Ratio will be reduced to the minimum extent necessary (rounded down to the nearest one thousandth) such that the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all shares of Lumentum Common Stock which may be issued after the Effective Time pursuant to company compensatory awards) does not exceed the Stock Threshold and (B) the Cash Consideration for all purposes will be increased on a per share basis by an amount equal to $68.975, multiplied by the difference between the initial Exchange Ratio and the Exchange Ratio.
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Each Oclaro restricted stock unit award (an “Oclaro RSU”) that does not become vested at the closing will be converted into a Lumentum restricted stock unit award (a “Lumentum RSU”) with the same terms and conditions, including vesting, that were applicable to such Oclaro RSU, except that the number of Lumentum shares subject to the Lumentum RSU will equal the product of (i) the number of Oclaro shares subject to such Oclaro RSU (with any performance milestones deemed achieved based on the maximum level of achievement) multiplied by (ii) the sum of (A) the Exchange Ratio plus (B) the quotient obtained by dividing the Cash Consideration by Lumentum’s average closing price of the 10 trading days ending on the third trading day prior to the closing (such sum, the “Equity Award Exchange Ratio”), rounded down to the nearest whole share.
Each Oclaro stock option (an “Oclaro Option”), whether vested or unvested, will be converted into a Lumentum stock option (a “Lumentum Option”) with the same terms and conditions, including vesting, that were applicable to such Oclaro Option, except that (i) the number of shares subject to the Lumentum Option will equal the product of (A) the number of Oclaro shares subject to such Oclaro Option multiplied by (B) the Equity Award Exchange Ratio, rounded down to the nearest whole share and (ii) the exercise price of the Lumentum Option will equal (A) the exercise price per share of the Oclaro Option divided by (B) the Equity Award Exchange Ratio, rounded up to the nearest whole cent. Notwithstanding the foregoing, any Oclaro Option that is held by an individual who is not an Oclaro employee as of immediately prior to the closing will be cancelled and converted into the Merger Consideration for each net option share covered by such Oclaro Option, subject to applicable withholding taxes.
In addition, each Oclaro restricted stock award (“Oclaro Restricted Stock Award”) and Oclaro RSU that becomes vested as of immediately prior to the closing (including each Oclaro Restricted Stock Award held by a non-employee director) will be converted into the right to receive the Merger Consideration in respect of each Oclaro share underlying such award, subject to applicable withholding taxes. Each Oclaro stock appreciation right (“Oclaro SAR”) will be cancelled and converted into the right to receive a cash amount equal to the product of (i) the number of Oclaro shares subject to the Oclaro SAR multiplied by (ii) the positive difference of (A) the cash equivalent value of the Merger Consideration less (B) the strike price of the Oclaro SAR, subject to applicable withholding taxes.
If Lumentum determines that the treatment of Oclaro equity awards described above would violate, in respect of the holder thereof, the applicable laws of a non-U.S. jurisdiction, Lumentum may treat such Oclaro equity award in a different manner so long as such treatment is no less favorable to the holder of such Oclaro equity award.
The Boards of Directors of Lumentum and Oclaro have unanimously approved the Merger and the Merger Agreement. The transaction is subject to customary closing conditions, including the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and under applicable anti-trust laws in China, the effectiveness of a registration statement on Form S-4 registering the shares of Lumentum common stock to be issued in connection with the Merger, and approval of the Merger Agreement by the holders of a majority of the outstanding shares of Oclaro Common Stock. The transaction is not subject to any financing condition. On April 4, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act. On July 10, 2018, Oclaro's stockholders approved the Merger Agreement.
The Merger Agreement contains customary representations, warranties and covenants of Lumentum, Oclaro, Merger Sub and Merger Sub LLC, including, (i) covenants by Oclaro concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (ii) covenants by Lumentum concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (iii) a covenant by Oclaro that, subject to certain exceptions, the Board of Directors of Oclaro will recommend to its shareholders adoption of the Merger Agreement, and (iv) a covenant that Oclaro will not solicit, initiate, or knowingly encourage, facilitate or induce the making of inquiry, offer or proposal that would reasonably be expected to lead to any Acquisition Proposal (as defined in the Merger Agreement). The Merger Agreement contains certain termination rights for both Lumentum and Oclaro and further provides that upon termination of the Merger Agreement under specified circumstances (including termination by Oclaro to accept a superior proposal), Oclaro may be required to pay Lumentum a termination fee of $63 million. The Merger Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals, Lumentum may be required to pay Oclaro a termination fee of $80 million.
During the year ended June 30, 2018, we recorded acquisition-related costs of $4.3 million in restructuring, acquisition and related (income) expense, net, within our consolidated statements of operations.
Competitive Differentiation
We believe that demonstrating the following competitive strengths continues to be important to maintain and reinforce our position as a leading provider of core optical network components, modules and subsystems:
• | Optical Technology Leadership. We have extensive expertise in optical technologies including optoelectronic devices, electronics design, firmware and software capabilities. Our expertise includes optoelectronic devices utilizing indium phosphide ("InP") and Lithium Niobate substrates. As of June 30, 2018, we have approximately 1,000 issued patents. |
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Our intellectual property ("IP") portfolio represents a significant investment in the optical industry over the past 30 years. We believe our commitment to the optical industry and our IP and know-how represents a differentiated value proposition for our customers. We are a leading supplier in many of our metro and long-haul telecom and 100 Gb/s datacom product markets.
• | Leading Photonic Integration Capabilities. Photonic integration, which is the combination of multiple functions on a single InP chip, is an important source of differentiation. Photonic integration can reduce the number of component elements, and thus the cost, of a solution, reduce the footprint of the required functionality, reduce the complexity of the corresponding integration of component elements and reduce overall power consumption of the related functionality. Our wafer fabrication facilities and process technologies position us to be a leader in delivering photonic integration. We believe that photonic integration will enable us to capture additional value in the optical network supply chain as customers demand increasing product integration, speed and complexity to build the next generation network. |
• | Vertically Integrated Approach. Our wafer fabrication facilities in the U.K., Japan and Italy position us to introduce product innovations delivering optical network cost and performance advantages to our customers. We believe that the combination of our in-house control of the product life-cycle process with the scalability and flexibility of our contract manufacturers enables us to respond more quickly to changing customer requirements, allowing our customers to reduce the time it takes them to deliver products to market. We operate back-end assembly and test facilities in China and Japan. We believe that our ability to deliver innovative technologies in a variety of vertical form factors, ranging from chip level to module level to subsystem level, allows us to address the needs of a broad base of potential customers regardless of their desired level of product integration or complexity. |
• | Flexibility and Responsiveness to Customers. We believe that providing innovative solutions to enhance our customers’ ease of doing business is critical to success, and this is at the core of our strategy. This includes exhibiting high standards of flexibility and quality and the ability to provide products ranging from standard components to advanced modules designed in partnership with our customers. We are a leading supplier of optical products at the component level, including fixed wavelength and tunable lasers, external modulators, integrated lasers and modulators and receivers. We are also a leading supplier of products at the module level, primarily in the form of transceivers, transponders or daughter cards. |
Business Strategy
We continue to pursue the following business strategies:
• | Maintain Focus on Communications Networks. We are positioned as a key strategic supplier to the major telecommunications equipment, data communications, cable and wireless equipment companies and intend to continue to focus on enabling our customers to build equipment for the implementation of next generation core optical networks. Our optical IP and development expertise provides us with optical network insights that enable us to partner with our customers to continue to develop and deliver innovative optical solutions. We plan to continue to work with our customers to develop key technologies and expand our product offerings across the optical network. |
• | Capture Share in New and Emerging Web 2.0, Data Center, Cable and Wireless Markets. The emerging data center and Web 2.0 markets are two of the fastest growing segments in optical communications, both in terms of capital network equipment investment and growth of high data rate optical transceivers. To support the higher data rates needed, single mode fiber is the connectivity media of choice for greenfield data centers, maximizing the operators’ return on investment. The transition from analog to digital networks architecture in the CATV and increased bandwidth needs for 5G wireless applications will drive growth in tunable and high speed optical modules. We believe we are ideally positioned with our technology to support a broad portfolio of high speed discrete lasers, receivers, optical sub-assemblies and transceivers, and supporting these market segments is a key strategic initiative for us as we move forward. |
• | Extend Optical Product Differentiation. We plan to continue to invest in optical innovation in order to power the infrastructure required to serve the rapidly growing demand for bandwidth. Our photonic integration capability enables additional functionality of our products and we plan to continue to leverage this advantage to advance the implementation of optical technologies in the network. We also plan to evaluate acquisitions of and investments in complementary businesses, products or technologies in order to continuously improve our solutions for customers. |
• | Match Global Engineering and Manufacturing Resources with Customer Demands. We believe our global engineering and manufacturing infrastructure enables us to deliver cost-effective solutions for our customers and meet our time to market objectives. Our use of contract manufacturers, primarily in Southeast Asia, to augment our internal manufacturing capabilities, provides us with an effective cost base and enables us to dynamically manage our production in the face of varying customer demand. We continually evaluate the capabilities of additional potential contract manufacturing partners to ensure we have a scalable and cost effective manufacturing strategy appropriate for achieving our business objectives over a long-term horizon. |
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• | Expand Position with Tier One Customers Through Technology Innovation and Manufacturing Flexibility. We believe we are a market leader in many of the market segments we address. Our combination of technology innovation and manufacturing flexibility is designed to enable us to deliver low-latency, high-performance products to our customers. We believe our customer-centric strategy will enable us to continue to gain share in our markets by innovating in partnership with our customers and delivering cost-effective solutions to them. |
• | Make Strategic Investments, Acquisitions and Divestitures to Maintain an Optical Leadership Position. Our industry has historically been fragmented and characterized by large numbers of competitors, but in recent years has experienced increasing levels of consolidation. In addition to our internal development capabilities, we have used acquisitions as a means to enhance our scale, obtain critical technologies and enter new markets. We have historically expanded our business through acquisitions where we have seen an opportunity to enhance scale, broaden our product offerings or integrate new technology. Our July 2012 acquisition of Opnext, Inc. ("Opnext") was consistent with this strategy. In addition, we have participated in significant merger and acquisition activities in the past, including our merger with Avanex in April 2009. The divestitures of our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) in September 2013, our optical amplifier and micro-optics business (the "Amplifier Business") in November 2013 and our industrial and consumer business based in Komoro, Japan (the "Komoro Business") in October 2014 were examples of transactions that enabled us to maintain strategic competitive focus. |
Our Product Offerings
• | Client Side Transceivers. Our pluggable transceiver portfolio includes fixed wavelength XFP and SFP+ at 10 Gb/s; SFP28 at 25 Gb/s; CFP, CFP2, CFP4 and QSFP28 at 100 Gb/s; and CFP8 at 400 Gb/s. These package form factors support different link distances based on different optical connectors and media types, in both industry standard and proprietary optical specifications. These link distances typically go from 2 kilometers to 80 kilometers, depending on the laser and receiver technology utilized. |
• | Line Side Transceivers. We believe the photonic integration of our internal components represents a differentiator and a competitive advantage in our 10 Gb/s tunable XFP and tunable SFP+ products, particularly for remote phy applications. We were the first company to supply coherent CFP2 transceivers at 100 Gb/s and 200 Gb/s. Our internal device and sub-assembly technology enables our customers to provide coherent pluggable 100 Gb/s and 200 Gb/s solutions for metro and long haul networks. |
• | Tunable laser transmitters. Our tunable laser products include discrete lasers and co-packaged laser modulators to optimize performance and reduce the size of the product. Our tunable products at the component level include a 10 Gb/s tunable optical sub assembly, a 10 Gb/s co-packaged tunable laser and mach-zender modulator, and a narrow line width laser assembly. They also include an integrated tunable laser assembly ("iTLA") and a 100 Gb/s or 200 Gb/s tunable laser assembly plus modulator ("iTXA"). We are in production of our micro-iTLA and iTXA, tunable laser products which are suitable for 100 Gb/s and 200 Gb/s systems. |
• | Lithium niobate modulators. Our lithium niobate external modulators are optical devices that manipulate the phase or the amplitude of an optical signal. Their primary function is to transfer information on an optical carrier by modulating the light. These devices externally modulate the lasers of discrete transmitter products including, but not limited to, our own standalone laser products. We supply 100 Gb/s, 200 Gb/s and 400 Gb/s modulators for coherent applications. |
• | Transponder modules. Our transponder modules provide both transmitter and receiver functions. A transponder includes electrical circuitry to control the laser diode and modulation function of the transmitter as well as the receiver electronics. We develop Coherent pluggable modules at 100 Gb/s, 200 Gb/s, 400 Gb/s and 1.2 Tb/s transmission rates. We believe the photonic integration of our internal componentry can represent a differentiator and a competitive advantage in certain of these products. |
• | Discrete lasers and receivers. Our portfolio of discrete receivers for metro and long-haul applications includes 10 Gb/s XMD PIN and avalanche photodiode ("APD") receivers, 10 Gb/s coplanar receivers in PIN and APD configurations and 20 Gb/s balanced receivers. We also supply distributed feedback ("DFB") and Electro-absorption modulated (“EML”) laser dies at 10 Gb/s and 25 Gb/s. |
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The following table sets forth our revenues by product group for the periods indicated:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
100 Gb/s + transmission modules | $ | 422,699 | $ | 457,975 | $ | 228,619 | |||||
40 Gb/s and lower transmission modules | 120,471 | 142,993 | 179,295 | ||||||||
$ | 543,170 | $ | 600,968 | $ | 407,914 | ||||||
Customers, Sales and Marketing
We believe it is essential to maintain a comprehensive and capable sales and marketing organization. As of June 30, 2018, our sales and marketing organization, which included our direct sales force, customer service, marketing communications and product line specific marketing employees, totaled 75 people in Canada, China, Germany, Italy, Japan, Malaysia, the United Kingdom and the United States. In addition to our direct sales and marketing organization, we also sell and market our products through international sales representatives and resellers that extend our commercial reach to smaller geographic locations and customers that are not currently covered by our direct sales and marketing efforts.
Many of our products typically have a long sales cycle. The period of time from our initial contact with a customer to the receipt of an actual purchase order is frequently a year or more. In addition, many customers perform, and require us to perform, extensive process and product evaluation and testing of components before entering into purchase arrangements.
We offer support services in connection with the sale and purchase of certain products, primarily consisting of customer service and technical support. Customer service representatives assist customers with orders, warranty returns and other administrative functions. Technical support engineers provide customers with answers to technical and product-related questions. Technical support engineers also provide application support to customers who have incorporated our products into custom applications.
Our customers include Amazon.com, Inc.; Ciena Corporation ("Ciena"); Cisco Systems, Inc. ("Cisco"); Coriant GmbH ("Coriant"); Google Inc.; Huawei Technologies Co. Ltd ("Huawei"); InnoLight Technology Corporation; Juniper Networks, Inc.; Nokia/Alcatel-Lucent; and ZTE Corporation ("ZTE").
For the fiscal year ended June 30, 2018, Nokia accounted for 17 percent, Ciena accounted for 13 percent, Cisco accounted for 13 percent and Huawei accounted for 11 percent of our revenues.
Our customers are primarily network equipment manufacturers of telecommunications and datacom systems, hyperscale data center operators and datacom module manufacturers.
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The following table sets forth our revenues by geographic region for the periods indicated, determined based on the country or region to which the products were shipped:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Asia-Pacific: | |||||||||||
China | $ | 169,825 | $ | 227,897 | $ | 167,229 | |||||
Thailand | 64,206 | 97,808 | 11,161 | ||||||||
Malaysia | 5,461 | 20,965 | 31,823 | ||||||||
Other Asia-Pacific | 20,466 | 15,776 | 6,665 | ||||||||
Total Asia-Pacific | $ | 259,958 | $ | 362,446 | $ | 216,878 | |||||
Americas: | |||||||||||
United States | $ | 78,858 | $ | 82,516 | $ | 63,158 | |||||
Mexico | 101,768 | 43,122 | 46,385 | ||||||||
Other Americas | 10,918 | 35,170 | 6,901 | ||||||||
Total Americas | $ | 191,544 | $ | 160,808 | $ | 116,444 | |||||
EMEA: | |||||||||||
Italy | $ | 43,196 | $ | 32,926 | $ | 27,249 | |||||
Germany | 17,438 | 14,221 | 21,284 | ||||||||
Other EMEA | 24,840 | 21,050 | 18,918 | ||||||||
Total EMEA | $ | 85,474 | $ | 68,197 | $ | 67,451 | |||||
Japan | $ | 6,194 | $ | 9,517 | $ | 7,141 | |||||
Total revenues | $ | 543,170 | $ | 600,968 | $ | 407,914 | |||||
Manufacturing
We have wafer fabrication facilities in Caswell, U.K.; Sagamihara, Japan; and San Donato, Italy. We also have facilities in Shenzhen, China; Sagamihara, Japan; and San Donato, Italy, where we perform assembly and test operations. We believe that innovation at the wafer and fab level is a key differentiator in optical components and we are positioned accordingly. We also use third-party contract manufacturers in Asia, and continually evaluate the capabilities of additional potential contract manufacturing partners to ensure we have a scalable and cost effective manufacturing strategy appropriate for executing our business objectives over a long-term horizon.
We believe our wafer fabrication facilities position us well to introduce product innovations delivering optical network cost and performance advantages to our customers. We also believe that our ability to deliver innovative technologies in a variety of form factors, ranging from chip level to component level to module level, allows us to address the needs of a broad base of potential customers regardless of their desired level of product integration or complexity.
We believe our advanced chip and component design and manufacturing facilities would be very expensive to replicate. On-chip, or monolithic, integration of functionality is more difficult to achieve without control over the production process, and requires advanced process know-how and equipment. Although the market for optical integrated circuits is still in its early stages, it shares many characteristics with the semiconductor market, including the positive relationship between the number of features integrated on a chip, the wafer size and the cost and sophistication of the fabrication equipment. We believe our wafer fabrication facilities and our know-how provide a competitive advantage by allowing us to increase the complexity of the optical circuits that we design and manufacture, and the integration of photonics components within smaller packages, without the relatively high cost, power and size issues associated with less integrated solutions.
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Our manufacturing capabilities include fabrication processing operations for InP substrates and lithium niobate substrates, including clean room facilities for each of these fabrication processes, along with assembly and test capability and reliability/quality testing. We utilize semiconductor processing equipment in these operations, such as epitaxy reactors, metal deposition systems, photolithography, etching, analytical measurement and control equipment. Our assembly and test facilities, whether internal or under service agreements with our contract manufacturers, include specialized automated assembly equipment, temperature and humidity control and reliability and testing facilities.
As of June 30, 2018, our manufacturing organization was comprised of 1,194 people.
Research and Development
We draw upon our internal development and manufacturing capabilities to continue to create innovative solutions for our customers. We believe that continued focus on the development of our technology, and cost reduction of existing products through design enhancements, are critical to our future competitive success. We seek to expand and develop our products to reduce cost, improve performance and address new market opportunities, and to enhance our manufacturing processes to reduce production costs, provide increased device performance and reduce product time to market.
We have significant expertise in optical technologies such as optoelectronic semiconductors utilizing InP, lithium niobate substrates and micro-optic assembly and packaging technology. In addition to these technologies, we also have electronics design, firmware and software capabilities to produce transceivers and transponders. We will also consider supplementing our in-house technical capabilities with strategic alliances or technology development arrangements with third parties when we deem appropriate. We spent $64.5 million, $57.1 million and $46.1 million on research and development during the years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively. As of June 30, 2018, our research and development organization was comprised of 289 people.
Our research and development facilities are in China, Italy, Japan, the United Kingdom and the United States. These facilities include computer-aided design stations, modern laboratories and automated test equipment. Our research and development organization has optical and electronic integration expertise that facilitates meeting customer-specific requirements as they arise.
Intellectual Property
Our competitive position significantly depends upon our research, development, engineering, manufacturing and marketing capabilities, and not just on our patent position. However, obtaining and enforcing intellectual property rights, including patents, provides us with a further competitive advantage. In the appropriate circumstances, these rights can help us to obtain entry into new markets by providing consideration for cross-licenses. In other circumstances, they can be used to prevent competitors from copying our products or from using our inventions. Accordingly, our practice is to file patent applications in the United States and certain other countries for inventions that we consider significant. In addition to patents, we also possess other intellectual property, including trademarks, know-how, trade secrets, design rights and copyrights.
We have a substantial number of patents in the United States and other countries, and additional applications are pending. These relate to technology that we have obtained from our acquisitions of businesses and companies in addition to our own internally developed technology. As of June 30, 2018, we held approximately 1,000 issued patents worldwide, with additional patent applications pending in various jurisdictions. Although our business is not materially dependent upon any one patent, our rights and the products made and sold under our patents, taken as a whole, are a significant element of our business. We maintain an active program designed to identify technology appropriate for patent protection.
We require employees and consultants to execute appropriate non-disclosure and proprietary rights agreements. These agreements acknowledge our exclusive ownership of intellectual property developed for us and require that all proprietary information disclosed remain confidential. While such agreements are intended to be binding, we may not be able to enforce these agreements in all jurisdictions. Although we continue to take steps to identify and protect our patentable technology and to obtain and protect proprietary rights to our technology, we cannot be certain the steps we have taken will prevent misappropriation of our technology, especially in certain countries where the legal protections of intellectual property are still developing. We may take legal action to enforce our patents and trademarks and other intellectual property rights. However, legal action may not always be successful or appropriate, and may be costly. Further, situations may arise in which we may decide to grant intellectual property licenses to third parties, in which case other parties will be able to exploit our technology in the marketplace.
We enter into patent and technology licensing agreements with other companies when management determines that it is in our best interest to do so. For example, see our risk factor “Our products may infringe the intellectual property rights of others, which could result in materially expensive litigation or require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future” appearing in Item 1A of this Annual Report. These may result in net royalties payable to us by third parties or by us to third parties. However, royalties received from or paid to third parties to date have not been material to our consolidated results of operations.
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In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for us to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms, or at all. If we are not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition and results of operations could be materially adversely affected.
Competition
The optical communications markets are rapidly evolving. We expect these markets to continue to be highly competitive because of the available capacity and number of competitors. We compete with domestic and international companies, many of which have substantially greater financial and other resources than we do. As of June 30, 2018, we believe that our principal competitors in the optical subsystems, modules and components industry include Acacia Communications, Inc., Applied Optoelectronics, Inc., Finisar Corporation ("Finisar"), Fujitsu Limited ("Fujitsu"), InnoLight Technology Ltd., Lumentum, NeoPhotonics Corporation ("NeoPhotonics"), Source Photonics Inc. and Sumitomo Electric Industries, Ltd. The principal competitive factors upon which we compete include breadth of product line, availability, performance, product reliability, innovation and selling price. We seek to differentiate ourselves from our competitors by offering high levels of customer value through collaborative product design, technology innovation, manufacturing capabilities, optical/mechanical performance, intelligent features for configuration, control and monitoring, multi-function integration and overall customization. There can be no assurance that we will continue to compete favorably with respect to these factors. We encounter substantial competition in most of our markets, although no one competitor competes with us across all product lines or markets.
Consolidation in the optical systems and components industry has intensified the competitive pressures that we face. For example, ADVA announced the acquisition of MRV Communications, Inc. in 2017, Fujitsu announced the acquisition of a 51 percent stake in FITEC Corp. in 2017, APAT Optoelectronics acquired the access and low speed transceiver business from NeoPhotonics in 2017, Avago acquired Broadcom Corp. in 2016, Nokia acquired Alcatel-Lucent in 2016, Ciena acquired Cyan Inc. in 2015, NeoPhotonics acquired the tunable laser product line of Emcore Corporation in 2015, Finisar acquired u2t Photonics AG in 2014 and Avago acquired CyOptics, Inc. in 2013. On March 11, 2018, we entered into the Merger Agreement with Lumentum, pursuant to which we have agreed to be acquired by Lumentum.
We also face competition from companies that may expand into our industry and introduce additional competitive products. Existing and potential customers are also our potential competitors. These customers may internally develop or acquire additional competitive products or technologies, which may cause them to reduce or cease their purchases from us (for example, Cisco's acquisition of Lightwire, Inc., Ciena's acquisition of TeraXion, and Juniper Networks' acquisition of Aurrion, Inc.).
Long-Lived Tangible Assets
The following table sets forth our long-lived tangible assets, which consists of our property and equipment, by geographic area as of the dates indicated:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
United States | $ | 14,956 | $ | 11,057 | $ | 1,985 | |||||
Japan | $ | 61,845 | $ | 49,843 | $ | 32,244 | |||||
China | 23,126 | 25,010 | 12,456 | ||||||||
United Kingdom | 20,112 | 8,174 | 5,783 | ||||||||
Malaysia | 8,651 | 10,521 | 5,307 | ||||||||
Rest of world | 8,748 | 9,728 | 7,270 | ||||||||
Total long-lived assets outside the United States | $ | 122,482 | $ | 103,276 | $ | 63,060 | |||||
Total long-lived assets | $ | 137,438 | $ | 114,333 | $ | 65,045 | |||||
Employees
As of June 30, 2018, we employed 1,701 people, comprising 289 in research and development, 1,194 in manufacturing, 75 in sales and marketing, and 143 in general and administration. In Italy, 175 employees belong to local collective bargaining/professional guilds. None of our other employees are subject to collective bargaining agreements.
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Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial also may impair our business, operations, liquidity and stock price materially and adversely. You should carefully consider the risks and uncertainties described below in addition to the other information included or incorporated by reference in this Annual Report. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall and you could lose all or part of your investment.
Risks Related to the Lumentum Acquisition
The Merger is subject to a number of conditions, some of which are outside of the parties’ control, and, if these conditions are not satisfied, the Merger Agreement may be terminated and the Merger may not be completed.
The Merger Agreement contains a number of conditions that must be fulfilled to complete the Merger. These conditions include, among other customary conditions, the required approval of Oclaro’s stockholders to complete the Merger, absence of laws, orders, judgments and injunctions that enjoin or otherwise prohibit consummation of the Merger in any jurisdiction that is material to the business or operations of Oclaro or Lumentum, receipt of certain antitrust approvals in the United States and the People’s Republic of China, approval by NASDAQ for listing of the shares of Lumentum common stock to be issued in the Merger, accuracy of representations and warranties of the parties subject to the applicable standard provided by the Merger Agreement, no event occurring that had or would reasonably be expected to have a “Material Adverse Effect” (as defined in the Merger Agreement) on Lumentum or Oclaro, compliance by the parties with their obligations in the Merger Agreement in all material respects and the effectiveness of the registration statement relating to the shares of Lumentum common stock to be issued in connection with the Merger. On April 4, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act. On July 10, 2018, Oclaro's stockholders approved the Merger Agreement.
The required satisfaction of the foregoing conditions could delay the completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the Merger could cause Lumentum not to realize some or all of the benefits that the parties expect Lumentum to achieve following the Merger. Further, there can be no assurance that the conditions to closing will be satisfied or waived or that the Merger will be completed.
In addition, if the Merger is not completed by December 11, 2018, which deadline will be automatically extended to March 11, 2019 if the closing is delayed due to certain conditions to closing relating to antitrust laws not being satisfied, either Lumentum or Oclaro may choose to terminate the Merger Agreement. Lumentum or Oclaro may also elect to terminate the Merger Agreement in certain other circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the closing, before or after approval of the Merger Agreement by Oclaro's stockholders, as applicable.
The business relationships of Oclaro and its subsidiaries may be subject to disruption due to uncertainty associated with the Merger, which could have an adverse effect on the results of operations, cash flows and financial position of Oclaro and, following the completion of the Merger, the combined company.
Parties with which Oclaro and its subsidiaries do business may be uncertain as to the effects on them of the Merger and related transactions, including with respect to current or future business relationships with Oclaro, its subsidiaries or the combined company. These relationships may be subject to disruption as customers, suppliers and other persons with whom Oclaro has a business relationship may delay or defer certain business decisions or might decide to terminate, change or renegotiate their relationships with Oclaro, or consider entering into business relationships with parties other than Oclaro, its subsidiaries or the combined company. These disruptions could have an adverse effect on the results of operations, cash flows and financial position of Oclaro. The risk, and adverse effect, of any disruption could be exacerbated by a delay in completion of the Merger or termination of the Merger Agreement.
Failure to complete the Merger could negatively affect the share prices and the future business and financial results of Oclaro.
If the Merger is not completed, the ongoing businesses of Oclaro may be adversely affected. Additionally, if the Merger is not completed and the Merger Agreement is terminated, in certain circumstances Oclaro may be required to pay Lumentum a termination fee of $63.0 million. In addition, Oclaro has incurred and will continue to incur significant transaction expenses in connection with the Merger regardless of whether the Merger is completed. Furthermore, Oclaro may experience negative reactions from the financial markets, including negative impacts on its stock price, or negative reactions from its customers, suppliers, other business partners and employees, should the Merger not be completed.
The foregoing risks, or other risks arising in connection with the failure to consummate the Merger, including the diversion of management attention from conducting the business of Oclaro and its subsidiaries and pursuing other opportunities during the
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pendency of the Merger, may have a material adverse effect on the businesses, operations, financial results and stock price of Oclaro. Oclaro could also be subject to litigation related to any failure to consummate the Merger or any related action that could be brought to enforce a party’s obligations under the Merger Agreement.
Uncertainties associated with the Merger may cause a loss of management personnel and other key employees of Oclaro, which could adversely affect the future business and operations of Oclaro.
In some of the fields in which Oclaro operates, there are only a limited number of people in the job market who possess the requisite skills, and it may be increasingly difficult for Oclaro to hire personnel during the pendency of the Merger. Current and prospective employees of Oclaro may experience uncertainty about their roles with the combined company following the Merger, which may materially adversely affect the ability of Oclaro to attract and retain key personnel during the pendency of the Merger. In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the Merger. The loss of services of certain senior management or key employees of Oclaro or the inability to hire new personnel with the requisite skills could restrict the ability of Oclaro to develop new products or enhance existing products in a timely manner, to sell products to customers or to effectively manage the business of Oclaro. Also, the business, financial condition and results of operations of Oclaro could be materially adversely affected by the loss of any of its key employees, by the failure of any key employee to perform in his or her current position, or by Oclaro’s inability to attract and retain skilled employees.
The Merger Agreement contains provisions that limit Oclaro’s ability to pursue alternatives to the Merger which could discourage a potential competing acquiror of Oclaro from making an alternative transaction proposal and, in specified circumstances, could require Oclaro to pay a termination fee to Lumentum.
The Merger Agreement provides that Oclaro shall not, and requires Oclaro to refrain from authorizing or knowingly permitting its representatives to, solicit, participate in negotiations with respect to or approve or recommend any third-party proposal for an alternative transaction, subject to exceptions set forth in the Merger Agreement relating to the receipt of certain unsolicited offers.
These provisions could discourage a potential third-party acquiror or merger partner that might have an interest in acquiring all or a significant portion of Oclaro or pursuing an alternative transaction from considering or proposing such a transaction, even if it were prepared to pay consideration with a higher per share cash or market value than the consideration in the Merger, or might result in a potential third-party acquiror or merger partner proposing to pay a lower price to Oclaro’s stockholders than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.
Additionally, if the Merger Agreement is terminated and Oclaro determines to seek another business combination, Oclaro may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.
The Merger is subject to the expiration of applicable waiting periods under, and the receipt of approvals, consents or clearances from, antitrust regulatory authorities in the United States and China that may impose conditions that could have an adverse effect on Lumentum or Oclaro or, if not obtained, could prevent completion of the Merger.
Before the Merger may be completed, any waiting period (or extension thereof) applicable to the Merger must have expired or been terminated, and any approvals, consents or clearances required in connection with the Merger must have been obtained, in each case, under the HSR Act and under the antitrust and competition laws of China. In deciding whether to grant the required regulatory approval, consent or clearance, the relevant governmental entities will consider the effect of the Merger on competition within their relevant jurisdiction, and other considerations they may deem appropriate. On April 4, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act, which satisfies the closing conditions related to receipt of antitrust approval in the United States under the Merger Agreement.
Under the Merger Agreement, Lumentum and Oclaro have agreed to use their reasonable best efforts to obtain any waivers, consents, or approvals required to effect the Merger (subject to certain limitations) and therefore may be required to comply with certain conditions or limitations imposed by governmental antitrust authorities. However, there can be no assurance that antitrust regulators will not impose unanticipated conditions, terms, obligations or restrictions. In addition, Oclaro cannot provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Merger.
Until the completion of the Merger or the termination of the Merger Agreement in accordance with its terms, in consideration of the agreements made by the parties in the Merger Agreement, Oclaro is prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to Oclaro and its stockholders.
Until the earlier of the Effective Time and the termination of the Merger Agreement, the Merger Agreement restricts Oclaro from taking specified actions without the consent of Lumentum, and requires Oclaro to generally operate in the ordinary course of business consistent with past practices. These restrictions may prevent Oclaro from making appropriate changes to its businesses, retaining its workforce, paying dividends or pursuing attractive business opportunities that may arise prior to the completion of the Merger.
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Litigation against Oclaro, or the members of Oclaro’s Board of Directors, could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger.
While Oclaro believes that any claims that have been and may be asserted by purported stockholder plaintiffs related to the Merger are and would be without merit, the results of any such potential legal proceedings are difficult to predict and could delay or prevent the Merger from becoming effective in a timely manner. Moreover, any litigation could be time consuming and expensive, could divert Oclaro’s management’s attention away from its regular business and, if any lawsuit is adversely resolved against Oclaro or members of the Oclaro’s Board of Directors (each of whom Oclaro is required to indemnify pursuant to indemnification agreements), could have a material adverse effect on Oclaro’s financial condition.
One of the conditions to closing of the Merger is the absence of any order or law by a court or other governmental entity in any jurisdiction that is material to the business or operations of Oclaro or Lumentum that prohibits, enjoins or makes illegal the closing of the Merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed and a claimant secures injunctive or other relief prohibiting, delaying or otherwise adversely affecting Lumentum’s and/or Oclaro’s ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective in a timely manner or at all. See also Part I, Item 3, Legal Proceedings, "Oclaro Merger Litigation" in this Form 10-K.
Risks Related to Our Business
We depend on a limited number of customers for a significant percentage of our revenues and the loss of a major customer could have a materially adverse impact on our financial condition.
Historically, we have generated most of our revenues from a limited number of customers. Our dependence on a limited number of customers is due to the fact that the optical telecommunications and data communications systems industries are dominated by a small number of large companies. These companies in turn depend primarily on a limited number of major telecommunications carrier and data center customers to purchase their products that incorporate our optical components. The industry in which our customers operate is subject to a trend of consolidation. To the extent this trend continues, we may become dependent on even fewer customers to maintain and grow our revenues.
During the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, our three largest customers accounted for 42 percent, 50 percent and 44 percent of our revenues, respectively. Because we rely on a limited number of customers for a significant percentage of our revenues, a decrease in demand for our products from any of our major customers for any reason (including due to data center and telecom market conditions, customer inventory buildup, catastrophic events, changes in network architecture, government action, financial viability or otherwise) could have a material adverse impact on our financial condition and results of operations. For example, we were unable to ship products for an extended period of time to one of our largest customers, ZTE, as discussed in our risk factor in this Form 10-K, "The inability to obtain government licenses and approvals for desired international trading activities or technology transfers, including export licenses, may prevent the profitable operation of our business."
The markets in which we operate are highly competitive, which could result in lost sales and lower revenues.
The market for optical components and modules is highly competitive and this competition could result in our existing customers moving their orders to our competitors. We are aware of a number of companies that have developed or are developing optical component products, including tunable lasers, pluggable components, modulators and subsystems, among others, that compete directly with our current and proposed product offerings.
Certain of our competitors may be able to more quickly and effectively:
• | develop or respond to new technologies or technical standards; |
• | react to changing customer requirements and expectations; |
• | devote needed resources to the development, production, promotion and sale of products; |
• | attain high manufacturing yields on new product designs; and |
• | deliver competitive products at lower prices. |
Some of our current competitors, as well as some of our potential competitors in adjacent industries such as semiconductors and data communications, have longer operating histories, greater name recognition, broader customer relationships, product offerings and industry alliances and substantially greater financial, technical and marketing resources than we do. Our competitors and new Chinese companies are establishing manufacturing operations in China and other Asian countries to take advantage of comparatively low manufacturing costs, which could enable them to reduce their costs and lower their prices, making their products more competitive than ours.
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In addition, network equipment manufacturers and service providers may decide to design and manufacture the optical module and subsystems portions of their products in-house, rather than outsourcing to companies like us. This type of product disaggregation could result in lower revenues and materially and adversely affect our business.
All of these risks may be increased if the market were to further consolidate through mergers or other business combinations between our competitors. We may not be able to compete successfully with our competitors and aggressive competition in the market may result in lower prices for our products, fewer design wins and/or decreased gross margins. Any such development could have a material adverse effect on our business, financial condition and results of operations.
Our results of operations may suffer if we do not effectively manage our inventory, and we may continue to incur inventory-related charges.
We need to manage our inventory of component parts and finished goods effectively to meet changing customer requirements and demand. Some of our products and supplies have in the past, and may in the future, become obsolete or be deemed excess while in inventory due to rapidly changing customer specifications or a decrease in customer demand. We also have exposure to contractual liabilities to our contract manufacturers for inventories purchased by them on our behalf, based on our forecasted requirements, which may become excess or obsolete. Our inventory balances also represent an investment of cash. To the extent our inventory turns are slower than we anticipate based on historical practice, our cash conversion cycle extends and more of our cash remains invested in working capital. If we are not able to manage our inventory effectively, we may need to write down the value of some of our existing inventory or write off non-saleable or obsolete inventory. We have from time to time incurred significant inventory-related charges. Any such charges we incur in future periods could materially and adversely affect our results of operations and our cash flow.
Many of our long-term customer contracts do not commit customers to specified buying levels, and our customers may decrease, cancel or delay their buying levels at any time with little or no advance notice to us.
Many of our customers typically purchase our products pursuant to individual purchase orders or contracts that do not contain purchase commitments. Some customers provide us with their expected forecasts for our products several months in advance, but these customers may decrease, cancel or delay purchase orders already in place, including on short notice, and the impact of any such actions may be intensified given our dependence on a small number of large customers. If any of our major customers decrease, stop or delay purchasing our products for any reason, our business and results of operations would be harmed. Cancellation or delays of such orders may result in excess and obsolete inventory and charges therefor and cause us to fail to achieve our short-term and long-term financial and operating goals.
We may not be able to maintain or improve gross margin levels.
We may not be able to maintain or improve our gross margins, due to slow introductions of new products, pricing pressure from increased competition, the failure to effectively reduce the cost of existing products, the failure to improve our product mix, the potential for future macroeconomic or market volatility reducing sales volumes, changes in customer demand (including a change in product mix between different areas of our business) or other factors. Our gross margins can also be adversely impacted for reasons including, but not limited to, fixed manufacturing costs that we are not able to decrease in proportion to any decrease in revenues; unfavorable production yields or variances; increases in costs of input parts and materials; the timing of movements in our inventory balances; warranty costs and related returns; changes in foreign currency exchange rates; and possible exposure to inventory reserves. Any failure to maintain, or improve, our gross margins will adversely affect our financial results, including our goals to maintain profitability and sustainable cash flow from operations.
As a result of our global operations, our business is subject to currency fluctuations that may adversely affect our results of operations.
Our financial results have been and will continue to be materially impacted by foreign currency fluctuations. At certain times in our history, declines in the value of the U.S. dollar versus the U.K. pound sterling and the Japanese yen have had a major negative effect on our margins and our cash flow. A portion of our expenses are denominated in U.K. pound sterling and Japanese yen and substantially all of our revenues are denominated in U.S. dollars.
Fluctuations in the exchange rate between these currencies and, to a lesser extent, other currencies in which we collect revenues and/or pay expenses could have a material effect on our future operating results. For example, on June 23, 2016, the U.K. citizens voted in a referendum to exit the European Union, which resulted in a sharp decline in the value of the British pound, which may impact our future manufacturing overhead and operating expenses. Also during fiscal year 2017, the Japanese yen depreciated approximately 10 percent relative to the U.S. dollar, impacting our manufacturing overhead and operating expenses. If the U.S. dollar appreciates or depreciates relative to the U.K. pound sterling and/or Japanese yen in the future, our future operating results may be materially impacted. Additional exposure may occur should the exchange rate between the U.S. dollar and the Chinese yuan or the Euro vary more significantly than they have to date.
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We periodically engage in currency hedging transactions in an effort to cover some of our exposure to U.S. dollar to U.K. pound sterling and Japanese Yen currency fluctuations, and we may be required to convert currencies to meet our obligations. Our hedging contracts currently do not exceed 90 days. These transactions may not operate to fully hedge our exposure to currency fluctuations, and under certain circumstances, these transactions could have an adverse effect on our financial condition.
The inability to obtain government licenses and approvals for desired international trading activities or technology transfers, including export licenses, may prevent the profitable operation of our business.
Many of our present and future business activities are subject to licensing by the United States government under the Export Administration Act, the Export Administration Regulations ("EAR") and other laws, regulations and requirements governing international trade and technology transfer. For example, on April 16, 2018, the U.S. Department of Commerce ("DOC") changed and reactivated its previously suspended denial order and suspended the export privileges of Zhongxing Telecommunications Equipment Corporation ("ZTE Corporation") and its subsidiary, ZTE Kangxun Telecommunications Ltd. ("ZTE Kangxun") (collectively, "ZTE") after determining that ZTE made false statements to the DOC related to senior employee disciplinary actions ("Denial Order"). On July 13, 2018, following approval of a settlement agreement between the DOC and ZTE and ZTE's payment of certain amounts to the DOC, the Denial Order was terminated and ZTE was removed from the DOC's Denied Persons List. During the pendency of the Denial Order, ZTE was prohibited from participating in any way in any transaction subject to the EAR and U.S. companies were restricted from exporting or re-exporting to or on behalf of ZTE any item subject to the EAR or engaging in any transaction to service any item subject to the EAR that has been or will be exported from the U.S. and which was owned, possessed or controlled by ZTE. During this period, we ceased shipment of products to ZTE, which has been one of our significant customers. In addition, we cannot predict whether the export sanctions and financial penalties imposed on ZTE by the DOC will have a negative impact on future orders of our products by ZTE, which could have an adverse effect on our financial situation.
As previously reported, on March 6, 2016, the DOC had amended the EAR and imposed additional licensing restrictions on exports of certain products to ZTE. In response to the DOC's action, we temporarily ceased shipment of products to ZTE at that time as well. The DOC created a temporary general license on March 24, 2016 applicable to exports to ZTE, after which time we resumed shipments of products to ZTE. The DOC subsequently granted several extensions, before issuing a final rule on March 29, 2017 in connection with the settlement by ZTE and the U.S. government of certain administrative and criminal charges, eliminating the additional licensing restrictions imposed on ZTE.
In the future, the DOC may impose denial orders, sanctions or licensing restrictions on ZTE again or on other customers with whom we conduct business if they violate the EAR or other export laws. Any future action by the U.S. government that precludes us from shipping products to ZTE or to other customers may have a material adverse impact on our revenues and results of operations.
We also presently manufacture products in other countries that either do or may require licenses from time to time. The operation of our business may require the continuity of these licenses and may require further licenses and approvals for future products in these and other countries. However, there is no certainty to the continuity of these licenses, nor that further desired licenses and approvals may be obtained. The failure to obtain or retain such licenses may materially harm our revenues and results of operations.
We may not be able to ramp the production of our new products to customer required volumes, which could result in delayed or lost revenue.
Many of our new product samples for metro, data center and long haul communication applications have been well received by our existing and prospective customers. These newer generation products typically will have greater functionality and a smaller footprint, resulting in more complexity in the manufacturing process. This increased complexity may result in lower manufacturing yields or more difficulty manufacturing them in volume. If we experience large demand for these products and are unable to manufacture them in sufficient volume, we would fall short of our planned output and revenue targets as we move from low volume sampling to manufacturing for commercial production. In addition, a production ramp for certain products can include a manufacturing transition between two or more locations which carries an inherent risk of delay. Our failure to satisfy our customers' demand could result in lost sales or our customers postponing or canceling orders or seeking alternative suppliers for these products, which would materially harm our revenues and adversely affect our results of operations.
Customer requirements for new products are increasingly challenging, which could lead to significant executional risk in designing and manufacturing such products.
Across the entire network, our customers are demanding increased performance from our products, at lower prices and in smaller and lower power designs. These requirements stretch the capabilities of our optical chips, packages and electronics to the limit of technical feasibility. In addition, these demands are often customer specific, leading to numerous product variations and increased costs. If one of these customers fails to qualify our products or there is a delay in qualification, we may incur additional expenses and our revenues may be harmed. In addition, if one of these customers fails to purchase the products we anticipate, we may not
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be able to sell this customized inventory to other customers, resulting in inventory obsolescence. We enter our new product introduction process with clear performance and cost goals. Because of the complexity of design requirements, executing on these goals is becoming increasingly difficult and less predictable. In addition, some of our suppliers of in feed components are increasingly designing their products at the same time we are designing our own products. Any delays these suppliers may experience in designing and producing these components could also cause delays in the introduction of our new products utilizing these components. These difficulties could result in product sampling delays and/or missing targets on key specifications and customer requirements, leading to design losses and reduced sales opportunities. Our failure to meet our customers' technical and performance requirements for these products could result in our customers seeking alternative suppliers for these products, or increased costs to us, either of which would adversely affect our results of operations.
Significant tariffs or other restrictions applied to goods traded between the United States and China could materially and adversely affect our business and results of operations.
Since the beginning of 2018, there has been increasing rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding the possibility of instituting tariffs against foreign imports of certain materials. More specifically, since March 2018, the U.S. and China have applied tariffs to certain of each other’s exports. In July 2018, the U.S. announced a list of thousands of categories of goods, including electronics, that could face tariffs of 10 percent. Following the July 2018 announcement, on August 1, 2018, the President directed the U.S. Trade Representative to consider increasing the proposed level of the additional tariffs from 10 percent to 25 percent. It is currently expected that these tariffs will be finalized after a public comment period that ends on September 6, 2018. Most of our products are produced outside of China and would not be subject to the proposed tariffs on imports into the U.S. from China. A limited number of our products have a China country of origin, but these products are not currently imported into the U.S. other than in limited numbers for our internal research and development purposes. If circumstances change and we import materially greater quantities of our China country of origin products into the U.S., we may be required to raise our prices, which may result in the loss of customers and harm our operating performance. Even if the currently proposed duties are not imposed on our products, it is possible further tariffs will be imposed on imports of our products, or that our business will be impacted by retaliatory trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes to our operations, any of which could materially harm our revenue or operating results.
The implementation of trade tariffs both globally and between the U.S. and China specifically carries the risk of negatively impacting China’s overall economic condition, which could have negative repercussions on us. Furthermore, imposition of tariffs could cause a decrease in the sales of our products to customers located in China or other customers selling to Chinese end users, which would directly impact our business.
We depend on a limited number of suppliers and key contract manufacturers who could disrupt our business if they stopped, decreased, delayed or were unable to meet our demand for shipments of their products or manufacturing of our products.
We depend on a limited number of suppliers of raw materials and equipment used to manufacture our products. We currently also depend on a limited number of contract manufacturers, principally Fabrinet in Thailand, Venture Corporation Limited ("Venture") in Malaysia, Toyo in Japan and Thailand, and eLASER in Taiwan, to manufacture certain of our products. Some of these suppliers are our sole sources for certain materials and equipment. We typically have not entered into long-term agreements with our suppliers other than Fabrinet and Venture. As a result, these suppliers generally may stop supplying us materials and equipment at any time. Our reliance on a sole supplier or limited number of suppliers could result in delivery problems, reduced control over product pricing and quality, and an inability to identify and qualify another supplier in a timely manner. Some of our suppliers that may be small or under-capitalized may experience financial difficulties that could prevent them from supplying us materials and equipment. In addition, our suppliers, including our sole source suppliers, may experience manufacturing delays or shut downs due to earthquakes, floods, fires, labor unrest, political unrest, trade disputes or other events.
Any supply deficiencies relating to the quality or quantities of materials or equipment we use to manufacture our products could materially and adversely affect our ability to fulfill customer orders and our results of operations. Lead times for the purchase of certain materials and equipment from suppliers have increased and in some cases have limited our ability to rapidly respond to increased demand, and may continue to do so in the future. To the extent we introduce additional contract manufacturing partners, introduce new products with new partners and/or move existing internal or external production lines to new partners, we could experience supply disruptions during the transition process. In addition, due to our customers’ requirements relating to the qualification of our suppliers and contract manufacturing facilities and operations, we cannot quickly enter into alternative supplier relationships, which prevents us from being able to respond immediately to adverse events affecting our suppliers. Any transition to a new supplier could result in lost or delayed sales if our customers fail to qualify these new supply sources on a timely basis, or at all.
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Sales of older legacy products continue to represent a significant percentage of our total revenues and, if we do not increase the percentage of sales associated with new products, our revenues may not grow in the future or could decline.
The markets for our products are characterized by changing technology and continuing process development. The future of our business will depend in large part upon the continuing relevance of our technological capabilities, and our ability to introduce new products that address our customers’ requirements for more cost-effective and higher bandwidth solutions. We must also develop these new technologies and products on a cost-effective basis in order to effectively complete with our competitors. Our inability to successfully launch or sustain new or next generation programs or product features that anticipate or adequately address future market trends and market transitions in a timely manner could materially adversely affect our revenues and financial results. We may also encounter competition from new or revised technologies that render our products less profitable or obsolete in our chosen markets, and our operating results may suffer. Furthermore, we cannot assure you that we will introduce new or next generation products in a timely manner, these products will gain market acceptance, or new product revenues will increase at a rate sufficient to replace declining legacy product revenues, and failure to do so could materially affect our operating results.
We have significant operations in China, which exposes us to risks inherent in doing business in China.
A significant portion of our assembly and test operations, chip-on-carrier operations and manufacturing and supply chain management operations are concentrated in our facility in Shenzhen, China. In addition, we have research and development related activities in Shenzhen, China. To be successful in China we will need to:
• | qualify our manufacturing lines and the products we produce in Shenzhen, as required by our customers; and |
• | attract and retain qualified personnel to operate our Shenzhen facility. |
We cannot assure you that we will be able to achieve these objectives.
Employee turnover in China is high due to the intensely competitive and fluid market for skilled labor. To operate our Shenzhen facility under these conditions, we need to continue to hire direct manufacturing personnel, administrative personnel and technical personnel; obtain and retain required legal authorization to hire such personnel; and incur the time and expense to hire and train such personnel.
Operations in China are subject to greater political, legal and economic risks than our operations in other countries. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. For example, we have been subject to commercial litigation in China initiated by a former supplier. For a description of this lawsuit, see Part I, Item 3, Legal Proceedings, "Raysung Commercial Litigation," in our 2016 Annual Report on Form 10-K. Further, personal privacy, cyber security, and data protection are becoming increasingly significant issues in China. To address these issues, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China (the “Cyber Security Law”), which took effect on June 1, 2017. The Cyber Security Law sets forth various requirements relating to the collection, use, storage, disclosure and security of data, among other things. Various Chinese agencies are expected to issue additional regulations in the future to define these requirements more precisely. These requirements may increase our costs of compliance. We cannot assure you that we will be able to comply with all of these regulatory requirements. Any failure to comply with the Cyber Security Law and the relevant regulations and policies, could result in additional cost and liability to us or restrictions on our ability to operate in China and could adversely affect our business and results of operations. Additionally, increased costs to comply with, and other burdens imposed by, the Cyber Security Law and relevant regulations and policies that are applicable to the businesses of our suppliers, vendors and other service providers, as well as our customers, could adversely affect our business and results of operations.
Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, employee benefits, cyber security and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits.
We intend to continue to export the products manufactured at our Shenzhen facility. Under current regulations, upon application and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and will be exempt from certain duties on imported materials that are used in the manufacturing process and subsequently exported from China as finished products. However, Chinese trade regulations are subject to frequent change, and we may become subject to other forms of taxation and duties in China or may be required to pay export fees in the future, particularly if the status of the free trade zone in Shenzhen changes in the future. In the event that we become subject to new forms of taxation or export fees in China, our expenses would increase and our business and results of operations could be materially adversely affected. We may also be required to expend greater amounts than we currently anticipate in connection with increasing production at our Shenzhen facility. Any one of the factors cited above, or a combination of them, could result in unanticipated costs or interruptions in production, which could materially and adversely affect our business.
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We may experience low manufacturing yields.
Manufacturing yields depend on a number of factors, including the volume of production due to customer demand and the nature and extent of changes in specifications required by customers for which we perform design-in work. Higher volumes due to demand for a fixed, rather than continually changing, design generally results in higher manufacturing yields, whereas lower volume production generally results in lower yields. In addition, lower yields may result, and have in the past resulted, from commercial shipments of products prior to full manufacturing qualification to the applicable specifications. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs, introduction of new product lines and changes in contract manufacturers have historically caused, and may in the future cause, significantly reduced manufacturing yields, resulting in low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process, before, during or after manufacture, results in lower gross margins from lower yields and additional rework costs. Finally, manufacturing yields and margins can also be lower if we receive or inadvertently use defective or contaminated materials from our suppliers. Any reduction in our manufacturing yields will adversely affect our gross margins and could have a material impact on our operating results.
In order to remain competitive, we have been in the past and may be in the future required to agree to customer terms and conditions that may have an adverse effect on our financial condition and operating results.
Many of our customers have significant purchasing power and, accordingly, have requested more favorable terms and conditions, including extended payment terms, than we typically provide. In order for us to remain competitive, we may be required to accommodate these requests, which may include granting terms that affect the timing of our receipt of cash. As a result, these more favorable customer terms may have a material adverse effect on our financial condition and results of operations.
In the future we may incur significant additional restructuring charges that could adversely affect our results of operations.
In the past we have enacted a series of restructuring plans and cost reduction plans designed to reduce our manufacturing overhead and our operating expenses that have resulted in significant restructuring charges.
For instance, while we incurred minimal restructuring charges in fiscal years 2017 and 2016, during fiscal year 2015, we incurred $2.5 million in restructuring charges in connection with the transition of certain portions of our Shenzhen, China assembly and test operations to Venture. In addition, during fiscal year 2015, we incurred $4.0 million in restructuring charges in connection with the restructuring plan we initiated in the first quarter of fiscal year 2014 to simplify our operating footprint, reduce our cost structure and focus our research and development investment in the optical communications market where we can leverage our core competencies.
We cannot assure you that we will not incur additional restructuring charges in the future. Significant additional restructuring charges could materially and adversely affect our operating results in the periods that they are incurred and recognized. In addition, such charges could require significant cash commitments that may adversely affect our cash balances.
We may record additional impairment charges that will adversely impact our results of operations.
As of June 30, 2018, we had $137.4 million of property and equipment, net on our consolidated balance sheet. If we make changes in our business strategy or if market or other conditions adversely affect our business operations, we may be forced to record an impairment charge related to these assets, which would adversely impact our results of operations. If impairment has occurred, we will be required to record an impairment charge for the difference between the carrying value of the assets and the implied fair value of the assets in the period in which such determination is made. The testing for impairment requires us to make significant estimates about the future performance and cash flows of our business, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic, industry, or market conditions, changes in underlying business operations, future reporting unit operating performance, changes in competition, or changes in technologies. Any changes in key assumptions, or actual performance compared with those assumptions, about our business and its future prospects or other assumptions could affect the fair value of one or more reporting units, and result in an impairment charge.
We have identified a material weakness in our internal control over financial reporting of foreign currency transaction gains and losses which, if not remediated, could adversely affect our stock price.
Our controls over the identification and recording of foreign currency transaction gains and losses was not designed and operating effectively. As described under Part II, Item 9A, Controls and Procedures, our management has concluded that the deficiency constitutes a material weakness in our internal control over financial reporting, which was not effective as of June 30, 2018.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Although we have developed and are implementing a plan to remediate this material weakness and
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believe, based on our evaluation to date, that this material weakness will be remediated during the second half of calendar year 2018, we cannot assure you that this will occur within the contemplated timeframe. Moreover, we cannot assure you that we will not identify additional material weaknesses in our internal control over financial reporting in the future. If we are unable to remediate the material weakness, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission, could be adversely affected. The occurrence of or our failure to remediate the material weakness may adversely affect the market price of our common stock and any other securities we may issue.
Delays, disruptions or quality control problems in manufacturing could result in delays in product shipments to customers and could adversely affect our business.
We may experience delays, disruptions or quality control problems in our manufacturing operations or the manufacturing operations of our subcontractors. As a result, we could incur additional costs that would adversely affect our gross margins, and our product shipments to our customers could be delayed beyond the shipment schedules requested by our customers, which could harm our relationship with our customers and would negatively affect our revenues, competitive position and reputation. Furthermore, even if we are able to deliver products to our customers on a timely basis, we may be unable to recognize revenues at the time of delivery based on our revenue recognition policies.
Our revenues, growth rates and operating results are likely to fluctuate significantly as a result of factors that are outside our control, which could adversely impact our operating results.
Our revenues, growth rates and operating results are likely to fluctuate significantly in the future as a result of factors that are outside our control. We may not achieve similar revenues, growth rates or operating results in future periods. Our revenues, growth rates and operating results for any prior quarterly or annual period should not be relied upon as any indication of our future revenues, growth rates or operating results. The timing of order placement, size of orders and satisfaction of contractual customer acceptance criteria, changes in the pricing of our products due to competitive pressures as well as order or shipment delays or deferrals, with respect to our products, may cause material fluctuations in revenues. Slower growth rates in China and for some of our client side transceivers may also cause our results to fluctuate. For example, revenues for the three months ended June 30, 2018 were reduced as a result of our cessation of shipments to ZTE following the DOC's re-imposition of export sanctions on ZTE, and we cannot guarantee the levels at which ZTE will resume ordering our products now that sanctions have been lifted. See our risk factor in this Form 10-K, "The inability to obtain government licenses and approvals for desired international trading activities or technology transfers, including export licenses, may prevent the profitable operation of our business."
Our lengthy sales cycle, which may extend to more than one year, may cause our revenues and operating results to vary from period to period and it may be difficult to predict the timing and amount of any variation. Delays or deferrals in purchasing decisions by our customers may increase as we develop new or enhanced products for new markets, including data communications, industrial, research, consumer and biotechnology markets. Purchase decisions by our customers are also impacted by the capital expenditure plans of the global telecom carriers and hyper scale data centers, which tend to be the primary customers of our customers. Our current and anticipated future dependence on a small number of customers increases the revenue impact of each such customer’s decision to delay or defer purchases from us, or decision not to purchase products from us. Our expense levels in the future will be based, in large part, on our expectations regarding future revenue sources and, as a result, operating results for any quarterly period in which anticipated material orders fail to occur, or are delayed or deferred, could be significantly harmed. Because our business is capital intensive, we may not be able to decrease our expenses in the short term to adjust to significant fluctuations in our revenues, which can have a significant adverse impact on our operating results.
We have a complex multinational tax structure, and changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.
We have a complex multinational tax structure with multiple types of intercompany transactions, and our allocation of profits and losses through our intercompany transfer pricing agreements is subject to review by the Internal Revenue Service and other tax authorities. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are also subject to periodic examination of our income tax returns and related transfer pricing documentation by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have an adverse effect on our operating results and financial condition.
We are also exposed to changes in tax law which can impact our current and future year's tax provision.
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We continue to assess the impact of the recently enacted H.R.1, commonly referred to as the Tax Cuts and Jobs Act, and the Finance (No. 2) Act 2017 in the United Kingdom (together, the “New Tax Laws”) as well as any future regulations implementing the New Tax Laws and any interpretations of the New Tax Laws. The effect of those regulations and interpretations, as well as any additional tax reform legislation in the United States, United Kingdom or elsewhere, could have a material adverse effect on our business, financial condition and results of operations by, among other things, decreasing the value of our deferred tax asset and/or requiring us to recognize a deferred tax liability for non-U.S. earnings. See Note 1 to the consolidated financial statements, Basis of Preparation and Summary of Significant Accounting Policies - U.S. Tax Reform, in this Annual Report on Form 10-K. If, in the future, we are required to reduce the value of our deferred tax asset or record a deferred tax liability, we may be required to record a corresponding charge to current earnings, which could have a material adverse effect on our financial condition and results of operations in the period in which it is recorded.
Our business and results of operations may be negatively impacted by financial market conditions and general economic conditions in the industries in which we operate, and such conditions may increase the other risks that affect our business.
During the 2008 financial crisis and its aftermath, the world’s financial markets experienced significant turmoil, resulting in reductions in available credit, increased costs of credit, extreme volatility in security prices, potential changes to existing credit terms, and rating downgrades of investments. In the past, due to these conditions, many of our customers reduced their spending plans, leading them to draw down their existing inventory and reduce orders for our products. It is possible that changes in current economic conditions could result in similar setbacks in the future, and that some of our customers could as a result reduce production levels of existing products, defer introduction of new products or place orders and accept delivery for products for which they do not pay us due to their economic difficulties or other reasons. In the past, financial market volatility has materially and adversely affected the market conditions in the industries in which we operate, and has had a material adverse impact on our revenues. Our suppliers may also be adversely affected by economic conditions that may impact their ability to provide important components used in our manufacturing processes on a timely basis, or at all. To a large degree, orders from many of our customers are dependent on demand from telecom carriers and hyper scale data centers around the world. Telecom carrier capital expenditure plans and execution can also be adversely impacted, both in terms of total spend and in determination of areas of investment within network infrastructures, by global and regional macroeconomic conditions. In addition, the recent imposition of tariffs by the United States, China and the European Union, and possible additional trade restrictions, may have an adverse impact on our customers, suppliers and the economies of the countries where we operate. We are unable to predict the likely occurrence, severity or duration of any potential future disruption in financial markets or adverse economic conditions in the U.S. and other countries, but the longer the duration the greater the risks we face in operating our business.
Changes to our enterprise resource planning system and other key software applications could cause unexpected problems to occur and disrupt the management of our business.
We recently completed an upgrade to our enterprise resource planning (“ERP”) system, and other management information systems, which are critical to the operational, accounting and financial functions of our company. We have invested $14.4 million towards our ERP system, and significant management attention and resources will continue to be used to facilitate training and full implementation of this system. We have experienced, and may continue to experience, operating or reporting disruptions during the course of utilizing and fine-tuning our ERP system, including limitations on our ability to deliver and bill for customer shipments, project our inventory requirements, manage our supply chain, maintain current and complete books and records, maintain an effective internal control environment and meet external reporting deadlines. We may also decide to modify or enhance our internal control processes as a result of gaining further experience operating our ERP system. These changes or other difficulties could materially and adversely impact our ability to manage our business as well as the accuracy and timely reporting of our operating results.
We may undertake divestitures of portions of our business, such as the divestiture of our Komoro Business, Zurich Business and our Amplifier Business, that require us to continue providing substantial post-divestiture transition services and support, which may cause us to incur unanticipated costs and liabilities and adversely affect our financial condition and results of operations.
From time to time, we consider divestitures of product lines or portions of our assets in order to streamline our business, focus on our core operations and raise cash. For example, on October 27, 2014, we sold our Komoro Business to Ushio Opto Semiconductors, Inc. ("Ushio Opto"). In addition, on September 12, 2013, we sold our Zurich Business to II-VI and on November 1, 2013, we sold our Amplifier Business to II-VI (See Note 3, Business Combinations and Dispositions, in our 2016 Annual Report, for further details). In connection with these divestitures, we entered into transition service, manufacturing service and supply agreements with both Ushio and II-VI to facilitate the ownership transition, collectively referred to as “transition agreements.” In order to perform under these transition agreements, we have been required to continue operating certain facilities, dedicate certain manufacturing capacity and maintain certain supplier agreements that have added additional costs and delayed our ability to fully restructure our operations to efficiently focus on our core ongoing business. If we fail to perform under any of these transition
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agreements, or if we do not successfully execute the restructuring of our operations after our transition agreement obligations have been fulfilled, our financial condition and results of operations could be harmed.
Our intellectual property rights may not be adequately protected.
Our future success will depend, in large part, upon our intellectual property rights, including patents, copyrights, design rights, trade secrets, trademarks and know-how. We maintain an active program of identifying technology appropriate for patent protection. Our practice is to require employees and consultants to execute non-disclosure and proprietary rights agreements upon commencement of employment or consulting arrangements. These agreements acknowledge our exclusive ownership of all intellectual property developed by the individuals during their work for us and require that all proprietary information disclosed will remain confidential. Although such agreements may be binding, they may not be enforceable in full or in part in all jurisdictions and any breach of a confidentiality obligation could have a negative effect on our business and our remedy for such breach may be limited.
Our intellectual property portfolio is an important corporate asset. The steps we have taken and may take in the future to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. We cannot assure you that our competitors will not successfully challenge the validity of our patents or design products that avoid infringement of our proprietary rights with respect to our technology. There can be no assurance that other companies are not investigating or developing other similar technologies, any patents will be issued from any application pending or filed by us, or, if patents are issued, the claims allowed will be sufficiently broad to deter or prohibit others from marketing similar products. In addition, we cannot assure you that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights under those patents will provide a competitive advantage to us or that our products and technology will be adequately covered by our patents and other intellectual property. Further, the laws of certain regions in which our products are or may be developed, manufactured or sold, including Asia-Pacific, Southeast Asia and Latin America, may not be enforceable to protect our products and intellectual property rights to the same extent as the laws of the United States, the United Kingdom and continental European countries. This is especially relevant since we have transferred our assembly and test operations and chip-on-carrier operations, including certain engineering-related functions, to Shenzhen, China, and have completed the transition of portions of these assembly and test operations to Venture in Malaysia. If we are unable to adequately protect our intellectual property rights, this may impede the development of new technologies and products, and our financial condition and operating results could be materially and adversely affected.
If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for volume shipments, our operating results could suffer.
Most of our customers do not purchase products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with our customers. Our manufacturing lines have passed our qualification standards, as well as our technical standards. However, our customers also require that our manufacturing lines pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under international quality standards. In addition, we have in the past encountered, and may in the future encounter, quality control issues as a result of relocating or changing our manufacturing lines or introducing new products to fill production. We may be unable to obtain customer qualification of our manufacturing lines or we may experience delays in obtaining customer qualification of our manufacturing lines. If we introduce new contract manufacturing partners and move any production lines from existing internal or external facilities, the new production lines will likely need to be re-qualified with our customers. Any delays or failure to obtain qualifications would harm our operating results and customer relationships.
Data breaches and cyber attacks could compromise our operations, or the operations of our contract manufacturers upon whom we rely, and cause significant damage to our business and reputation.
Cyber attacks have become more prevalent and much harder to detect and defend against. Companies, including in our industry, have been increasingly subject to a wide variety of security incidents, cyber attacks and other attempts to gain unauthorized access to their systems or to deny access and disrupt their systems and operations. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to a state-sponsored attack. Cyber threats may be generic, or they may be custom-crafted against our information systems.
In the ordinary course of our business, we maintain sensitive data on our networks, including our intellectual property, employee personal information and proprietary or confidential business information relating to our business and that of our customers and business partners. The secure maintenance of this information is critical to our business and reputation. Despite our implementation of network security measures, our network and storage applications may be subject to computer viruses, denial of service attacks, ransomware and other forms of cyber terrorism, unauthorized access by hackers or may be breached due to operator error, malfeasance or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. Data breaches and any unauthorized access or disclosure of our information, employee information or
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intellectual property could compromise our intellectual property, trade secrets and other sensitive business information, any of which could result in legal action against us, exposure of our intellectual property to our competitors, damages, fines and other adverse effects. A data security breach could also lead to public exposure of personal information of our employees, customers and others. Any such theft, loss or misuse of personal data collected, used, stored or transferred by us to run our business could result in significantly increased security costs or costs related to defending legal claims. Cyber attacks, such as computer viruses or other forms of cyber terrorism, may disrupt access to our network or storage applications. Such disruptions could result in delays or cancellations of customer orders or the production or shipment of our products. Further, cyber attacks may cause us to incur significant remediation costs, result in product development delays, disrupt key business operations and divert attention of management and key information technology resources. These incidents could also subject us to liability, expose us to significant expense and cause significant harm to our reputation and business.
Privacy concerns and compliance with domestic or foreign privacy laws and regulations may increase our expenses, result in legal or regulatory proceedings against us and may harm our business.
In the ordinary course of our business, we maintain sensitive personal data on our networks, including confidential information relating to our customers, employees and business partners. Global privacy legislation, enforcement, and policy activity are rapidly expanding and creating a complex compliance regulatory environment regarding the collection, use, storage and disclosure of such information. These laws and regulations are still evolving and are likely to be in flux and subject to uncertain interpretation for the foreseeable future. For example, various Chinese agencies are expected to issue additional regulations in the future to further define the requirements of the new Chinese Cyber Security Law, which took effect on June 1, 2017. For additional information regarding the new Cyber Security Law, see “We have significant operations in China, which exposes us to risks inherent in doing business in China.” Additionally, the European Union's General Data Protection Regulation (the “GDPR”), which comprehensively reforms the EU’s data protection laws, took effect on May 25, 2018. The GDPR imposes strict data protection requirements that may necessitate changes to our business practices to comply with the new requirements or to address the concerns of our customers or business partners relating to the GDPR. The GDPR also includes severe financial penalties for non-compliance. Complying with any new regulatory requirements could force us to incur substantial expenses or require us to change our business practices in a manner that could harm our business and any non-compliance may result in lawsuits, regulatory fines, or other actions or liability. Our business may also be harmed if these privacy-related laws or any newly adopted privacy-related laws are interpreted or implemented in a manner that is inconsistent from country to country and inconsistent with our current policies and practices, or those of our customers or business partners.
Costs to comply with rapidly changing global privacy-related laws and regulations and to implement related data protection measures could be significant. We may also have to change the manner in which we contract with our business partners, store and transfer information and otherwise conduct our business, which could increase our costs and harm our financial results. In addition, even inadvertent failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others, resulting in fines, penalties, restrictions on or prohibitions on our operations in certain jurisdictions, increased compliance costs and other adverse effects.
Our products may infringe the intellectual property rights of others, which could result in materially expensive litigation or require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future.
Companies in the industry in which we operate frequently are sued or receive informal claims of patent infringement or infringement of other intellectual property rights. We have, from time to time, received such claims, including from competitors and from companies that have substantially more resources than us. For example, see Part I, Item 3, Legal Proceedings, "Furukawa Patent Litigation," in our 2014 Annual Report.
Third parties may in the future assert claims against us concerning our existing products or with respect to future products under development, or with respect to products that we may acquire through acquisitions. We have entered into and may in the future enter into indemnification obligations in favor of some customers that could be triggered upon an allegation or finding that we are infringing other parties’ proprietary rights. For example, see Part I, Item 3, Legal Proceedings, "Oyster Optics Litigation," in this Annual Report on Form 10-K. Satisfaction of any such indemnification obligations to our customers could be costly and materially adversely affect our operating results. If we do infringe a third party’s rights, we may need to negotiate with holders of those rights in order to obtain a license to those rights or otherwise settle any infringement claim. We have from time to time received notices from third parties alleging infringement of their intellectual property and where appropriate have entered into license agreements with those third parties with respect to that intellectual property. Any license agreements that we wish to enter into the future with respect to intellectual property rights may not be available to us on commercially reasonable terms, or at all. We may not in all cases be able to resolve allegations of infringement through licensing arrangements, settlement, alternative designs or otherwise. We may take legal action to determine the validity and scope of the third-party rights or to defend against any allegations of infringement. Holders of intellectual property rights could become more aggressive in alleging infringement of their intellectual property rights and we may be the subject of such claims asserted by a third party. In the course of pursuing any of these means
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or defending against any lawsuits filed against us, we could incur material legal fees and related costs. The amount of time required to resolve these types of lawsuits, particularly patent-related litigation, is unpredictable and these actions may divert management's attention from the day-to-day operation of our business and consume our resources, which could materially and adversely affect our business, results of operations and cash flows. Due to the competitive nature of our industry, it is unlikely that we could increase our prices to cover such costs. In addition, such claims could result in significant penalties or injunctions that could prevent us from selling some of our products in certain markets or result in settlements or judgments that require payment of significant royalties or damages.
If we fail to obtain the right to use the intellectual property rights of others necessary to operate our business, our business and results of operations will be materially and adversely affected.
Certain companies in the telecommunications, data communications and optical components markets in which we sell our products have experienced frequent litigation regarding patent and other intellectual property rights. Numerous patents in these industries are held by others, including academic institutions and our competitors. Optical component suppliers may seek to gain a competitive advantage or other third parties, inside or outside our market, may seek an economic return on their intellectual property portfolios by making infringement claims against us. We currently license certain intellectual property from third parties, and in the future, we may need to obtain license rights to patents or other intellectual property held by others in order to conduct our business. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could be used to inhibit or prohibit our production and sale of existing products and our development of new products for our markets. Licenses granting us the right to use third-party technology may not be available on commercially reasonable terms, or at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results. In addition, in the event we are granted such a license, it is likely such license would be non-exclusive and other parties, including competitors, may be able to utilize such technology. Our larger competitors may be able to obtain licenses or cross-license their technology on better terms than we can, which could put us at a competitive disadvantage. In addition, our larger competitors may be able to buy such technology and preclude us from licensing or using such technology.
We generate a significant portion of our revenues internationally and therefore are subject to additional risks associated with the extent of our international operations.
For the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, 15 percent, 14 percent and 15 percent of our revenues, respectively, were derived from sales to customers located in the United States and 85 percent, 86 percent and 85 percent of our revenues, respectively, were derived from sales to customers located outside the United States. We are subject to additional risks related to operating in foreign countries, including:
• | currency fluctuations, which could result in increased operating expenses; |
• | changes in national infrastructure development priorities and associated capital budgets; |
• | trade restrictions, including restrictions imposed by the United States government on trading with parties in foreign countries, particularly with respect to China; |
• | difficulty in enforcing or adequately protecting our intellectual property; |
• | ability to hire qualified candidates; |
• | foreign income, value added and customs taxes; |
• | greater difficulty in accounts receivable collection and longer collection periods; |
• | political, legal and economic instability in foreign markets; |
• | foreign regulations; |
• | changes in, or impositions of, legislative or regulatory requirements; |
• | transportation delays; |
• | epidemics and illnesses; |
• | terrorism and threats of terrorism; |
• | work stoppages and infrastructure problems due to adverse weather conditions or natural disasters; |
• | work stoppages related to employee dissatisfaction; and |
• | the effective protections of, and the ability to enforce, contractual arrangements. |
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Any of these risks, or any other risks related to our foreign operations, could materially adversely affect our business, financial condition and results of operations.
We may face product liability claims.
Despite quality assurance measures, defects may occur in our products. The occurrence of any defects in our products could give rise to liability for damages caused by such defects, including consequential damages. Such defects could, moreover, impair market acceptance of our products and harm our reputation. Both could have a material adverse effect on our business and financial condition. In addition, we may assume product warranty liabilities related to companies we acquire, which could have a material adverse effect on our business and financial condition. In order to help mitigate the risk of liability for damages, we carry product liability insurance and errors and omissions insurance. We cannot assure you, however, that this insurance would adequately cover our costs arising from any product liability-related issues with our products or otherwise.
If we fail to attract and retain key personnel, our business could suffer.
Our future success depends, in part, on our ability to attract and retain key personnel, including executive management. Competition for highly skilled technical personnel is extremely intense and we continue to face difficulty identifying and hiring qualified engineers in many areas of our business and in various geographic locations. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Volatility or lack of performance in the trading price of our common stock may also affect our ability to attract and retain qualified personnel because job candidates and existing employees often emphasize the value of the stock awards they receive in connection with their employment when considering whether to accept or continue employment. If the perceived value of our stock awards is low or declines, it may harm our ability to recruit and retain highly skilled employees. Our future success also depends on the continued contributions of our executive management team and other key management and technical personnel, each of whom would be difficult to replace. The loss of services of these or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business.
At times, the market price of our common stock has fluctuated significantly.
The market price of our common stock has been, and is likely to continue to be, highly volatile. For example, during fiscal year 2018, the market price of our common stock ranged from a low of $5.61 per share to a high of $10.49 per share. Many factors could cause the market price of our common stock to rise and fall.
In addition to the matters discussed in other risk factors included in our public filings, some of the events that could impact our stock price are:
• | fluctuations in our financial condition and results of operations, including our gross margins and cash flow; |
• | changes in our business, operations or prospects; |
• | hiring or departure of key personnel; |
• | new contractual relationships with key suppliers or customers by us or our competitors; |
• | proposed acquisitions and dispositions by us or our competitors; |
• | financial results or projections that fail to meet public market analysts’ expectations and changes in stock market analysts’ recommendations regarding us, other optical technology companies or the telecommunication industry in general; |
• | future sales of common stock, or securities convertible into, exchangeable or exercisable for common stock, including in connection with acquisitions or other strategic transactions; |
• | adverse judgments or settlements obligating us to pay damages; |
• | acts of war, terrorism, or natural disasters; |
• | industry, domestic and international market and economic conditions, including sovereign debt issues in certain parts of the world and related global macroeconomic issues; |
• | low trading volume in our stock; |
• | developments relating to patents or property rights; and |
• | government regulatory changes. |
In connection with certain of our past acquisitions and the conversion of our convertible notes, we have issued shares of our common stock. The issuance of these shares has diluted our existing stockholders and their subsequent sale could potentially have a negative impact on our stock price.
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Our shares of common stock have experienced substantial price and volume fluctuations, in many cases without any direct relationship to our operating performance. An outgrowth of this market volatility is the significant vulnerability of our stock price to any actual or perceived fluctuation in the strength of the markets we serve, regardless of the actual consequence of such fluctuations. As a result, the market price for our stock is highly volatile. These broad market and industry factors have caused the market price of our common stock to fluctuate, and may in the future cause the market price of our common stock to fluctuate, regardless of our actual operating performance.
We are not restricted from issuing additional shares of our common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Issuances of shares of our common stock or convertible securities, including outstanding options and warrants, will dilute the ownership interest of our stockholders.
We have a history of large operating losses. We may not be able to sustain profitability in the future and as a result we may not be able to maintain sufficient levels of liquidity.
We have historically incurred losses and negative cash flows from operations since our inception. As of June 30, 2018, we had an accumulated deficit of $1,155.6 million. Although we achieved income from continuing operations during the years ended June 30, 2018, July 1, 2017 and July 2, 2016, we incurred losses from continuing operations for the year ended June 27, 2015 of $48.2 million.
As of June 30, 2018, we held $323.1 million in cash, cash equivalents and short-term investments, comprised of $245.7 million in cash and cash equivalents, and $77.4 million in short-term investments; and we had working capital, including cash, of $453.2 million. At June 30, 2018, we had debt of $3.2 million, consisting of capital leases.
The optical communications industry is subject to significant fluctuations. In order to remain competitive we incur substantial costs associated with research and development, qualification, production capacity and sales and marketing activities in connection with products that may be purchased, if at all, long after we have incurred such costs. In addition, the rapidly changing industry in which we operate, the length of time between developing and introducing a product to market, frequent changing customer specifications for products, customer cancellations of products or orders, intense competition, and general down cycles in the industry, among other things, make our prospects difficult to evaluate. As a result of these factors, it is possible that we may not (i) generate sufficient positive cash flow from operations; (ii) raise funds through the issuance of equity, equity-linked or convertible debt securities; (iii) be able to enter into new loan agreements in the future, draw advances under such agreements or repay any such amounts; (iv) conclude additional strategic dispositions or similar transactions; or (v) otherwise have sufficient capital resources to meet our future capital or liquidity needs. There are no guarantees we will be able to generate additional financial resources beyond our existing balances.
We have a large amount of intercompany balances with our China entities which may be subject to taxes and penalties when we try to pay them down or collect them.
Payments for goods and services into and out of China are subject to numerous and over-lapping government regulation with respect to foreign exchange controls, banking controls, import and export controls, and taxes. We have been operating in China for an extended period of time and have accumulated significant intercompany balances with our related entities. Our ability to repay or collect these balances may be restricted by Chinese laws and, as a result, we may be unable to successfully pay down or collect on these balances. As a consequence, we may be assessed additional taxes in China if we are unable to claim bad debt deductions or incur debt forgiveness income from the cancellation of these intercompany balances. Additionally, if we are found not to have complied with the various local laws surrounding cross border payments, we may incur penalties and fines for non-compliance. Any such taxes, penalties and/or fines could be significant in amount and, as a result, could have a material adverse effect on our financial condition, including our cash and cash equivalent balances.
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We have been named as a party to derivative action lawsuits in the past, and we may be named in additional litigation in the future, which would require significant management time and attention and result in significant legal expenses and could result in an unfavorable outcome which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
When the market price of a stock experiences a sharp decline, as has happened to us in the past, holders of that stock have often brought securities class action litigation against the company that issued the stock. Several securities class action lawsuits have been filed against us and certain of our current and former officers and directors in the past. Other class action lawsuits have been initiated in the past against Opnext, us and certain of our respective current and former officers and directors as purported derivative actions. The securities class action complaints alleged violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission (the "SEC"). Each purported derivative complaint alleged, among other things, counts for breaches of fiduciary duty, waste, and unjust enrichment. The courts approved the settlement of these lawsuits and the settlements became final in December 2014. For a description of these lawsuits, see Part II, Item 1, Legal Proceedings, "Class Action and Derivative Litigation" in our Quarterly Report on Form 10-Q filed on February 5, 2015. If new litigation of this type were to be initiated in the future, such litigation would likely divert the time and attention of our management and could cause us to incur significant expense in defending against the litigation. We could also be responsible for the advancement or reimbursement of significant legal fees of our current and former officers and directors to whom we may owe indemnity obligations. In addition, if any such suits were resolved in a manner adverse to us, the damages we could be required to pay may be substantial and could have a material and adverse impact on our results of operations and our ability to operate our business.
Because we do not intend to pay dividends, stockholders will benefit from an investment in our common stock only if it appreciates in value.
We have never declared or paid any dividends on our common stock. We anticipate that we will retain any future earnings to support operations and to finance the development of our business and do not expect to pay cash dividends in the foreseeable future. In addition, the Merger Agreement prohibits us from paying dividends. As a result, the success of an investment in our common stock will depend entirely upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.
We are subject to anti-corruption laws in the jurisdictions in which we operate, including the U.S. Foreign Corrupt Practices Act, or the FCPA, and the U.K. Bribery Act. Our failure to comply with these laws could result in penalties which could harm our reputation and have a material adverse effect on our business, results of operations and financial condition.
We are subject to the FCPA, the U.K. Bribery Act and other anti-corruption laws that generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits, along with various other anti-corruption laws. Although we have implemented policies and procedures designed to ensure that we, our employees and other intermediaries comply with the FCPA and other anti-corruption laws to which we are subject, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA or other laws for actions taken by our employees and other intermediaries with respect to our business or any businesses that we may acquire. We have manufacturing operations in China and other jurisdictions, many of which pose elevated risks of anti-corruption violations, and we export our products for sale internationally. This puts us in frequent contact with persons who may be considered “foreign officials” under the FCPA, resulting in an elevated risk of potential FCPA violations. If we are not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities could harm our reputation and have an adverse impact on our business, financial condition and results of operations.
In the future we may need to access the capital markets to raise additional equity, which could dilute our shareholder base.
We may need additional liquidity beyond our current expectations, such as to fund future growth, strengthen our balance sheet or to fund the cost of restructuring activities or acquisitions, and will continue to explore other sources of additional liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all. In addition, the Merger Agreement restricts our ability to issue equity securities, incur indebtedness or sell our product lines and businesses.
If we raise funds through the issuance of equity, or equity-linked or convertible debt securities, our stockholders may be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of securities held by existing stockholders. For example, we raised funds in a public offering of our common stock in September 2016, which diluted our existing
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stockholder base. If we raise funds in the future through the issuance of debt instruments, such as we did in February 2015 when we issued convertible notes and December 2012 when we issued exchangeable bonds, we will incur debt servicing costs and the agreements governing such debt instruments may contain covenant restrictions that limit our ability to, among other things: (i) incur additional debt, assume obligations in connection with letters of credit, or issue guarantees; (ii) create liens; (iii) make certain investments or acquisitions; (iv) enter into transactions with our affiliates; (v) sell certain assets; (vi) redeem capital stock or make other restricted payments; (vii) declare or pay dividends or make other distributions to stockholders; and (viii) merge or consolidate with any entity. (See Note 6, Credit Line and Notes, in our 2016 Annual Report, for further details). The exchangeable bonds issued in 2012 and the convertible notes issued in 2015 were subsequently exchanged for common stock and, in the case of the convertible notes issued in 2015, a cash payment. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations, develop or enhance our products, make acquisitions or otherwise respond to competitive pressures and operate effectively could be significantly limited.
We may have to incur substantially more debt in the future, which may subject us to restrictive covenants that could limit our ability to operate our business.
In the future, we may incur additional indebtedness through arrangements such as credit agreements or term loans that may impose restrictions and covenants that limit our ability to respond appropriately to market conditions, make capital investments or take advantage of business opportunities. In addition, any debt arrangements we may enter into would likely require us to make regular interest payments, which would adversely affect our results of operations.
Prior to our acquisition of Opnext, Opnext licensed its intellectual property to Hitachi and its wholly owned subsidiaries without restriction. In addition, Hitachi is free to license certain of Hitachi’s intellectual property that Opnext used in its business to any third party, including competitors, which could harm our business and operating results.
Opnext was initially created as a stand-alone entity by acquiring certain assets of Hitachi through various transactions. In connection with these transactions, Opnext acquired a number of patents and know-how from Hitachi, but also granted Hitachi and its wholly owned subsidiaries a perpetual right to continue to use those patents and know-how, as well as other patents and know-how that Opnext developed during a period which ended in July 2011 (or October 2012 in certain cases). This license back to Hitachi is broad and permits Hitachi to use this intellectual property for any products or services anywhere in the world, including licensing this intellectual property to our competitors.
Additionally, while significant intellectual property owned by Hitachi was assigned to Opnext when Opnext was formed, Hitachi retained and only licensed to Opnext the intellectual property rights to underlying technologies used in both Opnext products and the products of Hitachi. Under the agreement, Hitachi remains free to license these intellectual property rights to the underlying technologies to any party, including competitors. The intellectual property that has been retained by Hitachi and that can be licensed in this manner does not relate solely or primarily to one or more of Opnext’s products, or groups of products; rather, the intellectual property that was licensed to Opnext by Hitachi is used across a broad portion of our product portfolio. Competition from third parties using the underlying technologies retained by Hitachi could harm our business, financial condition and results of operations.
Our business and operating results may be adversely affected by natural disasters or other catastrophic events beyond our control.
Our business and operating results are vulnerable to natural disasters, such as earthquakes, fires, tsunami, volcanic activity and floods, as well as other events beyond our control such as power loss, telecommunications failures and uncertainties arising out of terrorist attacks in the United States and armed conflicts overseas. For example, in the latter three quarters of fiscal year 2012, our results of operations were materially and adversely impacted by the flooding in Thailand. Additionally, our corporate headquarters and a portion of our research and development and manufacturing operations are located in Silicon Valley, California, and select manufacturing facilities are located in Japan. These regions in particular have been vulnerable to natural disasters, such as the 2011 earthquake and subsequent tsunami that occurred in Japan, and the April 2016 earthquakes that took place on the island of Kyushu in Japan. The occurrence of any of these events could pose physical risks to our property and personnel, which may adversely affect our ability to produce and deliver products to our customers. Although we presently maintain insurance against certain of these events, we cannot be certain that our insurance will be adequate to cover any damage sustained by us or by our customers.
Our business involves the use of hazardous materials, and we are subject to environmental and import/export laws and regulations that may expose us to liability and increase our costs.
We handle hazardous materials as part of our manufacturing activities. Consequently, our operations are subject to environmental laws and regulations governing, among other things, the use and handling of hazardous substances and waste disposal. We may incur costs to comply with current or future environmental laws. As with other companies engaged in manufacturing activities
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that involve hazardous materials, a risk of environmental liability is inherent in our manufacturing activities, as is the risk that our facilities will be shut down in the event of a release of hazardous waste, or that we would be subject to extensive monetary liabilities. The costs associated with environmental compliance or remediation efforts or other environmental liabilities could adversely affect our business. Under applicable European Union regulations, we, along with other electronics component manufacturers, are prohibited from using lead and certain other hazardous materials in our products. We could lose business or face product returns if we fail to maintain these requirements properly.
In addition, the sale and manufacture of certain of our products require on-going compliance with governmental security and import/export regulations. We may, in the future, be subject to investigation which may result in fines for violations of security and import/export regulations. Furthermore, any disruptions of our product shipments in the future, including disruptions as a result of efforts to comply with governmental regulations, could adversely affect our revenues, gross margins and results of operations.
The disclosure requirements related to the “conflict minerals” provision of the Dodd-Frank Act may limit our supply and increase our costs for certain metals used in our products and could affect our reputation with customers or shareholders.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the SEC adopted a rule requiring public companies to disclose the use of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacturing of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to the due diligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex and we use contract manufacturers for some of our products, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. If we cannot determine that our products exclude conflict minerals sourced from the DRC or adjoining countries, some of our customers may discontinue, or materially reduce, purchases of our products, which could negatively affect our results of operations.
We can issue shares of preferred stock that may adversely affect your rights as a stockholder of our common stock.
Our certificate of incorporation authorizes us to issue up to 1.0 million shares of preferred stock with designations, rights and preferences determined from time-to-time by our Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights superior to those of holders of our common stock. For example, an issuance of shares of preferred stock could:
• | adversely affect the voting power of the holders of our common stock; |
• | make it more difficult for a third-party to gain control of us; |
• | discourage bids for our common stock at a premium; |
• | limit or eliminate any payments that the holders of our common stock could expect to receive upon our liquidation; or |
• | otherwise adversely affect the market price of our common stock. |
We may in the future issue shares of authorized preferred stock at any time.
Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.
Some provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These include provisions:
• | authorizing the Board of Directors to issue preferred stock; |
• | prohibiting cumulative voting in the election of directors; |
• | limiting the persons who may call special meetings of stockholders; |
• | prohibiting stockholder actions by written consent; |
• | creating a classified Board of Directors pursuant to which our directors are elected for staggered three-year terms; |
• | permitting the Board of Directors to increase the size of the board and to fill vacancies; |
• | requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and |
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• | establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings. |
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15 percent or more of the corporation’s outstanding voting securities, or certain affiliated persons. We do not currently have a stockholder rights plan in place.
Although we believe that these charter and bylaw provisions, and provisions of Delaware law, provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal properties as of June 30, 2018 are set forth below:
Location | Square Feet | Principal Use | Ownership | Lease Expiration | ||||
Sagamihara-shi, Japan | 343,000 | Office space, manufacturing, research and development | Lease | March 2033 | ||||
Shenzhen, China | 188,000 | Office space, manufacturing, research and development | Lease | June 2024 | ||||
Caswell, United Kingdom | 183,000 | Office space, manufacturing, research and development | Lease | March 2026 | ||||
San Donato, Italy | 68,000 | Office space, manufacturing, research and development | Lease | July 2025 | ||||
San Jose, California | 42,000 | Corporate headquarters, office space, research and development | Lease | January 2023 | ||||
In addition to the above properties, we also lease administrative, manufacturing and research and development facilities in Paignton, United Kingdom (18,000 square feet); Penang, Malaysia (2,000 square feet); Bangkok, Thailand (1,000 square feet); and Shanghai, China (1,000 square feet), with lease expiration dates ranging from February 2019 to December 2027.
As of June 30, 2018, we leased a total of approximately 0.8 million square feet worldwide, including the locations listed above. We believe that our properties are adequate to meet our business needs.
Item 3. Legal Proceedings
Overview
In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings are described below. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and a number of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect on our results of operations, financial position or cash flows, and even if we are ultimately successful in defending these claims, such claims may be expensive to defend and could distract our management team from other important business matters.
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Specific Matters
Oyster Optics Litigation
On November 23, 2016, Oyster Optics LLC (“Oyster”) filed a civil suit against Cisco Systems, Inc. (“Cisco”) and British Telecommunications PLC (“BT”), in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-CV-01301. In the complaint, Oyster alleges that Cisco and BT infringed seven patents owned by Oyster, which patents allegedly relate to certain Cisco optical platform products, some of which may incorporate Oclaro components. Oyster subsequently dismissed its claim against BT without prejudice. In January 2017, Cisco requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Cisco. In May 2017, Oclaro and Cisco preliminarily agreed to an allocation of the responsibilities for the costs of defense associated with Oyster’s claims. However, due to the uncertainty regarding the infringement allegations that Oyster may present at trial and the resultant uncertainty regarding the number of Oclaro components that may be implicated by such infringement allegations, Oclaro and Cisco agreed to defer until the conclusion of the litigation the final determination of whether and to what extent Oclaro will indemnify Cisco for any amounts Cisco may be required to pay Oyster and Cisco’s related defense costs. After discovery, Oyster’s infringement case against Cisco involved claims of only one patent and did not involve Oclaro components that were the subject of our commercial agreements with Cisco. In June of 2018, Cisco communicated its determination that the Oyster litigation against it did not involve Oclaro. Trial proceedings are set to begin November 5, 2018. Between June and September of 2017, Cisco and Oclaro filed eleven Petitions for inter partes review with the U.S. Patent Office of claims in six of the patents that Oyster originally asserted against Cisco. The Patent Office eventually instituted inter partes review for eight of the eleven Petitions involving claims of five of the six patents. Trials for the instituted Petitions are ongoing.
On November 24, 2016, Oyster also filed a civil suit against Coriant America Inc. (“Coriant”) in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-cv-01302. In the complaint against Coriant, Oyster alleges that Coriant has infringed the same seven patents that were asserted against Cisco. On May 18, 2017, Oyster’s case against Coriant was consolidated with cases that Oyster brought against other parties, including Cisco. On December 21, 2017, Coriant requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Coriant. Oclaro has refused this request for reasons including that Oyster’s claims against Coriant do not clearly implicate Oclaro products and that Coriant’s request was not timely made. Coriant has stated their disagreement with this position. As a result, Oclaro remains in discussions with Coriant regarding Coriant’s request for defense and indemnification. Oyster and Coriant informed the Court on April 12, 2018, that “all matters in controversy between the parties have been settled, in principle.” On July 3, 2018, the Court granted a joint motion from Oyster and Coriant to dismiss their case with prejudice.
Oyster also filed a civil suit on November 24, 2016 against Ciena Corporation (“Ciena”) in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-CV-01300. In the complaint against Ciena, Oyster alleges that Ciena has infringed the same seven patents that were asserted against Cisco. Oyster’s case against Ciena was later transferred to the Northern District of California which granted a motion that Ciena filed to stay the case pending inter partes review of the Oyster patents. On June 1, 2018, the parties filed a joint status report reporting on the status of the inter partes review proceedings. Also on June 1, 2018, counsel for Oyster wrote the Court a letter indicating that because there are no further proceedings in the PTAB concerning one of the asserted patents, that Oyster requested that the litigation move forward as to the asserted claims of that patent only and that the Court set a scheduling conference. On June 4, 2018, the Court indicated that Oyster should file a noticed motion for any such relief and the case currently remains stayed. On October 16, 2017, Ciena requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Ciena. Oclaro refused this request for reasons including that Oyster's claims against Ciena do not clearly implicate Oclaro products and that Ciena's request was not timely made. Ciena has stated its disagreement with this position. As a result, discussions with Ciena regarding Ciena’s request for defense and indemnification have not completed.
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Oclaro Merger Litigation
Following announcement of the execution of the Merger Agreement on March 12, 2018, seven lawsuits were filed by purported stockholders of Oclaro challenging its proposed acquisition by Lumentum, Inc. The first suit, a putative class action styled as Nicholas Neinast v. Oclaro, Inc., et al., No. 3:18-cv-03112-VC, was filed in the United States District Court for the Northern District of California on May 24, 2018, and was against Oclaro, its directors, Lumentum, Merger Sub, and Merger Sub LLC (the “Neinast Lawsuit”). Five additional suits, styled as Gerald F. Wordehoff v. Oclaro, Inc., et al., No. 5:18-cv-03148-NC (the “Wordehoff Lawsuit”), Walter Ryan v. Oclaro, Inc., et al., No. 3:18-cv-03174-VC (the “Ryan Lawsuit”), and Jayme Walker v. Oclaro, Inc., et al., No. 3:18-cv-03203 (the “Walker Lawsuit”), Kevin Garcia v. Oclaro, Inc., et al., No. 5:18-cv-03262-VKD (the “Garcia Lawsuit”), and Saisravan Bharadwaj Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit”) were also filed in the United States District Court for the Northern District of California on, respectively, May 25, 2018, May 29, 2018, May 30, 2018, May 31, 2018 and June 9, 2018. Each of the lawsuits name Oclaro and its directors as defendants. The Ryan Lawsuit and the Karri Lawsuit, like the Neinast Lawsuit, were putative class actions. A seventh suit, a putative class action styled as Adam Franchi v. Oclaro, Inc., et al., Case 1:18-cv-00817-GMS, was filed in the United States District Court for the District of Delaware on May 30, 2018, and was against Oclaro, its directors, Lumentum, Merger Sub, and Merger Sub LLC (the “Franchi Lawsuit” and, with the Neinast Lawsuit, the Wordehoff Lawsuit, the Ryan Lawsuit, the Walker Lawsuit, the Garcia Lawsuit, and the Karri Lawsuit, the “Lawsuits”).
The Lawsuits alleged that Oclaro and its directors violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder because the Proxy Statement/Prospectus was incomplete and misleading. The Lawsuits further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act. The Neinast Lawsuit additionally alleged that Oclaro’s directors breached fiduciary duties by entering into the Merger, and also names Lumentum, Merger Sub, and Merger Sub LLC as violators of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The Franchi Lawsuit additionally named Lumentum, Merger Sub, and Merger Sub LLC as violators of Section 20(a) of the Exchange Act.
The Lawsuits sought, among other things, injunctive relief preventing the parties from consummating the merger, rescission of the transactions contemplated by the Merger Agreement should they be consummated, and litigation costs, including attorneys’ fees. The Lawsuits also sought damages to be awarded to the plaintiff and any class if the Merger were consummated. In addition, the Wordehoff Lawsuit sought injunctive relief directing defendants to disseminate a true and complete proxy statement/prospectus and declaratory relief that defendants violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder.
To avoid the risk of the Lawsuits delaying or adversely affecting the Merger and to minimize the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing and believing that the initial Proxy Statement/Prospectus disclosed all material information concerning the Merger and no supplemental disclosure was required under applicable law, Oclaro voluntarily filed with the SEC a supplement to the Proxy Statement/Prospectus on June 29, 2018.
Thereafter, on July 25, 2018, the plaintiff in the Garcia Lawsuit dismissed his action, with prejudice as to the individual plaintiff. The plaintiffs in the Neinast, Franchi, Wordehoff, and Ryan Lawsuits dismissed these actions, with prejudice as to the respective individual plaintiffs, on July 27, 2018. The plaintiff in the Walker Lawsuit dismissed her action, with prejudice as to the individual plaintiff, on August 14, 2018. Counsel for plaintiff in the remaining lawsuit, the Karri Lawsuit, has stated his intention to file an amended complaint. If the Karri Lawsuit proceeds, Oclaro intends to defend the action vigorously.
Item 4. Mine Safety Disclosures
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders
Our common stock is currently quoted on the NASDAQ Global Select Market under the symbol “OCLR.” The following table shows, for the periods indicated, the high and low sale prices of our common stock as reported on the NASDAQ Global Select Market.
Price Per Share of Common Stock | |||||||
High | Low | ||||||
Fiscal year 2018 quarter ended: | |||||||
September 30, 2017 | $ | 10.49 | $ | 7.95 | |||
December 30, 2017 | 8.95 | 5.87 | |||||
March 31, 2018 | 10.20 | 5.61 | |||||
June 30, 2018 | 9.67 | 7.43 | |||||
Fiscal year 2017 quarter ended: | |||||||
October 1, 2016 | $ | 9.34 | $ | 4.58 | |||
December 31, 2016 | 10.19 | 6.93 | |||||
April 1, 2017 | 11.30 | 8.02 | |||||
July 1, 2017 | 10.93 | 6.92 | |||||
On August 13, 2018, the closing sale price of our common stock as reported on the NASDAQ Global Select Market was $9.05 per share. According to the records of our transfer agent, there were 1,617 stockholders of record of our common stock on August 13, 2018. A substantially greater number of holders of our common stock are “street name” or beneficial owners, whose shares of record are held by banks, brokers and other financial institutions.
Dividends
We have never paid cash dividends on our common stock. To the extent we generate earnings, we intend to retain them for use in our business and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, the Merger Agreement prohibits us from paying dividends.
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Comparison of Stockholder Return
The following graph compares the cumulative five-year total return provided to stockholders on Oclaro, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite Index and the NASDAQ Telecommunications Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Oclaro, Inc., the NASDAQ Composite Index, and the NASDAQ Telecommunications Index
June 29, 2013 | June 28, 2014 | June 27, 2015 | July 2, 2016 | July 1, 2017 | June 30, 2018 | ||||||||||||||||||
Oclaro, Inc. | $ | 100.00 | $ | 182.20 | $ | 191.53 | $ | 405.93 | $ | 791.53 | $ | 756.78 | |||||||||||
NASDAQ Composite Index | $ | 100.00 | $ | 129.23 | $ | 149.28 | $ | 142.88 | $ | 180.43 | $ | 220.68 | |||||||||||
NASDAQ Telecommunications Index | $ | 100.00 | $ | 113.12 | $ | 118.74 | $ | 114.66 | $ | 130.24 | $ | 154.02 | |||||||||||
* Assumes that $100.00 was invested in Oclaro common stock and in each index at market closing prices on June 29, 2013, and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.
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Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report.
The selected financial data set forth below at June 30, 2018 and July 1, 2017, and for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, are derived from our consolidated financial statements included elsewhere in this Annual Report.
The selected financial data at July 2, 2016, June 27, 2015 and June 28, 2014, and for the fiscal years ended June 27, 2015 and June 28, 2014 are derived from audited financial statements not included in this Annual Report, and are adjusted to reflect the discontinued operations related to our Amplifier and Zurich Businesses.
Consolidated Statements of Operations Data
Year Ended | |||||||||||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | June 27, 2015 | June 28, 2014 | |||||||||||||||
(Thousands, except per share data) | |||||||||||||||||||
Revenues | $ | 543,170 | $ | 600,968 | $ | 407,914 | $ | 341,276 | $ | 390,871 | |||||||||
Operating income (loss) | 67,325 | 118,968 | 15,842 | (45,461 | ) | (102,331 | ) | ||||||||||||
Income (loss) from continuing operations | 62,453 | 127,859 | 8,580 | (48,234 | ) | (102,125 | ) | ||||||||||||
Income (loss) from discontinued operations | — | — | — | (8,458 | ) | 119,944 | |||||||||||||
Net income (loss) | 62,453 | 127,859 | 8,580 | (56,692 | ) | 17,819 | |||||||||||||
Income (loss) from continuing operations per common share: | |||||||||||||||||||
Basic | $ | 0.37 | $ | 0.81 | $ | 0.08 | $ | (0.45 | ) | $ | (1.03 | ) | |||||||
Diluted | $ | 0.36 | $ | 0.77 | $ | 0.08 | $ | (0.45 | ) | $ | (1.03 | ) | |||||||
Weighted average shares of common stock outstanding: | |||||||||||||||||||
Basic | 169,263 | 158,115 | 110,599 | 108,144 | 98,986 | ||||||||||||||
Diluted | 171,736 | 165,031 | 113,228 | 108,144 | 98,986 | ||||||||||||||
Consolidated Balance Sheet Data
June 30, 2018 | July 1, 2017 | July 2, 2016 | June 27, 2015 | June 28, 2014 | |||||||||||||||
(Thousands) | |||||||||||||||||||
Total assets | $ | 720,799 | $ | 665,149 | $ | 359,049 | $ | 325,884 | $ | 365,685 | |||||||||
Total stockholders’ equity | 592,016 | 513,673 | 166,611 | 153,000 | 207,928 | ||||||||||||||
Long-term obligations | 11,297 | 12,398 | 75,857 | 71,545 | 18,884 | ||||||||||||||
The following items affect the comparability of our financial data for the periods shown in the consolidated statements of operations data above:
Revenues, operating income (loss), income (loss) from continuing operations and net income (loss) in fiscal year 2016 are based on a 53 week year, as compared to a 52 week year in each of fiscal years 2018, 2017, 2015 and 2014.
Revenues, operating income (loss), income (loss) from continuing operations and net income (loss) in fiscal years 2015 and 2014 includes the revenues, costs of revenues and operating expenses of the industrial and consumer business of Oclaro Japan through October 27, 2014, the date the sale of the business to Ushio Opto Semiconductors, Inc. ("Ushio Opto") was completed.
Operating income (loss), income (loss) from continuing operations and net income (loss) for fiscal year 2018 includes approximately $4.3 million in acquisition-related costs related to the proposed merger with Lumentum, as more fully discussed in Note 1, Basis
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of Preparation and Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Operating income (loss) for fiscal year 2014 includes approximately $3.7 million in flood-related income related to settlement payments from our insurers and contract manufacturer relating to losses we incurred during the Thailand flooding as more fully discussed in Note 6, Flood-Related (Income) Expense, Net, to our consolidated financial statements included in our Annual Report on Form 10-K filed on August 28, 2015.
Income (loss) from discontinued operations corresponds to the net operating results of our Amplifier and Zurich Businesses, as more fully discussed in Note 3, Business Combinations and Dispositions, to our consolidated financial statements included in our Annual Report on Form 10-K file on August 28, 2015.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Risk Factors” appearing in Item 1A of this Annual Report , “Selected Financial Data” appearing in Item 6 of this Annual Report and our consolidated financial statements and related notes appearing elsewhere in this Annual Report, including Note 1, Basis of Preparation and Summary of Significant Accounting Policies, to such consolidated financial statements. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated by the forward-looking statements due to, among other things, the risks set forth above under the caption "Risk Factors," our critical accounting estimates discussed below and important other factors set forth in this Annual Report. Please see “Special Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual Report.
Overview
During our fiscal year 2018, we were one of the leading providers of optical components and modules for the long-haul, metro and data center markets. Leveraging more than three decades of laser technology innovation and photonics integration, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
We have research and development ("R&D") and chip fabrication facilities in China, Italy, Japan, United Kingdom and the United States. We also have contract manufacturing sites in Asia, with design, sales and service organizations in most of the major regions around the world.
Our customers include Amazon.com, Inc.; Ciena Corporation ("Ciena"); Cisco Systems, Inc. ("Cisco"); Coriant GmbH ("Coriant"); Google Inc.; Huawei Technologies Co. Ltd ("Huawei"); InnoLight Technology Corporation; Juniper Networks, Inc.; Nokia/Alcatel-Lucent; and ZTE Corporation ("ZTE").
Recent Developments
Merger
On March 11, 2018, Lumentum Holdings Inc., a Delaware corporation (“Lumentum”), Oclaro, Prota Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Lumentum (“Merger Sub”), and Prota Merger, LLC, a Delaware limited liability company and a wholly owned subsidiary of Lumentum (“Merger Sub LLC”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, the acquisition of Oclaro will be accomplished through a merger of Merger Sub with and into Oclaro (the “First Step Merger”) with Oclaro surviving the First Step Merger. As soon as reasonably practicable following the First Step Merger, Oclaro will merge with and into Merger Sub LLC with Merger Sub LLC continuing as the surviving entity and a wholly owned subsidiary of Lumentum (the “Second Step Merger,” and taken together with the First Step Merger, the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the terms and conditions set forth therein, at the effective time of the First Step Merger (the “Effective Time”), each share of the common stock of Oclaro (the “Oclaro Common Stock”) issued and outstanding immediately prior to the Effective Time (other than (x) shares of Oclaro Common Stock owned by Lumentum, Oclaro, or any direct or indirect wholly owned subsidiary of Lumentum or Oclaro or (y) shares of Oclaro Common Stock owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law, in each case immediately prior to the Effective Time, will be cancelled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):
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(A) | $5.60 in cash, without interest (the “Cash Consideration”), plus |
(B) | 0.0636 of a validly issued, fully paid and nonassessable share of the common stock of Lumentum, par value $0.001 per share (“Lumentum Common Stock”) (such ratio, the “Exchange Ratio”). |
With regard to the Merger Consideration, if the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all Lumentum Common Stock which may be issued in the future pursuant to the conversion of Oclaro Options, Oclaro Restricted Stock Units, or Oclaro Restricted Stock (as defined below)) would exceed 19.9 percent of the Lumentum Common Stock issued and outstanding immediately prior to the Effective Time (the “Stock Threshold”), (A) the Exchange Ratio will be reduced to the minimum extent necessary (rounded down to the nearest one thousandth) such that the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all shares of Lumentum Common Stock which may be issued after the Effective Time pursuant to company compensatory awards) does not exceed the Stock Threshold and (B) the Cash Consideration for all purposes will be increased on a per share basis by an amount equal to $68.975, multiplied by the difference between the initial Exchange Ratio and the Exchange Ratio.
Each Oclaro restricted stock unit award (an “Oclaro RSU”) that does not become vested at the closing will be converted into a Lumentum restricted stock unit award (a “Lumentum RSU”) with the same terms and conditions, including vesting, that were applicable to such Oclaro RSU, except that the number of Lumentum shares subject to the Lumentum RSU will equal the product of (i) the number of Oclaro shares subject to such Oclaro RSU (with any performance milestones deemed achieved based on the maximum level of achievement) multiplied by (ii) the sum of (A) the Exchange Ratio plus (B) the quotient obtained by dividing the Cash Consideration by Lumentum’s average closing price of the 10 trading days ending on the third trading day prior to the closing (such sum, the “Equity Award Exchange Ratio”), rounded down to the nearest whole share.
Each Oclaro stock option (an “Oclaro Option”), whether vested or unvested, will be converted into a Lumentum stock option (a “Lumentum Option”) with the same terms and conditions, including vesting, that were applicable to such Oclaro Option, except that (i) the number of shares subject to the Lumentum Option will equal the product of (A) the number of Oclaro shares subject to such Oclaro Option multiplied by (B) the Equity Award Exchange Ratio, rounded down to the nearest whole share and (ii) the exercise price of the Lumentum Option will equal (A) the exercise price per share of the Oclaro Option divided by (B) the Equity Award Exchange Ratio, rounded up to the nearest whole cent. Notwithstanding the foregoing, any Oclaro Option that is held by an individual who is not an Oclaro employee as of immediately prior to the closing will be cancelled and converted into the Merger Consideration for each net option share covered by such Oclaro Option, subject to applicable withholding taxes.
In addition, each Oclaro restricted stock award (“Oclaro Restricted Stock Award”) and Oclaro RSU that becomes vested as of immediately prior to the closing (including each Oclaro Restricted Stock Award held by a non-employee director) will be converted into the right to receive the Merger Consideration in respect of each Oclaro share underlying such award, subject to applicable withholding taxes. Each Oclaro stock appreciation right (“Oclaro SAR”) will be cancelled and converted into the right to receive a cash amount equal to the product of (i) the number of Oclaro shares subject to the Oclaro SAR multiplied by (ii) the positive difference of (A) the cash equivalent value of the Merger Consideration less (B) the strike price of the Oclaro SAR, subject to applicable withholding taxes.
If Lumentum determines that the treatment of Oclaro equity awards described above would violate, in respect of the holder thereof, the applicable laws of a non-U.S. jurisdiction, Lumentum may treat such Oclaro equity award in a different manner so long as such treatment is no less favorable to the holder of such Oclaro equity award.
The Boards of Directors of Lumentum and Oclaro have unanimously approved the Merger and the Merger Agreement. The transaction is subject to customary closing conditions, including the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and under applicable anti-trust laws in China, the effectiveness of a registration statement on Form S-4 registering the shares of Lumentum common stock to be issued in connection with the Merger, and approval of the Merger Agreement by the holders of a majority of the outstanding shares of Oclaro Common Stock. The transaction is not subject to any financing condition. On April 4, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act. On July 10, 2018, Oclaro's stockholders approved the Merger Agreement.
The Merger Agreement contains customary representations, warranties and covenants of Lumentum, Oclaro, Merger Sub and Merger Sub LLC, including, (i) covenants by Oclaro concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (ii) covenants by Lumentum concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (iii) a covenant by Oclaro that, subject to certain exceptions, the Board of Directors of Oclaro will recommend to its shareholders adoption of the Merger Agreement, and (iv) a covenant that Oclaro will not solicit, initiate, or knowingly encourage, facilitate or induce the making of inquiry, offer or proposal that would reasonably be expected to lead to any Acquisition Proposal (as defined in the Merger Agreement). The Merger Agreement contains certain termination rights for both Lumentum and Oclaro and further provides that upon termination of the Merger Agreement under specified circumstances (including termination by Oclaro to accept a superior
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proposal), Oclaro may be required to pay Lumentum a termination fee of $63 million. The Merger Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals, Lumentum may be required to pay Oclaro a termination fee of $80 million.
Termination of Denial Order and Reinstitution of ZTE's Export Privileges
On April 16, 2018, the U.S. Department of Commerce ("DOC") changed and reactivated its previously suspended denial order and suspended the export privileges of Zhongxing Telecommunications Equipment Corporation ("ZTE Corporation") and its subsidiary, ZTE Kangxun Telecommunications Ltd. ("ZTE Kangxun") (collectively, "ZTE") after determining that ZTE made false statements to the DOC related to senior employee disciplinary actions ("Denial Order"). On July 13, 2018, following approval of a settlement agreement between the DOC and ZTE and ZTE's payment of certain amounts to the DOC, the Denial Order was terminated and ZTE was removed from the DOC's Denied Persons List. During the pendency of the Denial Order, ZTE was prohibited from participating in any way in any transaction subject to the EAR and U.S. companies were restricted from exporting or re-exporting to or on behalf of ZTE any item subject to the EAR or engaging in any transaction to service any item subject to the EAR that has been or will be exported from the U.S. and which was owned, possessed or controlled by ZTE. During the pendency of the Denial Order, we ceased shipment of products to ZTE, which has been one of our significant customers.
As of June 30, 2018, we have an accounts receivable balance of $0.5 million with ZTE, which we believe to be collectible. During the year ended June 30, 2018, we recorded a $3.1 million charge to write-down on-hand inventory that was designated for future products to be sold to ZTE, that we may no longer be able to use or re-allocate to other customers.
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Results of Operations
Fiscal Years Ended June 30, 2018 and July 1, 2017
The following table sets forth our consolidated results of operations for the fiscal years ended June 30, 2018 and July 1, 2017, and the year-over-year increase (decrease) in our results, expressed both in dollar amounts (thousands) and as a percentage of revenues, except where indicated:
Year Ended | Increase (Decrease) | ||||||||||||||||||||
June 30, 2018 | July 1, 2017 | Change | |||||||||||||||||||
(Thousands) | % | (Thousands) | % | (Thousands) | % | ||||||||||||||||
Revenues | $ | 543,170 | 100.0 | $ | 600,968 | 100.0 | $ | (57,798 | ) | (9.6 | ) | ||||||||||
Cost of revenues | 340,266 | 62.6 | 365,729 | 60.9 | (25,463 | ) | (7.0 | ) | |||||||||||||
Gross profit | 202,904 | 37.4 | 235,239 | 39.1 | (32,335 | ) | (13.7 | ) | |||||||||||||
Operating expenses: | |||||||||||||||||||||
Research and development | 64,498 | 11.9 | 57,094 | 9.5 | 7,404 | 13.0 | |||||||||||||||
Selling, general and administrative | 64,489 | 11.9 | 58,461 | 9.7 | 6,028 | 10.3 | |||||||||||||||
Amortization of other intangible assets | 653 | 0.1 | 786 | 0.1 | (133 | ) | (16.9 | ) | |||||||||||||
Restructuring, acquisition and related (income) expense, net | 4,358 | 0.8 | 60 | — | 4,298 | 7,163.3 | |||||||||||||||
(Gain) loss on disposal of property and equipment | 1,581 | 0.3 | (130 | ) | — | 1,711 | n/m | (1 | ) | ||||||||||||
Total operating expenses | 135,579 | 25.0 | 116,271 | 19.3 | 19,308 | 16.6 | |||||||||||||||
Operating income | 67,325 | 12.4 | 118,968 | 19.8 | (51,643 | ) | (43.4 | ) | |||||||||||||
Other income (expense): | |||||||||||||||||||||
Interest income (expense), net | 912 | 0.2 | (13,313 | ) | (2.2 | ) | 14,225 | n/m | (1 | ) | |||||||||||
Gain (loss) on foreign currency transactions | 3,267 | 0.6 | (3,652 | ) | (0.6 | ) | 6,919 | n/m | (1 | ) | |||||||||||
Other income (expense), net | 3,339 | 0.6 | 810 | 0.1 | 2,529 | 312.2 | |||||||||||||||
Total other income (expense) | 7,518 | 1.4 | (16,155 | ) | (2.7 | ) | 23,673 | n/m | (1 | ) | |||||||||||
Income before income taxes | 74,843 | 13.8 | 102,813 | 17.1 | (27,970 | ) | (27.2 | ) | |||||||||||||
Income tax (benefit) provision | 12,390 | 2.3 | (25,046 | ) | (4.2 | ) | 37,436 | n/m | (1 | ) | |||||||||||
Net income | $ | 62,453 | 11.5 | $ | 127,859 | 21.3 | $ | (65,406 | ) | (51.2 | ) | ||||||||||
(1) | Not meaningful |
Revenues
Revenues for the year ended June 30, 2018 decreased by $57.8 million, or 10 percent, compared to the year ended July 1, 2017. Compared to the year ended July 1, 2017, revenues from sales of our 100 Gb/s + transmission modules decreased by $35.3 million, or 8 percent, primarily due to a decline in our sales of our client side transceivers and our line side components; and revenues from sales of our 40 Gb/s and lower transmission modules decreased by 22.5 million, or 16 percent, primarily due to certain legacy 40 Gb/s and 10 Gb/s products being gradually replaced by our newer higher speed products. This product mix shift reflects our continued focus on the market for higher speed products that are smaller in size and have lower power consumption. The decline in revenues during the year ended June 30, 2018 was also due to our cessation of shipments to ZTE during the fourth quarter of fiscal year 2018 following the DOC's re-imposition of export sanctions on ZTE. For the fiscal year ended June 30, 2018, ZTE accounted for $49.8 million, or 9 percent of our revenues, compared to $105.3 million, or 18 percent, for the fiscal year ended July 1, 2017. On July 13, 2018, the DOC terminated the export sanctions on ZTE, following which we are permitted to resume business activities with ZTE. The timing of our resumption of shipping products to ZTE and the quantities thereof are uncertain.
For the year ended June 30, 2018, Nokia accounted for $92.2 million, or 17 percent, of our revenues; Ciena accounted for $70.5 million, or 13.0 percent, of our revenues; Cisco accounted for $68.1 million, or 13 percent, or our revenues; and Huawei accounted for $59.4 million, or 11 percent, of our revenues.
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For the year ended July 1, 2017, Cisco accounted for $106.2 million, or 18 percent, or our revenues; ZTE accounted for $105.3 million, or 18 percent, of our revenues; Huawei accounted for $87.6 million, or 15 percent, of our revenues; and Nokia accounted for $69.3 million, or 12 percent, of our revenues.
Gross Profit
Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross profit reflected as a percentage of revenues.
Our gross margin rate decreased to 37 percent for the year ended June 30, 2018, compared to 39 percent for the year ended July 1, 2017. This decrease was primarily due to a 4 percentage point impact of our fixed costs on lower revenues and a 2 percentage point impact related to the write-down of inventory, including inventory that was designated for future products to be sold to ZTE, which we may no longer be able to use or re-allocate to other customers. This was partially offset by approximately 4 percentage points of improved product mix, primarily as a result of increased sales of higher margin 100 Gb/s products.
Our cost of revenues consists of the costs associated with manufacturing our products, and includes the purchase of raw materials, labor costs and related overhead, including stock-based compensation charges and the costs charged by our contract manufacturers for the products they manufacture for us. Charges for excess and obsolete inventory are also included in cost of revenues.
Research and Development Expenses
Research and development expenses increased by $7.4 million, or 13 percent, for the year ended June 30, 2018, compared to the year ended July 1, 2017. The increase was primarily related to an increase of $4.1 million in personnel-related costs; an increase of $1.2 million in stock-based compensation charges; an increase of $1.2 million in non-recurring engineering and material expenses; and an increase of $1.3 million in depreciation expense related to higher levels of capital investments for our fabrication facilities.
Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer hardware, costs related to prototyping and facilities costs for certain research and development focused sites.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $6.0 million, or 10 percent, for the year ended June 30, 2018, compared to the year ended July 1, 2017. The increase was primarily a result of transition costs and incremental depreciation charges of $4.4 million related to the upgrade of our enterprise resource planning system; an increase of $1.7 million in stock-based compensation charges; and an increase of $1.6 million in professional fees. This was partially offset by a decrease of $0.6 million in personnel-related charges and a $0.4 million decrease in sales-related incentives.
Selling, general and administrative expenses consist primarily of personnel-related expenses, including stock-based compensation charges related to employees engaged in sales, general and administrative functions, and other costs, including costs for audit, professional fees and insurance costs; information technology; insurance; sales and marketing; human resources and legal and other corporate costs. Selling, general and administrative expenses also include facilities expenses for sites which are not primarily focused on manufacturing or research and development.
Amortization of Other Intangible Assets
Amortization of other intangible assets decreased by $0.1 million during the year ended June 30, 2018 as compared to the year ended July 1, 2017. Based on the current level of our other intangible assets as of June 30, 2018, we expect our future amortization of intangible assets to be immaterial for fiscal year 2019.
Restructuring, Acquisition and Related (Income) Expense, Net
Restructuring, acquisition and related (income) expense, net was $4.4 million in expense for the year ended June 30, 2018, as compared to $0.1 million in expense for the year ended July 1, 2017. The increase was primarily related to $4.3 million in professional fees associated with the Merger Agreement with Lumentum entered into during fiscal year 2018.
(Gain) Loss on Disposal of Property and Equipment
Loss on disposal of property and equipment was $1.6 million for the year ended June 30, 2018, as compared to a $0.1 million gain on disposal of property and equipment for the year ended July 1, 2017. The loss on disposal of property and equipment in fiscal year 2018 was primarily related to the disposal of property and equipment related to certain legacy data communication products.
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Other Income (Expense), Net
Other income (expense) was $7.5 million in income for the year ended June 30, 2018, compared to $16.2 million in expense for the year ended July 1, 2017, or a $23.7 million change in other income (expense). This change in other income (expense) primarily related to a $14.2 million increase in interest income, as a result of recording a $13.3 million expense in fiscal year 2017 related to the conversion of our outstanding 6.00% Notes. We also recorded a $3.3 million gain on foreign currency transactions during fiscal year 2018, which represented a $6.9 million improvement from the prior year, related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries. Effective October 1, 2017, the functional currency for our worldwide operations is the U.S. dollar. Prior to October 1, 2017, the functional currency for each of our foreign subsidiaries was the respective local currency for that subsidiary. We also realized a $2.5 million increase in our other income (expense), net as a result of a recovery of certain accounts receivable balances previously written-off.
Income Tax (Benefit) Provision
For the fiscal year ended June 30, 2018, we recorded an income tax provision of $12.4 million, primarily related to our Japan subsidiary's reversal of deferred tax assets related to the net operating loss utilized to offset the subsidiary's taxable income in fiscal year 2018. For the fiscal year ended July 1, 2017, we recorded an income tax benefit of approximately $25.0 million, primarily related to the release of a valuation allowance against our Japan subsidiary's deferred tax assets.
Fiscal Years Ended July 1, 2017 and July 2, 2016
The following table sets forth our consolidated results of operations for the fiscal years ended July 1, 2017 and July 2, 2016, and the year-over-year increase (decrease) in our results, expressed both in dollar amounts (thousands) and as a percentage of revenues, except where indicated:
Year Ended | Increase (Decrease) | |||||||||||||||||||||
July 1, 2017 | July 2, 2016 | Change | ||||||||||||||||||||
(Thousands) | % | (Thousands) | % | (Thousands) | % | |||||||||||||||||
Revenues | $ | 600,968 | 100.0 | $ | 407,914 | 100.0 | $ | 193,054 | 47.3 | |||||||||||||
Cost of revenues | 365,729 | 60.9 | 291,496 | 71.5 | 74,233 | 25.5 | ||||||||||||||||
Gross profit | 235,239 | 39.1 | 116,418 | 28.5 | 118,821 | 102.1 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||
Research and development | 57,094 | 9.5 | 46,067 | 11.3 | 11,027 | 23.9 | ||||||||||||||||
Selling, general and administrative | 58,461 | 9.7 | 53,457 | 13.1 | 5,004 | 9.4 | ||||||||||||||||
Amortization of other intangible assets | 786 | 0.1 | 995 | 0.2 | (209 | ) | (21.0 | ) | ||||||||||||||
Restructuring, acquisition and related (income) expense, net | 60 | — | 25 | — | 35 | 140.0 | ||||||||||||||||
(Gain) loss on disposal of property and equipment | (130 | ) | — | 32 | — | (162 | ) | n/m | (1 | ) | ||||||||||||
Total operating expenses | 116,271 | 19.3 | 100,576 | 24.7 | 15,695 | 15.6 | ||||||||||||||||
Operating income | 118,968 | 19.8 | 15,842 | 3.9 | 103,126 | 651.0 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||
Interest income (expense), net | (13,313 | ) | (2.2 | ) | (4,986 | ) | (1.2 | ) | (8,327 | ) | 167.0 | |||||||||||
Loss on foreign currency transactions | (3,652 | ) | (0.6 | ) | (2,362 | ) | (0.6 | ) | (1,290 | ) | 54.6 | |||||||||||
Other income (expense), net | 810 | 0.1 | 935 | 0.2 | (125 | ) | (13.4 | ) | ||||||||||||||
Total other income (expense) | (16,155 | ) | (2.7 | ) | (6,413 | ) | (1.6 | ) | (9,742 | ) | 151.9 | |||||||||||
Income before income taxes | 102,813 | 17.1 | 9,429 | 2.3 | 93,384 | 990.4 | ||||||||||||||||
Income tax (benefit) provision | (25,046 | ) | (4.2 | ) | 849 | 0.2 | (25,895 | ) | n/m | (1 | ) | |||||||||||
Net income | $ | 127,859 | 21.3 | $ | 8,580 | 2.1 | $ | 119,279 | 1,390.2 | |||||||||||||
(1) | Not meaningful |
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Revenues
Revenues for the year ended July 1, 2017 increased by $193.1 million, or 47 percent, compared to the year ended July 2, 2016. Compared to the year ended July 2, 2016, revenues from sales of our 100 Gb/s transmission modules increased by $229.4 million, or 100 percent, primarily due to growth in our 100 Gb/s and above client side transceivers and our line side modules and components; and revenues from sales of our 40 Gb/s transmission and lower modules decreased by 36.3 million, or 20 percent, primarily due to certain legacy 40 Gb/s and 10 Gb/s products being gradually replaced by our newer higher speed products. This product mix shift reflects our continued focus on the market for higher speed products that are smaller in size and have lower power consumption.
For the year ended July 1, 2017, Cisco accounted for $106.2 million, or 18 percent, or our revenues; ZTE accounted for $105.3 million, or 18 percent, of our revenues; Huawei accounted for $87.6 million, or 15 percent, of our revenues; and Nokia accounted for $69.3 million, or 12 percent, of our revenues.
For the year ended July 2, 2016, Huawei accounted for $85.6 million, or 21 percent, of our revenues; Nokia/Alcatel-Lucent accounted for $53.8 million, or 13 percent, of our revenues; ZTE accounted for $41.6 million, or 10 percent, of our revenues; and Coriant accounted for $40.7 million, or 10 percent, of our revenues.
Gross Profit
Gross profit is calculated as revenues less cost of revenues. Gross margin rate is gross profit reflected as a percentage of revenues.
Our gross margin rate increased to 39 percent for the year ended July 1, 2017, compared to 29 percent for the year ended July 2, 2016. The improvement in the gross margin rate relates to higher margin 100 Gb/s product growth that contributed approximately 14 percentage points of improvement and economies of scale related to manufacturing overhead that contributed approximately 4 percentage points of improvement. This was partially offset by a 7 percentage point decrease due to lower sales of our 40 Gb/s telecommunications products.
Research and Development Expenses
Research and development expenses increased by $11.0 million, or 24 percent, for the year ended July 1, 2017, compared to the year ended July 2, 2016. The increase was primarily related to an increase of $6.0 million in personnel-related costs from additional hiring, which included an increase of $0.6 million in stock-based compensation charges; and an increase of $4.8 million in non-recurring engineering and material expenses. In addition, our fiscal year 2017 research and development expenses were favorably impacted by $1.2 million as a result of the weakening of the British pound, Euro and other currencies relative to the U.S. dollar.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $5.0 million, or 9 percent, for the year ended July 1, 2017, compared to the year ended July 2, 2016. The increase was primarily related to an increase of $2.4 million in stock-based compensation charges; an increase of $0.7 million in personnel related costs from additional hiring, an increase of $0.7 million in property and other business taxes, and an increase of $0.6 million in travel-related charges.
Amortization of Other Intangible Assets
Amortization of other intangible assets decreased by $0.2 million during the year ended July 1, 2017 as compared to the year ended July 2, 2016.
Other Income (Expense), Net
Other income (expense) was $16.2 million in expense for the year ended July 1, 2017 as compared to $6.4 million in expense for the year ended July 2, 2016. This increase in expense primarily related to an $8.3 million increase in interest expense related to the conversion of $65.0 million of our convertible notes during the first quarter of fiscal year 2017, resulting in an induced conversion expense of $7.4 million and an interest make-whole charge of $5.9 million, partially offset by $4.7 million in additional interest expense that was recognized in fiscal year 2016 related to the convertible notes compared to fiscal year 2017 due to the conversion of these notes; and a $1.3 million increase in foreign currency transaction losses during the year ended July 1, 2017 as compared to the year ended July 2, 2016, related to the revaluation of our U.S. dollar denominated balances in our U.K. and Japan subsidiaries.
Income Tax (Benefit) Provision
For the fiscal year ended July 1, 2017, we recorded an income tax benefit of approximately $25.0 million, primarily related to the release of a valuation allowance against our Japan subsidiary's deferred tax assets; partially offset by our current foreign operations.
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For the fiscal year ended July 2, 2016, we recorded an income tax provision of approximately $0.8 million, primarily related to our foreign operations; partially offset by the deferred tax benefits generated by our Italy investment tax credit.
Liquidity and Capital Resources
Cash flows from Operating Activities
Net cash provided by operating activities for the year ended June 30, 2018 was $125.1 million, primarily resulting from net income adjusted for non-cash items of $119.4 million and a $5.6 million increase in cash due to changes in operating assets and liabilities. The adjustment to net income for non-cash items consisted of $30.2 million in depreciation and amortization, $15.0 million of expense related to stock-based compensation, a $9.2 million adjustment to the deferred tax asset as a result of our utilization of net operating losses in Japan, a $3.1 million write-down of inventories designated to be sold to ZTE, and a $1.6 million loss on our disposal of property and equipment primarily related to certain legacy data communication products; partially offset by $1.2 million in accretion on our marketable securities and $0.8 million from the amortization of the deferred gain from the Caswell sales-leaseback transaction. The $5.6 million increase in cash due to changes in operating assets and liabilities was primarily comprised of a $24.1 million decrease in accounts receivable attributable to a decrease in revenues and timing of collections; and a $6.6 million decrease in prepaid expenses and other current assets primarily due to a decrease in our non-trade receivables from our contract manufacturers, reflecting our lower revenue levels in fiscal year 2018; partially offset by a $16.8 million decrease in accounts payable largely attributable to the timing of purchases and payments to vendors, a $7.0 million increase in inventory resulting from the receipt of inventory intended for sale in future quarters, and a $1.9 million decrease in our accrued expenses and other liabilities.
Net cash provided by operating activities for the year ended July 1, 2017 was $95.6 million, primarily resulting from net income adjusted for non-cash items of $142.6 million, partially offset by a $47.1 million decrease in cash due to changes in operating assets and liabilities. The adjustment to net income for non-cash items consisted $21.5 million in depreciation and amortization, $11.2 million of expense related to stock-based compensation, an $8.5 million charge related to the issuance of common stock to settle a portion of the interest make-whole and induced conversion liabilities in connection with the convertible notes, partially offset by a $25.7 million release of the valuation allowance on the deferred tax assets related to Japan, and $0.7 million from the amortization of the deferred gain from the Caswell sales-leaseback transaction. The $47.1 million decrease in cash due to changes in operating assets and liabilities was primarily comprised of a $28.8 million increase in accounts receivable attributable to an increase in revenues and timing of collections, a $27.0 million increase in inventory resulting from the receipt of inventory intended for sale in future quarters, and a $17.9 million increase in prepaid expenses and other current assets primarily due to an increase in our non-trade receivables related to the increased volume of business going through our contract manufacturers, partially offset by a $17.8 million increase in accounts payable largely attributable to the timing of purchases and payments to vendors, and a $9.1 million increase in our accrued expenses and other liabilities.
Net cash provided by operating activities for the year ended July 2, 2016 was $8.1 million, primarily resulting from net income of $8.6 million and non-cash charges of $25.0 million, partially offset by a $25.4 million decrease in cash due to changes in operating assets and liabilities. The $25.0 million of non-cash adjustments primarily consisted of $16.8 million of expense related to depreciation and amortization, $8.2 million of expense related to stock-based compensation, and $0.8 million related to the amortization of debt issuance costs of the convertible notes, partially offset by $0.8 million from the amortization of the deferred gain from the Caswell sales-leaseback transaction. The $25.4 million decrease in cash due to changes in operating assets and liabilities was primarily comprised of a $23.4 million increase in accounts receivable attributable to an increase in revenues and timing of collections, an $11.0 million increase in inventory resulting from the receipt of inventory intended for sale in future quarters, and a $2.4 million increase in prepaid expenses and other current assets, partially offset by an $11.3 million increase in accounts payable largely attributable to the timing of purchases and payments to vendors, and a $0.1 million decrease in other non-current assets.
Cash flows from Investing Activities
Net cash used in investing activities for the year ended June 30, 2018 was $95.6 million, primarily consisting of $219.3 million of purchases of available-for-sale short-term investments and $57.6 million used in capital expenditures, partially offset by $180.6 million of maturities of available-for-sale short-term investments and the transfer of $0.7 million from restricted cash related to the release of collateral used to secure credit card accounts and deposits for value-added taxes in foreign jurisdictions.
Net cash used in investing activities for the year ended July 1, 2017 was $107.3 million, primarily consisting of $69.4 million of purchases of available-for-sale short-term investments and $70.1 million used in capital expenditures, partially offset by a $32.0 million of maturities of available-for-sale short-term investments.
Net cash used in investing activities for the year ended July 2, 2016 was $27.2 million, primarily consisting of $29.6 million used in capital expenditures, partially offset by a $2.4 million reduction in restricted cash.
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Cash Flows from Financing Activities
Net cash used in financing activities for the year ended June 30, 2018 was $2.3 million, primarily consisting of $3.7 million related to shares repurchased to settle tax obligations on vesting of restricted stock units and $1.2 million in payments on capital lease obligations; partially offset by $2.6 million in proceeds from the exercise of stock options.
Net cash provided by financing activities for the year ended July 1, 2017 was $133.4 million, primarily consisting of $135.2 million in proceeds relating to offering, issuance and sale of 17,250,000 shares of our common stock and $4.9 million in proceeds from the exercise of stock options, partially offset by $4.4 million related to shares repurchased for tax withholdings on vesting of restricted stock units and $2.2 million in payments on capital lease obligations.
Net cash used in financing activities for the year ended July 2, 2016 was $4.5 million, primarily consisting of $3.2 million in payments on capital leases and $1.6 million related to shares repurchased for tax withholdings on vesting of restricted stock units, partially offset by $0.3 million in cash proceeds from the exercise of stock options.
Effect of Exchange Rates on Cash and Cash Equivalents for the Years Ended June 30, 2018, July 1, 2017 and July 2, 2016
Effective October 1, 2017, the functional currency for our worldwide operations is the U.S. dollar. Prior to October 1, 2017, the functional currency for each of our foreign subsidiaries was the respective local currency for that subsidiary. Translation adjustments reported prior to October 1, 2017, remain as a component of accumulated other comprehensive income in our consolidated balance sheet. Effective October 1, 2017, monetary assets and liabilities denominated in currencies other than the U.S. dollar functional currency are re-measured each reporting period into U.S. dollars, with the resulting exchange gains and losses reported in gain (loss) on foreign currency transactions, net within our consolidated statement of operations.
The effect of exchange rates on cash and cash equivalents for the years ended June 30, 2018, July 1, 2017 and July 2, 2016, was a decrease of $0.8 million, an increase of $1.6 million and an increase of $7.7 million, respectively, which primarily consisted of the revaluation of the U.S. dollar denominated operating intercompany payables and receivables of our foreign subsidiaries and the revaluation of foreign currency cash, accounts receivable and accounts payable balances to the functional currency of the respective subsidiaries.
Credit Line and Notes
On February 19, 2015, we closed the private placement of our 6.00% Notes, representing $65.0 million in aggregate principal. The sale of the 6.00% Notes resulted in proceeds of approximately $61.6 million, after deducting the initial purchaser's discount of $3.4 million. We also incurred offering costs of $0.6 million in connection with the 6.00% Notes. In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all of our 6.00% Notes were canceled, and the indenture, dated as of February 19, 2015, by and between us and U.S. Bank National Association, pursuant to which the 6.00% Notes were issued, was satisfied and discharged. We issued in aggregate 34,659,972 shares of our common stock and made cash payments totaling $4.7 million in exchange for $65.0 million aggregate principal amount of our 6.00% Notes. These agreements are more fully discussed in Note 4, Credit Line and Notes, to our consolidated financial statements included elsewhere in this Annual Report.
On March 28, 2014, Oclaro, Inc. and its subsidiary, Oclaro Technology Limited (the “Borrower”), entered into a loan and security agreement (the “Loan Agreement”) with Silicon Valley Bank (the “Bank”) pursuant to which the Bank provided the Borrower with a three-year revolving credit facility of up to $40.0 million. On March 28, 2017, the Loan Agreement expired, and was not renewed. There were no amounts outstanding under the Loan Agreement during fiscal year 2017 or at the time of the Loan Agreement's expiration. This agreement is more fully discussed in Note 4, Credit Line and Notes, to our consolidated financial statements included elsewhere in this Annual Report.
Future Cash Requirements
As of June 30, 2018, we held $323.1 million in cash, cash equivalents and short-term investments, comprised of $245.7 million in cash and cash equivalents and $77.4 million in short-term investments; and we had working capital of $453.2 million.
Based on our current cash and cash equivalent balances, we believe that we have sufficient funds to support our operations through the next 12 months, including approximately $25.0 million to $35.0 million of capital expenditures that we expect to incur during such 12 month period.
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In the event we need additional liquidity beyond our current expectations, such as to fund future growth or strengthen our balance sheet, we will explore additional sources of liquidity. These additional sources of liquidity could include one, or a combination, of the following: (i) issuing equity securities, (ii) incurring indebtedness secured by our assets, (iii) issuing debt and/or convertible debt securities, or (iv) selling product lines, other assets and/or portions of our business. Issuance of additional equity securities would dilute our existing investors and could contain terms that are senior to or that adversely impact our common stock. Incurring additional indebtedness or issuing debt and/or convertible debt securities would subject us to debt service expenses, and could subject us to restrictive covenants, potential events of default and other terms that could harm our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all. Our Merger Agreement with Lumentum restricts our ability to issue securities, incur indebtedness and sell product lines and businesses.
For additional information on the risks we face related to future cash requirements, see Item 1A. Risk Factors under “— Risks Related to Our Business — We have a history of large operating losses. We may not be able to sustain profitability in the future and as a result we may not be able to maintain sufficient levels of liquidity.” included elsewhere in this Annual Report.
As of June 30, 2018, $53.7 million of the $245.7 million of our cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we could be required to accrue and pay additional taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S., except for specific entities in China and Germany where we decided to exit certain businesses.
Risk Management — Foreign Currency Risk
As our business is multinational in scope, we are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. We expect that a majority of our revenues will continue to be denominated in U.S. dollars, while a portion of our expenses will continue to be denominated in the U.K. pound sterling and the Japanese yen. Fluctuations in the exchange rate between the U.S. dollar, the U.K. pound sterling, the Japanese yen and, to a lesser extent, other currencies in which we collect revenues and pay expenses, could affect our operating results. This includes the Chinese yuan and the Euro in which we pay expenses in connection with operating our facilities in Shenzhen and Shanghai, China, and San Donato, Italy. To the extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more significantly than experienced to date, our exposure would increase.
Periodically, we have entered into foreign currency forward exchange contracts in an effort to mitigate a portion of our exposure to such fluctuations between the U.S. dollar and the U.K. pound sterling, and between the U.S. dollar and the Japanese yen, and we may be required to convert currencies to meet our obligations. Under certain circumstances, foreign currency forward exchange contracts can have an adverse effect on our financial condition. As of June 30, 2018 and July 1, 2017, we did not have any outstanding foreign currency forward exchange contracts. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk," below.
Contractual Obligations
Our contractual obligations at June 30, 2018, by nature of the obligation and amount due over identified periods of time, are set out in the table below:
Capital Lease Obligations(1) | Operating Lease Obligations | Sublease Income | Purchase Obligations | Total | |||||||||||||||
(Thousands) | |||||||||||||||||||
Fiscal Year: | |||||||||||||||||||
2019 | $ | 2,444 | $ | 9,071 | $ | (248 | ) | $ | 78,835 | $ | 90,102 | ||||||||
2020 | 613 | 9,787 | (133 | ) | — | 10,267 | |||||||||||||
2021 | 265 | 9,981 | (10 | ) | — | 10,236 | |||||||||||||
2022 | — | 10,290 | — | — | 10,290 | ||||||||||||||
2023 | — | 10,159 | — | — | 10,159 | ||||||||||||||
Thereafter | — | 37,734 | — | — | 37,734 | ||||||||||||||
$ | 3,322 | $ | 87,022 | $ | (391 | ) | $ | 78,835 | $ | 168,788 | |||||||||
(1) | Amounts include interest. |
The purchase obligations consist of our total outstanding purchase order commitments at June 30, 2018. Any capital purchases to which we are committed are included in these outstanding purchase order commitments, with the exception of capital purchases
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made under capital leases, which are shown separately. Operating leases are future annual commitments under non-cancelable operating leases, including rents payable for land and buildings.
Our total amount of unrecognized tax benefits as of June 30, 2018 was approximately $3.1 million. While it is often difficult to predict the final outcome of any particular uncertain tax position, management believes that unrecognized tax benefits could decrease by $1.1 million in the next twelve months.
Off-Balance Sheet Arrangements
We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and executive officers. We have not recorded a liability associated with these indemnification arrangements, as we historically have not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that we maintain, however, such insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in connection with acquisitions, divestitures and during the normal course of business, such as indemnifications in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any material amounts related to these indemnifications; therefore, no accrual has been made for these indemnifications.
Other than as set forth above, we are not currently party to any material off-balance sheet arrangements.
Recent Accounting Pronouncements
See Note 1, Basis of Preparation and Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding the effect of new accounting pronouncements on our consolidated financial statements.
Application of Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements included elsewhere in this Annual Report, which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect our reported assets and liabilities, revenues and expenses and other financial information. Actual results may differ significantly from those based on our estimates and judgments or could have been materially different if we had used different assumptions, estimates or conditions. In addition, our financial condition and results of operations could vary due to a change in the application of a particular accounting standard.
We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where:
• | the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
• | the impact of such estimates and assumptions on our financial condition or operating performance is material. |
Our significant accounting policies are described in Note 1, Basis of Preparation and Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report. Not all of these significant accounting policies, however, require that we make estimates and assumptions that we believe are “critical accounting estimates.” We have discussed our accounting policies with the Audit Committee of our Board of Directors, and we believe that the policies described below involve critical accounting estimates.
Revenue Recognition
Revenue represents the amounts, excluding sales taxes, derived from the sale of goods and services to third-party customers during a given period. Specifically, we recognize product revenue when persuasive evidence of an arrangement exists, the product has been shipped, title has transferred, collectability is reasonably assured, fees are fixed or determinable and there are no uncertainties with respect to customer acceptance. For certain sales, we are required to determine, in particular, whether the delivery has occurred, whether items will be returned and whether we will be paid under normal commercial terms. For certain products sold to customers, we specify delivery terms in the agreement under which the sale was made and assess each shipment against those terms, and only recognize revenue when we are certain that the delivery terms have been met. Before accepting a new customer, we review publicly available information and credit rating databases to provide ourselves with reasonable assurance that the new customer will pay
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all outstanding amounts in accordance with our standard terms. For existing customers, we monitor historic payment patterns and we perform ongoing credit evaluations to assess whether we can expect payment in accordance with the terms set forth in the agreement under which the sale was made.
Inventory Valuation
In general, our inventories are valued at the lower of cost to acquire or manufacture our products or market value, less write-offs of inventory we believe could prove to be unsalable. Manufacturing costs include the cost of the components purchased to produce our products and related labor and overhead. We review our inventory on a quarterly basis to determine if it is saleable. Products may be unsalable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. We currently reduce the cost basis for inventory using methods that take these factors into account. If we find that the cost of inventory is greater than the current market price, we will write the inventory down to the estimated selling price, less the estimated cost to complete and sell the product.
Accounting for Stock-Based Compensation
We recognize in our statement of operations all stock-based compensation, including grants of employee stock options and grants of restricted stock, based on their fair values on the grant dates. Estimating the grant date fair value of employee stock options required us to make judgments in the determination of inputs into the Black-Scholes valuation model which we used to arrive at estimates of the fair value for such awards. These inputs are based upon highly subjective assumptions as to the volatility of the underlying stock, risk free interest rates and the expected life of the options. As required under the accounting standards, we reviewed our valuation assumptions at each grant date and, as a result, our valuation assumptions used to value employee stock options granted periodically change. No stock options have been granted in fiscal years 2016, 2017 or 2018.
If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation expense and our consolidated results of operations could be materially impacted. During the years ended June 30, 2018, July 1, 2017 and July 2, 2016, we recognized $15.0 million, $11.2 million and $8.2 million of stock-based compensation expense, respectively. See Note 9, Stock-based Compensation, to the accompanying consolidated financial statements included elsewhere in this Annual Report for further information.
Income Taxes
We account for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities using enacted applicable tax rates. Valuation allowances are provided against deferred income tax assets which are not likely to be realized.
Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance, recorded cumulative net losses in prior fiscal periods and uncertainty about the timing of future profits, we have provided a full valuation allowance against most of our U.S. and foreign deferred tax assets except for Japan deferred tax assets where recognition is more likely than not, and an Italy investment tax credit. Our valuation allowance decreased by $32.2 million and $60.0 million for fiscal years 2018 and 2017, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our principal market risks are our exposure to changes in interest rates and certain exchange rates. We do not use risk sensitive instruments for trading purposes.
Interest rates
We have financed our operations through a mixture of issuances of equity and debt securities, capital leases, working capital and by drawing on credit agreements. We have exposure to interest rate fluctuations on our money market funds, certain of our short-term investments and for amounts borrowed through our capital leases.
At June 30, 2018, we had $3.2 million due under our capital leases. An increase in our average interest rate by 1.0 percent would increase our annual interest expense by less than $0.1 million.
We monitor our interest rate risk on cash balances and short-term investments. At June 30, 2018, a 100 basis point increase in interest rates would reduce the market value of our cash equivalents and short-term investments by $0.1 million, while a 100 basis point decrease in interest rates would increase the market value of our cash equivalents and short-term investments by $0.1 million.
We believe our current interest rate risk is immaterial.
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Foreign currency
As our business is multinational in scope, we are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. We expect that a majority of our revenues will be denominated in U.S. dollars, while a majority of our expenses will be denominated in the U.S. dollar, and to a lesser extent, the U.K. pound sterling and the Japanese yen. Fluctuations in the exchange rate between the U.S. dollar, the U.K. pound sterling, the Japanese yen, the Chinese yuan, the Euro and other currencies utilized by us to pay expenses, could affect our operating results. To the extent the exchange rate between the U.S. dollar and these currencies were to fluctuate more significantly than experienced to date, our exposure would increase.
Effective October 1, 2017, the functional currency for our worldwide operations is the U.S. dollar. Prior to October 1, 2017, the functional currency for each of our foreign subsidiaries was the respective local currency for that subsidiary. The change in our functional currency is a result of significant changes in economic facts and circumstances, including (i) a re-organization of our operating environment, which includes consolidating and integrating our sales, supply chain and manufacturing organizations; (ii) a transition to centrally negotiating worldwide supplier contracts and capital expenditures in U.S. dollars; and (iii) a shift to recording all intercompany transactions in U.S. dollars.
Translation adjustments reported prior to October 1, 2017, will remain as a component of accumulated other comprehensive income in our condensed consolidated balance sheet. The translated values for any non-monetary assets and liabilities as of October 1, 2017 become the new accounting basis for those assets.
Effective October 1, 2017, monetary assets and liabilities denominated in currencies other than the U.S. dollar functional currency are re-measured each reporting period into U.S. dollars, with the resulting exchange gains and losses reported in gain (loss) on foreign currency transactions, net within the consolidated statement of operations.
As of June 30, 2018, certain of our foreign subsidiaries had $11.5 million in non-U.S. dollar denominated accounts payable, net of accounts receivable, related to purchases from suppliers and sales to external customers, and $7.3 million in non-U.S. dollar denominated cash accounts. It is estimated that a 10 percent fluctuation in the U.S. dollar relative to these other foreign currencies would lead to a profit of $0.4 million (U.S. dollar strengthening), or loss of $0.4 million (U.S. dollar weakening) on the translation of these balances, which would be recorded as gain (loss) on foreign currency transactions, net, in our consolidated statement of operations.
Hedging
Periodically, we enter into foreign currency forward contracts in an effort to mitigate a portion of our exposure to fluctuations between the U.S. dollar and the Japanese Yen and between the U.S. dollar and the U.K. pound sterling. We do not currently hedge our exposure to the Chinese yuan or the Euro, but we may in the future if conditions warrant. Under certain circumstances, foreign currency forward contracts can have an adverse effect on our financial condition.
During the year ended June 30, 2018, we entered into foreign currency forward exchange contracts, which expired in the same fiscal quarter in which they were opened. In connection with these hedges, during the year ended June 30, 2018, we recorded a $0.7 million loss on foreign currency transactions, net within our consolidated statement of operations. As of June 30, 2018, we did not have any outstanding foreign currency forward contracts.
Bank Liquidity Risk
As of June 30, 2018, we have approximately $88.3 million of unrestricted cash (excluding money market funds) in operating accounts that are held with domestic and international financial institutions. These cash balances could be lost or become inaccessible if the underlying financial institutions fail or if they are unable to meet the liquidity requirements of their depositors and they are not supported by the national government of the country in which such financial institution is located. Notwithstanding, to date, we have not incurred such losses and have had full access to our operating accounts. See Note 1, Basis of Preparation and Summary of Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report. We believe any failures of domestic and international financial institutions could impact our ability to fund our operations in the short term.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item may be found beginning on pages F-1 of this Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
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Item 9A. Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018.
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as the principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, the Company's controls over the identification and recording of foreign currency transaction gains and losses was not designed or operating effectively and resulted in a material weakness in internal control over financial reporting.
We have also concluded that this material weakness does not require a restatement of, or a change in, our consolidated financial statements for any prior annual or interim period. We have developed a remediation plan for this material weakness, which includes enhanced analytical and review-based controls over the identification and recording of foreign currency transaction gains and losses.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.
Our management assessed the effectiveness of our internal control over financial reporting as of June 30, 2018. In making its assessment of internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on our assessment, management concluded that, as of June 30, 2018, our internal control over financial reporting of foreign currency transaction gains and losses was not effective based on these criteria.
Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting. This report appears under Item 8 of this Annual Report.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the most recent fiscal quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except as noted above.
Item 9B. Other Information
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have three classes of directors, currently consisting of three Class I directors, three Class II directors and two Class III directors. The Class I, Class II and Class III directors serve until the annual meeting of stockholders to be held in 2020, 2018 and 2019, respectively, or until their respective successors are elected and qualified. At each annual meeting, directors are elected for a full term of three years to succeed those whose terms are expiring. The terms of the three classes are staggered in a manner so that only one class is elected by stockholders annually. Edward Collins, Denise Haylor and William L. Smith are currently serving as Class I directors.
For each member of the Board and person nominated to become a director there follows information given by each concerning his or her principal occupation and business experience for at least the past five years, the names of other public reporting companies of which he or she serves, or has during the past five years served, as a director and his or her age and length of service as one of our directors. In addition, for each director and person nominated to become a director, there follows information regarding the specific experience, qualifications, attributes or skills that led to the conclusion of the Board that the person should serve as a director. There are no family relationships among any of our directors and executive officers. No director or executive officer is related by blood, marriage or adoption to any other director or executive officer. No arrangements or understandings exist between any director or person nominated for election as a director and any other person pursuant to which such person is to be selected as a director or nominee for election as a director.
Class I Directors - Terms Expiring 2020
Edward Collins, 75, has served as a director of Oclaro since May 2008. From 1995 to 2014, Mr. Collins served as the Managing Director and a Partner at ChinaVest Group, a private equity group investing in China. In connection with the winding up of ChinaVest V, LP, he was an officer of Phoenix Liquidators LLC from 2011 to 2013. From 2012 to 2015, Mr. Collins was Senior Counsel with the international law firm White and Case. From 2007 to 2010, Mr. Collins served as Chairman, and is currently a director, of California Bank of Commerce. From 1999 to 2011 he served as chairman of the audit committee of TFC - the Taiwan Greater China Fund, listed on the NYSE, and was a director and chairman of the audit committee of the successor to TFC, the Shelton Greater China Fund, until 2012. Since 2009, Mr. Collins has served as non-executive Chairman of Branded Spirits, Ltd., a privately held company that sells branded spirits. He served as non-executive Chairman of MedioStream, Inc., a software company, from 2001 to 2014. From 1988 to 1994, Mr. Collins was a partner at the law firm of McCutchen, Doyle, Brown, & Enersen, where he was responsible for the Greater China practice. He has served as counsel to various investment groups, banks and manufacturing companies in Hong Kong and Taiwan, and is a member of the State Bar of California. With his many years of experience in the private equity industry, Mr. Collins brings to our Board in-depth knowledge of finance and strategic investment strategy. Mr. Collins’ experience and training as a practicing attorney also enables him to bring valuable insights to the Board, including his thorough understanding of the legal risk of our business. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Collins should serve as a director.
Denise Haylor, 54, has served as a director of Oclaro since August 2016. She has served as a Partner and Managing Director of The Boston Consulting Group since April 2017. From June 2014 to March 2017, she served as the Chief Human Resources Officer and member of the Executive Committee of Royal Philips, a global industrial company with businesses in lighting, healthcare and consumer lifestyle. Prior to joining Royal Philips, from February 2011 to November 2012, Ms. Haylor was the Senior Vice President, HR Operations, HR Business Partners and Talent Management of Flextronics, an electronics, manufacturing services and end to end supply chain solutions provider, and from November 2012 to June 2014, Ms. Haylor was the Chief Human Resources Officer of Flextronics. Ms. Haylor began her carrier in human resources with Siemens in 1988 and later joined Motorola in June 1998, where she held a number of HR roles within Motorola and worked in many businesses. She earned a master's degree in strategic human resource management from the Kingston Business School of the University of London, graduated from the advanced human resource executive program at the University of Michigan and earned a six sigma - black belt. Ms. Haylor brings to the Board her extensive knowledge in the area of human resources, as well as experience as a senior executive of a global, complex and large industrial company. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Ms. Haylor should serve as a director.
William L. Smith, 61, has served as a director of Oclaro since July 2012. Prior to Oclaro, Mr. Smith served on Opnext’s Board of Directors from April 2009 to July 2012. From September 2014 to September 2016, Mr. Smith served as President, AT&T Technology Operations, where he was responsible for all technology-related operations across AT&T’s global service footprint, including network planning and engineering, AT&T’s global network operations center, mobility and wireline central offices, undersea cable infrastructure, construction and engineering with wireless field operations, core installation and maintenance, U-verse field operations and data center operations. From January 2010 to September 2014, Mr. Smith was President, AT&T Network Operations. From March 2008 to December 2009, Mr. Smith was President, Local Network Operations at AT&T, where he was responsible
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for all local network-related operations across AT&T’s domestic footprint. From October 2007 to March 2008, Mr. Smith was AT&T’s Executive Vice President - Shared Services, in charge of mass market and enterprise operations, corporate real estate, procurement, regional wireline planning, and business planning and integration, and from January 2007 to October 2007 he served as AT&T’s Senior Vice President of Network Operations in the Southeast. Before AT&T’s acquisition of BellSouth Corporation in December 2006, Mr. Smith served as Chief Technology Officer for BellSouth from 2001 until December 2006, responsible for setting the overall technology direction for BellSouth’s core infrastructure. In that position, he was responsible for network and operations technology, internet protocol applications, next generation strategy, and BellSouth Entertainment, LLC. He served in a variety of roles at AT&T between February 1979 and 2001. Mr. Smith graduated with honors from North Carolina State University at Raleigh in 1979, and was on the board of advisors of its graduate school for several years. He is the former chairman of the board of the Make a Wish Foundation of Georgia and Alabama and has served on several other non-profit boards. With Mr. Smith’s previous service as a director of Opnext, he brings to the Board extensive knowledge of our business, operations, products and industry. In addition, his more than three decades of service in various management and executive positions at a large, international telecommunications company enables Mr. Smith to make a significant contribution in his role as director, especially with respect to the operational and strategic issues we encounter. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Smith should serve as a director.
Class II Directors - Terms Expiring 2018
Greg Dougherty, 58, has served as Chief Executive Officer of Oclaro since June 2013 and has served as a director of Oclaro since April 2009. Prior to Oclaro, Mr. Dougherty served as a director of Avanex Corporation ("Avanex"), a leading global provider of intelligent photonic solutions, from April 2005 to April 2009, when Avanex and Bookham merged to create 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 Chief Executive Officer from January 2002 to April 2004. He also served on the board of directors of the Ronald McDonald House at Stanford from January 2004 to December 2009. From February 2001 until September 2002, Mr. Dougherty was the Chief Operating Officer at JDS Uniphase Corporation (JDS), an optical technology company. Prior to JDS he was the Chief Operating Officer of SDL, Inc., from March 1997 to February 2001 when they were acquired by JDS. 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 received a bachelor's degree in optics in 1983 from the University of Rochester. Mr. Dougherty brings significant leadership, operations, sales, marketing and general management experience to the Board. Mr. Dougherty provides the Board with valuable insight into management’s perspective with respect to our operations. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Dougherty should serve as a director.
Marissa Peterson, 56, was elected Chairman of the Board of Directors in June 2013 and has served as a director of Oclaro since July 2011. She currently runs an executive coaching and management consulting practice. Ms. Peterson was formerly Executive Vice President, Worldwide Operations, Services and Customer Advocacy for Sun Microsystems Inc., a seller of computers, computer components, computer software, and information technology services until her retirement in 2005 after 17 years with the company. From August 2008 to the present, Ms. Peterson has served as a director of Humana Inc., a healthcare benefits and insurance provider, and is currently the chair of their technology committee. From August 2006 to the present, she has served as a director for Ansell Limited, a public company listed on the Australia Stock Exchange and a global leader in safety and protection solutions, where she is currently a member of their risk committee and chairman of their human resources committee. She previously served as a director of Supervalu Inc., the Lucile Packard Children’s Hospital at Stanford, Quantros, Inc., and served on the board of trustees of Kettering University. Ms. Peterson has received the distinction of being an NACD (National Association of Corporate Directors) Board Leadership Fellow. She earned a master's degree from Harvard University in business administration, and an honorary doctorate of management and a bachelor's degree in mechanical engineering from Kettering University. Ms. Peterson brings to the Board her extensive knowledge in the areas of operations, management, and customer relations, as well as experience as a senior executive of a large, global, complex and well-respected technology company. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Ms. Peterson should serve as a director.
Ian Small, 54, has served as a director of Oclaro since September 2017. Most recently, he served as the Chairman of the Board of TokBox, a platform-as-a-service provider of embedded video communications, from April 2014 through July 2018. From November 2013 to June 2016, he held a variety of positions at Telefonica S.A., a global broadband and telecommunications provider, most recently as its Chief Data Officer. From May 2009 to April 2014, he served as the CEO of TokBox, which was acquired by Telefonica in October 2012. Prior to joining TokBox, Mr. Small held a variety of technology and strategy positions at MarkLogic, marchFIRST and USWeb/CKS. He earned a master's degree in computer science and a bachelor's degree in engineering science from the University of Toronto. Mr. Small brings to the Board his extensive knowledge in the areas of communications services and digital services as well as experience as a senior executive of a global telecommunications company. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Small should serve as a director.
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Class III Directors - Terms Expiring 2019
Kendall Cowan, 64, has served as a director of Oclaro since July 2012. Prior to Oclaro, Mr. Cowan served on Opnext’s Board of Directors from March 2007 through July 2012. Mr. Cowan has served as Chairman and Chief Executive Officer of The Cowan Group, LLC, an investment and consulting firm, since January 2000, and Chairman and Chief Executive Officer of Cowan Holdings, Inc., since October 2006. Mr. Cowan is also a shareholder and board member of several privately owned businesses. Previously, Mr. Cowan served as a board member of Lea County Bancshares, Inc., a bank holding company, and served as a board member and chairman of the audit committee of DBSD North America, Inc., a provider of satellite and terrestrial wireless service, from 2006 until March 2012. Mr. Cowan was the Chief Financial Officer of Alamosa Holdings, Inc., a wireless telephone network operator, from December 1999 until February 2006, and he served on the Board from April 2003 to February 2006. He became a partner in an international public accounting firm in 1983, and from January 1986 until September 1993 he was a partner at Coopers & Lybrand. Mr. Cowan received his bachelor’s degree in business administration in accounting from Texas Tech University. He is a Certified Public Accountant and a member of both the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. Mr. Cowan brings significant financial management and financial disclosure experience, as well as significant knowledge of Opnext’s history and experiences to the Board. Mr. Cowan also brings to the Board his extensive knowledge in the areas of finance, management, financial reporting, and controls and experience as a leader of a well-respected telecommunications company and as a partner at a large international public accounting firm. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Cowan should serve as a director.
Joel A. Smith III, 73, has served as a director since April 2009 and served as lead independent director of Oclaro between July 2011 and June 2013. Prior to Oclaro, Mr. Smith served as a director of Avanex Corporation from December 1999 to April 2009, when Avanex and Bookham merged to create Oclaro. Mr. Smith was the Dean of the Darla Moore School of Business of the University of South Carolina from October 2000 to December 2007. Previously, Mr. Smith served as the President of Bank of America East, a financial institution, from October 1998 to September 2000. From July 1991 to October 1998, Mr. Smith served as President of Nations Bank Carolinas, a financial institution. Mr. Smith earned a bachelor’s degree in political science and economics from the University of the South. Mr. Smith brings significant financial management and financial disclosure experience, as well as significant knowledge of Avanex’s history and experiences to the Board. Mr. Smith brings to the Board his extensive knowledge in the areas of finance, management, financial reporting, and controls and experience as a leader of large, well-respected financial institutions. Mr. Smith also brings to the Board significant experience in corporate governance matters, which gives him the ability to assist in governance decisions and related responsibilities. Based on the Board’s identification of these qualifications, skills and experiences, the Board has concluded that Mr. Smith should serve as a director.
Executive Officers
Greg Dougherty, see “Class II Directors - Terms Expiring 2018” above.
Dr. Adam Carter, 54, has served as Oclaro's Chief Commercial Officer since July 2014. Prior to joining Oclaro, he served as the Senior Director and General Manager of the Transceiver Module Group at Cisco Systems, Inc. ("Cisco") from February 2008 to July 2014, where he was instrumental in the acquisition of Lightwire, a Silicon Photonics start-up. He also served as a Marketing Director at Cisco from February 2007 to February 2008. From September 1994 to February 2007, Dr. Carter held various strategic marketing and business development roles at Avago Technologies, Agilent Technologies and Hewlett Packard. In addition, Dr. Carter was a Process and Device Engineer at British Telecom & Dupont from November 1989 to September 1994. Dr. Carter holds a bachelor's degree (Honors) in applied physics from Portsmouth University and received a Ph.D. from the University of Wales, Cardiff, for his research on plasma etching of III-V semiconductor materials.
Craig Cocchi, 53, has served as Oclaro’s Chief Operating Officer since April 2017. Prior to joining Oclaro, from June 2016 to April 2017, he served as the Executive Vice President, Operations of Fabrinet, a provider of advanced optical packaging and precision optical, electro-mechanical, and electronic manufacturing services to original equipment manufacturers of complex products, such as optical communication components, modules and subsystems, industrial lasers and sensors. From January 2008 to February 2016, he served in a variety of management roles at Lumentum (formerly JDSU Corporation), most recently as Senior Vice President, Operations. Prior to Lumentum, Mr. Cocchi served in a variety of operations roles at SAE Magnetics and Read-Rite Corporation. Mr. Cocchi holds a bachelor’s degree in electrical engineering and a bachelor’s degree in sociology from the University of California, San Diego.
Walter Jankovic, 49, has served as Oclaro's President of Optical Connectivity Business since February 2018. Prior to joining Oclaro, from June 2005 to February 2018, he served in a variety of roles at Celestica Inc., a design, manufacturing and supply chain solutions company. From December 2016 to February 2018 he served as Celestica’s Senior Vice President, Advanced Industrial and Health Tech Markets, from May 2012 to December 2016 as its Senior Vice President, Communications and ISP Markets, from January 2009 to April 2012 as its Vice President and General Manager, Cisco Global Business Unit and from June
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2005 to December 2008 in a variety of financial and operational roles. Prior to Celestica, Mr. Jankovic served in a variety of financial roles at Nortel Networks from July 1992 to December 2004. He began his career at Deloitte & Touche in Canada. Mr. Jankovic holds a bachelor's degree (Honors) in chartered accountancy from the University of Waterloo in Canada and a master's degree in accounting from the University of Waterloo. He is a Chartered Accountant and a Certified Management Accountant in Canada.
Yves LeMaitre, 54, has served as Oclaro's Chief Strategy Officer since February 2018. From October 2013 to February 2018 he served as Oclaro’s President of Optical Connectivity Business. Prior to this, Mr. LeMaitre was Oclaro's Chief Commercial Officer from July 2011 to September 2013. He previously served as Executive Vice President, Strategy and Corporate Development, from February 2011 to July 2011, and was Executive Vice President and General Manager of Oclaro's Advanced Photonic Solutions division from April 2009 to January 2011. Previously, Mr. LeMaitre served as Vice President of Telecommunications Sales and Corporate Marketing for Oclaro from February 2008 to April 2009. From May 2005 to December 2007, Mr. LeMaitre was with Avanex, most recently serving as Chief Marketing Officer in charge of worldwide sales and marketing. Previously, Mr. LeMaitre was President and Chief Executive Officer of Lightconnect, a leading supplier of optical MEMS components and modules. In addition, he also worked for Alcatel and its joint venture with Sprint International in a variety of general management, senior marketing and engineering positions in the United States, France, the Netherlands and Italy. Mr. LeMaitre earned a master's degree in mathematics and computer science from Nantes University in France. He also holds an engineering degree from Ecole Nationale Superieure des Telecommunications (ENST) in Paris.
Pete Mangan, 58, has served as Oclaro's Chief Financial Officer (CFO) since November 2013. From May 2012 to November 2013, Mr. Mangan served as Oclaro’s Vice President of Corporate Finance where he was initially responsible for the global operations finance team and then the corporate accounting and tax group. Mr. Mangan brings to Oclaro nearly 30 years of experience in a wide range of finance positions with leading companies including AMD, Trident Microsystems, FormFactor, Spansion, Asyst Technologies, and Sun Microsystems. Mr. Mangan served as CFO at Trident Microsystems from 1996 to 1998 and again from 2008 to 2012. Trident Microsystems, Inc. filed for Chapter 11 bankruptcy protection in January 2012 and subsequently liquidated in accordance with its plan of liquidation. He holds a bachelor's degree in business economics from the University of California, Santa Barbara.
Dr. Beck Mason, 51, has served as Oclaro's President, Integrated Photonics Business, since September 2016. From January 2015 to September 2016, Dr. Mason served as Oclaro’s Senior Vice President of R&D, Integrated Photonics Business. Prior to joining Oclaro, from February 2007 to January 2015, he served in a variety of management positions at JDSU Corporation, a company that designed and manufactured products for optical communications networks, communications test and measurement equipment, lasers, optical solutions for authentication and decorative applications, and other custom optics, most recently as its Vice President of R&D for Transmission Products. Prior to 2007, Dr. Mason served in a variety of technology management roles at Collinear, Finisar Corporation, Agere Systems and Lucent Technologies Bell Laboratories. He holds a bachelor's degree in engineering from the University of Waterloo in Canada, a master's degree in aerospace engineering from the University of Toronto in Canada and a Ph.D. in electrical and computer engineering from the University of California, Santa Barbara.
Lisa Paul, 54, has served as Oclaro's Executive Vice President, Human Resources since November 2014. Prior to joining Oclaro, she served from April 2012 to November 2014 as the Vice President, Talent Management of Flextronics International, a public supply chain solutions company, and from June 2011 to March 2013 as the Vice President, Human Resources Business Partner of its Integrated Network Solutions Business Group. From May 2006 to June 2011 she served as a Human Resources Business Partner with Cisco. Prior to Cisco, Ms. Paul served in a variety of human resources roles at Sun Microsystems and other companies.
David Teichmann, 62, has served as Oclaro's Executive Vice President, General Counsel and Corporate Secretary since January 2014. Prior to joining Oclaro, he served from April 2007 to December 2012 as the Executive Vice President, General Counsel and Corporate Secretary of Trident Microsystems, Inc., a public fabless semiconductor company that sold television and set top box integrated circuits. Trident Microsystems, Inc. filed for Chapter 11 bankruptcy protection in January 2012 and subsequently liquidated in accordance with its plan of liquidation. From August 1998 to February 2006, he served as the Senior Vice President, General Counsel and Secretary of GoRemote Internet Communications, Inc., a secure managed global remote access solutions provider, guiding the company through its initial public offering in 1999 and its acquisition by iPass, Inc. in 2006. From 1993 to July 1998, he served in various positions at Sybase, Inc., an enterprise software company, including Vice President, International Law as well as Director of European Legal Affairs based in The Netherlands. From 1989 to 1993, Mr. Teichmann was Assistant General Counsel for Tandem Computers Corporation, a fault tolerant computer company, handling legal matters in Asia-Pacific, Japan, Canada and Latin America. He began his legal career as an attorney with the Silicon Valley-based Fenwick & West LLP. Mr. Teichmann holds a bachelor's degree in political science from Trinity College, a master's degree in law & diplomacy from the Fletcher School of Law & Diplomacy and a J.D. from the William S. Richardson School of Law at the University of Hawaii. He was also a Rotary Foundation Scholar at the Universidad Central de Venezuela, where he did post-graduate work in Latin American Economics and Law.
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and the holders of more than 10% of our common stock to file with the Commission initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% stockholders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of copies of reports filed by the reporting persons furnished to us, or written representations from such reporting persons, we believe that, during fiscal year 2018, all filings required to be made by our reporting persons were timely made in accordance with the requirements of Section 16(a) of the Exchange Act, except as follows: a Form 4 was filed on August 7, 2017 for each of Adam Carter, Greg Dougherty, Mike Fernicola, Yves LeMaitre, Beck Mason, Pete Mangan, Lisa Paul and David Teichmann with respect to reporting the July 25, 2018 determination that the performance criteria had been achieved for certain performance-based restricted stock unit awards previously granted to them.
CORPORATE GOVERNANCE
The Board believes that good corporate governance is important to ensure that Oclaro is managed for the long-term benefit of our stockholders. This section describes key corporate governance guidelines and practices that Oclaro has adopted. Complete copies of the committee charters and code of business conduct and ethics described below are available on our website at www.oclaro.com. Alternatively, you can request a copy of any of these documents without charge by writing to Oclaro, Inc., 225 Charcot Avenue, San Jose, California 95131, Attention: Corporate Secretary.
Corporate Governance Guidelines
The Board has adopted corporate governance guidelines to assist the Board in the exercise of its duties and responsibilities and to serve the best interests of Oclaro and our stockholders. These guidelines, which provide a framework for the conduct of the Board’s business, provide that:
• | in the event that the Chairman of the Board is not an independent director, the nominating and corporate governance committee shall nominate an independent director to serve as our “Lead Director” who will be approved by the majority of our independent directors; |
• | the principal responsibility of the directors is to oversee the management of Oclaro; |
• | a majority of the members of the Board shall be independent directors; |
• | the independent directors shall meet in executive session at least twice a year and at other times upon request of an independent director; |
• | directors shall have full and free access to officers and employees of Oclaro and, as necessary, independent advisors; |
• | new directors shall participate in an orientation program and all directors are expected to participate in continuing director education on an ongoing basis; |
• | at least annually, the nominating and corporate governance committee shall oversee a self-evaluation of the Board designed to determine whether the Board and its committees are functioning effectively; and |
• | in an uncontested election of directors, each incumbent director nominee must submit an advance irrevocable resignation that is conditioned upon (i) the director's failure to receive the affirmative vote of the "majority of votes cast" of stockholders for that director and (ii) the Board's acceptance of such resignation. See “- Majority Voting Provision” below. |
Board Committees
The Board has standing audit, compensation, and nominating and corporate governance committees, each of which operates under a charter that has been approved by the Board. A current copy of each committee’s charter is posted on the Corporate Governance section of our website, www.oclaro.com.
The members of the Compensation Committee of the Board are Ms. Haylor (Chair), Mr. Cowan, Mr. Small and Mr. W. Smith; the members of the Audit Committee of the Board are Mr. Cowan (Chair), Mr. Collins, Mr. J. Smith and Ms. Peterson; the members of the Nominating and Corporate Governance Committee of the Board are Mr. J. Smith (Chair), Mr. Collins, Mr. Small and Mr. W. Smith.
The Board has determined that all of the current members of each of the three standing committees described above are independent as defined under the rules of the NASDAQ Stock Market, including, in the case of all members of the Audit Committee of the
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Board, the independence requirements of Rule 10A-3 under the Exchange Act, and in the case of all members of the Compensation Committee, the independence requirements of Rule 10C-1 under the Exchange Act.
Audit Committee. The Audit Committee’s responsibilities include:
• | appointing, approving the compensation of, and evaluating the independence of our independent registered public accounting firm; |
• | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of certain reports from the firm; |
• | reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly consolidated financial statements and related disclosures; |
• | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; |
• | establishing procedures for the receipt and retention of accounting related complaints and concerns; and |
• | meeting independently with our independent registered public accounting firm and management. |
The Audit Committee will meet a minimum of four times annually. The Board has determined that Kendall Cowan, Edward Collins and Joel Smith are “audit committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K.
Compensation Committee. The Compensation Committee’s responsibilities include:
• | annually reviewing and approving the compensation of our Chief Executive Officer and other executive officers; |
• | annually reviewing market trends and our compensation peer group for comparative purposes and reviewing our compensation-related risk profile to ensure that our compensation-related risks are not reasonably likely to have a material adverse effect on us; |
• | making recommendations to the Board with respect to incentive compensation and equity-based plans; |
• | administering our incentive compensation and equity-based plans; |
• | preparing an annual committee report for inclusion in our proxy statements; and |
• | reviewing and discussing our Compensation Discussion and Analysis with senior management and recommending to the Board that the same be included in our proxy statement. |
The Compensation Committee also has a Section 162(m)/Section 16 committee that operates as a subcommittee of the Compensation Committee.
Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee’s responsibilities include:
• | reviewing with the Board, on an annual basis, the requisite skills and criteria for new board members and the composition of the Board as a whole; |
• | recommending to the Board the persons to be nominated for election as directors or for appointment to the Board and to each of the Board’s committees; |
• | reviewing and making recommendations to the Board with respect to director compensation; |
• | developing and recommending to the Board corporate governance guidelines; |
• | overseeing the self-evaluation of the Board; |
• | overseeing an annual review by the Board of succession planning; and |
• | promptly considering the resignation tendered by a director nominee in connection with an uncontested election of directors at which such director nominee did not receive the vote of the majority of votes cast and recommending to the Board whether to accept the tendered resignation or to take some other action. |
Board Leadership
Our corporate governance guidelines provide that the offices of Chairman of the Board and Chief Executive Officer shall be held by separate individuals. The Board believes that its current leadership structure best serves the objectives of the Board’s oversight of management, the ability of the Board to carry out its roles and responsibilities on behalf of the stockholders, and the Company’s overall corporate governance. The Board also believes that the separation of the Chairman of the Board of Directors and CEO roles allows the CEO to focus his time and energy on operating and managing the Company and leveraging the experience and
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perspectives of the Chairman of the Board of Directors. The Board periodically reviews the leadership structure and may make changes in the future.
Our corporate governance guidelines provide that in the event that the Chairman of the Board is not an independent director, the nominating and corporate governance committee shall nominate an independent director to serve as “Lead Director,” who shall be approved by a majority of the independent directors. If appointed, the Lead Director will have significant responsibilities with respect to our corporate governance. The Lead Director’s responsibilities will include the following:
• | presiding at all meetings of the Board at which the Chairman of the Board of Directors is not present, including executive sessions of the independent directors; |
• | meeting with any director who is not adequately performing his or her duties as a member of the Board or any committee; |
• | serving as liaison between the Chairman of the Board of Directors and Chief Executive Officer and the independent directors; |
• | approving information sent to the Board; |
• | approving meeting schedules to assure that there is sufficient time for discussion of all agenda items; |
• | working with the Chairman of the Board of Directors in the preparation of the agenda for each board of director meeting and approve such meeting agendas; |
• | otherwise consulting with the Chairman of the Board of Directors and Chief Executive Officer on matters relating to corporate governance and board of director performance; and |
• | if requested by a major stockholder, making himself or herself available for consultation and direct communication. |
Majority Voting Provision
Our by-laws provide that, in an uncontested election of directors, each nominee shall be elected by the vote of the majority of the votes cast by stockholders for that nominee (meaning the number of shares voted “for” a nominee’s election must exceed the number of shares voted “against” such nominee’s election), and in a contested election, each director shall be elected by the vote of a plurality of the shares represented in person or by proxy at such meeting. An uncontested election means an election where the number of nominees for director does not exceed the number of directors to be elected as of the tenth day preceding the date we first mail our notice of meeting for such meeting to stockholders.
Under our Corporate Governance Guidelines, incumbent director nominees must submit to the Chairman of the nominating and corporate governance committee of the Board or, in the case of such Chairman, to the Chairman of the Board, an advance irrevocable resignation that is conditioned upon (i) the director’s failure to receive the affirmative vote of the majority of votes cast of stockholders for that director in an uncontested election at the next annual meeting for the reelection of such director at which a quorum is present, and (ii) the Board’s acceptance of such resignation. The nominating and corporate governance committee will promptly consider the resignation tendered and will recommend to the Board whether to accept the tendered resignation or to take some other action, such as rejecting the tendered resignation and addressing the apparent underlying causes of the “against” votes. In making this recommendation, the nominating and corporate governance committee will consider all factors that it deems relevant including, without limitation, the underlying reasons why stockholders voted “against” the election of the director (if ascertainable), the length of service and qualifications of the director, the director’s contributions to the Company and the Board, whether by accepting such resignation the Company will no longer be in compliance with any applicable law, rule, regulation or governing document, and whether or not accepting the resignation is in the best interest of the Company and its stockholders. The Board will consider these and any other factors and additional information it deems relevant, as well as the nominating and corporate governance committee’s recommendation, when deciding whether to accept or reject the tendered resignation. Any director whose resignation is under consideration shall not participate in the nominating and corporate governance committee and Board deliberation and recommendation regarding whether to accept the resignation. The Board shall take action within 90 days following certification of the vote, unless a longer period of time is necessary in order to comply with any applicable law, rule, regulation or governing document, in which case the Board may determine to extend such 90 day period by an additional 90 days if it determines that an extension is in the best interest of the Company and its stockholders. We will promptly disclose the decision and process in a Current Report on Form 8-K filed with the SEC.
If a director’s conditional resignation is rejected by the Board, the director will continue to serve for the remainder of his or her term and until his or her successor is duly elected, or his or her earlier death, resignation or removal. If a director’s conditional resignation is accepted by the Board, then the Board, in its sole discretion, may fill any resulting vacancy or may decrease the number of directors comprising the Board, in each case pursuant to the provisions of the Company’s certificate of incorporation and by-laws.
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Risk Oversight
The Board as a whole has oversight responsibility for our risk management process. This risk oversight function is carried out both by the full board and by individual committees that are tasked by the Board with oversight of specific risks. The Audit Committee oversees risks associated with financial and accounting matters including compliance with legal and regulatory requirements, and our financial reporting and internal control systems. The Compensation Committee evaluates risks associated with our compensation policies and practices so as not to encourage or reward excessive risk-taking by our executives or employees.
On a regular basis the Board receives information and reports from committees, senior management and/or outside counsel and consultants and discusses the identification, assessment, management and mitigation of the risks associated with our strategic and business plans and operations. The Board also holds regular sessions with members of management with the specific purpose of identifying, prioritizing and managing those risks that we believe are material to our operations.
Director Nomination Process
In the event of a decision to nominate one or more non-incumbents for service on the Board, due to the resignation of a sitting director or otherwise, our nominating and corporate governance committee would undertake a process to identify and evaluate director candidates. This process would include requests to board members and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by the Chairman of the Board, the Lead Director and other members of our nominating and corporate governance committee and the Board. This process may also include the retention of a search firm or other consultants to assist the committee. The committee would also consider the extent to which a given candidate increases the diversity of the Board in terms of background, business experience, education, and other factors.
In general, in considering whether to recommend any particular candidate for inclusion in the Board’s slate of recommended director nominees or whether to appoint a particular candidate to fill a vacancy, the nominating and corporate governance committee will apply the criteria set forth in our corporate governance guidelines. These criteria include the candidate’s integrity, business acumen, commitment to understanding our business and industry, experience, conflicts of interest and the ability to act in the interests of all stockholders. Further, specific consideration is given to, among other things, diversity of background and experience that a candidate would bring to the Board. The committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities.
Stockholders may recommend individuals to the nominating and corporate governance committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and a statement as to whether the stockholder or group of stockholders making the recommendation has beneficially owned more than 5% of our common stock for at least a year as of the date such recommendation is made, to our nominating and corporate governance committee at the following address: Oclaro, Inc., 225 Charcot Avenue, San Jose, California 95131, Attention: Corporate Secretary. Assuming that appropriate biographical and background material has been provided on a timely basis, the committee will evaluate stockholder recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others.
Stockholders also have the right under our By-laws to directly nominate director candidates, without any action or recommendation on the part of the committee or the Board, by following the procedures set forth under “Stockholder Proposals for 2018 Annual Meeting” in this proxy statement.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers, contractors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the code on our website, www.oclaro.com. In addition, we intend to post on our website all disclosures that are required by law or NASDAQ listing standards concerning any amendments to, or waivers from, any provision of the code of business conduct and ethics. There were no waivers of the code of business conduct and ethics in fiscal year 2018.
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Item 11. Executive Compensation
COMPENSATION COMMITTEE REPORT
The information contained under this “Compensation Committee Report” shall not be deemed to be “soliciting material” or to be “filed” with the Commission, nor shall such information be incorporated by reference into any filings under the Securities Act of 1933, as amended, or under the Exchange Act, or be subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate this information by reference into any such filing.
The Compensation Committee of the Board has reviewed and discussed with management the Compensation Discussion and Analysis below. Based on this review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in our 2018 Annual Report.
Submitted by the Compensation Committee of the Board of Directors:
Denise Haylor, Chair
Kendall Cowan
Ian Small
William Smith
COMPENSATION DISCUSSION AND ANALYSIS
This Compensation Discussion and Analysis provides information regarding the fiscal year 2018 compensation program for our Chief Executive Officer, our Chief Financial Officer, and our three most-highly compensated executive officers (other than our Chief Executive Officer and Chief Financial Officer) who were serving at the end of fiscal year 2018. For fiscal year 2018, these individuals -- our Named Executive Officers -- were:
• | Greg Dougherty, our Chief Executive Officer; |
• | Pete Mangan, our Chief Financial Officer; |
• | Yves LeMaitre, our Chief Strategy Officer, who previously served as our President, Optical Connectivity Business through February 7, 2018; |
• | David Teichmann, our Executive Vice President, General Counsel and Corporate Secretary; and |
• | Craig Cocchi, our Chief Operating Officer. |
Executive Summary
During fiscal year 2018, we were one of the leading providers of optical components and modules for the long-haul, metro and data center markets. Leveraging over three decades of laser technology innovation and photonics integration, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
We operate in a highly competitive and cyclical industry, and during the past few years we have made a conservative use of cash and equity compensation for our executive officers and other employees. For fiscal year 2018, our principal financial objectives were to continue achieving high levels of operating income, primarily by increasing revenues of higher gross margin products and generate higher levels of free cash flow. During fiscal year 2018, although we did not fully meet our operating income objectives, we thoughtfully rewarded our employees, including our executive officers, commensurate with that performance.
Fiscal Year 2018 Business Highlights
For fiscal year 2018, we achieved the following key financial results:
• | Revenues were $543.2 million for fiscal year 2018. This compares with revenues of $601.0 million and $407.9 million in fiscal years 2017 and 2016, respectively. |
• | GAAP gross margin was 37 percent for fiscal year 2018. This compares with GAAP gross margin of 39 percent and 29 percent in fiscal years 2017 and 2016, respectively. |
• | Non-GAAP gross margin was 39 percent for fiscal year 2018. This compares with non-GAAP gross margin of 39 percent and 29 percent in fiscal years 2017 and 2016, respectively. |
• | GAAP operating income was $67.3 million for fiscal year 2018. This compares with GAAP operating income of $119.0 million and $15.8 million in fiscal years 2017 and 2016, respectively. |
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• | Non-GAAP operating income was $92.9 million for fiscal year 2018. This compares with non-GAAP operating income of $130.9 million and $25.1 million in fiscal years 2017 and 2016, respectively. |
• | Free cash flow was $69.3 million for fiscal year 2018, as compared to free cash flow of $79.0 million and $4.7 million in fiscal years 2017 and 2016, respectively. |
See Exhibit 99.1 for a reconciliation of non-GAAP gross margin, non-GAAP operating income and free cash flow.
Fiscal Year 2018 Executive Compensation Actions
On behalf of our Board of Directors, the Compensation Committee of the Board (the "Compensation Committee") assessed our executive compensation levels for fiscal year 2018. Key compensation decisions for fiscal year 2018 for our executive officers, including our Named Executive Officers, were as follows:
• | Base Salary: During fiscal year 2018, the Compensation Committee maintained the base salaries of our executive officers at the levels in effect since the beginning of calendar year 2016, keeping the majority of our executive officer's target total direct compensation in the form of equity compensation. |
• | Annual Cash Incentive Awards: The Compensation Committee used non-GAAP operating income as the sole performance metric for our semi-annual cash incentive program during fiscal year 2018, to keep the focus of our executive officers on profitable corporate growth. We achieved 63% of the target level established for the first half of fiscal year 2018 and 67% of the target level established for the second half of fiscal year 2018. |
• | Equity Awards: In August 2017, we granted each of the Named Executive Officers an annual equity award comprised of a mix of shares of our common stock subject to a time-based restricted stock unit award and a performance-based restricted stock unit award. The time-based restricted stock unit awards are subject to a four-year service based vesting requirement. The performance-based restricted stock unit awards could only be earned as to one-third of the performance-based restricted stock unit award if we achieve $700.0 million of revenue over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; one-third of the performance-based restricted stock unit award if we achieve $100.0 million of free cash flow (defined as adjusted EBITDA less capital expenditures) over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; and one-third of the performance-based restricted stock unit award if we achieve $800.0 million of revenue in any one fiscal year from 2018 through 2020 and also achieve $100.0 million of free cash flow over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions. Upon attaining each performance condition, the service-based vesting condition is satisfied for that tranche as to 1/3 of the performance-based restricted stock unit award on the first anniversary of the vesting commencement date, and with respect to 1/12 of the underlying shares each subsequent quarter, such that all performance-based restricted stock unit awards for that tranche are fully vested on the third anniversary of the vesting commencement date. |
Target Pay Mix
In fiscal year 2018, 58% of our Chief Executive Officer's target total direct compensation was performance-based and, thus, only paid or earned to the extent that we achieved one or more pre-established performance objectives.
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Fiscal Year 2018 Executive Compensation Policies and Practices
We endeavor to design and implement our executive compensation policies and practices in accordance with sound governance standards. The Compensation Committee (and, since October 2017, its subcommittee, the Section 162(m)/Section 16 Committee) meets regularly throughout the year to review our executive compensation program on an ongoing basis to ensure that it is consistent with our short-term and long-term goals given the dynamic nature of our business and the market in which we compete for executive talent. The following policies and practices continued in effect during fiscal year 2018:
• | Independent Compensation Committee. The Compensation Committee is comprised solely of independent directors who have established effective means for communicating with our stockholders regarding their executive compensation ideas and concerns. |
• | Independent Compensation Committee Advisor. The Compensation Committee engaged its own compensation consultant to assist with its fiscal year 2018 compensation reviews. This consultant performed no consulting or other services for the Company. |
• | Annual Executive Compensation Review. The Compensation Committee conducts an annual review and approval of our compensation strategy, including a review of our compensation peer group used for comparative purposes and a review of our compensation-related risk profile to ensure that our compensation-related risks are not reasonably likely to have a material adverse effect on the Company. |
• | Executive Compensation Policies and Practices. Our compensation philosophy and related corporate governance policies and practices are complemented by several specific compensation practices that are designed to align our executive compensation with long-term stockholder interests, including the following: |
• | Compensation At-Risk. Our executive compensation program is designed so that a significant portion of compensation is “at risk” based on corporate performance, as well as equity-based to align the interests of our executive officers and stockholders. |
• | No Perquisites. We do not provide any perquisites or other personal benefits to our executive officers. |
• | No Tax Reimbursements. We do not provide any tax reimbursement payments (including “gross-ups”) on any perquisites or other personal benefits, other than standard relocation benefits. |
• | No Special Health or Welfare Benefits. Our executive officers participate in broad based company-sponsored health and welfare benefits programs on the same basis as our other full-time, salaried employees. |
• | No Post-Employment Tax Reimbursements. We do not provide any tax reimbursement payments (including “gross-ups”) on any severance or change-in-control payments or benefits. |
• | “Double-Trigger” Change-in-Control Arrangements. All change-in-control payments and benefits are based on a “double-trigger” arrangement (that is, they require both a change-in-control of the Company plus a qualifying termination of employment before payments and benefits are paid). |
• | Performance-Based Incentives. We use performance-based short-term and long-term incentives. |
• | Multi-Year Vesting Requirements. The equity awards granted to our executive officers generally vest or are earned over multi-year periods, consistent with current market practice and our retention objectives. The performance-based restricted stock unit awards granted to our executive officers in August 2017 included a three-year time-based vesting requirement for earned shares and the time-based restricted stock unit awards granted to our executive officers in August 2017 had a four-year time-based vesting requirement. In addition, our employee stock plan contains a minimum required vesting period of one year, subject to certain exceptions. |
• | Minimum Share Ownership Requirement. The members of our Board, including our Chief Executive Officer, are subject to a stock ownership policy (described in greater detail below). |
• | Hedging and Pledging Prohibited. We prohibit our executive officers and other employees, as well as the members of our Board, from engaging in hedging transactions with respect to Company securities, including entering into any short sales, puts, calls or other derivative instruments based on Company securities. We also prohibit our executive officers and other employees, as well as the members of our Board, from pledging any Company securities, except with respect to pledges in limited circumstances approved by the Company’s General Counsel. |
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Fiscal Year 2017 Stockholder Advisory Vote on Executive Compensation
At our fiscal year 2017 Annual Meeting of Stockholders, we conducted a stockholder advisory vote on the fiscal year 2017 compensation of the Named Executive Officers (commonly known as a “Say-on-Pay” vote). Our stockholders approved the fiscal year 2017 compensation of the Named Executive Officers with approximately 94% of the votes cast in favor of the proposal.
We believe that the outcome of the Say-on-Pay vote reflects our stockholders’ support of our compensation approach, specifically our efforts to attract, retain, and motivate our Named Executive Officers. Accordingly, no significant design changes were made to our executive compensation program in response to the fiscal year 2017 Say-on-Pay vote. Further, any design changes resulting from the Say-on-Pay vote would not typically show up in compensation until the following fiscal year due to the timing of our annual meeting of stockholders compared to the timing of our annual executive compensation decisions.
We value the opinions of our stockholders and will continue to consider the outcome of future Say-on-Pay votes, as well as feedback received throughout the year, when making compensation decisions for our executive officers, including our Named Executive Officers.
Based on the results of a separate stockholder advisory vote on the frequency of future stockholder advisory votes regarding the compensation of our Named Executive Officers (commonly known as a “Say-When-on-Pay” vote) conducted at our fiscal year 2017 Annual Meeting of Stockholders, the Board determined that we will hold our Say-on-Pay votes on an annual basis.
Compensation Philosophy and Objectives
We believe that the quality, skills, and dedication of our executive officers are critical factors affecting our performance and stockholder value. Accordingly, the key objective of our executive compensation program is to attract, retain, and motivate superior executive talent while maintaining an appropriate cost structure. In addition, we seek to implement an overarching pay-for-performance philosophy by designing our executive compensation program to link a substantial component of our executive officers’ target total direct compensation to the achievement of financial and strategic performance objectives that directly correlate to company objectives and the long-term enhancement of stockholder value. Thus, the Compensation Committee believes that the compensation paid to our executive officers should be closely aligned with our corporate performance on both a short-term and long-term basis, linked to specific, measurable results such as operating income and free cash flow, and that such compensation should assist us in motivating and retaining the key executive officers critical to our long-term success. Finally, our executive compensation program is designed to maintain an appropriate balance of annual and long-term incentive compensation opportunities to ensure an appropriate focus on operational objectives and the creation of long-term stockholder value.
Compensation Program Design
To accomplish the foregoing objectives, for fiscal year 2018, the Compensation Committee structured our executive compensation program to include the following principal compensation elements:
• | Base salaries at levels that we believe allow us to attract and retain key executive officers; |
• | Semi-annual cash incentive compensation opportunities tied to the achievement of pre-established performance goals related to the important financial objectives set forth in our annual operating plan; |
• | Long-term incentive compensation using a mix of restricted stock unit and performance-based restricted stock unit awards, to align the interests of our executive officers with those of our stockholders and to promote our performance and retention objectives; and |
• | Limited post-employment compensation arrangements payable on an involuntary termination of employment, with the cash component not exceeding three times the executive officer’s annual cash compensation. |
Generally, the Compensation Committee seeks to allocate a substantial portion of our executive officers’ target total direct compensation opportunity to elements that are performance-based and, therefore, “at risk,” including cash and equity based incentives. In recent years, at least half of the target total direct compensation for our Named Executive Officers was "at risk" subject to performance conditions. However, the Compensation Committee does not maintain formal policies for allocating between short-term and long-term compensation or between cash and non-cash compensation. Instead, the Compensation Committee maintains flexibility and adjusts different elements of compensation based upon its evaluation of our financial position (including cash needs), the impact on stockholder dilution, hiring and retention concerns, and the compensation mix paid by our compensation peer group.
While compensation levels may differ among our executive officers, including the Named Executive Officers, based on the role, responsibilities and performance of each individual executive officer, there are no material differences in the compensation philosophy, policies, or practices among our executive officers.
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Compensation-Setting Process
The Compensation Committee is the primary architect of our executive compensation program. The Compensation Committee conducts an annual review of our executive compensation strategy to ensure that it is appropriately aligned with our business strategy, reflective of our compensation philosophy and working toward our desired objectives. The Compensation Committee also reviews market trends and changes in compensation practices. Based on its review and assessment, the Compensation Committee either approves, or recommends to the Board for approval, the annual changes in our executive compensation program.
For fiscal year 2018, the Compensation Committee reviewed and either approved, or recommended to the Board for approval, the compensation for each of our Named Executive Officers. The Compensation Committee also oversaw management’s decisions concerning the compensation of other company officers and employees, administered our equity compensation plans, and evaluated the effectiveness of our overall executive compensation program.
The Compensation Committee’s authority, duties, and responsibilities are described in its charter, which is reviewed annually and revised and updated as warranted. The charter, which was most recently updated on October 24, 2017, is available at investor.oclaro.com/governance.cfm.
Role of Executive Officers
In formulating its compensation decisions, the Compensation Committee meets with our Chief Executive Officer to obtain his feedback and recommendations with respect to the structure of our executive compensation program, as well as his assessment of the performance of each of the other executive officers and his recommendations on the compensation for each other executive officer. In addition, our Chief Executive Officer and Chief Financial Officer develop recommendations for performance metrics and target award opportunities under our annual cash incentive compensation plan based on management’s business forecast both at the company and business unit levels, as well as provide information at year end regarding individual and company performance. Our General Counsel also supports the Compensation Committee's review and deliberations on compensation programs, as and when requested by the Compensation Committee.
Role of Compensation Consultant
The Compensation Committee has the authority to retain the services of external advisors, including compensation consultants, legal counsel, accounting, and other advisors. During fiscal year 2018, the Compensation Committee continued to directly engage Compensia, Inc., a national compensation consulting firm (“Compensia”), as its adviser for executive officer and director compensation, and broad based equity compensation matters. More specifically, Compensia:
• | Reviewed and provided market data on executive officer and director cash and equity compensation for fiscal year 2018 compensation planning; |
• | Reviewed and provided recommendations on the annual and long-term incentive compensation award design; |
• | Reviewed and provided an analysis of annual share utilization and stockholder dilution levels resulting from our employee stock plans; |
• | Reviewed and provided recommendations for the proposed amendment of our Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan submitted to our stockholders for approval in our proxy statement for fiscal year 2017; and |
• | Reviewed and provided comments on the Compensation Discussion & Analysis section of our proxy statement for fiscal year 2017. |
In fiscal year 2018, the Compensation Committee considered the independence of Compensia in light of the listing standards of NASDAQ on compensation committee independence and the rules of the Securities and Exchange Commission. Based on these standards and rules, the Compensation Committee has concluded that the work performed by Compensia did not raise a conflict of interest.
Competitive Positioning
During fiscal year 2017, the Compensation Committee directed Compensia to develop and recommend a compensation peer group to be used as a reference in its executive compensation deliberations for fiscal year 2018. In conducting this project, Compensia reviewed, but did not rely on, the compensation peer group used in fiscal year 2017. Among other things, Compensia developed this compensation peer group to reflect our market capitalization, recognize our evolving business focus, and account for acquisitions of prior peer companies. The companies in this compensation peer group were selected on the basis of their similarity to us, based on the following criteria:
• | similar revenue size - ~0.5x to ~2.4x our last four fiscal quarter revenue of approximately $577 million (approximately $306 million to approximately $1.4 billion); |
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• | similar market capitalization - ~0.23x to ~4.5x our market capitalization of $1.5 billion (approximately $346 million to approximately $6.7 billion); |
• | industry - communications equipment (with a focus on optical networking) and semiconductor and hardware (with a focus on networking/communications); |
• | executive positions similar in breadth, complexity, and/or scope of responsibility; and |
• | competitors for executive talent. |
As a result, the Compensation Committee approved a revised compensation peer group for use in fiscal year 2018 consisting of the following companies:
Acacia Communications | Infinera | NeoPhotonics |
Applied Optoelectronics | Inphi | Plantronics |
CalAmp | IPG Photonics | Power Integrations |
Coherent | Ixia | Semtech |
Extreme Networks | Lumentum Holdings | Viavi Solutions |
Finisar | M/A-COM | |
II-VI | MaxLinear | |
To analyze the compensation practices of the companies in our compensation peer group, Compensia gathered data from public filings (primarily proxy statements) for the peer group companies. This market data, supplemented by additional compensation survey data, was then used as a reference point for the Compensation Committee to assess our current compensation levels in the course of its deliberations on compensation forms and amounts.
Going forward, the Compensation Committee intends to review and update the compensation peer group as needed and make adjustments to its composition, taking into account changes in both our business and the businesses of the companies in the peer group.
Fiscal Year 2018 Compensation Decisions
Base Salary
As noted above, we generally rely on base salaries to attract and retain key executive officers. At the start of fiscal year 2018, the Compensation Committee evaluated our performance in fiscal year 2017, considered our fiscal year 2018 annual operating plan (including our compensation budget) for fiscal year 2018, and reviewed the strong steady progress our Named Executive Officers have made in leading the Company to sustained profitability over the past several years. Based on these considerations, the Compensation Committee maintained the base salaries of our executive officers, including our Named Executive Officers, at the levels in effect since the beginning of calendar year 2016.
Annual Cash Incentive Compensation
We use performance-based cash incentives to motivate our executive officers, including our Named Executive Officers, to focus on specific goals established by the Board in our annual operating plan, to provide additional cash compensation opportunities beyond base salary in a manner that is consistent with our peers’ practices, and to recognize and reward achievement at or above our pre-established levels of performance. For fiscal year 2018, the Compensation Committee decided to maintain the semi-annual performance period structure we have used since fiscal year 2008. The Compensation Committee believed that, since we initially achieved profitability in fiscal year 2016, the semi-annual performance period structure remained appropriate to allow the Compensation Committee to closely monitor and respond to unexpected changes in the execution of our business plan and to maintain flexibility to solidify our operating strategy in the event of unanticipated internal or external developments.
For fiscal year 2018, after reviewing market data and our annual operating budget for our cash compensation programs, the Compensation Committee approved, and the Board ratified, that no changes would be made to the target annual cash incentive award opportunities (as a percentage of base salary) for our Named Executive Officers or our other executive officers, other than Lisa Paul, whose target annual cash incentive award opportunity was increased from 50% to 60% of her base salary. As such, Mr. Dougherty’s target annual cash incentive award opportunity remained at 100% of his base salary and each of our other Named Executive Officers continued to have a target annual cash incentive award opportunity equal to 60% of his base salary.
First Half of Fiscal Year 2018
Our Chief Executive Officer recommended to the Compensation Committee that the performance metric for the first half of fiscal year 2018 (that is, the six-month period ending December 30, 2017) be non-GAAP operating income, with a threshold performance level of $57 million (which would result in a payout of 50% of the target annual cash incentive award opportunity for the performance
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period), a target performance level of $65 million, and a stretch goal of $75 million (which would result in a payout of 200% of the target annual cash incentive award opportunity for Mr. Dougherty and 150% of the target annual cash incentive award opportunity for our other executive officers). The Compensation Committee agreed with our Chief Executive Officer's recommendation, and approved this metric and related performance levels without change, to encourage our executive officers to continue to work to achieve high levels of profitability. Non-GAAP operating income excludes items that our management and the Compensation Committee believe are not reflective of our core ongoing operations, as shown in Exhibit 99.1, and as such is an important financial indicator of profitable growth and cash generation. The Compensation Committee believed that establishing threshold and maximum payout levels under our program would provide a means to mitigate risk associated with this incentive compensation program, while also providing motivation to exceed expectations.
At the conclusion of the first half of fiscal year 2018, our Compensation Committee determined that we had achieved $59 million in non-GAAP operating income. This performance resulted in a 63% payout of the target annual cash incentive award opportunities for our executive officers, including Mr. Dougherty. The Compensation Committee approved the payments to our Named Executive Officers shown in the actual payout column below.
Named Executive Officer | First Half Fiscal Year 2018 Target Cash Incentive Award Payment | First Half Fiscal Year 2018 Maximum Cash Incentive Award Payment | First Half Fiscal Year 2018 Actual Cash Incentive Award Payment | ||||||||||||
Mr. Dougherty | $ | 300,000 | $ | 600,000 | $ | 189,000 | |||||||||
Mr. Mangan | $ | 105,000 | $ | 157,500 | $ | 66,150 | |||||||||
Mr. LeMaitre | $ | 105,000 | $ | 157,500 | $ | 66,150 | |||||||||
Mr. Teichmann | $ | 99,000 | $ | 148,500 | $ | 62,370 | |||||||||
Mr. Cocchi | $ | 105,000 | $ | 157,500 | $ | 66,150 | |||||||||
Second Half of Fiscal Year 2018
For the second half of fiscal year 2018 (that is, the six-month period ending June 30, 2018), in light of our first half performance, our Chief Executive Officer recommended to the Compensation Committee that the performance metric continue to be non-GAAP operating income, with a threshold performance level of $28 million (which would result in a payout of 50% of the target annual cash incentive award opportunity for the performance period), a target performance level of $45 million, and a stretch performance goal of $62 million (which would result in a payout of 200% for Mr. Dougherty and 150% for the other executive officers). The Compensation Committee agreed with our Chief Executive Officer's recommendation, and approved this metric and related performance levels, to encourage our executive officers to continue to achieve strong operating income levels consistent with our then current operating plan in light of challenging market and industry conditions.
At the conclusion of the second half of fiscal year 2018, our Compensation Committee determined that we had achieved $34 million of non-GAAP operating income. This performance resulted in a payout of 67% of the annual cash incentive award opportunity for each of our executive officers, including Mr. Dougherty. The Compensation Committee approved the payments to our Named Executive Officers shown in the actual payout column below.
Named Executive Officer | Second Half Fiscal Year 2018 Target Cash Incentive Award Payment | Second Half Fiscal Year 2018 Maximum Cash Incentive Award Payment | Second Half Fiscal Year 2018 Actual Cash Incentive Award Payment | ||||||||||||
Mr. Dougherty | $ | 300,000 | $ | 600,000 | $ | 201,000 | |||||||||
Mr. Mangan | $ | 105,000 | $ | 157,500 | $ | 70,350 | |||||||||
Mr. LeMaitre | $ | 105,000 | $ | 157,500 | $ | 70,350 | |||||||||
Mr. Teichmann | $ | 99,000 | $ | 148,500 | $ | 66,330 | |||||||||
Mr. Cocchi | $ | 105,000 | $ | 157,500 | $ | 70,350 | |||||||||
Spot Bonus
On March 11, 2018, the Compensation Committee approved a one-time cash bonus of $60,000 to Mr. Teichmann, in recognition of his extraordinary efforts to further Oclaro's strategic projects.
Long-Term Incentive Compensation
Given our commitment to containing cash expenses over the past four years, we have relied on equity compensation as the most significant portion of our executive compensation program. We provide equity compensation opportunities to our executive officers, including our Named Executive Officers, to align their financial interests with those of our stockholders, to provide compensation that is consistent with the practices of our compensation peer group so that we can attract and retain qualified talent, and to motivate our executive officers to achieve specific performance objectives. The Compensation Committee generally grants a mix of time-based and performance-based full value equity awards for annual retention purposes, as we believe this is most consistent with current competitive market practices.
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On August 10, 2017, each of our Named Executive Officers other than Mr. Cocchi received annual equity awards comprised of a time-based restricted stock unit award and a performance-based restricted stock unit award. At that time, Mr. Cocchi only received a performance-based restricted stock unit award because he had received a sizeable initial time-based restricted stock unit award late in fiscal year 2017 shortly after he commenced employment. To directly align the interests of our Named Executive Officers with the interests of our stockholders, 60% of the value of such annual equity awards granted were in the form of a performance-based restricted stock unit award to be earned as to one-third of the performance-based restricted stock unit awards upon the achievement of $700.0 million of revenue over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; one-third of the performance-based restricted stock unit awards upon the achievement of $100.0 million of free cash flow (defined as adjusted EBITDA less capital expenditures) over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; and one-third of the performance-based restricted stock unit awards upon the achievement of $800.0 million of revenue in any one fiscal year from 2018 through 2020 and achievement of $100.0 million of free cash flow over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions. Upon attaining each performance condition, the service-based vesting condition is satisfied for that tranche as to 1/3 of the performance-based restricted stock unit awards on the first anniversary of the vesting commencement date, and with respect to 1/12 of the underlying shares each subsequent quarter, such that all performance-based restricted stock unit awards for that tranche are fully vested on the third anniversary of the vesting commencement date. The performance conditions associated with these performance-based restricted stock unit awards will be considered achieved upon the consummation of the merger with Lumentum. The Compensation Committee granted the remaining target amount of the annual equity incentive award value in the form of restricted stock unit awards subject to time-based vesting over four years (with a one year cliff and quarterly vesting thereafter).
The time-based service structure for these awards selected by the Compensation Committee was designed to focus our Named Executive Officers on long term sustained performance, retention and decision-making in an otherwise rapidly changing business environment. Following our achievement of profitability and free cash flow in fiscal year 2017, our Compensation Committee chose dual performance metrics to focus our Named Executive Officers on continuing to invest in sustained revenue growth while generating sustained levels of free cash flow.
In determining the size and relative weight of each of these awards, the Compensation Committee and the Board considered competitive market data (based on the compensation peer group data), as well as the Compensation Committee's objective of creating a meaningful retention and performance incentive for each Named Executive Officer, managing internal pay equity, and balancing the impact of these awards on our burn rate and available reserves. The Compensation Committee determined that using a combination of four year time-based vesting (for the solely time-based awards) and three year time-based vesting (for the performance-based awards) would help to maintain a long term focus on retention.
Refer to the table "Grants of Plan-Based Awards For Fiscal Year 2018" for further information regarding the annual equity incentive awards.
Health, Welfare, and Other Benefits
Our executive officers, including the Named Executive Officers, are eligible to participate in our employee benefit plans, which are generally provided for all full-time employees, including a tax-qualified Section 401(k) savings plan. In calendar year 2017, we matched contributions made to the Section 401(k) plan by our employees, including our executive officers, in amounts up to 4% of the employee’s compensation (capped at $11,000 for employees making more than $275,000 per year in eligible earnings).
In addition, consistent with market practices and our retention goals, we provide other benefits to our Named Executive Officers, on the same basis as all of our full-time employees in the country in which they are resident. These benefits include group health insurance (medical, dental, and vision), group disability insurance, and group life insurance.
Perquisites and Other Personal Benefits
Currently, we do not provide any perquisites or other personal benefits to our Named Executive Officers. In the future, we may provide perquisites or other personal benefits in limited circumstances, such as where we believe it is appropriate to assist an individual executive officer in the performance of his or her duties, to make our executive officers more efficient and effective, and for recruitment, motivation or retention purposes. We do not expect that these perquisites or other personal benefits will be a significant aspect of our executive compensation program. All future practices with respect to perquisites or other personal benefits will be approved and subject to periodic review by the Compensation Committee.
Employment Agreements
Generally, we rely on "at-will" employment offer letters and do not have written employment agreements with a specified term of employment. However, we did enter into an "at-will" employment agreement with our current Chief Executive Officer, Mr. Dougherty, after he was hired, reflecting the specific terms of his "new hire" compensation package and the significance of his service as our Chief Executive Officer.
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Post-Employment Severance Payments and Benefits
Each of the Named Executive Officers other than Mr. Dougherty has entered into an Executive Severance and Retention Agreement (which we refer to as the "Retention Agreements"). These Retention Agreements provide, under certain circumstances, for payments and benefits upon an involuntary termination of employment, including following a change in control of the Company. In the case of Mr. Dougherty, his employment agreement provides for certain payments and benefits in similar circumstances (other than in connection with his death) as well as involuntary terminations of employment occurring in the absence of a change in control of the Company.
The payments and benefits payable under these arrangements in the event of a change in control of the Company are subject to a “double trigger,” meaning that both a change in control of the Company and a subsequent involuntary termination of employment are required. In other words, the change in control of the Company does not by itself trigger any payments or benefits. Instead, payments and benefits are paid only if the employment of the Named Executive Officer is subsequently terminated without “cause” (or the Named Executive Officer resigns for “good reason”) during a specified period following the change in control. We believe that a “double trigger” arrangement maximizes stockholder value because it prevents an unintended windfall to our Named Executive Officers in the event of a change in control of the Company, while still providing them appropriate incentives to cooperate in negotiating a transaction involving a potential change in control of the Company in which they believe they may lose their jobs.
We believe these arrangements help us compete for and retain executive talent. After reviewing the practices of companies represented in the compensation peer group, we believe that our severance and change of control payments and benefits are generally comparable with severance packages offered to executive officers by the companies in the compensation peer group.
Other Compensation Policies
Equity Award Grant Policy
Our equity award grant policy provides that, in the case of newly-hired or newly-promoted executive officers, options to purchase shares of our common stock and restricted stock and restricted stock unit awards for shares of our common stock will be approved by the Compensation Committee at a regularly-scheduled quarterly meeting of the Board (or at a special meeting called between regularly-scheduled meetings of the Board). The grant date of equity awards for newly-hired executive officers approved by the Compensation Committee is (i) the 10th day of the month in which such approval occurs (if such approval occurs on or prior to the 8th day of such month), (ii) the 10th day of the following month (if such approval occurs after such 8th day) or (iii) such other date as the Compensation Committee determines, after giving due consideration to the purposes of this policy (or the next succeeding trading day on NASDAQ if such 10th day or other date so determined is not a trading day). However, if the award is an option to purchase shares of our common stock and the tentative grant date falls on a date on which the Company’s trading window is closed, the grant date of such option will be the date on which the trading window reopens.
In accordance with our equity award grant policy, all new-hire and promotion equity awards for non-executive officers will be approved by the Compensation Committee, or, if so delegated, the Chairman of the Compensation Committee. The grant date of such equity awards is (i) the 10th day of the month in which award approval occurs (if such approval occurs on or prior to the 8th day of such month), (ii) the 10th day of the following month (if such approval occurs after such 8th day) or (iii) such other date as the Compensation Committee (or, if authority has been delegated, the Chairman of the Compensation Committee) determines, after giving due consideration to the purposes of the policy (or the next succeeding trading day on NASDAQ if such 10th day or other date so determined is not a trading day).
All equity awards other than equity awards granted in connection with new hires or promotions will be approved by the Board, the Compensation Committee, or, if so delegated, the Chairman of the Compensation Committee. The grant date of such equity awards is (i) the 10th day of the month in which award approval occurs (if such approval occurs on or prior to the 8th day of such month), (ii) the 10th day of the following month (if such approval occurs after such 8th day) or (iii) such other date as the Compensation Committee (or, if authority has been delegated, the Chairman of the Compensation Committee) determines, after giving due consideration to the purposes of the policy (or the next succeeding trading day on NASDAQ if such 10th day or other date so determined is not a trading day). However, if the award is an option to purchase shares of our common stock and the tentative grant date falls on a date on which the Company’s trading window is closed, the grant date of such option will be the date on which the trading window reopens.
To the extent that the Compensation Committee grants options to purchase shares of our common stock, such options must have exercise prices at least equal to the fair market value (based on the closing market price) of our common stock on the date(s) of grant.
CEO and Director Stock Ownership Policy
In August 2016, we adopted a Director Stock Ownership Policy that applies to our non-employee directors and our Chief Executive Officer. Each of our non-employee directors must attain a stock ownership target of five times his or her annual cash board service
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retainer, and our Chief Executive Officer must attain a stock ownership target of three times his annual base salary. Compliance for any fiscal year is measured on the first day of such fiscal year. Only vested shares of our common stock directly owned by the individual (including joint ownership with a spouse or held in a permitted trust) and vested shares subject to a deferral election count toward the stock ownership target. Unexercised options to purchase shares of our common stock (even if vested) and unvested compensatory equity awards do not count toward the stock ownership target. Until his or her stock ownership target is achieved, each affected individual must retain 50% of his or her shares received on vesting or exercise of compensatory equity awards (determined after reduction for shares used to pay for taxes or the exercise price). As of the first day of fiscal year 2019, our Chief Executive Officer and each of our then current non-employee directors were in compliance with the Director Stock Ownership Policy.
Derivatives Trading, Hedging and Pledging Policy
The Board has adopted a policy regarding the trading of derivatives or the hedging of our equity securities by our employees, including our executive officers, and members of the Board. This policy provides that all employees, executive officers and members of the Board are prohibited from engaging in hedging transactions, including entering into any short sales, puts, calls or other derivative instruments based on Company securities, that allow the employee, executive officer or director to continue to own the covered securities, but without the full risks and rewards of ownership.
In addition to the foregoing, our employees, including our executive officers, and members of the Board are prohibited from holding Company securities in a margin account or otherwise pledging Company securities as collateral for a loan, except in limited circumstances approved by the Company’s General Counsel.
Compensation Recovery Policy
Currently, we have not implemented a policy regarding retroactive adjustments to any cash or equity-based incentive compensation paid to our executive officers and other employees where the payments were predicated upon the achievement of financial results that were subsequently the subject of a financial restatement. We intend to adopt a general compensation recovery (“clawback”) policy covering our incentive-based compensation arrangements once the SEC adopts final rules implementing the requirements of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Tax and Accounting Considerations
Deductibility of Executive Compensation
The Compensation Committee considers the deductibility of executive compensation as just one factor when determining the form, size and terms of the compensation elements paid or awarded to our executive officers. However, given our recent financial history, our applicable tax rates, and the loss of flexibility that arises when trying to comply with the requirements for full deductibility of executive compensation under Section 162(m) of the Code (under the so-called "performance-based compensation" exception), the Compensation Committee has not prioritized deductibility over the other goals of our executive compensation program. Instead, the Compensation Committee reserves the discretion, in its judgment, to authorize compensation payments that do not comply with an exemption from the deduction limit when it believes that such payments are in the best interests of the Company. In addition, the "performance-based compensation" exception to the deductibility limit of Code Section 162(m) has now generally been repealed, effective for taxable years beginning after December 31, 2017, unless transition relief for certain compensation arrangements in place as of November 2, 2017 is available.
Taxation of “Parachute” Payments
Sections 280G and 4999 of the Code provide that executive officers and directors who hold significant equity interests and certain other service providers may be subject to significant additional taxes if they receive payments or benefits in connection with a change in control of the Company that exceeds certain prescribed limits, and that the Company (or a successor) may forfeit a deduction on the amounts subject to this additional tax. We are not obligated to provide any Named Executive Officer with a “gross-up” or other reimbursement payment for any tax liability that he may owe as a result of the application of Sections 280G or 4999 in the event of a change in control of the Company. While the Compensation Committee considers deductibility of compensation as one of many factors when determining the form, size and terms of executive compensation elements, the Compensation Committee retains the discretion, in its judgment, to authorize compensation payments that may not be fully deductible under Section 280G of the Code when it believes that such payments are in the best interests of the Company.
Accounting for Stock-Based Compensation
The Compensation Committee considers the accounting impact of equity awards when designing compensation plans and arrangements for our executive officers and other employees. Chief among these is Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“ASC 718”), the standard which governs the accounting treatment of stock-based compensation awards. However, accounting cost is just one factor considered when designing such compensation plans and arrangements for our executive officers and other employees.
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COMPENSATION-RELATED RISKS
In April 2018, the Compensation Committee reviewed our compensation policies and practices applicable to all employees and determined that our compensation programs do not encourage excessive or inappropriate risk-taking. The Compensation Committee believes that the design and mix of our compensation programs appropriately encourage our executive officers and other employees to focus on the creation of long-term stockholder value. In its review, the Compensation Committee noted the following features:
• | payout levels under our annual cash incentive and sales incentive plans are capped and payout opportunities may be achieved on a straight-line interpolation basis between threshold and target levels, and between the target and stretch levels; |
• | non-GAAP adjustments are made to align achievement of the applicable performance measures with our business strategy; |
• | all non-GAAP adjustments are subject to Audit Committee review and approval to ensure that actual payout levels appropriately reflect company and business unit performance; and |
• | long-term performance-based incentive compensation constitutes a significant portion of our executive officers’ target total direct compensation opportunity, thereby focusing such individuals on enhancing long-term stockholder value. |
COMPENSATION TABLES
Summary Compensation Table
The following table sets forth certain information concerning the compensation for fiscal years 2018, 2017 and 2016 for our principal executive officer (Mr. Dougherty), our principal financial officer (Mr. Mangan), our three other most highly-compensated executive officers (Mr. LeMaitre, Mr. Teichmann and Mr. Cocchi) who served in that capacity at the end of fiscal year 2018. We refer to these officers collectively as our Named Executive Officers.
Fiscal Year 2018 Summary Compensation Table
Year (1) | Salary ($) | Bonus ($) | Stock Awards ($)(2) | Option Awards ($)(2) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||
Greg Dougherty | 2018 | $ | 600,000 | $ | — | $ | 3,848,000 | $ | — | $ | 390,000 | $ | 18,430 | (6) | $ | 4,856,430 | ||||||||
Chief Executive Officer and | 2017 | $ | 600,000 | $ | — | $ | 2,332,500 | $ | — | $ | 888,000 | $ | 9,277 | (5) | $ | 3,829,777 | ||||||||
Director | 2016 | $ | 550,000 | $ | — | $ | 1,359,260 | $ | — | $ | 975,000 | $ | 10,600 | (5) | $ | 2,894,860 | ||||||||
Pete Mangan | 2018 | $ | 350,000 | $ | — | $ | 1,872,000 | $ | — | $ | 136,500 | $ | 10,542 | (5) | $ | 2,369,042 | ||||||||
Chief Financial Officer | 2017 | $ | 341,823 | $ | — | $ | 1,119,600 | $ | — | $ | 258,300 | $ | 10,600 | (5) | $ | 1,730,323 | ||||||||
2016 | $ | 325,000 | $ | — | $ | 522,480 | $ | — | $ | 288,750 | $ | 10,600 | (5) | $ | 1,146,830 | |||||||||
Yves LeMaitre | 2018 | $ | 350,000 | $ | — | $ | 1,664,000 | $ | — | $ | 136,500 | $ | 10,800 | (5) | $ | 2,161,300 | ||||||||
Chief Strategy Officer | 2017 | $ | 350,000 | $ | — | $ | 1,119,600 | $ | — | $ | 258,300 | $ | 10,600 | (5) | $ | 1,738,500 | ||||||||
2016 | $ | 325,000 | $ | — | $ | 522,480 | $ | — | $ | 288,750 | $ | 6,346 | (5) | $ | 1,142,576 | |||||||||
David Teichmann | 2018 | $ | 330,000 | $ | 60,000 | (4) | $ | 1,248,000 | $ | — | $ | 128,700 | $ | 10,800 | (5) | $ | 1,777,500 | |||||||
Executive Vice President, | 2017 | $ | 330,000 | $ | — | $ | 870,800 | $ | — | $ | 243,540 | $ | 10,600 | (5) | $ | 1,454,940 | ||||||||
General Counsel and Corporate Secretary | 2016 | $ | 311,539 | $ | — | $ | 516,315 | $ | — | $ | 261,000 | $ | 10,600 | (5) | $ | 1,099,454 | ||||||||
Craig Cocchi | 2018 | $ | 350,000 | $ | — | $ | 998,400 | $ | — | $ | 136,500 | $ | 14,808 | (5) | $ | 1,499,708 | ||||||||
Chief Operating Officer (3) | 2017 | $ | 74,038 | $ | — | $ | 1,162,200 | $ | — | $ | — | $ | 2,154 | (5) | $ | 1,238,392 | ||||||||
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(1) | The years in this column refer to the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016. |
(2) | The amounts reported in these columns reflect the grant date fair value, computed in accordance with ASC 718, of time-based and performance-based stock awards granted during each fiscal year. There can be no assurance that the ASC 718 amounts will ever be realized. The assumptions we used to calculate these amounts are included in Note 9 to our audited consolidated financial statements included elsewhere in this Annual Report. With respect to the performance-based stock awards granted in fiscal year 2018, the amounts above reflect the probable payout percentage for the awards, which is based on the highest level of performance that can be achieved, calculated in accordance with ASC 718. For more information about these awards, see the discussion above under “Compensation Discussion and Analysis.” |
(3) | Mr. Cocchi was appointed our Chief Operating Officer effective April 10, 2017. |
(4) | On March 11, 2018, the Compensation Committee approved a one-time cash bonus of $60,000 for Mr. Teichmann in recognition of his efforts to further Oclaro’s strategic projects. |
(5) | The amount reported in this column includes Section 401(k) plan matching contributions by the Company to our Named Executive Officers’ for fiscal years 2018, 2017 and 2016. |
(6) | The amount reported in this column includes $10,800 of Section 401(k) plan matching contributions by the Company and a stipend related to a sales recognition meeting attended by Mr. Dougherty during fiscal year 2018. |
Fiscal Year 2018 Grants of Plan-Based Awards Table
The following table sets forth information regarding each grant of an award made to our Named Executive Officers during fiscal year 2018 under any plan, contract, authorization or arrangement pursuant to which cash, securities, similar instruments or other property may be received.
Grants of Plan-Based Awards for Fiscal Year 2018
Estimated Possible Payouts Under Non-Equity Incentive Plan Awards ($) | Estimated Possible Payouts Under Equity Incentive Plan Awards in Shares of Stock | All Other Stock Awards: Number of Shares of Stock or Units | Grant Date Fair Value of Stock Awards ($)(2) | ||||||||||||||||||||||||
Name | Grant Date | Threshold | Target | Maximum | Threshold (1) | Target (1) | Maximum (1) | ||||||||||||||||||||
Greg Dougherty | 7/2/2017 (3) | $ | 150,000 | $ | 300,000 | $ | 600,000 | — | — | — | — | $ | — | ||||||||||||||
12/31/2017 (4) | $ | 150,000 | $ | 300,000 | $ | 600,000 | — | — | — | — | $ | — | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | 277,500 | — | — | $ | 2,308,800 | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | — | — | 185,000 | $ | 1,539,200 | |||||||||||||||
Pete Mangan | 7/2/2017 (3) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | ||||||||||||||
12/31/2017 (4) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | 135,000 | — | — | $ | 1,123,200 | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | — | — | 90,000 | $ | 748,800 | |||||||||||||||
Yves LeMaitre | 7/2/2017 (3) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | ||||||||||||||
12/31/2017 (4) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | 120,000 | — | — | $ | 998,400 | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | — | — | 80,000 | $ | 665,600 | |||||||||||||||
David Teichmann | 7/2/2017 (3) | $ | 49,500 | $ | 99,000 | $ | 148,500 | — | — | — | — | $ | — | ||||||||||||||
12/31/2017 (4) | $ | 49,500 | $ | 99,000 | $ | 148,500 | — | — | — | — | $ | — | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | 90,000 | — | — | $ | 748,800 | |||||||||||||||
8/10/2017 | $ | — | $ | — | $ | — | — | — | — | 60,000 | $ | 499,200 | |||||||||||||||
Craig Cocchi | 7/2/2017 (3) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | ||||||||||||||
12/31/2017 (4) | $ | 52,500 | $ | 105,000 | $ | 157,500 | — | — | — | — | $ | — | |||||||||||||||
8/10/2017 | $ | — | — | 120,000 | — | — | $ | 998,400 | |||||||||||||||||||
(1) | On August 10, 2017, each of Messrs. Dougherty, Mangan, LeMaitre, Teichmann and Cocchi received a performance-based restricted stock unit award ("PSU"). One-third of the PSUs will vest subject to the achievement of $700.0 million of revenue over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; one-third of the PSUs will vest upon the achievement of $100.0 million of free cash flow (defined as adjusted EBITDA less capital expenditures) |
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over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; and one-third of the PSUs will vest upon the achievement of $800.0 million of revenue in any one fiscal year from 2018 through 2020 and upon achievement of $100.0 million of free cash flow over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions. Upon attaining each performance condition, the service-based vesting condition is satisfied for that tranche as to 1/3 of the PSUs on the first anniversary of the vesting commencement date, and with respect to 1/12 of the underlying shares each subsequent quarter, such that all PSUs for that tranche are fully vested on the third anniversary of the vesting commencement date.
(2) | The amounts reported in this column reflect the grant date fair value of the stock awards computed in accordance with ASC 718. With respect to the performance-based stock awards granted in fiscal year 2018, the amounts above reflect the probable payout percentage for the awards, which is based on the highest level of performance that can be achieved, calculated in accordance with ASC 718. The assumptions we used to calculate these amounts are included in Note 9 to our audited consolidated financial statements included elsewhere in this Annual Report. |
(3) | For the first half of fiscal year 2018, the annual cash incentive plan was based on achieving a non-GAAP operating income target for the six months ended December 30, 2017. Performance had to at least meet the threshold level for any amounts to be paid under this plan. For more information, see the discussion above under “Compensation Discussion and Analysis.” |
(4) | For the second half of fiscal year 2018, the annual cash incentive plan was based on achieving a non-GAAP operating income target for the six months ended June 30, 2018. Performance had to at least meet the threshold level for any amounts to be paid under this plan. For more information, see the discussion above under “Compensation Discussion and Analysis.” |
Narrative Disclosure to Fiscal Year 2018 Summary Compensation Table and Fiscal Year 2018 Grants of Plan Based Awards Table
A discussion of 2018 base salaries, bonuses, incentive plans, awards and employment agreements is set forth in “Compensation Discussion and Analysis,” including a discussion of the material terms and conditions of the fiscal year 2018 equity awards.
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Fiscal Year 2018 Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth information concerning stock options that have not been exercised and unvested restricted stock awards and performance-based stock awards held by each of our Named Executive Officers as of June 30, 2018.
Option Awards | Stock Awards | |||||||||||||||||||
Name | Option/Award Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock that Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) (1) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)(1) | |||||||||||
Greg | 11/13/2008 | 1,447 | — | $ | 1.50 | 11/12/2018 | — | — | — | — | ||||||||||
Dougherty | 5/13/2009 | 3,334 | — | $ | 3.10 | 5/13/2019 | — | — | — | — | ||||||||||
10/21/2009 | 8,000 | — | $ | 5.80 | 10/21/2019 | — | — | — | — | |||||||||||
10/27/2010 | 3,898 | — | $ | 13.68 | 10/27/2020 | — | — | — | — | |||||||||||
10/26/2011 | 14,881 | — | $ | 3.54 | 10/26/2021 | — | — | — | — | |||||||||||
8/10/2015 | — | — | — | — | 14,569 | (2) | $ | 130,101 | — | — | ||||||||||
8/10/2015 | — | — | — | — | 18,731 | (3) | $ | 167,268 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 105,469 | (4) | $ | 941,838 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 105,469 | (5) | $ | 941,838 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 185,000 | (6) | $ | 1,652,050 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 277,500 | (7) | $ | 2,478,075 | — | — | ||||||||||
Pete | 1/14/2014 | 15,000 | — | $ | 2.55 | 1/14/2024 | — | $ | — | — | — | |||||||||
Mangan | 8/10/2015 | — | — | — | — | 7,493 | (2) | $ | 66,912 | — | — | |||||||||
8/10/2015 | — | — | — | — | 7,493 | (3) | $ | 66,912 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 50,625 | (4) | $ | 452,081 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 50,625 | (5) | $ | 452,081 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 90,000 | (6) | $ | 803,700 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 135,000 | (7) | $ | 1,205,550 | — | — | ||||||||||
Yves | 8/15/2008 | 6,000 | — | $ | 8.90 | 8/15/2018 | — | $ | — | — | — | |||||||||
LeMaitre | 8/16/2010 | 13,947 | — | $ | 10.43 | 8/16/2020 | — | $ | — | — | — | |||||||||
8/16/2010 | 3,253 | — | $ | 10.43 | 8/16/2020 | — | $ | — | — | — | ||||||||||
8/10/2015 | — | — | — | — | 7,493 | (2) | $ | 66,912 | — | — | ||||||||||
8/10/2015 | — | — | — | — | 7,493 | (3) | $ | 66,912 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 50,625 | (4) | $ | 452,081 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 50,625 | (5) | $ | 452,081 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 80,000 | (6) | $ | 714,400 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 120,000 | (7) | $ | 1,071,600 | — | — | ||||||||||
David | 2/10/2014 | 60,000 | — | $ | 2.53 | 2/10/2024 | — | $ | — | — | — | |||||||||
Teichmann | 5/12/2014 | 25,000 | — | $ | 1.78 | 5/12/2024 | — | $ | — | — | — | |||||||||
8/10/2015 | — | — | — | — | 7,493 | (2) | $ | 66,912 | — | — | ||||||||||
8/10/2015 | — | — | — | — | 7,493 | (3) | $ | 66,912 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 39,375 | (4) | $ | 351,619 | — | — | ||||||||||
8/10/2016 | — | — | — | — | 39,375 | (5) | $ | 351,619 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 60,000 | (6) | $ | 535,800 | — | — | ||||||||||
8/10/2017 | — | — | — | — | 90,000 | (7) | $ | 803,700 | — | — | ||||||||||
Craig | 5/10/2017 | — | — | — | — | 97,500 | (8) | $ | 870,675 | — | — | |||||||||
Cocchi | 8/10/2017 | — | — | — | — | 120,000 | (7) | $ | 1,071,600 | — | — | |||||||||
(1) | Calculated by multiplying the number of unvested shares of our common stock by $8.93, the closing market price per share of our common stock on the NASDAQ Global Select Market on June 29, 2018. |
(2) | These restricted stock unit awards will vest as to 33.33% of the number of shares subject to each award on August 10, 2016; and 8.33% of the number of shares subject to each such award shall vest on the November 10th, February 10th, May 10th, and August 10th following August 10, 2016 over the following two years. |
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(3) | On August 10, 2015, each of Messrs. Dougherty, Mangan, LeMaitre and Teichmann received a performance-based restricted stock unit award. These performance-based restricted stock unit awards will be earned at a 100% target level, based upon the achievement of positive free cash flow (defined as EBITDA less capital expenditures) in any fiscal quarter ending prior to June 30, 2018. Vesting of these PSUs is contingent upon service conditions being met through August 10, 2018. The Compensation Committee certified that this performance condition was achieved during the quarter ended September 26, 2015. As a result, these PSUs vest as to 33.33% of the number of shares subject to each award on August 10, 2016; and 8.33% of the number of shares subject to each such award shall vest on the November 10th, February 10th, May 10th, and August 10th following August 10, 2016 over the following two years. |
(4) | These restricted stock unit awards will vest as to 25% of the number of shares subject to each award on August 10, 2017; and 6.25% of the number of shares subject to each such award shall vest on the November 10th, February 10th, May 10th, and August 10th following August 10, 2017 over the following three years. |
(5) | On August 10, 2016, each of Messrs. Dougherty, Mangan, LeMaitre and Teichmann received a performance-based restricted stock unit award. These performance-based restricted stock unit awards will be earned at a 100% target level, based on the achievement of $25 million of positive free cash flow (defined as Adjusted EBITDA less capital expenditure) over any consecutive four fiscal quarter period ending prior to June 27, 2020. On July 25, 2017, the Compensation Committee certified that this performance condition was achieved during the quarter ended July 1, 2017. As a result, these performance-based restricted stock unit awards cliff vest with respect to 25 percent of the underlying shares on August 10, 2017, and with respect to 6.25 percent of the underlying shares each subsequent quarter over the following three years, subject to continuous service. |
(6) | These restricted stock unit awards will vest as to 25% of the number of shares subject to each award on August 10, 2018; and 6.25% of the number of shares subject to each such award shall vest on the November 10th, February 10th, May 10th, and August 10th following August 10, 2018 over the following three years. |
(7) | On August 10, 2017, each of Messrs. Dougherty, Mangan, LeMaitre, Teichmann and Cocchi received a performance-based restricted stock unit award. These performance-based restricted stock unit awards will be earned based as to one-third of the performance-based restricted stock unit awards upon the achievement of $700.0 million of revenue over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; one-third of the performance-based restricted stock unit awards upon the achievement of $100.0 million of free cash flow (defined as adjusted EBITDA less capital expenditures) over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; and one-third of the performance-based restricted stock unit awards upon the achievement of $800.0 million of revenue in any one fiscal year from 2018 through 2020 and upon achievement of $100.0 million of free cash flow over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions. Upon attaining each performance condition, the service-based vesting condition is satisfied for that tranche as to 1/3 of the performance-based restricted stock unit awards on the first anniversary of the vesting commencement date, and with respect to 1/12 of the underlying shares each subsequent quarter, such that all performance-based restricted stock unit awards for that tranche are fully vested on the third anniversary of the vesting commencement date. The performance conditions associated with these PSUs will be considered achieved upon the consummation of the merger with Lumentum. |
(8) | The restricted stock unit awards vested as to 25% of the number of shares subject to the award on May 10, 2018; and 6.25% of the number of shares subject to each such award shall vest on the August 10th, November 10th, February 10th, and May 10th following May 10, 2018 over the following three years. |
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Fiscal Year 2018 Option Exercises and Stock Vested Table
The following table sets forth information regarding options exercised and the vesting of restricted stock awards held by our Named Executive Officers during the fiscal year ended June 30, 2018.
Fiscal Year 2018 Option Exercises and Restricted Stock Awards Vested | |||||||||||||
Option Awards | Stock Awards | ||||||||||||
Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($) | Number of Shares Acquired on Vesting (#)(1) | Value Realized on Vesting ($)(2) | |||||||||
Greg Dougherty | — | $ | — | 307,679 | $ | 2,347,126 | |||||||
Pete Mangan | — | $ | — | 157,398 | $ | 1,195,275 | |||||||
Yves LeMaitre | 4,875 | $ | 8,288 | 151,981 | $ | 1,154,798 | |||||||
David Teichmann | — | $ | — | 143,794 | $ | 1,085,210 | |||||||
Craig Cocchi | — | $ | — | 32,500 | $ | 278,850 | |||||||
______________
(1) | The amounts reported in this column represent the number of shares of our common stock acquired with respect to full value awards that vested in fiscal year 2018. |
(2) | The amounts reported in this column represent the number of shares of our common stock that vested during fiscal year 2018 multiplied by the closing market price of our common stock as quoted on the NASDAQ Global Select Market on each corresponding vesting date. |
Potential Payments Upon Termination or Change in Control
Employment, Change in Control and Severance Arrangements
Our employment agreement with Mr. Dougherty provides that if we terminate his employment without “cause” or if he resigns his employment with “good reason” (a “Qualifying Termination”), then he will be eligible to receive the following payments and benefits:
• | A cash payment equal to the sum of twice his annual base salary and twice his target annual cash incentive award opportunity; |
• | Accelerated vesting of all outstanding and unvested restricted stock and/or restricted stock unit awards which vest based solely on his continued employment; and |
• | A monthly payment in the amount of $6,000 for 24 months in lieu of continuing other benefits, such as health and welfare benefits. |
In addition, if Mr. Dougherty’s employment is terminated as the result of a Qualifying Termination in connection with a change in control of the Company, then the payments and benefits to which he would be eligible would include, in addition to those set forth above for a Qualifying Termination, accelerated vesting of all outstanding and unvested or unearned restricted stock and/or restricted stock unit awards, whether or not vesting is based on his continued employment.
Other Named Executive Officers.
Each of our Named Executive Officers (other than Mr. Dougherty) is party to a Retention Agreement. The Retention Agreement provides that if an executive officer dies or his employment with the Company is terminated without “cause” (and not due to Disability, as defined in the Retention Agreement) prior to a “change in control” of the Company, the executive officer will be eligible to receive the following payments and benefits, in addition to accrued benefits:
• | an amount (the "Pro Rata" Bonus) equal to the product of (i) the average of the executive’s bonuses earned during the last three full fiscal years (or such lesser number of years in which the executive earned a bonus), divided by 2, and (ii) a fraction, the numerator of which is the number of days before the “separation from service” (as defined under Treasury Regulations Section 1.409A-1(h)) in the current bonus period applicable to the current bonus, and the denominator of which is the total number of days in the current bonus period applicable to the current bonus; and |
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• | an amount equal to the result obtained by multiplying the executive’s "reference salary" by a fraction, the numerator of which is eight months plus one additional month of base salary for each whole year of the executive's employment by us (up to a maximum of 18 months) and the denominator of which is 12. |
However, instead of receiving the payments and benefits set forth in the preceding paragraph, if the employment of an executive officer is terminated without “cause” (and not due to Disability), upon his or her death, or the executive officer leaves for “good reason” within 12 months following, or 30 days before, a “change in control” of the Company, and only if such termination constitutes a separation from service, the executive officer will be eligible to receive the following payments and benefits, in addition to accrued benefits:
• | an amount equal to 1.5 times the executive’s "reference salary" then in effect; |
• | an amount equal to the average of the executive’s bonuses earned during the last 3 full fiscal years (or such lesser number of years in which the executive earned a bonus); and |
• | a taxable lump-sum cash payment of $72,000 which the executive may, but is not required to, use to continue his or her existing group health coverage (medical, dental, and vision) then in effect. |
In addition to the above payments and benefits, following a “change in control” of the Company, the executive officer will also receive full acceleration of his outstanding equity awards and will have until the earliest of (i) the first anniversary of the separation from service, (ii) the expiration of the original term of the option or (iii) on the first date on which a change in control occurs if options are not assumed or replaced by the successor entity, in order to exercise any outstanding stock option accelerated in accordance with such provisions.
If the employment of an executive officer is terminated by reason of his or her Disability, the executive officer will be eligible to receive an amount equal to the Pro Rata Bonus (defined above), in addition to accrued benefits. If the Disability termination had occurred on June 30, 2018, the executive officers would have received a Pro Rata Bonus in the amounts set forth below in the Table Regarding Amounts Payable, under the column entitled "Non-Equity Incentive Plan Compensation" for a Type I event, as well as the unpaid accrued vacation time set forth under the column entitled "Benefits" for a Type I event.
To receive any payments or benefits under the Retention Agreements, the executive officer must sign, and allow to become effective not later than the 55th day after the executive officer's separation from service, a separation agreement and release in a form reasonably acceptable to the Company that contains, among other standard provisions, the form of release of claims in substantially the form attached to the Retention Agreement. In addition, the executive officer must also continue to comply with his or her continuing obligations to the Company under applicable law and his or her confidential information and inventions assignment agreement. Payments will be made in a single lump sum on or before the 55th day after the executive officer's separation from service.
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Table Regarding Amounts Payable.
The following table shows the payments and benefits potentially payable to each of our Named Executive Officers upon death, if his employment were terminated, if he resigned for good reason, or if a change of control of the Company occurred. These amounts are calculated assuming that the death, employment termination, resignation for good reason or change of control took place on June 29, 2018. The closing market price per share of our common stock on the NASDAQ Global Select Market on June 29, 2018 (the final business day of our fiscal year 2018) was $8.93.
Base Salary ($)(1) | Non-Equity Incentive Plan Compensation ($) | Accelerated Vesting of Options | Accelerated Vesting of Restricted Stock Units (2) | Benefits ($) | Total ($) | ||||||||||||||||
Greg Dougherty | |||||||||||||||||||||
Type I event (3) | $ | 1,200,000 | (5) | $ | 1,200,000 | (6) | — | $ | 6,311,170 | $ | 213,231 | (7) | $ | 8,924,401 | |||||||
Type II event (4) | $ | 1,200,000 | (5) | $ | 1,200,000 | (6) | — | $ | 6,311,170 | $ | 213,231 | (7) | $ | 8,924,401 | |||||||
Pete Mangan | |||||||||||||||||||||
Type I event (3) | $ | 408,333 | $ | 113,925 | — | $ | — | $ | 13,601 | (8) | $ | 535,859 | |||||||||
Type II event (4) | $ | 525,000 | $ | 227,850 | — | $ | 3,047,237 | $ | 85,601 | (9) | $ | 3,885,688 | |||||||||
Yves LeMaitre | |||||||||||||||||||||
Type I event (3) | $ | 525,000 | $ | 113,925 | — | $ | — | $ | 40,385 | (8) | $ | 679,310 | |||||||||
Type II event (4) | $ | 525,000 | $ | 227,850 | — | $ | 2,823,987 | $ | 112,385 | (9) | $ | 3,689,222 | |||||||||
David Teichmann | |||||||||||||||||||||
Type I event (3) | $ | 330,000 | $ | 105,540 | — | $ | — | $ | 34,166 | (8) | $ | 469,706 | |||||||||
Type II event (4) | $ | 495,000 | $ | 211,080 | — | $ | 2,176,562 | $ | 106,166 | (9) | $ | 2,988,808 | |||||||||
Craig Cocchi | |||||||||||||||||||||
Type I event (3) | $ | 262,500 | $ | 68,250 | — | $ | — | $ | 15,264 | (8) | $ | 346,014 | |||||||||
Type II event (4) | $ | 525,000 | $ | 136,500 | — | $ | 1,942,275 | $ | 87,264 | (9) | $ | 2,691,039 | |||||||||
(1) | Amounts shown are based on each Named Executive Officer's "reference salary." As of June 30, 2018, the "reference salary" for each Named Executive Officer was as follows: Greg Dougherty, $600,000; Pete Mangan, $350,000; Yves LeMaitre, $350,000; David Teichmann, $330,000; Craig Cocchi, $350,000. Except as otherwise noted, upon a Type I event, each Named Executive Officer will receive an amount equal to the result obtained by multiplying his "reference salary" by a fraction, the numerator of which is eight months plus one additional month of base salary for each whole year of the Named Executive Officer’s employment by us (up to a maximum of 18 months) and the denominator of which is 12. Except as otherwise noted, upon a Type II event, each Named Executive Officer will receive an amount equal to 1.5 times such officer’s “reference salary.” |
(2) | Amounts shown represent the intrinsic value of all unvested restricted stock unit awards which would be accelerated upon the occurrence of the termination event, calculated based on the number of restricted stock unit awards subject to acceleration multiplied by the closing market price of our common stock of $8.93 on June 29, 2018, as quoted on the NASDAQ Global Select Market. Each of our Named Executive Officers’ equity awards are subject to "double-trigger" acceleration. As a result, the Named Executive Officers would not be entitled to receive the amounts listed in this column in the event of a change of control absent a corresponding termination of employment. |
(3) | For Mr. Dougherty, a “Type I event” means termination of employment without cause or resignation for good reason absent a change of control. For each of the other Named Executive Officers, a “Type I event” means death or termination of employment without cause absent a change of control. |
(4) | For Mr. Dougherty, a “Type II event” means termination of employment without cause or resignation for good reason in connection with a change of control. For each of the other Named Executive Officers, a “Type II event” means death, termination of employment without cause or resignation for good reason in connection with a change of control. |
(5) | Represents two times Mr. Dougherty’s annual salary. |
(6) | Represents twice the annual target cash incentive award opportunity for Mr. Dougherty. |
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(7) | Represents $69,231 of earned but unpaid vacation as of June 30, 2018 and $144,000 in lieu of employee medical insurance coverage and employee group life insurance coverage for a period of 24 months following termination of employment. |
(8) | Consists of earned but unpaid vacation as of June 30, 2018. |
(9) | Consists of earned but unpaid vacation as of June 30, 2018 and a taxable lump-sum cash payment equal to $72,000. |
Director Compensation
The Board believes that providing competitive compensation is necessary to attract and retain qualified non-employee directors. However, the Board is also mindful of our compensation budget and cash constraints, and the Board and the Nominating and Corporate Governance Committee work with the Compensation Committee's compensation consultant, Compensia, to ensure that cash and equity compensation are reasonable and consistent and competitive with market practices. The following table shows the Board and Board committee annual cash retainers (which are paid pro-rata on a quarterly basis) for fiscal year 2018.
Board of Director/Committee Position | Fiscal Year 2018 Annual Retainer | |||
Board Chairman | $ | 90,000 | ||
Board Member (non-Chairman) | $ | 50,000 | ||
Audit Committee Member (non-Chairman) | $ | 10,000 | ||
Audit Committee Chairman | $ | 25,000 | ||
Compensation Committee Member (non-Chairman) | $ | 7,500 | ||
Compensation Committee Chairman | $ | 16,000 | ||
Nominating and Corporate Governance Committee Member (non-Chairman) | $ | 5,000 | ||
Nominating and Corporate Governance Committee Chairman | $ | 10,000 | ||
No additional compensation was paid to any director based on the number of meetings attended in fiscal year 2018. We reimbursed our non-employee directors for reasonable out-of-pocket expenses incurred in attending Board and Board committee meetings.
Starting in fiscal year 2018, each non-employee director receives, on the date of our annual stockholders meeting, an annual grant of restricted stock with the number of shares equal to the lesser of (i) 50,000 shares or (ii) $135,000 divided by the average closing price of the Company’s common stock for the 30 days ending on the date of the annual stockholders meeting, with such shares vesting on the first anniversary of the grant date. In addition, newly-appointed non-employee directors receive an initial restricted stock grant with a value of $200,000 on their start date, with 1/3 of the shares vesting on the first anniversary of the grant date and 1/12 of the shares vesting quarterly for the next two years of service thereafter.
Fiscal Year 2018 Director Compensation Table
The following table sets forth information concerning the compensation of our non-employee directors for fiscal year 2018:
Name (1) | Fees Earned or Paid in Cash ($) | Stock Awards ($)(2) | Option Awards($) | All Other Compensation($) | Total ($) | |||||||||||||||
Edward B. Collins | $ | 65,000 | $ | 123,454 | $ | — | $ | — | $ | 188,454 | ||||||||||
Kendall Cowan | $ | 82,500 | $ | 123,454 | $ | — | $ | — | $ | 205,954 | ||||||||||
Denise Haylor (1) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Marissa Peterson | $ | 90,000 | $ | 123,454 | $ | — | $ | — | $ | 213,454 | ||||||||||
Ian Small | $ | 51,042 | $ | 323,447 | $ | — | $ | — | $ | 374,489 | ||||||||||
Joel A. Smith III | $ | 70,000 | $ | 123,454 | $ | — | $ | — | $ | 193,454 | ||||||||||
William L. Smith | $ | 62,500 | $ | 123,454 | $ | — | $ | — | $ | 185,954 | ||||||||||
(1) | The compensation information for Mr. Dougherty is set forth above under “Compensation Discussion and Analysis” and the corresponding compensation tables, footnotes and accompanying narratives. Effective April 2017, Ms. Haylor no longer received any compensation from us due to the internal policies of her current employer, The Boston Consulting Group. |
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(2) | The amounts reported in this column reflect the grant date fair value, computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation - Stock Compensation ("ASC 718"), of the restricted stock awards granted during the fiscal year ended June 30, 2018. There can be no assurance that the ASC 718 amounts will ever be realized. The assumptions we used to calculate these amounts are included in Note 9 to our audited consolidated financial statements included in this Annual Report. All the restricted stock awards listed were granted on November 17, 2017, with the exception of a grant of 23,391 restricted stock awards, valued at $199,993 granted to Mr. Small upon joining our Board of Directors on September 1, 2017. |
The following table sets forth the number of shares of our common stock subject to outstanding stock awards and option awards held by each of our non-employee directors as of the end of fiscal year 2018.
Name | Stock Awards (A) | Stock Option Awards (B) | ||||
Edward B. Collins | 18,762 | 34,779 | ||||
Kendall Cowan | 18,762 | — | ||||
Denise Haylor | 11,122 | — | ||||
Marissa Peterson | 18,762 | 17,046 | ||||
Ian Small | 42,153 | — | ||||
Joel A. Smith III | 18,762 | 31,560 | ||||
William L. Smith | 18,762 | — | ||||
(A) Stock awards consist of unvested shares of our common stock subject to such awards.
(B) Option awards include vested (but unexercised) shares of our common stock subject to such awards.
CEO Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information about the relationship of the median annual total compensation of our employees other than our Chief Executive Officer, Greg Dougherty (our “CEO”), and the annual total compensation of our CEO:
For fiscal year 2018:
▪ | the median of the annual total compensation of all our employees (excluding our CEO) was $36,878; |
▪ | the annual total compensation of our CEO was $4,856,430; and |
▪ | the ratio of the annual total compensation of our CEO to the median of the annual total compensation of all our employees (excluding our CEO) was 132 to 1. |
This ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K using the data, methodologies, exclusions, and assumptions summarized below. The methodologies, exclusions, and assumptions we used are specific to our company and our employee population. Because SEC rules allow companies to adopt a variety of methodologies, apply certain exclusions, and make reasonable estimates and assumptions that reflect their employee population and compensation practices, the pay ratio reported by other companies may not be comparable to our pay ratio, as other companies have different employee populations and compensation practices and may have used different methodologies, exclusions, estimates, and assumptions in calculating their pay ratios.
We identified the employee with compensation at the median of the annual total compensation of all our employees using the following methodology:
1. | We selected June 30, 2018, which was the last day of our last completed fiscal year, as the date on which to identify our median employee. |
2. | In determining our employee population, we considered the individuals, excluding our CEO, who were employed by us and our consolidated subsidiaries on June 30, 2018, whether employed on a full-time, part-time, seasonal or temporary basis. We did not include any independent contractors or “leased” workers in our employee population. |
3. | As of June 30, 2018, we had 1,701 employees, with 95 employees located in the United States and 1,606 employees located outside the United States. SEC rules permit companies to exclude non-U.S. employees from the median employee calculation if such non-U.S. employees account for 5% or less of the company’s total number of employees. Applying |
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this “de minimis” exemption, we excluded all of our non-U.S. employees in Canada (four employees), Germany (two employees), Hong Kong (one employee), Malaysia (25 employees), and Thailand (nine employees). After applying the de minimis exemption, 95 employees in the United States and 1,565 employees outside the United States were considered in identifying our median employee.
4. | To identify our median employee, we chose to use a consistently-applied compensation measure, which we selected as fiscal year 2018 total cash compensation, consisting of base salary as of June 30, 2018 compiled from our Human Resource records and actual bonuses for fiscal year 2018. We selected total cash compensation as an appropriate compensation measure as this information was readily available in each country in which we had employees and we do not grant equity awards to all employees. |
5. | For employees paid in foreign currencies, we converted their compensation to U.S. dollars using the applicable exchange rates in effect on May 14, 2018. We did not make any cost-of-living adjustment. |
Using this methodology, we identified the individual at the median of our employee population. We then calculated the annual total compensation for this individual using the same methodology we use to calculate the amount reported for our CEO in the “Total” column of the Fiscal Year 2018 Summary Compensation Table as set forth in this Annual Report on Form 10-K.
As disclosed in the Fiscal Year 2018 Summary Compensation Table, the annual total compensation for our CEO was $4,856,430.
Our pay ratio is not an element that our Compensation Committee considers in setting the compensation of our CEO, nor is our CEO’s compensation a material element that management considers in making decisions for non-officer employees.
Compensation Committee Interlocks and Insider Participation
During fiscal year 2018, Ms. Haylor, Mr. Cowan, Mr. I. Small and Mr. W. Smith served on our Compensation Committee. During fiscal year 2018, no executive officer of Oclaro served as a director or member of the Compensation Committee (or other committee serving an equivalent function) of any other entity, whose executive officers served on the Board or our Compensation Committee.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table summarizes our equity compensation plans as of June 30, 2018:
Number of Securities to be Issued Upon Exercise of Outstanding Options and Vesting of Restricted Stock Units | Weighted-average Exercise Price of Outstanding Options (1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) | ||||||||||||
(a) | (b) | (c) | ||||||||||||
Equity compensation plans approved by security holders | 7,651,338 | $ | 7.75 | 16,456,192 | ||||||||||
Equity compensations plans not approved by security holders | — | — | — | |||||||||||
7,651,338 | $ | 7.75 | 16,456,192 | |||||||||||
_______________
(1) | The weighted-average exercise price does not take into account shares issuable upon the vesting of outstanding time-based and performance-based restricted stock unit awards, which have no exercise price. |
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Beneficial Ownership
The following table shows the number of shares of our common stock beneficially owned as of July 1, 2018 by each entity or person who is known to us to own five percent or more of our common stock, each director, each executive officer listed in the Fiscal Year 2018 Summary Compensation Table below, and all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Commission. Except as indicated by footnote, to our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Shares of our common stock issuable pursuant to options to purchase or other rights to acquire shares of common stock that are exercisable within 60 days of July 1, 2018 are deemed to be beneficially owned by the person holding such options or rights for the purpose of computing ownership of such person, but are not treated as outstanding for the purpose of computing the ownership of any other person. Applicable percentage of beneficial ownership is based on 170,675,378 shares of our common stock outstanding as of July 1, 2018. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares.
The address of each of our executive officers and directors is c/o Oclaro, Inc., 225 Charcot Avenue, San Jose, California 95131.
Beneficial Owner | Number of Shares | Percentage of Total | |||
5% Stockholders | |||||
BlackRock, Inc. (1) 55 East 52 Street New York, NY 10055 | 20,857,498 | 12.2% | |||
Kopp Holding Company, LLC (2) 8400 Normandale Lake Boulevard, Suite 1450 Bloomington, MN 55437 | 9,718,293 | 5.7% | |||
The Vanguard Group (3) 100 Vanguard Blvd. Malvern, PA 19355 | 9,373,992 | 5.5% | |||
Magnetar Financial LLC (4) 1603 Orrington Avenue Evanston, Illinois 60201 | 8,615,308 | 5.0% | |||
Named Executive Officers and Directors | |||||
Greg Dougherty (5) | 902,577 | * | |||
Pete Mangan (6) | 303,755 | * | |||
Marissa Peterson (7) | 290,417 | * | |||
David Teichmann (8) | 265,644 | * | |||
Edward Collins (9) | 255,081 | * | |||
Joel A. Smith, III (10) | 241,128 | * | |||
William L. Smith (11) | 229,974 | * | |||
Kendall Cowan (12) | 224,553 | * | |||
Yves LeMaitre (13) | 149,972 | * | |||
Denise Haylor (14) | 29,888 | * | |||
Craig Cocchi (15) | 29,399 | * | |||
Ian Small | — | * | |||
All executive officers and directors as a group (16 persons) | 2,922,388 | 1.7% | |||
*less than 1%
(1) | The following information is based on Amendment No. 1 to Schedule 13G filed with the Commission on January 23, 2018 by BlackRock, Inc. (BlackRock). BlackRock is the beneficial owner of and has sole dispositive power with respect to 20,857,498 shares of our common stock, and sole voting power with respect to 20,495,393 shares of our common stock. |
(2) | The following information is based on Amendment No. 2 to Schedule 13G filed with the Commission on January 12, 2018 by Kopp Family Office, LLC (KFO), Kopp Holding Company, LLC (Holdco), which is the parent of KFO, and |
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LeRoy C. Kopp, who is the control person of Holdco. KFO is the beneficial owner of 9,718,293 shares of our common stock. KFO has shared voting power and shared dispositive power with respect to these shares of our common stock. HoldCo beneficially owns and has shared voting power with respect to 10,573,443 shares of our common stock and has shared dispositive power with respect to 7,566,953 shares of our common stock. Mr. Kopp beneficially owns 10,615,293 shares of our common stock, has shared voting power with respect to 10,573,443 shares of our common stock, has sole dispositive power with respect to 3,048,340 shares of our common stock and has shared dispositive power with respect to 7,566,953 shares of our common stock.
(3) | The following information is based on a Schedule 13G filed with the Commission on February 9, 2018 by The Vanguard Group. The Vanguard Group is the beneficial owner of 9,373,992 shares of our common stock, has sole dispositive power with respect to 9,070,394 shares of our common stock, and sole voting power with respect to 306,995 shares of our common stock and has shared voting power with respect to 10,200 of our common stock. |
(4) | The following information is based on a Schedule 13D filed with the Commission on July 23, 2018 by Magnetar Financial LLC, Magnetar Capital Partners LP, Supernova Management LLC and Alec Litowitz (collectively, Magnetar Reporting Persons). As of July 22, 2018, each of the Magnetar Reporting Persons may have been deemed to share the power to vote and direct the disposition of 8,615,308 Shares, which consisted of (i) 578,349 Shares held for the benefit of Magnetar Capital Master Fund, (ii) 5,432,629 Shares held for the benefit of PRA Master Fund, (iii) 2,168,811 Shares held for the benefit of Constellation Fund; (iv) 388,698 Shares held for the benefit of MSW Master Fund; and (v) 46,821 Shares held for the benefit of Premia Master Fund. |
(5) | Represents 798,479 shares beneficially owned by Mr. Dougherty and 104,098 shares issuable pursuant to options exercisable or restricted stock awards releasable within 60 days of July 1, 2018. |
(6) | Represents 253,137 shares beneficially owned by Mr. Mangan and 50,618 shares issuable pursuant to options exercisable or restricted stock awards releasable within 60 days of July 1, 2018. |
(7) | Represents 273,371 shares beneficially owned by Ms. Peterson and 17,046 shares issuable pursuant to options exercisable within 60 days of July 1, 2018. |
(8) | Represents 153,776 shares beneficially owned by Mr. Teichmann and 111,868 shares issuable pursuant to options exercisable or restricted stock awards releasable within 60 days of July 1, 2018. |
(9) | Represents 142,571 shares beneficially owned by Mr. Collins, 77,731 held in trust, 70,000 shares owned by his spouse and 34,779 shares issuable pursuant to options exercisable within 60 days of July 1, 2018. |
(10) | Represents 209,482 shares beneficially owned by Mr. Smith individually, 86 shares beneficially owned by his spouse and 31,560 shares issuable pursuant to options exercisable within 60 days of July 1, 2018. |
(11) | Represents 229,974 shares beneficially owned by Mr. Smith. |
(12) | Represents 224,553 shares beneficially owned by Mr. Cowan. |
(13) | Represents 99,654 shares beneficially owned by Mr. LeMaitre and 50,318 shares issuable pursuant to options exercisable or restricted stock awards releasable within 60 days of July 1, 2018. |
(14) | Represents 27,663 shares beneficially owned by Ms. Haylor and 2,225 shares issuable pursuant to restricted stock awards releasable within 60 days of July 1, 2018. |
(15) | Represents 21,274 shares beneficially owned by Mr. Cocchi and 8,125 shares issuable pursuant to restricted stock awards releasable within 60 days of July 1, 2018. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Person Transactions
During fiscal year 2018, there were no transactions and there are currently no proposed transactions with a related party, in which we were or are to become a participant and the amount involved exceeded $120,000.
Policies and Procedures for Related Person Transactions
The Board has adopted a written policy that contains procedures for the reporting and review of any transaction, arrangement or relationship in which Oclaro is a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% stockholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.
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If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our General Counsel. Our policy requires that the proposed related person transaction be reviewed and, if deemed consistent with the standards contained in our policy, approved by the Audit Committee of the Board. Whenever practicable, the reporting, review and approval must occur prior to the effectiveness or consummation of the transaction. If advance review and approval is not practicable, our Audit Committee must review, and, in its discretion, ratify the related person transaction. The policy permits the chairman of our Audit Committee to review and, if deemed consistent with the standards contained in our policy, approve the proposed related person transaction if it arises between Audit Committee meetings, subject to ratification of the related person transaction by our Audit Committee at its next meeting. Any related person transaction that is ongoing in nature must be reviewed annually by our Audit Committee.
A related person transaction reviewed under our policy will be considered approved or ratified if it is authorized by the Audit Committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, our Audit Committee must review and consider:
• | the related person’s interest in the related person transaction; |
• | the approximate dollar value involved in the related person transaction; |
• | the approximate dollar value of the related person’s interest in the transaction without regard to the amount of any profit or loss; |
• | whether the transaction was undertaken in the ordinary course of our business; |
• | whether the transaction with the related person is proposed to be, or was, entered into on terms no less favorable to us than terms that could have been reached with an unrelated third party; |
• | the purpose of, and the potential benefits to us of, the related person transaction; and |
• | any other information regarding the related person transaction or the related person in the context of the proposed transaction that would be material to investors in light of the circumstances of the particular transaction. |
Our Audit Committee may approve or ratify the transaction only if our Audit Committee determines that, under all of the circumstances, the transaction is in, or is not inconsistent with, Oclaro’s best interests. Our Audit Committee may impose any conditions on the related person transaction that it deems appropriate.
Our policy excludes from the definition of “related person transaction” the transactions identified by the Commission as not requiring disclosure under the Commission’s related person transaction disclosure rule. Accordingly, such transactions are not subject to reporting, review, approval or ratification under our policy. In addition, the Board has determined that, under certain circumstances, a transaction does not create a material direct or indirect interest on behalf of a related person (and therefore is not a related person transaction under our policy) including if:
• | the transaction is specifically contemplated by the provisions of our certificate of incorporation or By-laws; or |
• | the related person’s interests in the transaction arise solely from his or her position as an executive officer of another entity (whether or not he or she is also a director of such entity) that is a participant in the transaction, where (i) the related person and all other related persons own in the aggregate less than a 10% equity interest in such entity, (ii) the related person and his or her immediate family members are not involved in the negotiation of the terms of the transaction and do not receive any special benefits as a result of the transaction, and (iii) the amount involved in the transaction equals less than the greater of $200,000 or 5% of the annual consolidated gross revenues of the entity receiving payment under the transaction. |
Director Independence
Under applicable NASDAQ rules, a director of Oclaro will qualify as an “independent director” only if, among other things, in the opinion of the Board, that person does not have a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
The Board has determined that none of Joel Smith, Edward Collins, Denise Haylor, Marissa Peterson, Kendall Cowan, Ian Small or William L. Smith has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is an “independent director” as defined under Rule 5605 of the NASDAQ Stock Market, Inc. Marketplace Rules.
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Item 14. Principal Accounting Fees and Services
The following table summarizes the fees of Grant Thornton LLP, our independent registered accounting firm, for the fiscal years ended June 30, 2018 and July 1, 2017. For the fiscal year ended June 30, 2018, audit fees include an estimate of amounts not yet billed by Grant Thornton LLP.
Fiscal Year End | |||||||||||
Fee Category | June 30, 2018 | July 1, 2017 | |||||||||
(Thousands) | |||||||||||
Audit fees (1) | $ | 2,350 | $ | 1,976 | |||||||
Audit-related fees | — | — | |||||||||
Tax fees | — | — | |||||||||
All other fees | — | — | |||||||||
Total fees | $ | 2,350 | $ | 1,976 | |||||||
(1) | Audit fees consist of fees for the audit of our consolidated financial statements, the audit of our internal control over financial reporting, the review of our interim consolidated financial statements included in our quarterly reports, and other professional services provided in connection with statutory and regulatory filings or engagements. |
Pre-Approval Policies and Procedures
The Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by our independent registered public accounting firm. Our policy generally provides that we will not engage our independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.
From time to time, the Audit Committee may pre-approve specified types of services that are expected to be provided to us by our independent registered public accounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount.
The Audit Committee may delegate to each individual member of the Audit Committee the authority to approve any audit or non-audit services to be provided to us by our independent registered public accounting firm. Any approval of services by a member of the Audit Committee pursuant to this delegated authority is reported on to the Audit Committee at its next meeting.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | The following documents are filed as part of or are included in this Annual Report: |
1. Financial Statements
See Index to Consolidated Financial Statements on page F-1 of this Annual Report.
2. Financial Statement Schedule
The Financial Statement Schedule II: Valuation and Qualifying Accounts that follows the Notes to Consolidated Financial Statements is filed as part of this Annual Report. Other financial statement schedules have been omitted since they are either not required or the information is otherwise included.
3. List of Exhibits
The Exhibits filed as part of this Annual Report, or incorporated by reference, are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OCLARO, INC. (Registrant) | |||
August 23, 2018 | By: | /s/ Greg Dougherty | |
Greg Dougherty | |||
Chief Executive Officer | |||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Greg Dougherty, Pete Mangan and Mike Fernicola, jointly and severally, as their attorneys-in-fact, with full power of each to act alone and full powers of substitution, for them in any and all capacities, to sign any amendments to this Annual Report, 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 said attorneys-in-fact and agents, or his or their 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.
Signature | Title | Date | ||
/s/ Greg Dougherty | Director and Chief Executive Officer | August 23, 2018 | ||
Greg Dougherty | (Principal Executive Officer) | |||
/s/ Pete Mangan | Chief Financial Officer | August 23, 2018 | ||
Pete Mangan | (Principal Financial Officer) | |||
/s/ Mike Fernicola | Chief Accounting Officer | August 23, 2018 | ||
Mike Fernicola | (Principal Accounting Officer) | |||
/s/ Marissa Peterson | Chair of the Board | August 23, 2018 | ||
Marissa Peterson | ||||
/s/ Edward B. Collins | Director | August 23, 2018 | ||
Edward B. Collins | ||||
/s/ Kendall W. Cowan | Director | August 23, 2018 | ||
Kendall W. Cowan | ||||
/s/ Denise Haylor | Director | August 23, 2018 | ||
Denise Haylor | ||||
/s/ Ian Small | Director | August 23, 2018 | ||
Ian Small | ||||
/s/ Joel Smith III | Director | August 23, 2018 | ||
Joel Smith III | ||||
/s/ William L. Smith | Director | August 23, 2018 | ||
William L. Smith | ||||
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
F- 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Oclaro, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Oclaro, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2018 and July 1, 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2018, and the related notes and schedule (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2018 and July 1, 2017, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2018, in conformity with accounting principles generally accepted in the United States of America.
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 June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated August 23, 2018 expressed an adverse opinion.
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 supporting 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/ GRANT THORNTON LLP
We have served as the Company's auditor since 2008.
San Francisco, California
August 23, 2018
F- 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Oclaro, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Oclaro, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2018, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.
The controls over the identification and recording of foreign currency transaction gains and losses were not designed or operating effectively.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended June 30, 2018. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated August 23, 2018 which expressed an unqualified opinion on those financial statements.
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.
F- 3
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.
Other information
We do not express an opinion or any other form of assurance on management’s remediation plan for the material weakness.
/s/ GRANT THORNTON LLP
San Francisco, California
August 23, 2018
F- 4
OCLARO, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2018 | July 1, 2017 | ||||||
(Thousands, except par value) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 245,688 | $ | 219,270 | |||
Restricted cash | — | 716 | |||||
Short-term investments | 77,440 | 37,559 | |||||
Accounts receivable, net of allowances for doubtful accounts of $1,393 and $1,533 as of June 30, 2018 and July 1, 2017, respectively | 100,482 | 122,287 | |||||
Inventories | 106,678 | 101,068 | |||||
Prepaid expenses and other current assets | 35,175 | 40,870 | |||||
Total current assets | 565,463 | 521,770 | |||||
Property and equipment, net | 137,438 | 114,333 | |||||
Other intangible assets, net | 61 | 699 | |||||
Deferred tax assets, net | 16,625 | 25,774 | |||||
Other non-current assets | 1,212 | 2,573 | |||||
Total assets | $ | 720,799 | $ | 665,149 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 68,221 | $ | 88,316 | |||
Accrued expenses and other liabilities | 41,686 | 42,499 | |||||
Capital lease obligations, current | 2,386 | 2,368 | |||||
Total current liabilities | 112,293 | 133,183 | |||||
Deferred gain on sale-leaseback | 5,193 | 5,895 | |||||
Capital lease obligations, non-current | 857 | 1,379 | |||||
Other non-current liabilities | 10,440 | 11,019 | |||||
Total liabilities | 128,783 | 151,476 | |||||
Commitments and contingencies (Note 6) | |||||||
Stockholders’ equity: | |||||||
Preferred stock: 1,000 shares authorized; none issued and outstanding | — | — | |||||
Common stock: $0.01 par value per share; 275,000 shares authorized; 170,675 shares issued and outstanding at June 30, 2018; and 167,639 shares issued and outstanding at July 1, 2017 | 1,706 | 1,676 | |||||
Additional paid-in capital | 1,703,331 | 1,688,777 | |||||
Accumulated other comprehensive income | 42,547 | 40,973 | |||||
Accumulated deficit | (1,155,568 | ) | (1,217,753 | ) | |||
Total stockholders’ equity | 592,016 | 513,673 | |||||
Total liabilities and stockholders’ equity | $ | 720,799 | $ | 665,149 | |||
The accompanying notes form an integral part of these consolidated financial statements.
F- 5
OCLARO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands, except per share amounts) | |||||||||||
Revenues | $ | 543,170 | $ | 600,968 | $ | 407,914 | |||||
Cost of revenues | 340,266 | 365,729 | 291,496 | ||||||||
Gross profit | 202,904 | 235,239 | 116,418 | ||||||||
Operating expenses: | |||||||||||
Research and development | 64,498 | 57,094 | 46,067 | ||||||||
Selling, general and administrative | 64,489 | 58,461 | 53,457 | ||||||||
Amortization of other intangible assets | 653 | 786 | 995 | ||||||||
Restructuring, acquisition and related (income) expense, net | 4,358 | 60 | 25 | ||||||||
(Gain) loss on disposal of property and equipment | 1,581 | (130 | ) | 32 | |||||||
Total operating expenses | 135,579 | 116,271 | 100,576 | ||||||||
Operating income | 67,325 | 118,968 | 15,842 | ||||||||
Other income (expense): | |||||||||||
Interest income (expense), net | 912 | (13,313 | ) | (4,986 | ) | ||||||
Gain (loss) on foreign currency transactions, net | 3,267 | (3,652 | ) | (2,362 | ) | ||||||
Other income (expense), net | 3,339 | 810 | 935 | ||||||||
Total other income (expense) | 7,518 | (16,155 | ) | (6,413 | ) | ||||||
Income before income taxes | 74,843 | 102,813 | 9,429 | ||||||||
Income tax (benefit) provision | 12,390 | (25,046 | ) | 849 | |||||||
Net income | $ | 62,453 | $ | 127,859 | $ | 8,580 | |||||
Net income per share: | |||||||||||
Basic | $ | 0.37 | $ | 0.81 | $ | 0.08 | |||||
Diluted | 0.36 | 0.77 | 0.08 | ||||||||
Shares used in computing net income per share: | |||||||||||
Basic | 169,263 | 158,115 | 110,599 | ||||||||
Diluted | 171,736 | 165,031 | 113,228 | ||||||||
The accompanying notes form an integral part of these consolidated financial statements.
F- 6
OCLARO, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Net income | $ | 62,453 | $ | 127,859 | $ | 8,580 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Unrealized gain (loss) on marketable securities | 4 | (8 | ) | — | |||||||
Currency translation adjustments | 1,495 | 947 | (1,167 | ) | |||||||
Pension adjustments | 49 | 213 | (538 | ) | |||||||
Other adjustments | 26 | — | — | ||||||||
Total comprehensive income | $ | 64,027 | $ | 129,011 | $ | 6,875 | |||||
The accompanying notes form an integral part of these consolidated financial statements.
F- 7
OCLARO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 62,453 | $ | 127,859 | $ | 8,580 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Change in deferred tax assets, net | 9,244 | (25,680 | ) | — | |||||||
Accretion of premiums on short-term investments | (1,194 | ) | — | — | |||||||
Amortization and write-off of debt discount and issuance costs | — | 102 | 812 | ||||||||
Amortization of deferred gain on sale-leaseback | (792 | ) | (743 | ) | (842 | ) | |||||
Depreciation and amortization | 30,180 | 21,544 | 16,755 | ||||||||
(Gain) loss on disposal of property and equipment | 1,581 | (130 | ) | 32 | |||||||
Interest make-whole charge and induced conversion expense related to convertible notes | — | 8,463 | — | ||||||||
Stock-based compensation expense | 14,964 | 11,195 | 8,201 | ||||||||
Write-down of inventories designated to be sold to ZTE | 3,083 | — | — | ||||||||
Other adjustments | (91 | ) | — | — | |||||||
Changes in operating assets and liabilities: | |||||||||||
Accounts receivable, net | 24,086 | (28,811 | ) | (23,409 | ) | ||||||
Inventories | (7,033 | ) | (26,997 | ) | (11,008 | ) | |||||
Prepaid expenses and other current assets | 6,566 | (17,940 | ) | (2,383 | ) | ||||||
Other non-current assets | 699 | (255 | ) | 98 | |||||||
Accounts payable | (16,812 | ) | 17,819 | 11,293 | |||||||
Accrued expenses and other liabilities | (1,880 | ) | 9,128 | (24 | ) | ||||||
Net cash provided by operating activities | 125,054 | 95,554 | 8,105 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of property and equipment | (57,607 | ) | (70,069 | ) | (29,588 | ) | |||||
Purchases of short-term investments | (219,270 | ) | (69,415 | ) | — | ||||||
Maturities of short-term investments | 180,579 | 32,000 | — | ||||||||
Proceeds from sale of property and equipment | — | 231 | — | ||||||||
Transfer (to) from restricted cash | 716 | (1 | ) | 2,418 | |||||||
Net cash used in investing activities | (95,582 | ) | (107,254 | ) | (27,170 | ) | |||||
Cash flows from financing activities: | |||||||||||
Proceeds from the sale of common stock in connection with public offering, net of expenses | — | 135,153 | — | ||||||||
Proceeds from the exercise of stock options | 2,643 | 4,873 | 286 | ||||||||
Shares repurchased for tax withholdings on vesting of restricted stock units | (3,738 | ) | (4,426 | ) | (1,641 | ) | |||||
Payments on capital lease obligations | (1,186 | ) | (2,183 | ) | (3,151 | ) | |||||
Net cash provided by (used in) financing activities | (2,281 | ) | 133,417 | (4,506 | ) | ||||||
Effect of exchange rate on cash and cash equivalents | (773 | ) | 1,624 | 7,660 | |||||||
Net increase (decrease) in cash and cash equivalents | 26,418 | 123,341 | (15,911 | ) | |||||||
Cash and cash equivalents at beginning of fiscal year | 219,270 | 95,929 | 111,840 | ||||||||
Cash and cash equivalents at end of fiscal year | $ | 245,688 | $ | 219,270 | $ | 95,929 | |||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid for interest | $ | 24 | $ | 13,313 | $ | 3,936 | |||||
Cash paid for income taxes | 549 | 1,939 | 334 | ||||||||
Cash paid for interest make-whole and induced conversion charges related to the exercise of convertible notes | — | 4,700 | — | ||||||||
Supplemental disclosures of non-cash transactions: | |||||||||||
Issuance of common stock in exchange for the net carrying value of the liability component of convertible notes | $ | — | $ | 62,125 | $ | — | |||||
Unpaid property and equipment in accounts payable | 5,933 | 10,388 | 8,176 | ||||||||
Capital lease obligations incurred for purchases of property and equipment | 1,259 | 397 | 2,390 | ||||||||
The accompanying notes form an integral part of these consolidated financial statements.
F- 8
OCLARO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Additional Paid-In Capital | Accumulated Other Comprehen-sive Income | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||
Common Stock | ||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
(Thousands) | ||||||||||||||||||||||
Balance at June 27, 2015 | 109,889 | $ | 1,099 | $ | 1,464,567 | $ | 41,526 | $ | (1,354,192 | ) | $ | 153,000 | ||||||||||
Issuance of common stock related to restricted stock units and awards | 2,212 | 22 | — | — | — | 22 | ||||||||||||||||
Common stock repurchased for tax withholdings on vesting of restricted stock units | — | — | (1,640 | ) | — | — | (1,640 | ) | ||||||||||||||
Issuance of common stock upon the exercise of stock options | 106 | 1 | 264 | — | — | 265 | ||||||||||||||||
Stock-based compensation | — | — | 8,089 | — | — | 8,089 | ||||||||||||||||
Other comprehensive loss | — | — | — | (1,705 | ) | — | (1,705 | ) | ||||||||||||||
Net income | — | — | — | — | 8,580 | 8,580 | ||||||||||||||||
Balance at July 2, 2016 | 112,207 | 1,122 | 1,471,280 | 39,821 | (1,345,612 | ) | 166,611 | |||||||||||||||
Issuance of common stock related to restricted stock units and awards | 2,504 | 25 | — | — | — | 25 | ||||||||||||||||
Common stock repurchased for tax withholdings on vesting of restricted stock units | — | — | (4,426 | ) | — | — | (4,426 | ) | ||||||||||||||
Issuance of common stock upon the exercise of stock options | 1,018 | 10 | 4,863 | — | — | 4,873 | ||||||||||||||||
Issuance of common stock in connection with public offering | 17,250 | 173 | 134,980 | — | — | 135,153 | ||||||||||||||||
Issuance of common stock in connection with exchange of convertible notes | 34,660 | 346 | 70,276 | — | — | 70,622 | ||||||||||||||||
Stock-based compensation | — | — | 11,804 | — | — | 11,804 | ||||||||||||||||
Other comprehensive income | — | — | — | 1,152 | — | 1,152 | ||||||||||||||||
Net income | — | — | — | — | 127,859 | 127,859 | ||||||||||||||||
Balance at July 1, 2017 | 167,639 | 1,676 | 1,688,777 | 40,973 | (1,217,753 | ) | 513,673 | |||||||||||||||
Issuance of common stock related to restricted stock units and awards | 2,778 | 28 | (15 | ) | — | — | 13 | |||||||||||||||
Common stock repurchased for tax withholdings on vesting of restricted stock units | (284 | ) | (3 | ) | (3,748 | ) | — | — | (3,751 | ) | ||||||||||||
Issuance of common stock upon the exercise of stock options | 542 | 5 | 2,638 | — | — | 2,643 | ||||||||||||||||
Adoption of ASU No. 2016-09 | — | — | 268 | — | (268 | ) | — | |||||||||||||||
Stock-based compensation | — | — | 15,411 | — | — | 15,411 | ||||||||||||||||
Other comprehensive income | — | — | — | 1,574 | — | 1,574 | ||||||||||||||||
Net income | — | — | — | — | 62,453 | 62,453 | ||||||||||||||||
Balance at June 30, 2018 | 170,675 | $ | 1,706 | $ | 1,703,331 | $ | 42,547 | $ | (1,155,568 | ) | $ | 592,016 | ||||||||||
The accompanying notes form an integral part of these consolidated financial statements.
F- 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Oclaro, Inc., a Delaware corporation, is sometimes referred to in this Annual Report on Form 10-K as “Oclaro,” “we,” “us,” or “our.”
During our fiscal year 2018, we were one of the leading providers of optical components and modules for the long-haul, metro and data center markets. Leveraging more than three decades of laser technology innovation and photonics integration, we provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
Basis of Preparation
The consolidated financial statements include the accounts of Oclaro and our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
Merger
On March 11, 2018, Lumentum Holdings Inc., a Delaware corporation (“Lumentum”), Oclaro, Prota Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Lumentum (“Merger Sub”), and Prota Merger, LLC, a Delaware limited liability company and a wholly owned subsidiary of Lumentum (“Merger Sub LLC”), entered into an Agreement and Plan of Merger (the “Merger Agreement”).
Pursuant to the terms of the Merger Agreement, the acquisition of Oclaro will be accomplished through a merger of Merger Sub with and into Oclaro (the “First Step Merger”) with Oclaro surviving the First Step Merger. As soon as reasonably practicable following the First Step Merger, Oclaro will merge with and into Merger Sub LLC with Merger Sub LLC continuing as the surviving entity and a wholly owned subsidiary of Lumentum (the “Second Step Merger,” and taken together with the First Step Merger, the “Merger”).
Pursuant to the terms of the Merger Agreement, and subject to the terms and conditions set forth therein, at the effective time of the First Step Merger (the “Effective Time”), each share of the common stock of Oclaro (the “Oclaro Common Stock”) issued and outstanding immediately prior to the Effective Time (other than (x) shares of Oclaro Common Stock owned by Lumentum, Oclaro, or any direct or indirect wholly owned subsidiary of Lumentum or Oclaro or (y) shares of Oclaro Common Stock owned by stockholders who have properly exercised and perfected appraisal rights under Delaware law, in each case immediately prior to the Effective Time, will be cancelled and extinguished and automatically converted into the right to receive the following consideration (collectively, the “Merger Consideration”):
(A) | $5.60 in cash, without interest (the “Cash Consideration”), plus |
(B) | 0.0636 of a validly issued, fully paid and nonassessable share of the common stock of Lumentum, par value $0.001 per share (“Lumentum Common Stock”) (such ratio, the “Exchange Ratio”). |
With regard to the Merger Consideration, if the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all Lumentum Common Stock which may be issued in the future pursuant to the conversion of Oclaro Options, Oclaro Restricted Stock Units, or Oclaro Restricted Stock (as defined below) would exceed 19.9 percent of the Lumentum Common Stock issued and outstanding immediately prior to the Effective Time (the “Stock Threshold”), (A) the Exchange Ratio will be reduced to the minimum extent necessary (rounded down to the nearest one thousandth) such that the aggregate number of shares of Lumentum Common Stock to be issued in connection with the Merger (including all shares of Lumentum Common Stock which may be issued after the Effective Time pursuant to company compensatory awards) does not exceed the Stock Threshold and (B) the Cash Consideration for all purposes will be increased on a per share basis by an amount equal to $68.975, multiplied by the difference between the initial Exchange Ratio and the Exchange Ratio.
Each Oclaro restricted stock unit award (an “Oclaro RSU”) that does not become vested at the closing will be converted into a Lumentum restricted stock unit award (a “Lumentum RSU”) with the same terms and conditions, including vesting, that were applicable to such Oclaro RSU, except that the number of Lumentum shares subject to the Lumentum RSU will equal the product of (i) the number of Oclaro shares subject to such Oclaro RSU (with any performance milestones deemed achieved based on the maximum level of achievement) multiplied by (ii) the sum of (A) the Exchange Ratio plus (B) the quotient obtained by dividing the Cash Consideration by Lumentum’s average closing price of the 10 trading days ending on the third trading day prior to the closing (such sum, the “Equity Award Exchange Ratio”), rounded down to the nearest whole share.
F- 10
Each Oclaro stock option (an “Oclaro Option”), whether vested or unvested, will be converted into a Lumentum stock option (a “Lumentum Option”) with the same terms and conditions, including vesting, that were applicable to such Oclaro Option, except that (i) the number of shares subject to the Lumentum Option will equal the product of (A) the number of Oclaro shares subject to such Oclaro Option multiplied by (B) the Equity Award Exchange Ratio, rounded down to the nearest whole share and (ii) the exercise price of the Lumentum Option will equal (A) the exercise price per share of the Oclaro Option divided by (B) the Equity Award Exchange Ratio, rounded up to the nearest whole cent. Notwithstanding the foregoing, any Oclaro Option that is held by an individual who is not an Oclaro employee as of immediately prior to the closing will be canceled and converted into the Merger Consideration for each net option share covered by such Oclaro Option, subject to applicable withholding taxes.
In addition, each Oclaro restricted stock award (“Oclaro Restricted Stock Award”) and Oclaro RSU that becomes vested as of immediately prior to the closing (including each Oclaro Restricted Stock Award held by a non-employee director) will be converted into the right to receive the Merger Consideration in respect of each Oclaro share underlying such award, subject to applicable withholding taxes. Each Oclaro stock appreciation right (“Oclaro SAR”) will be canceled and converted into the right to receive a cash amount equal to the product of (i) the number of Oclaro shares subject to the Oclaro SAR multiplied by (ii) the positive difference of (A) the cash equivalent value of the Merger Consideration less (B) the strike price of the Oclaro SAR, subject to applicable withholding taxes.
If Lumentum determines that the treatment of Oclaro equity awards described above would violate, in respect of the holder thereof, the applicable laws of a non-U.S. jurisdiction, Lumentum may treat such Oclaro equity award in a different manner so long as such treatment is no less favorable to the holder of such Oclaro equity award.
The Boards of Directors of Lumentum and Oclaro have unanimously approved the Merger and the Merger Agreement. The transaction is subject to customary closing conditions, including the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and under applicable anti-trust laws in China, the effectiveness of a registration statement on Form S-4 registering the shares of Lumentum common stock to be issued in connection with the Merger, and approval of the Merger Agreement by the holders of a majority of the outstanding shares of Oclaro Common Stock. The transaction is not subject to any financing condition. On April 4, 2018, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act. On July 10, 2018, Oclaro's stockholders approved the Merger Agreement.
The Merger Agreement contains customary representations, warranties and covenants of Lumentum, Oclaro, Merger Sub and Merger Sub LLC, including, (i) covenants by Oclaro concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (ii) covenants by Lumentum concerning the conduct of its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the consummation of the Merger, (iii) a covenant by Oclaro that, subject to certain exceptions, the Board of Directors of Oclaro will recommend to its shareholders adoption of the Merger Agreement, and (iv) a covenant that Oclaro will not solicit, initiate, or knowingly encourage, facilitate or induce the making of inquiry, offer or proposal that would reasonably be expected to lead to any Acquisition Proposal (as defined in the Merger Agreement). Further, the Merger Agreement prohibits us from paying dividends.
The Merger Agreement contains certain termination rights for both Lumentum and Oclaro and further provides that upon termination of the Merger Agreement under specified circumstances (including termination by Oclaro to accept a superior proposal), Oclaro may be required to pay Lumentum a termination fee of $63 million. The Merger Agreement further provides that upon termination of the Merger Agreement under specified circumstances relating to failure to obtain regulatory approvals, Lumentum may be required to pay Oclaro a termination fee of $80 million.
During the year ended June 30, 2018, we recorded acquisition-related costs of $4.3 million in restructuring, acquisition and related (income) expense, net, within our consolidated statements of operations.
Termination of Denial Order and Reinstitution of ZTE's Export Privileges
On April 16, 2018, the U.S. Department of Commerce ("DOC") changed and reactivated its previously suspended denial order and suspended the export privileges of Zhongxing Telecommunications Equipment Corporation ("ZTE Corporation") and its subsidiary, ZTE Kangxun Telecommunications Ltd. ("ZTE Kangxun") (collectively, "ZTE") after determining that ZTE made false statements to the DOC related to senior employee disciplinary actions ("Denial Order"). On July 13, 2018, following approval of a settlement agreement between the DOC and ZTE and ZTE's payment of certain amounts to the DOC, the Denial Order was terminated and ZTE was removed from the DOC's Denied Persons List. During the pendency of the Denial Order, ZTE was prohibited from participating in any way in any transaction subject to the Export Administration Regulations ("EAR") and U.S. companies were restricted from exporting or re-exporting to or on behalf of ZTE any item subject to the EAR or engaging in any transaction to service any item subject to the EAR that has been or will be exported from the U.S. and which was owned, possessed or controlled by ZTE. During the pendency of the Denial Order, we ceased shipment of products to ZTE, which has been one of our significant customers.
F- 11
As of June 30, 2018, we have an accounts receivable balance of $0.5 million with ZTE, which we believe to be collectible. During the year ended June 30, 2018, we recorded a $3.1 million charge to write-down on-hand inventory that was designated for future products to be sold to ZTE, that we may no longer be able to use or re-allocate to other customers.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported periods. Examples of significant estimates and assumptions made by management involve the valuation allowances for deferred tax assets, the fair value of stock-based compensation, the fair value of pension liabilities, estimates for allowances for doubtful accounts and valuation of excess and obsolete inventories. These judgments can be subjective and complex and consequently actual results could differ materially from those estimates and assumptions.
Fiscal Years
We operate on a 52/53 week year ending on the Saturday closest to June 30. Our fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016 had 52 weeks, 52 weeks and 53 weeks, respectively.
Reclassifications
For presentation purposes, we have reclassified certain prior period amounts to conform to the current period financial statement presentation, including an adjustment relating to an immaterial error of approximately $8.2 million in fiscal year 2017 and $1.8 million in fiscal year 2016, increasing cash flows from operations associated with changes in accounts payable and increasing cash flows used in investing activities associated with purchases of property and equipment, in our consolidated statement of cash flows for the fiscal years ended July 1, 2017 and July 2, 2016, respectively. We determined that the adjustments did not have a material impact to our prior period consolidated financial statements. The following tables summarize the effect of the reclassification on certain key items of our previously issued consolidated statements of cash flows for the fiscal years ended July 1, 2017 and July 2, 2016:
Year Ended July 1, 2017 | |||||||||||
As Previously Reported | As Restated | Change | Increase (Decrease) | ||||||||
(Thousands) | % | ||||||||||
Selected Cash Flow Amounts | |||||||||||
Changes in operating assets and liabilities: accounts payable | 9,643 | 17,819 | 8,176 | 84.8 | |||||||
Net cash provided by operating activities | 87,378 | 95,554 | 8,176 | 9.4 | |||||||
Purchases of property and equipment | (61,893 | ) | (70,069 | ) | (8,176 | ) | 13.2 | ||||
Net cash used in investing activities | (99,078 | ) | (107,254 | ) | (8,176 | ) | 8.3 | ||||
Net increase (decrease) in cash and cash equivalents | 123,341 | 123,341 | — | — | |||||||
Year Ended July 2, 2016 | |||||||||||
As Previously Reported | As Restated | Change | Increase (Decrease) | ||||||||
(Thousands) | % | ||||||||||
Selected Cash Flow Amounts | |||||||||||
Changes in operating assets and liabilities: accounts payable | 9,455 | 11,293 | 1,838 | 19.4 | |||||||
Net cash provided by operating activities | 6,267 | 8,105 | 1,838 | 29.3 | |||||||
Purchases of property and equipment | (27,750 | ) | (29,588 | ) | (1,838 | ) | 6.6 | ||||
Net cash used in investing activities | (25,332 | ) | (27,170 | ) | (1,838 | ) | 7.3 | ||||
Net increase (decrease) in cash and cash equivalents | (15,911 | ) | (15,911 | ) | — | — | |||||
F- 12
None of these reclassifications affect our consolidated revenues, net income, cash and cash equivalents or stockholders’ equity as previously reported.
Functional Currency
Effective October 1, 2017, the functional currency for our worldwide operations is the U.S. dollar. Prior to October 1, 2017, the functional currency for each of our foreign subsidiaries was the respective local currency for that subsidiary. The change in our functional currency is a result of significant changes in economic facts and circumstances, including (i) a re-organization of our operating environment, which includes consolidating and integrating our sales, supply chain and manufacturing organizations; (ii) a transition to centrally negotiating worldwide supplier contracts and capital expenditures in U.S. dollars; and (iii) a shift to recording all intercompany transactions in U.S. dollars.
Translation adjustments reported prior to October 1, 2017, will remain as a component of accumulated other comprehensive income in our consolidated balance sheet. The translated values for any non-monetary assets and liabilities as of October 1, 2017 become the new accounting basis for those assets.
Effective October 1, 2017, monetary assets and liabilities denominated in currencies other than the U.S. dollar functional currency are re-measured each reporting period into U.S. dollars, with the resulting exchange gains and losses reported in gain (loss) on foreign currency transactions, net within our consolidated statement of operations.
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA"), was signed into law. Among other things, the TCJA permanently lowers the U.S. corporate federal income tax rate to 21 percent from the existing maximum rate of 35 percent, effective for tax years including or commencing January 1, 2018. Since we operate on a 52/53 week year ending on the Saturday closest to June 30, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28 percent for our fiscal year ending June 30, 2018, and 21 percent for subsequent fiscal years. U.S. GAAP requires companies to re-value their deferred tax assets and deferred tax liabilities for changes in tax rates as of the date of enactment, with the resulting tax effects accounted for in the reporting period of enactment. We have concluded this will cause our net deferred taxes to be re-measured at the new lower tax rate. Before valuation allowance, the rate change impact to our net deferred tax assets is a reduction of $35.0 million. We maintain a full valuation allowance on our U.S. net deferred tax assets. Deferred tax asset re-measurement (tax expense) will be offset by a net decrease in valuation allowance, resulting in no impact on our income tax for the period ending June 30, 2018.
Additionally, the TCJA introduces new international tax provisions that will be effective for our fiscal year 2019, including (i) a new provision designed to currently tax the global low-taxed income of our foreign subsidiaries known as GILTI; (ii) limitations on the deductibility of certain base eroding payments to foreign entities; and (iii) limitations on the use of foreign tax credits to reduce U.S. income tax liability. While each of these provisions may have an impact on our tax expense for fiscal year 2019 and future periods, we expect the tax on low-taxed income of foreign subsidiaries to have the most significant impact.
Due to the complexity of the provision for the TCJA and the lack of the current guidance, under the guidance of Staff Accounting Bulletin 118, the accounting is incomplete and we have not estimated the GILTI impact on deferred taxes. Additionally, state and local authorities are reviewing federal conformity matters related to GILTI. Provisional amounts or adjustments to provisional amounts identified in the measurement period would be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined. We have determined a reasonable estimate for the tax reform effects other than the impact of GILTI on our recognition of deferred tax assets, and reported the estimates as a provisional amount in our financial statements for which the accounting under ASC Topic 740 is completed. We will finalize the impact of the GILTI in fiscal year 2019.
Cash and Cash Equivalents
We consider all liquid investment securities with an original maturity date of three months or less to be cash equivalents. Any realized gains and losses on liquid investment securities are included in other income (expense), net in our consolidated statements of operations.
F- 13
The following table provides details regarding our cash and cash equivalents at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Cash and cash equivalents: | |||||||
Cash-in-bank | $ | 88,297 | $ | 79,259 | |||
Money market funds | 153,392 | 99,037 | |||||
Commercial paper | 3,999 | 22,981 | |||||
Corporate bonds | — | 2,012 | |||||
U.S. agency securities | — | 15,981 | |||||
$ | 245,688 | $ | 219,270 | ||||
As of June 30, 2018, $53.7 million of the $245.7 million of our cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the United States, we could be required to accrue and pay additional taxes to repatriate these funds.
Restricted Cash
As of June 30, 2018, we had restricted cash of $0.2 million, which is recorded in other non-current assets, consisting of collateral to secure certain deposits for value-added taxes in foreign jurisdictions.
As of July 1, 2017, we had restricted cash of $1.1 million, including $0.4 million in other non-current assets, consisting of collateral for the performance of our obligations under certain facility lease agreements, collateral to secure certain of our credit card accounts and deposits for value-added taxes in foreign jurisdictions.
Short-Term Investments
We classify short-term investments, which consist primarily of securities purchased with original maturities at date of purchase of more than three months and less than one year, as “available for sale securities.” These short-term investments are reported at market value, with the aggregate unrealized holding gains and losses reported as a component of accumulated other comprehensive income in stockholders’ equity. All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary and not involving credit losses are recorded in the consolidated statements of operations in the period they occur.
The following table provides details regarding our short-term investments at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Short-term investments: | |||||||
Commercial paper | $ | 41,401 | $ | 23,459 | |||
Corporate bonds | 4,100 | 10,094 | |||||
U.S. Treasury securities | 31,939 | 4,006 | |||||
$ | 77,440 | $ | 37,559 | ||||
Concentration of Credit Risks
We place our cash and cash equivalents with and in the custody of financial institutions, which at times, are in excess of amounts insured. Management monitors the ongoing creditworthiness of these institutions. To date, we have not experienced significant losses on these investments. As of June 30, 2018, $53.7 million of the $245.7 million of our cash and cash equivalents was held by our foreign subsidiaries.
Our trade accounts receivable are concentrated with companies in the telecom industry. At June 30, 2018, two customers accounted for a total of 36 percent of our net accounts receivable, with each individually accounting for more than 10 percent of our net accounts receivable. At July 1, 2017, one customer accounted for a total of 20 percent of our net accounts receivable.
F- 14
Allowance for Doubtful Accounts
We perform ongoing credit evaluations of our customers and record specific allowances for doubtful accounts when a customer is unable to meet its financial obligations, as in the case of bankruptcy filings or deteriorated financial position. Estimates are used in determining allowances for customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. We write off a receivable account when all rights, remedies and recourses against the account and its principals are exhausted and record a benefit when previously reserved accounts are collected. In fiscal years 2016, 2017 and 2018, we did not record any additional provisions as allowances for doubtful accounts.
Inventories
Inventories, consisting of raw materials, work-in-process and finished goods are stated at the lower of cost (first in, first out basis) or market. We plan production based on orders received and a forecast demand. These production estimates are dependent on assessment of current and expected orders from our customers, including consideration that orders are subject to cancellation with limited advance notice prior to shipment. We assess the valuation of our inventory, including significant inventories held by contract manufacturers on our behalf, on a quarterly basis. Products may be unsalable because they are technically obsolete due to substitute products, specification changes or excess inventory relative to customer forecasts. We adjust the carrying value of inventory using methods that take these factors into account. If we find that the cost basis of our inventory is greater than the current market value, we write the inventory down to the estimated selling price, less the estimated costs to complete and sell the product. As a result of the Denial Order, during the year ended June 30, 2018, we recorded a $3.1 million charge related to the write-down of on-hand inventory that was designated for future products to be sold to ZTE, which we may no longer be able to use or re-allocate to other customers.
The following table provides details regarding our inventories at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Inventories: | |||||||
Raw materials | $ | 30,488 | $ | 32,421 | |||
Work-in-process | 54,503 | 40,171 | |||||
Finished goods | 21,687 | 28,476 | |||||
$ | 106,678 | $ | 101,068 | ||||
Capitalized Software Costs
We capitalize certain development costs incurred in connection with our internal use software once an application has reached the development stage and until the software is substantially complete and ready for its intended use. These costs can include external direct costs of materials and services consumed in the project and internal costs, such as the payroll and benefits expenses attributable to those employees directly associated with the development of the software. Related maintenance and training costs are expensed as incurred. Capitalized software costs are included in property and equipment.
During fiscal year 2017, we began the implementation of a new enterprise resource planning ("ERP") system. We capitalized certain costs incurred in connection with the development of this ERP system, totaling $14.4 million. We capitalized $5.0 million and $9.4 million of internal use software costs during the fiscal years ended June 30, 2018 and July 1, 2017, respectively. During the second quarter of fiscal 2018, we began using the ERP software for its intended use, and began recording depreciation expense.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, which generally range from three to seven years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives or the term of the related lease, whichever is shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from asset dispositions are included in (gain) loss on disposal of property and equipment in the accompanying consolidated statements of operations. Repair and maintenance costs are expensed as incurred.
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The following table provides details regarding our property and equipment, net at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Property and equipment, net: | |||||||
Buildings and improvements | $ | 12,086 | $ | 10,222 | |||
Plant and machinery | 137,301 | 99,779 | |||||
Fixtures, fittings and equipment | 3,526 | 3,225 | |||||
Computer software and equipment | 22,721 | 15,901 | |||||
175,634 | 129,127 | ||||||
Less: accumulated depreciation | (38,196 | ) | (14,794 | ) | |||
$ | 137,438 | $ | 114,333 | ||||
During the year ended June 30, 2018, we incurred a $1.4 million loss on the disposal of property and equipment related to certain legacy data communication products.
Property and equipment includes assets under capital leases of $3.2 million and $3.7 million at June 30, 2018 and July 1, 2017, respectively. Amortization associated with assets under capital leases is recorded in depreciation expense.
Depreciation expense was $29.5 million, $20.8 million and $15.8 million for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively.
Other Intangible Assets
We review our other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The values assigned to other intangible assets are based on estimates and judgments regarding expectations for the success and life cycle of products and technologies acquired. Our other intangible assets with definite lives are amortized over their estimated useful lives.
Impairment of Long-Lived Assets
We review property and equipment and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparing their carrying amounts to market prices or the future undiscounted cash flows the assets are expected to generate. If property and equipment or certain identifiable intangibles are considered to be impaired, the impairment to be recognized would equal the amount by which the carrying value of the asset exceeds its fair value based on market prices or future discounted cash flows.
Derivative Financial Instruments
Our operating results are subject to fluctuations based upon changes in the exchange rates between the currencies in which we collect revenues and pay expenses. A majority of our revenues are denominated in U.S. dollars, while a portion of our expenses are denominated in United Kingdom (U.K.) pounds sterling, Japanese yen, Chinese yuan and euros, in which we pay expenses in connection with operating our facilities in the United Kingdom, Japan, China and Italy. Historically, we have entered into foreign currency forward exchange contracts in an effort to mitigate a portion of our exposure to exchange rate fluctuations between the U.S. dollar and both the U.K. pound sterling and the Japanese yen.
We recognize all derivatives, such as foreign currency forward exchange contracts, on our consolidated balance sheets at fair value regardless of the purpose for holding the instrument. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through operating results or recognized in accumulated other comprehensive income until the hedged item is recognized in operating results in our consolidated statements of operations.
During the year ended June 30, 2018, we entered into foreign currency forward exchange contracts, which expired in the same fiscal quarters in which they were opened. In connection with these hedges, during the fiscal years ended June 30, 2018 and July 1, 2017, we recorded net losses on foreign currency transactions of $0.7 million and $0.5 million, respectively, within our consolidated statement of operations. At June 30, 2018 and July 1, 2017, we had no outstanding foreign currency forward exchange contracts.
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Accrued Expenses and Other Liabilities
The following table provides details for our accrued expenses and other liabilities at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Accrued expenses and other liabilities: | |||||||
Trade payables | $ | 392 | $ | 7,805 | |||
Compensation and benefits related accruals | 14,167 | 13,837 | |||||
Warranty accrual | 3,879 | 4,124 | |||||
Purchase commitments in excess of future demand, current | 6,321 | 4,009 | |||||
Other accruals | 16,927 | 12,724 | |||||
$ | 41,686 | $ | 42,499 | ||||
Warranty
We generally provide a warranty for our products ranging from 12 months to 36 months from the date of sale, although warranties for certain of our products may be longer. We accrue for the estimated costs to provide warranty services at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs would increase, resulting in a decrease in gross profit.
Revenue Recognition
Our revenue consists primarily of sales of products to customers. We recognize product revenue when (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped and title has transferred, (iii) collectability is reasonably assured, (iv) the fees are fixed or determinable and (v) there are no uncertainties with respect to customer acceptance.
Research and Development Costs
Research and development costs are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred. Our advertising costs for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016 were not significant.
Stock-Based Compensation
We use grant date fair value to value restricted stock awards, restricted stock units and performance shares. We used the Black-Scholes option pricing model to value the fair value of stock options and stock appreciation rights when we last granted stock options in fiscal year 2015.
We record stock-based compensation expense for time-based awards using the straight-line method over the requisite service period. Pursuant to our adoption of Accounting Standards Update ("ASC") No. 2016-09, Compensation: Improvements to Employee Share-Based Payment Accounting, in the first quarter of fiscal year 2018, we transitioned from estimating forfeitures to recording forfeitures as they occur. This change in accounting principle with regards to forfeitures was adopted using a modified retrospective approach. With the adoption of this guidance we recorded an adjustment of $0.3 million in our accumulated deficit and additional paid-in capital during the first quarter of fiscal year 2018.
The amount of stock-based compensation expense recognized in any one period related to performance shares can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the underlying performance shares, and any previously recognized compensation expense related to those performance shares would be reversed.
Stock options have a term of seven to ten years and generally vest over a two to four year service period, and restricted stock awards and restricted stock units generally vest over a one to four year service period, and in certain cases each may vest earlier based upon the achievement of specific performance-based objectives as set by our Board of Directors or may be subject to additional vesting conditions based upon achievement of such performance-based objectives.
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Foreign Currency Transactions
Gains and losses from foreign currency transactions, realized and unrealized in the event of foreign currency transactions not designated as hedges, and those transactions denominated in currencies other than our functional currency, are recorded as gain (loss) on foreign currency transactions in our consolidated statements of operations.
Income Taxes
We account for income taxes using an asset and liability based approach. Deferred income tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Valuation allowances are provided against deferred income tax assets which are not likely to be realized.
Net Income Per Share
Basic net income per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted net income per share is computed assuming conversion of all potentially dilutive securities, such as stock options, stock appreciation rights, unvested restricted stock awards and shares issuable in connection with convertible notes during such period.
Recent Accounting Pronouncements
In March 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, to incorporate changes due to the TCJA being signed into law on December 22, 2017. This guidance is effective for us upon issuance. See Note 10. Income Taxes for the impact of this guidance on our financial statements and footnote disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA. The guidance will be effective for us in the first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation, to provide clarity and reduce both (i) diversity in practice and (ii) cost and complexity associated with changes to the terms or conditions of a share-based payment award. The guidance will be effective for us in the first quarter of fiscal year 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, changing the presentation of net periodic benefit cost in the income statement. The guidance will be effective for us in the first quarter of fiscal year 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, providing guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill and consolidation. The guidance will be effective for us in the first quarter of fiscal year 2019. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, to standardize the presentation of transfers between cash and restricted cash in the cash flow statement. Amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance will be effective for us in the first quarter of fiscal year 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, to reduce the complexity related to the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This guidance will be effective for us in the first quarter of fiscal year 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, to reduce the diversity in practice related to the presentation and classification of various cash flow scenarios. This
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guidance will be effective for us in the first quarter of fiscal year 2019, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
In May 2014 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers and ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, respectively. These updates clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. The guidance permits two methods of adoption, the full retrospective method applying the standard to each prior reporting period presented, or the modified retrospective method with a cumulative effect of initially applying the guidance recognized at the date of initial application. We currently plan on adopting this guidance on July 1, 2018, the start to our first quarter of fiscal year 2019, using the modified retrospective method. As a result of our assessment, we do not anticipate recording a material cumulative catch-up adjustment upon adoption of this guidance. We expect that certain of our policies, processes, footnote disclosures and customer contracts to change upon adoption of this guidance.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance will be effective for us in the first quarter of fiscal year 2020, with early adoption permitted. We are currently evaluating the likely impact the implementation of this standard will have on our financial statements and footnote disclosures.
NOTE 2. FAIR VALUE
Our financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued expenses and other liabilities have carrying amounts which approximate fair value due to the short-term maturity of these instruments.
We define fair value as the estimated price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk. We apply the following fair value hierarchy, which ranks the quality and reliability of the information used to determine fair values:
Level 1- | Quoted prices in active markets for identical assets or liabilities. |
Level 2- | Inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices of identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets), or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3- | Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. |
Our cash equivalents and short-term investment instruments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most money market funds, which are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include investment-grade corporate bonds, commercial paper, U.S. Treasury and agency securities, which are generally classified within Level 2 of the fair value hierarchy.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are shown in the tables below by their corresponding balance sheet captions and consisted of the following types of instruments at June 30, 2018 and July 1, 2017:
Fair Value Measurement at June 30, 2018 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: | (Thousands) | |||||||||||||||
Cash and cash equivalents: (1) | ||||||||||||||||
Money market funds | $ | 153,392 | $ | — | $ | — | $ | 153,392 | ||||||||
Commercial paper | — | 3,999 | — | 3,999 | ||||||||||||
Short-term investments: | ||||||||||||||||
Commercial paper | — | 41,401 | — | 41,401 | ||||||||||||
Corporate bonds | — | 4,100 | — | 4,100 | ||||||||||||
U.S. Treasury securities | — | 31,939 | — | 31,939 | ||||||||||||
Total assets measured at fair value | $ | 153,392 | $ | 81,439 | $ | — | $ | 234,831 | ||||||||
(1) | Excludes $88.3 million in cash held in our bank accounts at June 30, 2018. |
Fair Value Measurement at July 1, 2017 Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: | (Thousands) | |||||||||||||||
Cash and cash equivalents: (1) | ||||||||||||||||
Money market funds | $ | 99,037 | $ | — | $ | — | $ | 99,037 | ||||||||
Commercial paper | — | 22,981 | — | 22,981 | ||||||||||||
Corporate bonds | — | 2,012 | — | 2,012 | ||||||||||||
U.S. agency securities | — | 15,981 | — | 15,981 | ||||||||||||
Restricted cash: | ||||||||||||||||
Money market funds | 712 | — | — | 712 | ||||||||||||
Short-term investments: | ||||||||||||||||
Commercial paper | — | 23,459 | — | 23,459 | ||||||||||||
Corporate bonds | — | 10,094 | — | 10,094 | ||||||||||||
U.S. Treasury securities | — | 4,006 | — | 4,006 | ||||||||||||
Total assets measured at fair value | $ | 99,749 | $ | 78,533 | $ | — | $ | 178,282 | ||||||||
(1) | Excludes $79.3 million in cash held in our bank accounts at July 1, 2017. |
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NOTE 3. OTHER INTANGIBLE ASSETS
In connection with our acquisition of Opnext, Inc. ("Opnext") on July 23, 2012, we recorded $16.4 million in other intangible assets, with estimated useful lives ranging from 1 year to 11 years. In connection with our sale of the industrial and consumer business of Oclaro Japan located in Komoro, Japan in fiscal year 2015, we transferred certain of our other intangible assets with a book value of $4.4 million to Ushio Opto Semiconductors, Inc.
As of June 30, 2018, our other intangible assets, net is $0.1 million, which we expect to fully amortize during fiscal year 2019. Amortization of other intangible assets for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, was $0.7 million $0.8 million and $1.0 million, respectively. Amortization is recorded as an operating expense within the consolidated statements of operations.
During the fourth quarter of fiscal year 2016, 2017 and 2018, we reviewed our other intangible assets for impairment. We compared their carrying amounts to market prices or the future undiscounted cash flows the assets are expected to generate. We determined that the carrying value of the assets did not exceed the fair value based on market prices or future discounted cash flows. We did not record any impairment charges related to our other intangibles in fiscal year 2016, 2017 or 2018.
NOTE 4. CREDIT LINE AND NOTES
6.00% Convertible Senior Notes due 2020 ("6.00% Notes")
On February 12, 2015, we entered into a Purchase Agreement (the “Purchase Agreement”), with Jefferies LLC (the “Initial Purchaser”), pursuant to which we agreed to issue and sell to the Initial Purchaser up to $65.0 million in aggregate principal Convertible Senior Notes due 2020 (the “6.00% Notes”). On February 19, 2015, we closed the private placement of $65.0 million aggregate principal amount of the 6.00% Notes. The initial exchange price was $1.95 per share of common stock. The 6.00% Notes were sold at 100 percent of par, resulting in net proceeds of approximately $61.6 million, after deducting the Initial Purchaser’s discounts of $3.4 million. We also incurred offering expenses of $0.6 million. The net proceeds of this offering have been used for general corporate purposes, including working capital for, among other things, investing in development of new products and technologies.
The Purchase Agreement contained customary representations and warranties of the parties and indemnification and contribution provisions under which we, on the one hand, and the Initial Purchaser, on the other, agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”).
The 6.00% Notes were governed by an Indenture, dated February 19, 2015 (the “Indenture”), entered into between us and U.S. Bank National Association, as trustee (the “Trustee”). The Indenture contained affirmative and negative covenants that, among other things, limited our ability to incur, assume or guarantee additional indebtedness; create liens; sell or otherwise dispose of substantially all of our assets; and enter into mergers and consolidations. The Indenture also contained customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the 6.00% Notes could have declared all outstanding 6.00% Notes to be due and payable immediately.
On February 19, 2015, we also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Initial Purchaser to provide the holders of the 6.00% Notes with registration rights with respect to shares of common stock that have been issued upon conversion of the 6.00% Notes and are then outstanding, but only if Rule 144 under the Securities Act is unavailable to holders of the 6.00% Notes who are not affiliates of ours on and following the date that is six months after the original issuance date of the 6.00% Notes.
On February 19, 2015, we entered into a Consent and First Loan Modification Agreement (the “Amendment”) with Silicon Valley Bank (“SVB”). The Amendment modified the Loan and Security Agreement, dated as of March 28, 2014, by and among us, Oclaro Technology Limited and SVB to allow the cash payments provided for in the Indenture and the 6.00% Notes and include the 6.00% Notes as permitted indebtedness.
Prior to February 15, 2018, in the event that the last reported sale price of our common stock for 20 or more trading days (whether or not consecutive) in a period of 30 consecutive trading days ending within 5 trading days immediately prior to the date we would have received a notice of conversion had exceeded the conversion price in effect on each such trading day, we would have, in addition to delivering shares upon conversion by the holder of 6.00% Notes, together with cash in lieu of fractional shares, make an interest make-whole payment in cash equal to the sum of the remaining scheduled payments of interest on the 6.00% Notes to be converted through February 15, 2018.
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Prior to February 15, 2018, we could not redeem the 6.00% Notes. On or after February 15, 2018, we could redeem for cash all of the 6.00% Notes if the last reported sale price per share of our common stock has been at least 130 percent of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period ending within 5 trading days prior to the date on which we provide notice of redemption. The redemption price would equal (i) 100 percent of the principal amount of the Notes being redeemed, plus (ii) accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date plus (iii) the sum of the present values of each of the remaining scheduled payments of interest that would have been made on the 6.00% Notes to be redeemed had such 6.00% Notes remained outstanding from the redemption date to the maturity date (excluding interest accrued to, but excluding, the redemption date that is otherwise paid pursuant to the immediately preceding clause (ii)). Once notified, the holders of the 6.00% Notes could elect to convert, at which point they would receive their shares of common stock based on the initial exchange rate plus up to an additional 11.2 million shares.
The 6.00% Notes were scheduled to mature on February 15, 2020 and bore interest at a fixed rate of 6.00 percent per year, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on August 15, 2015.
In August 2016, we entered into multiple privately negotiated agreements, pursuant to which all of our 6.00% Notes were canceled, and the Indenture was satisfied and discharged. In connection with these privately negotiated agreements, we issued a total of 34,659,972 shares of our common stock and made total cash payments of $4.7 million.
Pursuant to the terms of the Indenture governing the 6.00% Notes, we recorded an interest make-whole charge of $5.9 million in interest (income) expense, net, in the consolidated statement of operations for the year ended July 1, 2017, which was settled with a combination of common stock issuances and cash payments. We also recorded an induced conversion expense of $7.4 million, which we recorded in interest (income) expense, net, in the consolidated statement of operations for the year ended July 1, 2017.
During the year ended July 2, 2016, we recorded interest expense of $4.7 million, which included the amortization of the debt discount and the issuance costs related to these 6.00% Notes. During the year ended July 2, 2016, we made interest payments of $3.9 million related to the 6.00% Notes.
Silicon Valley Bank Credit Facility
On March 28, 2014, Oclaro, Inc. and its subsidiary, Oclaro Technology Limited (the “Borrower”), entered into a loan and security agreement (the “Loan Agreement”) with SVB pursuant to which SVB provided the Borrower with a three-year revolving credit facility of up to $40.0 million. Under the Loan Agreement, advances were available based on up to 80 percent of “eligible accounts” as defined in the Loan Agreement. The Loan Agreement had a $10.0 million sub-facility for letters of credit, foreign exchange contracts and cash management services. On September 17, 2015, we entered into an amendment to the Loan Agreement with SVB increasing from $5.0 million to $15.0 million the amount of equipment liens that may qualify as "Permitted Liens" thereunder.
The obligations of the Borrower under the Loan Agreement were guaranteed by us and certain subsidiaries of ours (collectively, the “Guarantors”) pursuant to an Unconditional Guaranty in favor of SVB (the “Guaranty”), and were secured by substantially all of the assets of the Borrower and the Guarantors, including a pledge of the capital stock holdings of the Borrower and the Guarantors in their direct subsidiaries.
Borrowings made under the Loan Agreement bore interest at a rate based on either the London Interbank Offered Rate plus 2.25 percent or The Wall Street Journal’s prime rate plus 1.00 percent. If the sum of (a) the Borrower’s unrestricted cash and cash equivalents that are subject to SVB’s liens less (b) the amount outstanding to SVB under the Loan Agreement (such sum being “Net Cash”) was less than $15.0 million, then the interest rates were increased by 0.75 percent until Net Cash exceeds $15.0 million for a calendar month. If interest paid under the Loan Agreement was less than $45,000 in any fiscal quarter, the Borrower was required to pay SVB an additional amount equal to the difference between $45,000 and the actual interest paid during such fiscal quarter. The minimum interest payment was in lieu of a stand-by charge.
The obligations of the Borrower under the Loan Agreement could have been accelerated, and the Guarantors could have become obligated under the Guaranty, upon the occurrence of an event of default under the Loan Agreement. The Loan Agreement includes customary events of default. Upon the occurrence and during the continuance of an event of default, obligations would have borne interest at a rate per annum which was 2 percentage points above the rate that was otherwise applicable thereto, unless SVB had elected otherwise, in its sole discretion.
The Loan Agreement contained covenants applicable to us, the Borrower and our subsidiaries, including a financial covenant that, on a consolidated basis, required us to maintain a minimum fixed charge coverage ratio of no less than 1.10 to 1.00, if the Borrower had not maintained Net Cash of at least $15.0 million, and other customary covenants. The Loan Agreement also contained restrictions on our ability to pay cash dividends on our common stock.
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On March 28, 2017, the Loan Agreement expired, and was not renewed. There were no amounts outstanding under the Loan Agreement during fiscal year 2017 or at the time of the Loan Agreement expiration.
NOTE 5. POST-RETIREMENT BENEFITS
401(k) Plan
In the U.S., we sponsor a 401(k) plan that allows voluntary contributions by eligible employees, who may elect to contribute up to the maximum allowed under the U.S. Internal Revenue Service regulations. We generally make 100 percent matching contributions on the first 3 percent and 50 percent matching contributions on the following 2 percent (up to a maximum of $18,500 per eligible employee in calendar year 2018). We recorded related expenses of $0.5 million, $0.5 million and $0.4 million in fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively.
U.K. Defined Contribution Plan
We contribute to a U.K. based defined contribution pension scheme for employees. Contributions under this plan and the related expenses were $1.4 million, $1.1 million and $1.2 million in the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively.
Japan Defined Contribution Plan
We contribute to a Japan based defined contribution plan that provides retirement benefits to our employees in Japan. Under the defined contribution plan, contributions are provided based on grade level and totaled $0.5 million, $0.5 million and $0.5 million for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively. Employees can elect to receive the benefit as additional salary or contribute the benefit to the plan on a tax-deferred basis.
Japan Defined Benefit Plan
We contribute to a Japan based defined benefit plan that provides retirement benefits to our employees in Japan. Under the defined benefit plan in Japan (the "Japan Plan"), we calculate benefits based on an employee’s individual grade level and years of service. Employees are entitled to a lump sum benefit upon retirement or upon certain instances of termination.
As of June 30, 2018, there were no Japan Plan assets. As of June 30, 2018, there was $0.3 million in accrued expenses and other liabilities and $6.9 million in other non-current liabilities in our consolidated balance sheet, to account for the projected benefit obligations under the Japan Plan.
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The reconciliation of the actuarial present value of the projected benefit obligations for the defined benefit plan for the fiscal years ended June 30, 2018 and July 1, 2017 was as follows:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Change in projected benefit obligation: | |||||||
Projected benefit obligation, beginning of period | $ | 6,552 | $ | 6,912 | |||
Service cost | 637 | 624 | |||||
Interest cost | 19 | 4 | |||||
Benefits paid | (85 | ) | (197 | ) | |||
Actuarial (gain) loss on obligation | (57 | ) | (213 | ) | |||
Currency translation adjustment | 83 | (578 | ) | ||||
Projected benefit obligation, end of period | $ | 7,149 | $ | 6,552 | |||
Amounts recognized in consolidated balance sheets: | |||||||
Accrued expenses and other liabilities: | |||||||
Underfunded pension liability | $ | 264 | $ | 117 | |||
Other non-current liabilities: | |||||||
Underfunded pension liability | $ | 6,885 | $ | 6,435 | |||
Amounts recognized in accumulated other comprehensive income, net of tax: | |||||||
Pension actuarial loss | $ | 101 | $ | 150 | |||
Accumulated benefit obligation, end of period | $ | 7,149 | $ | 6,552 | |||
Net periodic pension cost associated with the Japan Plan in fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016 include the following components:
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Service cost | $ | 637 | $ | 624 | $ | 560 | |||||
Interest cost | 19 | 4 | 48 | ||||||||
Net periodic pension cost | $ | 656 | $ | 628 | $ | 608 | |||||
The projected and accumulated benefit obligations for the Japan Plan were calculated as June 30, 2018 and July 1, 2017 using the following assumptions:
June 30, 2018 | July 1, 2017 | ||||
Discount rate | 0.3 | % | 0.1 | % | |
Salary increase rate | 2.2 | % | 2.2 | % | |
Expected average remaining working life (in years) | 14.0 | 14.3 | |||
As of June 30, 2018, the accumulated benefit obligation was $7.1 million. Estimated future benefit payments under the Japan Plan are estimated to be $0.3 million in fiscal year 2019, $0.4 million in fiscal year 2020, $0.3 million in fiscal year 2021, $0.3 million in fiscal year 2022, $0.5 million in fiscal year 2023 and a total of $3.4 million for the following 5 years.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Loss Contingencies
We are involved in various lawsuits, claims and proceedings that arise in the ordinary course of business. We record a loss provision when we believe it is both probable that a liability has been incurred and the amount can be reasonably estimated.
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Guarantees
We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and executive officers. We have not recorded a liability associated with these indemnification arrangements, as we historically have not incurred any material costs associated with such indemnification obligations. Costs associated with such indemnification obligations may be mitigated by insurance coverage that we maintain, however, such insurance may not cover any, or may cover only a portion of, the amounts we may be required to pay. In addition, we may not be able to maintain such insurance coverage in the future.
We also have indemnification clauses in various contracts that we enter into in the normal course of business, such as indemnifications in favor of customers in respect of liabilities they may incur as a result of purchasing our products should such products infringe the intellectual property rights of a third party. We have not historically paid out any material amounts related to these indemnifications; therefore, no accrual has been made for these indemnifications. See Litigation - Oyster Optics Litigation below for additional details.
Warranty Accrual
We generally provide a warranty for our products for twelve to thirty-six months from the date of sale, although warranties for certain of our products may be longer. We accrue for the estimated costs to provide warranty services at the time revenue is recognized. Our estimate of costs to service our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty costs would increase, resulting in a decrease in gross profit.
The following table summarizes movements in the warranty accrual for the periods indicated:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Warranty provision—beginning of period | $ | 4,124 | $ | 3,827 | $ | 2,932 | |||||
Warranties issued | 414 | 2,225 | 2,477 | ||||||||
Warranties utilized or expired | (714 | ) | (1,878 | ) | (1,520 | ) | |||||
Currency translation and other adjustments | 55 | (50 | ) | (62 | ) | ||||||
Warranty provision—end of period | $ | 3,879 | $ | 4,124 | $ | 3,827 | |||||
Capital Leases
In October 2015 we entered into a capital lease agreement for certain capital equipment with Hitachi High-Technologies Corporation. The lease term is for 5 years, after which time the ownership of the equipment will transfer from lessor to us. During the lease term, we will make twenty equal installments of principal and interest, payable quarterly. Interest on the capital lease will accrue at 1.15 percent per annum.
In connection with our acquisition of Opnext on July 23, 2012, we assumed capital leases with Hitachi Capital Corporation for certain capital equipment, which had lease terms that ranged from one to five years, and provided us with the option to purchase the equipment at the residual value upon expiration. For certain of these capital leases, we have entered into one year extensions.
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The following table shows the future minimum lease payments due under non-cancelable capital leases at June 30, 2018:
Capital Leases | |||
(Thousands) | |||
Fiscal Year Ending: | |||
2019 | $ | 2,444 | |
2020 | 613 | ||
2021 | 265 | ||
2022 | — | ||
Thereafter | — | ||
Total minimum lease payments | 3,322 | ||
Less amount representing interest | (79 | ) | |
Present value of capitalized payments | 3,243 | ||
Less: current portion | (2,386 | ) | |
Long-term portion | $ | 857 | |
Operating Leases
We lease certain facilities under non-cancelable operating lease agreements that expire at various dates through 2033. Our future fiscal year minimum lease payments under non-cancelable operating leases and related sublease income, including the sale-leaseback of our Caswell facility, are as follows:
Operating Lease Payments | Sublease Income | ||||||
(Thousands) | |||||||
Fiscal Year: | |||||||
2019 | $ | 9,071 | $ | (248 | ) | ||
2020 | 9,787 | (133 | ) | ||||
2021 | 9,981 | (10 | ) | ||||
2022 | 10,290 | — | |||||
2023 | 10,159 | — | |||||
Thereafter | 37,734 | — | |||||
$ | 87,022 | $ | (391 | ) | |||
Rent expense for these leases was $8.9 million, $8.8 million and $7.8 million during the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, respectively. We evaluate our facility capacity on an ongoing basis to meet changing needs in our markets with a goal of minimizing our rent expense.
Taxes
It is our policy to classify accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes. For fiscal years 2018, 2017 and 2016, we recognized an immaterial amount of interest and penalties related to unrecognized tax benefits. As of June 30, 2018 and July 1, 2017, we accrued $0.7 million in each year of interest and penalties related to unrecognized tax benefits. At this time, we are unable to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time.
Our total amount of unrecognized tax benefits as of June 30, 2018 was approximately $3.1 million. While it is often difficult to predict the final outcome of any particular uncertain tax position, management believes that unrecognized tax benefits could decrease by $1.1 million in the next twelve months.
Purchase Commitments
We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and help ensure adequate component supply, we enter into agreements with suppliers and contract manufacturers that either allow them to procure inventory based upon
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criteria as defined by us or establish the parameters defining our requirements. A significant portion of our reported purchase commitments arising from these agreements consist of firm, non-cancelable and unconditional commitments. While these purchase commitments are legally binding, the terms generally allow us the option to adjust, reschedule or cancel orders based on our business needs. As of June 30, 2018, we had total purchase commitments of $78.8 million, which we expect to be fulfilled within one year.
We record a liability for firm, non-cancelable and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with the valuation of our excess and obsolete inventory. As of June 30, 2018, the liability for these purchase commitments was $6.3 million and was included in accrued expenses and other liabilities.
Malaysian Goods and Services Tax (“GST”)
In February 2016, the Malaysian tax authorities preliminarily denied our Malaysia GST refund claims representing approximately $2.5 million. These claims were made in connection with the export of finished goods from our contract manufacturing partner’s Malaysian facilities. We are currently appealing the denial of these claims, and believe that additional appeal options may be available to us if we do not obtain a favorable resolution. Although we have taken action to minimize the impact of the GST with respect to our ongoing operations, we believe it is reasonably possible that, ultimately, we may not be able to recover some of these GST amounts. Of the $2.5 million in GST claims, we recorded $0.7 million in prepaid expenses and other current assets in our consolidated balance sheet at June 30, 2018, net of reserves and certain offsetting payments from our contract manufacturing partner.
Litigation
Overview
In the ordinary course of business, we are involved in various legal proceedings, and we anticipate that additional actions will be brought against us in the future. The most significant of these proceedings are described below. These legal proceedings, as well as other matters, involve various aspects of our business and a variety of claims in various jurisdictions. Complex legal proceedings frequently extend for several years, and a number of the matters pending against us are at very early stages of the legal process. As a result, some pending matters have not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable us to determine whether the proceeding is material to us or to estimate a range of possible loss, if any. Unless otherwise disclosed, we are unable to estimate the possible loss or range of loss for the legal proceedings described below. While it is not possible to accurately predict or determine the eventual outcomes of these items, an adverse determination in one or more of these items currently pending could have a material adverse effect on our results of operations, financial position or cash flows, and even if we are ultimately successful in defending these claims, such claims may be expensive to defend and could distract our management team from other important business matters.
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Oyster Optics Litigation
On November 23, 2016, Oyster Optics LLC (“Oyster”) filed a civil suit against Cisco Systems, Inc. (“Cisco”) and British Telecommunications PLC (“BT”), in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-CV-01301. In the complaint, Oyster alleges that Cisco and BT infringed seven patents owned by Oyster, which patents allegedly relate to certain Cisco optical platform products, some of which may incorporate Oclaro components. Oyster subsequently dismissed its claim against BT without prejudice. In January 2017, Cisco requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Cisco. In May 2017, Oclaro and Cisco preliminarily agreed to an allocation of the responsibilities for the costs of defense associated with Oyster’s claims. However, due to the uncertainty regarding the infringement allegations that Oyster may present at trial and the resultant uncertainty regarding the number of Oclaro components that may be implicated by such infringement allegations, Oclaro and Cisco agreed to defer until the conclusion of the litigation the final determination of whether and to what extent Oclaro will indemnify Cisco for any amounts Cisco may be required to pay Oyster and Cisco’s related defense costs. After discovery, Oyster’s infringement case against Cisco involved claims of only one patent and did not involve Oclaro components that were the subject of our commercial agreements with Cisco. In June of 2018, Cisco communicated its determination that the Oyster litigation against it did not involve Oclaro. Trial proceedings are set to begin November 5, 2018. Between June and September of 2017, Cisco and Oclaro filed eleven Petitions for inter partes review with the U.S. Patent Office of claims in six of the patents that Oyster originally asserted against Cisco. The Patent Office eventually instituted inter partes review for eight of the eleven Petitions involving claims of five of the six patents. Trials for the instituted Petitions are ongoing.
On November 24, 2016, Oyster also filed a civil suit against Coriant America Inc. (“Coriant”) in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-cv-01302. In the complaint against Coriant, Oyster alleges that Coriant has infringed the same seven patents that were asserted against Cisco. On May 18, 2017, Oyster’s case against Coriant was consolidated with cases that Oyster brought against other parties, including Cisco. On December 21, 2017, Coriant requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Coriant. Oclaro has refused this request for reasons including that Oyster’s claims against Coriant do not clearly implicate Oclaro products and that Coriant’s request was not timely made. Coriant has stated their disagreement with this position. As a result, Oclaro remains in discussions with Coriant regarding Coriant’s request for defense and indemnification. Oyster and Coriant informed the Court on April 12, 2018, that “all matters in controversy between the parties have been settled, in principle.” On July 3, 2018, the Court granted a joint motion from Oyster and Coriant to dismiss their case with prejudice.
Oyster also filed a civil suit on November 24, 2016 against Ciena Corporation (“Ciena”) in the U.S. District Court for the Eastern District of Texas, Marshall Division, Case No. 2:16-CV-01300. In the complaint against Ciena, Oyster alleges that Ciena has infringed the same seven patents that were asserted against Cisco. Oyster’s case against Ciena was later transferred to the Northern District of California which granted a motion that Ciena filed to stay the case pending inter partes review of the Oyster patents. On June 1, 2018, the parties filed a joint status report reporting on the status of the inter partes review proceedings. Also on June 1, 2018, counsel for Oyster wrote the Court a letter indicating that because there are no further proceedings in the PTAB concerning one of the asserted patents, that Oyster requested that the litigation move forward as to the asserted claims of that patent only and that the Court set a scheduling conference. On June 4, 2018, the Court indicated that Oyster should file a noticed motion for any such relief and the case currently remains stayed. On October 16, 2017, Ciena requested that Oclaro indemnify and defend it in this litigation, pursuant to our commercial agreements with Ciena. Oclaro refused this request for reasons including that Oyster's claims against Ciena do not clearly implicate Oclaro products and that Ciena's request was not timely made. Ciena has stated its disagreement with this position. As a result, discussions with Ciena regarding Ciena’s request for defense and indemnification have not completed.
Oclaro Merger Litigation
Following announcement of the execution of the Merger Agreement on March 12, 2018, seven lawsuits were filed by purported stockholders of Oclaro challenging its proposed acquisition by Lumentum, Inc. The first suit, a putative class action styled as Nicholas Neinast v. Oclaro, Inc., et al., No. 3:18-cv-03112-VC, was filed in the United States District Court for the Northern District of California on May 24, 2018, and was against Oclaro, its directors, Lumentum, Merger Sub, and Merger Sub LLC (the “Neinast Lawsuit”). Five additional suits, styled as Gerald F. Wordehoff v. Oclaro, Inc., et al., No. 5:18-cv-03148-NC (the “Wordehoff Lawsuit”), Walter Ryan v. Oclaro, Inc., et al., No. 3:18-cv-03174-VC (the “Ryan Lawsuit”), and Jayme Walker v. Oclaro, Inc., et al., No. 3:18-cv-03203 (the “Walker Lawsuit”), Kevin Garcia v. Oclaro, Inc., et al., No. 5:18-cv-03262-VKD (the “Garcia Lawsuit”), and Saisravan Bharadwaj Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit”) were also filed in the United States District Court for the Northern District of California on, respectively, May 25, 2018, May 29, 2018, May 30, 2018, May 31, 2018 and June 9, 2018. Each of the lawsuits name Oclaro and its directors as defendants. The Ryan Lawsuit and the Karri Lawsuit, like the Neinast Lawsuit, were putative class actions. A seventh suit, a putative class action styled as Adam Franchi v. Oclaro, Inc., et al., Case 1:18-cv-00817-GMS, was filed in the United States District Court for the District of Delaware on May 30, 2018, and was against Oclaro, its directors, Lumentum, Merger Sub, and Merger Sub LLC (the “Franchi Lawsuit”
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and, with the Neinast Lawsuit, the Wordehoff Lawsuit, the Ryan Lawsuit, the Walker Lawsuit, the Garcia Lawsuit, and the Karri Lawsuit, the “Lawsuits”).
The Lawsuits alleged that Oclaro and its directors violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder because the Proxy Statement/Prospectus was incomplete and misleading. The Lawsuits further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act. The Neinast Lawsuit additionally alleged that Oclaro’s directors breached fiduciary duties by entering into the Merger, and also names Lumentum, Merger Sub, and Merger Sub LLC as violators of Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The Franchi Lawsuit additionally named Lumentum, Merger Sub, and Merger Sub LLC as violators of Section 20(a) of the Exchange Act.
The Lawsuits sought, among other things, injunctive relief preventing the parties from consummating the merger, rescission of the transactions contemplated by the Merger Agreement should they be consummated, and litigation costs, including attorneys’ fees. The Lawsuits also sought damages to be awarded to the plaintiff and any class if the Merger were consummated. In addition, the Wordehoff Lawsuit sought injunctive relief directing defendants to disseminate a true and complete proxy statement/prospectus and declaratory relief that defendants violated Sections 14(a) and/or 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder.
To avoid the risk of the Lawsuits delaying or adversely affecting the Merger and to minimize the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing and believing that the initial Proxy Statement/Prospectus disclosed all material information concerning the Merger and no supplemental disclosure was required under applicable law, Oclaro voluntarily filed with the SEC a supplement to the Proxy Statement/Prospectus on June 29, 2018.
Thereafter, on July 25, 2018, the plaintiff in the Garcia Lawsuit dismissed his action, with prejudice as to the individual plaintiff. The plaintiffs in the Neinast, Franchi, Wordehoff, and Ryan Lawsuits dismissed these actions, with prejudice as to the respective individual plaintiffs, on July 27, 2018. The plaintiff in the Walker Lawsuit dismissed her action, with prejudice as to the individual plaintiff, on August 14, 2018. Counsel for plaintiff in the remaining lawsuit, the Karri Lawsuit, has stated his intention to file an amended complaint. If the Karri Lawsuit proceeds, Oclaro intends to defend the action vigorously.
Sale-Leaseback
In March 2006, our Oclaro Technology Ltd. subsidiary entered into multiple agreements with a subsidiary of Scarborough Development (Scarborough) for the sale and leaseback of the land and buildings located at our Caswell, U.K., manufacturing site. The sale transaction, which closed on March 30, 2006, resulted in proceeds to Oclaro Technology Ltd. of £13.75 million (approximately $24.0 million on the date of the transaction). Under these agreements, Oclaro Technology Ltd. leases back the Caswell site for an initial term of 20 years, with options to renew the lease term for 5 years following the initial term and for rolling 2-year terms thereafter.
Based on the exchange rate on June 30, 2018, annual rent for the next 3 years of the lease is approximately £1.4 million, or $1.9 million; and annual rent for the last 5 years of the lease is approximately £1.6 million, or $2.1 million per year. Rent during the optional renewal terms will be determined according to the then market rent for the site. The obligations of Oclaro Technology Ltd under these agreements are guaranteed by us. In addition, Scarborough and us entered into a pre-emption agreement with the buyer under which Oclaro Technology Ltd, within the initial 20-year term, has a right to purchase the Caswell site in whole or in part on terms acceptable to Scarborough if Scarborough agrees to terms with or receives an offer from a third party to purchase the Caswell facility. As a result of these agreements, we deferred a related gain of $20.4 million, which is being amortized ratably against rent expense over the initial 20-year term of the lease. As of June 30, 2018, the unamortized balance of this deferred gain is $6.0 million.
At the inception of the Caswell lease, we determined the total minimum lease payments which were to be paid over the lease term, and we are recognizing the effects of scheduled rent increases, which are included in the total minimum lease payments, on a straight-line basis over the lease term.
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
Our restated certificate of incorporation authorizes us to issue up to 275.0 million shares of our common stock.
On September 21, 2016, we entered into an underwriting agreement (the “Underwriting Agreement”) with Jefferies LLC, as representative of the several underwriters (the “Underwriters”), relating to the offering, issuance and sale (the “Offering”) of 15.0
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million shares of our common stock, par value $0.01 per share. The price to the public in the Offering was $8.35 per share. Under the terms of the Underwriting Agreement, we granted the Underwriters a 30-day option to purchase up to an additional 2,250,000 shares of common stock. The option was exercised in full by the Underwriters on September 23, 2016. All of the shares in the Offering were sold by us. The Offering closed on September 27, 2016, subject to customary closing conditions. The net proceeds to us after deducting underwriting discounts and commissions and offering expenses were approximately $135.2 million.
In August 2016, we issued a total of 34,659,972 shares of our common stock in connection with the cancellation of our 6.00% Notes. See Note 4, Credit Line and Notes, for additional information.
Preferred Stock
Our restated certificate of incorporation authorizes us to issue up to 1.0 million shares of preferred stock with designations, rights and preferences determined from time-to-time by our Board of Directors. To date, we have not issued any preferred stock.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, net of tax, are as follows at the dates indicated:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Currency translation adjustments | $ | 42,626 | $ | 41,131 | |||
Unrealized loss on marketable securities | (4 | ) | (8 | ) | |||
Japan defined benefit plan | (101 | ) | (150 | ) | |||
Other | 26 | — | |||||
$ | 42,547 | $ | 40,973 | ||||
NOTE 8. EMPLOYEE STOCK PLANS
Stock Incentive Plans
On July 30, 2014, our Board of Directors approved the Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (the “Incentive Plan”) and on November 14, 2014, our shareholders ratified the Incentive Plan. The Incentive Plan amended and restated in its entirety the Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan. The Incentive Plan (i) increased the number of shares of common stock available for issuance by 6.0 million shares, (ii) consolidated the share reserve of the Incentive Plan with the share reserve of the Amended and Restated 2004 Stock Incentive Plan ("2004 Plan"), such that from November 14, 2014, no additional awards will be granted under the 2004 Plan, and (iii) established that full value awards count as 1.40 shares of common stock for purposes of the Incentive Plan. From time to time, our stockholders approved amendments to the Incentive Plan, most recently adding 8.0 million shares of common stock to the share reserve under the Incentive Plan on November 17, 2017.
As of June 30, 2018, there were approximately 16.5 million shares of our common stock available for grant under the Incentive Plan.
We grant restricted stock awards and units that vest over a one to four year service period, and in certain limited cases vesting is also subject to the achievement of specific performance-based objectives as set by our Board of Directors or the Compensation Committee of our Board of Directors. We no longer grant stock options.
We also have a minimal amount of stock appreciation rights ("SARs") outstanding as of June 30, 2018, which we assumed in connection with our acquisition of Opnext.
Performance-Based Restricted Stock Units ("PSUs")
In August 2017, our Board of Directors approved a grant of 1.1 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $9.5 million. These PSUs have service- and performance-based vesting conditions. One-third of the PSUs will vest subject to the achievement of $700.0 million of revenue over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; one-third of the PSUs will vest upon the achievement of $100.0 million of free cash flow (defined as adjusted earnings before interest, taxes, depreciation and amortization ("AEBITDA") less capital expenditures) over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions; and one-third of the PSUs will vest upon the achievement of $800.0 million of revenue in any one fiscal year from 2018 through 2020 and upon
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achievement of $100.0 million of free cash flow over any four consecutive quarters through the end of fiscal year 2020, subject to service conditions. Upon attaining each performance condition, the service-based vesting condition is satisfied for that tranche as to 1/3 of the PSUs on the first anniversary of the vesting commencement date, and with respect to 1/12 of the underlying shares each subsequent quarter, such that all PSUs for that tranche are fully vested on the third anniversary of the vesting commencement date. As of June 30, 2018, we determined that the achievement of the performance conditions associated with these PSUs was improbable. The performance conditions associated with these PSUs will be considered achieved upon the consummation of the merger with Lumentum.
In August 2016, our Board of Directors approved a grant of 0.8 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $4.8 million. Subject to the achievement of an aggregate of $25.0 million or more of free cash flow (defined as AEBITDA less capital expenditures delivered) over any consecutive four fiscal quarters ending on or before June 27, 2020, as determined by our Board of Directors, these PSUs will vest with respect to 25 percent of the shares subject to the PSUs on August 10, 2017, and with respect to 6.25 percent of the underlying shares each subsequent quarter over the following three years, subject to continuous service. On July 25, 2017, the Compensation Committee of our Board of Directors certified that the performance condition for these PSUs was achieved.
In August 2015, our Board of Directors approved a grant of 0.9 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $2.5 million. Subject to the achievement of positive free cash flow (defined as AEBITDA less capital expenditures) in any fiscal quarter ending prior to June 30, 2018, vesting of these PSUs is contingent upon service conditions being met through August 10, 2018. On October 29, 2015, the Compensation Committee of our Board of Directors certified that this performance condition was achieved during the first quarter of fiscal year 2016. As a result, these PSUs cliff vested with respect to 33.4 percent of the underlying shares on August 10, 2016, and with respect to 8.325 percent of the underlying shares each subsequent quarter over the following two years, subject to continuous service.
In August 2014, our Board of Directors approved a grant of 0.5 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.9 million. These PSUs vest at 100 percent upon the achievement of two consecutive quarters with positive AEBITDA on or before the end of our fiscal year 2017. During the second quarter of fiscal year 2016, the performance condition related to these PSUs was achieved. On February 2, 2016, the Compensation Committee of our Board of Directors certified that the performance condition was achieved and the PSUs immediately vested at 100 percent.
In March 2014, our Board of Directors approved a grant of 0.2 million PSUs to certain executive officers with an aggregate estimated grant date fair value of $0.5 million. These PSUs vest upon the achievement of non-GAAP operating income break-even for calendar year 2015. We did not achieve the performance conditions associated with these PSUs and the PSUs were forfeited in fiscal year 2016.
Restricted Stock Units ("RSUs")
In August 2017, our Board of Directors approved a long term incentive grant of 0.6 million RSUs to certain executive officers and 1.6 million RSUs to other employees, which vest over four years.
In August 2016, our Board of Directors approved a long term incentive grant of 0.8 million RSUs to certain executive officers and 2.0 million RSUs to other employees, which vest over four years.
In July 2015, our Board of Directors approved a long term incentive grant of 0.9 million RSUs to certain executive officers and 1.5 million RSUs to other employees, which vest over three years.
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Stock Incentive Plan Activity
The following table summarizes the combined activity under all of our equity incentive plans for the three-year period ended June 30, 2018:
Awards Available For Grant | Stock Options / SARs Outstanding | Weighted- Average Exercise Price | Restricted Stock Awards / Units Outstanding | Weighted- Average Grant Date Fair Value | ||||||||||||
(Thousands) | (Thousands) | (Thousands) | ||||||||||||||
Balances at June 27, 2015 | 8,921 | 3,381 | $ | 7.07 | 4,545 | $ | 1.80 | |||||||||
Increase in share reserve | 8,000 | — | — | — | — | |||||||||||
Granted | (5,496 | ) | — | — | 3,926 | 2.92 | ||||||||||
Exercised or released | — | (110 | ) | 2.40 | (2,897 | ) | 2.13 | |||||||||
Canceled or forfeited | 1,399 | (296 | ) | 9.29 | (552 | ) | 1.87 | |||||||||
Balances at July 2, 2016 | 12,824 | 2,975 | 7.03 | 5,022 | 2.67 | |||||||||||
Increase in share reserve | 6,000 | — | — | — | — | |||||||||||
Granted | (5,660 | ) | — | — | 4,043 | 6.53 | ||||||||||
Exercised or released | 163 | (1,029 | ) | 4.85 | (3,257 | ) | 2.57 | |||||||||
Canceled or forfeited | 254 | (88 | ) | 15.36 | (121 | ) | 4.76 | |||||||||
Balances at July 1, 2017 | 13,581 | 1,858 | 7.84 | 5,687 | 5.43 | |||||||||||
Increase in share reserve | 8,000 | — | — | — | — | |||||||||||
Granted | (6,027 | ) | — | — | 4,330 | 8.22 | ||||||||||
Exercised or released | 30 | (543 | ) | 4.87 | (2,959 | ) | 4.97 | |||||||||
Canceled or forfeited | 872 | (249 | ) | 14.67 | (472 | ) | 6.73 | |||||||||
Balances at June 30, 2018 | 16,456 | 1,066 | $ | 7.75 | 6,586 | $ | 7.38 | |||||||||
Supplemental disclosure information about our stock options and SARs outstanding as of June 30, 2018 was as follows:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Life | Aggregate Intrinsic Value | |||||||||
(Thousands) | (Years) | (Thousands) | ||||||||||
Options and SARs exercisable at June 30, 2018 | 1,054 | $ | 7.82 | 2.1 | $ | 3,088 | ||||||
Options and SARs outstanding at June 30, 2018 | 1,066 | $ | 7.75 | 2.1 | $ | 3,174 | ||||||
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on our closing stock price of $8.93 as of June 29, 2018, which would have been received by the option holders had all option holders exercised their options as of that date. There were approximately 0.6 million shares of common stock subject to in-the-money options which were exercisable as of June 30, 2018. We settle employee stock option exercises with newly issued shares of common stock.
NOTE 9. STOCK-BASED COMPENSATION
We recognize compensation expense in our statement of operations related to all share-based awards, including grants of stock options and restricted stock awards, based on the grant date fair value of such share-based awards. The grant date fair value for our restricted stock awards is based on the fair value of our common stock. The grant date fair value for our stock options was determined using the Black-Scholes stock option pricing model. No stock options have been granted in fiscal years 2016, 2017 or 2018.
In March 2016, the FASB issued ASU No. 2016-09, Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards, and classification on the statement of cash flows. This guidance was effective for us in the first quarter of fiscal year 2018. Pursuant to the adoption of ASU No. 2016-09, we elected to record forfeitures when they occur. This change in accounting principle with regards to forfeitures was adopted using a modified retrospective approach. With
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the adoption of this guidance we recorded an adjustment of $0.3 million in our accumulated deficit and additional paid-in capital during the first quarter of fiscal year 2018.
The amounts included in cost of revenues, operating expenses and net income for stock-based compensation expenses were as follows:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Stock-based compensation by category of expense: | |||||||||||
Cost of revenues | $ | 2,739 | $ | 1,885 | $ | 1,883 | |||||
Research and development | 3,457 | 2,290 | 1,689 | ||||||||
Selling, general and administrative | 8,768 | 7,020 | 4,629 | ||||||||
$ | 14,964 | $ | 11,195 | $ | 8,201 | ||||||
Stock-based compensation by type of award: | |||||||||||
Stock options | $ | 92 | $ | 134 | $ | 213 | |||||
Restricted stock awards | 15,218 | 11,275 | 7,876 | ||||||||
Inventory adjustment to cost of revenues | (346 | ) | (214 | ) | 112 | ||||||
$ | 14,964 | $ | 11,195 | $ | 8,201 | ||||||
As of June 30, 2018 and July 1, 2017, we capitalized $0.9 million and $0.6 million, respectively, of stock-based compensation in inventory.
Included in stock-based compensation for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, is approximately $2.2 million, $3.2 million and $1.4 million, respectively, in stock-based compensation cost related to the issuance of PSUs. The amount of stock-based compensation expense recognized in any one period related to PSUs can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the underlying PSUs, and any previously recognized compensation expense related to those PSUs would be reversed. As of June 30, 2018, we have recorded no stock-based compensation expense related to the issuance of PSUs granted in August 2017 as we determined that the achievement of the performance conditions associated with these PSUs was not probable. The performance conditions associated with the PSUs issued in August 2016 and August 2015 were achieved and we are recognizing stock-based compensation expense related to these grants over the requisite service periods.
As of June 30, 2018, we had less than $0.1 million in unrecognized stock-based compensation expense related to unvested stock options that will be recognized over a weighted-average period of 0.3 year, and $32.2 million in unrecognized stock-based compensation expense related to unvested time-based and performance-based restricted stock awards that will be recognized over a weighted-average period of 2.3 years.
NOTE 10. INCOME TAXES
For financial reporting purposes, our income before income taxes includes the following:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Domestic | $ | (237 | ) | $ | (12,579 | ) | $ | (856 | ) | ||
Foreign | 75,080 | 115,392 | 10,285 | ||||||||
$ | 74,843 | $ | 102,813 | $ | 9,429 | ||||||
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The components of our income tax provision (benefit) are as follows:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Current: | |||||||||||
Domestic | $ | 8 | $ | 6 | $ | 16 | |||||
Foreign | 3,138 | 629 | 1,023 | ||||||||
Deferred: | |||||||||||
Domestic | — | — | — | ||||||||
Foreign | 9,244 | (25,681 | ) | (190 | ) | ||||||
$ | 12,390 | $ | (25,046 | ) | $ | 849 | |||||
Reconciliations of our income tax provision (benefit) at the statutory rate to our income tax provision (benefit) are as follows:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Tax expense at U.S. federal statutory rate | $ | 20,609 | $ | 34,957 | $ | 3,206 | |||||
Tax expense at state statutory rate | 959 | 1,070 | 138 | ||||||||
Other permanent adjustments | 948 | 2,796 | 1,894 | ||||||||
Foreign rate differential | (3,095 | ) | (9,043 | ) | (786 | ) | |||||
Change in valuation allowance | (39,876 | ) | (54,584 | ) | (3,705 | ) | |||||
Impact of Tax Cuts and Jobs Act - rate reduction | 34,953 | — | — | ||||||||
Other | (2,108 | ) | (242 | ) | 102 | ||||||
Provision for (benefit from) income taxes | $ | 12,390 | $ | (25,046 | ) | $ | 849 | ||||
We plan to permanently reinvest the unremitted earnings of our non-U.S. subsidiaries except for those subsidiaries where the closure of these subsidiaries is expected to be imminent. We recorded a tax liability of $0.1 million and $0.1 million for the withholding taxes that would be owed upon distribution of these entities' earnings as of June 30, 2018 and July 1, 2017, respectively.
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Deferred income taxes reflect the tax 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 our deferred tax assets and liabilities are as follows:
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Deferred tax assets: | |||||||
Net operating loss carryforwards | $ | 157,411 | $ | 189,620 | |||
Depreciation and capital losses | 15,242 | 25,809 | |||||
Capitalized research and development | 5,977 | 8,531 | |||||
Inventory valuation | 4,724 | 3,234 | |||||
Accruals and reserves | 16,339 | 13,613 | |||||
Tax credit carryforwards | 7,063 | 6,736 | |||||
Stock-based compensation | 2,209 | 2,424 | |||||
Other asset impairments | 1,277 | 1,999 | |||||
Deferred tax assets | 210,242 | 251,966 | |||||
Valuation allowance | (193,435 | ) | (225,643 | ) | |||
Total deferred tax assets | 16,807 | 26,323 | |||||
Deferred tax liabilities: | |||||||
Acquired intangibles | (182 | ) | (454 | ) | |||
Withholding tax | (95 | ) | (95 | ) | |||
Total deferred tax liabilities | (277 | ) | (549 | ) | |||
Net deferred tax assets | $ | 16,530 | $ | 25,774 | |||
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence including past operating results, the existence of cumulative losses and our forecast of future taxable income. In determining future taxable income, we are responsible for assumptions utilized including the amount of state, federal and international pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.
Recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance, the recorded cumulative net losses in prior fiscal periods and the uncertainty of the timing of future profits, we have provided a full valuation allowance against most of our U.S. and foreign deferred tax assets with the exception of our Italy investment tax credit and Japan. Based on our Japan subsidiary's operating profits in previous years, firm sales backlog and future income projections, management has released the valuation allowance on all of our Japan subsidiary's deferred tax assets during the fourth quarter of fiscal year 2017. Our valuation allowance decreased by $32.2 million, $60.0 million and $44.7 million for fiscal years 2018, 2017 and 2016, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was signed into law. Among other changes is a permanent reduction in the federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. As a result of the reduction in the corporate income tax rate, we revalued our net deferred tax asset at June 30, 2018. This resulted in a reduction in the value of the net deferred tax asset of approximately $35.0 million, which was offset by the change in valuation allowance of $35.0 million due to our full valuation allowance position.
Due to the complexity of the provision for the TCJA and the lack of the current guidance, under the guidance of Staff Accounting Bulletin 118, the accounting is incomplete and we have not estimated the GILTI impact on deferred taxes. Additionally, state and local authorities are reviewing federal conformity matters related to GILTI. Provisional amounts or adjustments to provisional amounts identified in the measurement period, would be included as an adjustment to tax expense or benefit from continuing operations in the period the amounts are determined. We have determined a reasonable estimate for the tax reform effects other than the impact of GILTI on our recognition of deferred tax assets, and reported the estimates as a provisional amount in our financial statements for which the accounting under ASC Topic 740 is completed. We will finalize the impact of the GILTI in fiscal year 2019.
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In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based payment awards to their employees. We adopted ASU 2016-09 during the first quarter of fiscal year 2018. Under ASU 2016-09, excess tax benefits and deficiencies are required to be recognized prospectively as part of provision for income taxes rather than additional paid-in capital. We have adopted this requirement prospectively. We recognized additional $2.8 million and $0.2 million of deferred tax assets associated with the net operating loss on the excess tax benefits for federal and states, respectively.
Net operating loss carryforwards by jurisdiction are summarized as follows:
June 30, 2018 | Years of Expiration | ||||
(Thousands) | |||||
United Kingdom | $ | 497,670 | Indefinite | ||
Federal | 242,169 | Varies (1) | |||
California | 167,944 | 2019 - 2038 | |||
Other Foreign | 1,162 | 2019 - 2038 | |||
Total | $ | 908,945 | |||
(1) | Of the $242.2 million in federal net operating loss carryforwards, $236.0 million expires between 2019 and 2037, and $6.2 million has an indefinite life. |
In addition to our net operating losses, as of June 30, 2018, we had U.S. federal, California and Canada research and development credits of approximately $0.3 million, $1.0 million and $1.9 million, respectively. The U.S. federal research credits will expire from 2019 through 2038. The California research credit may be carried forward indefinitely. The Canada research credit will expire during 2026 if unused. In addition, we have foreign tax credits of approximately $3.9 million, which will expire from 2028 through 2036, and an Italy investment tax credit of $0.1 million.
Utilization of net operating loss carryforwards and credit carryforwards are subject to annual limitations due to ownership changes as provided in the Internal Revenue Code of 1986, as amended, as well as similar state and foreign tax laws. This annual limitation may result in the expiration of a significant portion of the net operating loss carryforwards and tax credits before utilization.
Our total amount of unrecognized tax benefits as of June 30, 2018 was approximately $3.1 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.3 million as of June 30, 2018. While it is often difficult to predict the final outcome of any particular uncertain tax position, management believes that unrecognized tax benefits could decrease by $1.1 million in the next twelve months.
A reconciliation of the beginning balance and the ending balance of gross unrecognized tax benefits, net of interest and penalties, for fiscal year ended June 30, 2018, July 1, 2017 and July 2, 2016 is as follows:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Balance at beginning of period | $ | 3,515 | $ | 3,779 | $ | 4,058 | |||||
Additions for tax positions related to the current year | 100 | 21 | 639 | ||||||||
Additions for tax positions related to prior years | 93 | 6 | 538 | ||||||||
Reductions for tax positions related to prior years | (14 | ) | (291 | ) | (1,016 | ) | |||||
Lapse of the applicable statute of limitations | (610 | ) | — | (440 | ) | ||||||
Balance at end of period | $ | 3,084 | $ | 3,515 | $ | 3,779 | |||||
We include interest and penalties related to unrecognized tax benefits within the provision for income taxes on our consolidated statements of operations. As of June 30, 2018 and July 1, 2017, we have accrued approximately $0.7 million and $0.7 million for payment of interest and penalties related to unrecognized tax benefits, respectively.
We file U.S. federal, U.S. state and foreign tax returns and have determined that our major tax jurisdictions are the United States, the United Kingdom, Italy, Japan and China. At June 30, 2018, our 2012 to 2018 tax returns were open to potential examination in one or more jurisdictions. In addition, in the U.S., any net operating loss and credit carryforwards may extend the ability of the
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tax authorities to examine our tax returns beyond the regular limits. We are not currently under any U.S. federal, U.S. state, or other foreign tax examinations.
NOTE 11. NET INCOME PER SHARE
Basic net income per share is computed using only the weighted-average number of shares of common stock outstanding for the applicable period, while diluted net income per share is computed assuming conversion of all potentially dilutive securities, such as stock options, unvested restricted stock units and awards, and convertible notes during such period.
The following table presents the calculation of basic and diluted net income (loss) per share for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016:
Year Ended | |||||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||||
(Thousands, except per share amounts) | |||||||||||||
Net income | $ | 62,453 | $ | 127,859 | $ | 8,580 | |||||||
Weighted-average shares - Basic | 169,263 | 158,115 | 110,599 | ||||||||||
Effect of dilutive potential common shares from: | |||||||||||||
Stock options and stock appreciation rights | 389 | 674 | 204 | ||||||||||
Restricted stock units and awards | 2,084 | 2,489 | 2,425 | ||||||||||
Convertible notes | — | 3,753 | — | ||||||||||
Weighted-average shares - Diluted | 171,736 | 165,031 | 113,228 | ||||||||||
Basic net income per share | $ | 0.37 | $ | 0.81 | $ | 0.08 | |||||||
Diluted net income per share | $ | 0.36 | $ | 0.77 | $ | 0.08 | |||||||
For fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, we excluded 0.7 million, 0.8 million and 35.6 million, respectively, of outstanding stock options, stock appreciation rights, unvested restricted stock units or shares issuable in connection with convertible notes from the calculation of diluted net income per share because their effect would have been anti-dilutive.
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NOTE 12. GEOGRAPHIC INFORMATION, PRODUCT GROUPS AND CUSTOMER CONCENTRATION
We evaluate our reportable segments in accordance with ASC Topic 280, Segment Reporting, which establishes standards for reporting information about operating segments, geographic areas and major customers in financial statements. During fiscal years 2018, 2017 and 2016, we had one operating segment in which we designed, manufactured and marketed optical components and modules for the long-haul, metro and data center markets.
Geographic Information
The following table shows revenues by geographic area for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016, based on the delivery locations of our products:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
Asia-Pacific: | |||||||||||
China | $ | 169,825 | $ | 227,897 | $ | 167,229 | |||||
Thailand | 64,206 | 97,808 | 11,161 | ||||||||
Malaysia | 5,461 | 20,965 | 31,823 | ||||||||
Other Asia-Pacific | 20,466 | 15,776 | 6,665 | ||||||||
Total Asia-Pacific | $ | 259,958 | $ | 362,446 | $ | 216,878 | |||||
Americas: | |||||||||||
United States | $ | 78,858 | $ | 82,516 | $ | 63,158 | |||||
Mexico | 101,768 | 43,122 | 46,385 | ||||||||
Other Americas | 10,918 | 35,170 | 6,901 | ||||||||
Total Americas | $ | 191,544 | $ | 160,808 | $ | 116,444 | |||||
EMEA: | |||||||||||
Italy | $ | 43,196 | $ | 32,926 | $ | 27,249 | |||||
Germany | 17,438 | 14,221 | 21,284 | ||||||||
Other EMEA | 24,840 | 21,050 | 18,918 | ||||||||
Total EMEA | $ | 85,474 | $ | 68,197 | $ | 67,451 | |||||
Japan | $ | 6,194 | $ | 9,517 | $ | 7,141 | |||||
Total revenues | $ | 543,170 | $ | 600,968 | $ | 407,914 | |||||
The following table sets forth our long-lived tangible assets by country as of the dates indicated:
Year Ended | |||||||
June 30, 2018 | July 1, 2017 | ||||||
(Thousands) | |||||||
Japan | $ | 61,845 | $ | 49,843 | |||
China | 23,126 | 25,010 | |||||
United Kingdom | 20,112 | 8,174 | |||||
United States | 14,956 | 11,057 | |||||
Malaysia | 8,651 | 10,521 | |||||
Rest of world | 8,748 | 9,728 | |||||
$ | 137,438 | $ | 114,333 | ||||
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Product Groups
The following table sets forth revenues by product group for the fiscal years ended June 30, 2018, July 1, 2017 and July 2, 2016:
Year Ended | |||||||||||
June 30, 2018 | July 1, 2017 | July 2, 2016 | |||||||||
(Thousands) | |||||||||||
100 Gb/s + transmission modules | $ | 422,699 | $ | 457,975 | $ | 228,619 | |||||
40 Gb/s and lower transmission modules | 120,471 | 142,993 | 179,295 | ||||||||
$ | 543,170 | $ | 600,968 | $ | 407,914 | ||||||
Significant Customers and Concentration of Credit Risk
For the fiscal year ended June 30, 2018, four customers accounted for 10 percent or more of our revenues, representing 17 percent, 13 percent, 13 percent and 11 percent of our revenues, respectively. For the fiscal year ended July 1, 2017, four customers accounted for 10 percent or more of our revenues, representing 18 percent, 18 percent, 15 percent and 12 percent, of our revenues, respectively. For the fiscal year ended July 2, 2016, four customers accounted for 10 percent or more of our revenues, representing 21 percent, 13 percent, 10 percent and 10 percent, of our revenues, respectively.
As of June 30, 2018, two customers accounted for 10 percent or more or our accounts receivable, representing approximately 22 percent and 14 percent of our accounts receivable, respectively. As of July 1, 2017, one customer accounted for 10 percent or more of our accounts receivable, representing approximately 20 percent of our accounts receivable.
NOTE 13. RELATED PARTY TRANSACTIONS
During fiscal year 2015, Hitachi, Ltd. (“Hitachi”) was considered our related party based on their ownership interest as disclosed on Schedule 13G with the SEC. During the second quarter of fiscal year 2016, Hitachi sold approximately 6.6 million shares of our common stock. Based on a review of public filings, as of June 30, 2018 and July 1, 2017, Hitachi owned less than 5 percent of our outstanding common stock.
We continue to enter into transactions with Hitachi in the normal course of business. We are also party to a research and development agreement and intellectual property license agreements with Hitachi. We also have certain capital equipment leases with Hitachi Capital Corporation and Hitachi High-Technologies Corporation as described in Note 6, Commitments and Contingencies.
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NOTE 14. SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following tables set forth our unaudited condensed consolidated statements of operations data for each of the eight quarterly periods ended June 30, 2018. We have prepared this unaudited information on a basis consistent with our audited consolidated financial statements, reflecting all normal recurring adjustments that we consider necessary for a fair presentation of our financial position and operating results for the fiscal quarters presented. Basic and diluted net income per share is computed independently for each of the quarters presented. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted net income per share.
Quarter Ended | |||||||||||||||
June 30, 2018 | March 31, 2018 | December 30, 2017 | September 30, 2017 | ||||||||||||
(Thousands) | |||||||||||||||
Revenues | $ | 120,944 | $ | 127,293 | $ | 139,335 | $ | 155,598 | |||||||
Cost of revenues | 76,136 | 83,729 | 87,507 | 92,894 | |||||||||||
Gross profit | 44,808 | 43,564 | 51,828 | 62,704 | |||||||||||
Operating expenses | 35,898 | 35,633 | 32,573 | 31,475 | |||||||||||
Other income (expense), net | 97 | 3,266 | 2,658 | 1,497 | |||||||||||
Income before income taxes | 9,007 | 11,197 | 21,913 | 32,726 | |||||||||||
Income tax provision | 2,587 | 390 | 3,176 | 6,237 | |||||||||||
Net income | $ | 6,420 | $ | 10,807 | $ | 18,737 | $ | 26,489 | |||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.04 | $ | 0.06 | $ | 0.11 | $ | 0.16 | |||||||
Diluted | $ | 0.04 | $ | 0.06 | $ | 0.11 | $ | 0.16 | |||||||
Shares used in computing net income per share: | |||||||||||||||
Basic | 170,325 | 169,602 | 168,990 | 168,137 | |||||||||||
Diluted | 172,316 | 171,261 | 170,692 | 170,849 | |||||||||||
Quarter Ended | |||||||||||||||
July 1, 2017 | April 1, 2017 | December 31, 2016 | October 1, 2016 | ||||||||||||
(Thousands) | |||||||||||||||
Revenues | $ | 149,380 | $ | 162,182 | $ | 153,914 | $ | 135,492 | |||||||
Cost of revenues | 88,049 | 95,394 | 93,150 | 89,136 | |||||||||||
Gross profit | 61,331 | 66,788 | 60,764 | 46,356 | |||||||||||
Operating expenses | 31,444 | 29,048 | 27,362 | 28,417 | |||||||||||
Other income (expense), net | 30 | 1,095 | (3,098 | ) | (14,182 | ) | |||||||||
Income before income taxes | 29,917 | 38,835 | 30,304 | 3,757 | |||||||||||
Income tax (benefit) provision | (26,110 | ) | 621 | 37 | 406 | ||||||||||
Net income | $ | 56,027 | $ | 38,214 | $ | 30,267 | $ | 3,351 | |||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.33 | $ | 0.23 | $ | 0.18 | $ | 0.03 | |||||||
Diluted | $ | 0.33 | $ | 0.22 | $ | 0.18 | $ | 0.02 | |||||||
Shares used in computing net income per share: | |||||||||||||||
Basic | 167,349 | 166,808 | 165,822 | 132,480 | |||||||||||
Diluted | 170,204 | 169,841 | 168,856 | 135,529 | |||||||||||
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Financial Statement Schedule II: Valuation and Qualifying Accounts
For the Years Ended June 30, 2018, July 1, 2017 and July 2, 2016
Allowance for Doubtful Accounts | |||
(Thousands) | |||
Balance at June 27, 2015 | $ | 2,815 | |
Additions charged to cost, expenses or revenues | — | ||
Deductions, write-offs and adjustments | (1,141 | ) | |
Balance at July 2, 2016 | 1,674 | ||
Additions charged to cost, expenses or revenues | — | ||
Deductions, write-offs and adjustments | (141 | ) | |
Balance at July 1, 2017 | 1,533 | ||
Additions charged to cost, expenses or revenues | — | ||
Deductions, write-offs and adjustments | (140 | ) | |
Balance at June 30, 2018 | $ | 1,393 | |
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EXHIBIT INDEX
Exhibit Number | Description of Exhibit | |
Agreement and Plan of Merger dated March 11, 2018, by and among Lumentum Holdings Inc., Prota Merger Sub, Inc., Prota Merger, LLC and Oclaro, Inc. (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K filed on March 12, 2018 and incorporated herein by reference.) | ||
Agreement and Plan of Merger dated March 26, 2012, among Oclaro, Inc., Tahoe Acquisition Sub, Inc. and Opnext, Inc. (previously filed as Exhibit 2.1 to Registrant's Current Report on Form 8-K filed on March 26, 2012 and incorporated herein by reference.) | ||
Master Separation Agreement, dated August 5, 2014, entered into by Oclaro Japan, Inc., Ushio Opto Semiconductors, Inc., and Ushio, Inc. (previously filed as Exhibit 2.4 to Registrant's Annual Report on Form 10-K on September 10, 2014 and incorporated herein by reference). | ||
Oclaro, Inc. Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on August 1, 2014 and incorporated herein by reference). | ||
Certificate of Amendment to Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to Registrant's Current Report on Form 8-K, filed on November 10, 2015 and incorporated herein by reference). | ||
Amended and Restated By-Laws of Oclaro, Inc. (previously filed as Exhibit 3.1 to Registrant's Current Report on Form 8-K filed on October 29, 2014 and incorporated herein by reference). | ||
Asset Purchase Agreement, dated October 10, 2013, entered into by Oclaro Technology Limited and II-VI Incorporated (previously filed as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q on November 7, 2013 and incorporated herein by reference.) | ||
Share and Asset Purchase Agreement, dated September 12, 2013, entered into by Oclaro Technology Limited and II-VI Holdings B.V. (previously filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on September 17, 2013 and incorporated herein by reference.) | ||
Option Agreement, dated September 12, 2013, entered into by Oclaro Technology Limited, Oclaro, Inc., Oclaro (North America), Inc., Avanex Communications Technologies Co, II-VI Holdings B.V., and II-VI Incorporated (previously filed as Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q filed on November 7, 2013 and incorporated herein by reference.) | ||
Asset Purchase Agreement between Oclaro, Inc. and II-VI Incorporated, Photop Technologies, Inc. (California) and Photop Koncent, Inc. (Fuzhou) (China) dated as of November 19, 2012 (previously filed as Exhibit 10.8 to Registrant’s Quarterly Report on Form 10-Q filed on February 7, 2013 and incorporated herein by reference.) | ||
Manufacturing and Purchase Agreement, dated March 19, 2012, between Oclaro Technology, Ltd and Venture Corporation Ltd. (previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2012 and incorporated herein by reference.) | ||
Equipment and Inventory Purchase Agreement, dated March 19, 2012, between Oclaro Technology Ltd, Oclaro Technology (Shenzhen) Co., Ltd, Venture Electronics (Shenzhen) Co., Ltd, and Venture Electronics Services (M) Sdn Bhd. (previously filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2012 and incorporated herein by reference.) | ||
Manufacturing and Purchase Agreement, dated November 8, 2011, between Oclaro, Inc. and Fabrinet. (previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed on February 8, 2012 and incorporated herein by reference.) | ||
Loan and Security Agreement, dated March 28, 2014, by and among Oclaro, Inc., Oclaro Technology Ltd. and Silicon Valley Bank (previously filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q filed on May 8, 2014 and incorporated herein by reference.) | ||
Unconditional Guaranty, dated March 28, 2014, by and among Oclaro, Inc., Oclaro Technology Ltd. and Silicon Valley Bank (previously filed as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q filed on May 8, 2014 and incorporated herein by reference.) | ||
Underwriting Agreement, dated September 21, 2016, by and between Oclaro, Inc. and Jefferies LLC, as representative of the Underwriters (previously filed as Exhibit 1.1 to Registrant's Current Report on Form 8-K filed on September 27, 2016 and incorporated herein by reference.) | ||
Offer Letter of Adam Carter, Chief Commercial Officer, dated June 12, 2014 (previously filed as Exhibit 10.27 to Registrant's Annual Report on Form 10-K filed on September 10, 2014 and incorporated herein by reference.) | ||
Offer Letter of Craig Cocchi, Executive Vice President, Global Operations, dated March 7, 2017 (previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q filed on May 8, 2017 and incorporated herein by reference.) | ||
Amendment to Offer Letter of Craig Cocchi, Chief Operating Officer, dated April 10, 2017 (previously filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q filed on May 8, 2017 and incorporated herein by reference.) | ||
Offer Letter of Walter Jankovic, President, Optical Connectivity, dated February 8, 2018 (previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q filed on May 8, 2018 and incorporated herein by reference.) | ||
Offer Letter of David L. Teichmann, Executive Vice President, General Counsel and Corporate Secretary, dated December 5, 2013 (previously filed as Exhibit 10.7 to Registrant's Quarterly Report on Form 10-Q filed on February 6, 2014 and incorporated herein by reference.) | ||
Employment Agreement, dated September 11, 2013, between Oclaro, Inc. and Greg Dougherty (previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on September 17, 2013 and incorporated herein by reference.) | ||
Form of Indemnification Agreement, between Oclaro, Inc. and directors and executive officers (previously filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed on February 6, 2008 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated 2001 Long-Term Stock Incentive Plan (previously filed as Annex A to Registrant's Proxy Statement on Schedule 14A, filed on November 26, 2013 and incorporated herein by reference.) | ||
Oclaro, Inc. (Opnext, Inc.) Third Amended and Restated 2001 Long-Term Stock Incentive Plan, dated as of July 23, 2013 (previously filed as Exhibit 10.45 to Registrant's Annual Report on Form 10-K filed on September 27, 2013.) | ||
U.K. Subplan to the 2004 Stock Incentive Plan (previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed on May 17, 2005, and incorporated herein by reference.) | ||
Form of Incentive Stock Option, Form of Non-Statutory Stock Option, Form of Restricted Stock Unit Agreement and Form of Restricted Stock Award Agreement (previously filed as Exhibit 10.25 to Registrant’s Annual Report on Form 10-K filed on September 9, 2011 and incorporated herein by reference.) | ||
Oclaro, Inc. Amended and Restated 2004 Stock Incentive Plan (previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K, filed with the SEC on October 28, 2010, and incorporated herein by reference.) | ||
Opnext, Inc. 2001 Long-Term Stock Incentive Plan (previously filed as Exhibit 10.3 to Opnext, Inc.’s Registration Statement 333-138262 on Form S-1 filed on October 27, 2006 and incorporated herein by reference.) | ||
Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement (previously filed as Exhibit 10.4 to Opnext, Inc.’s Registration Statement 333-138262 on Amendment Number 1 to Form S-1 filed on December 13, 2006 and incorporated herein by reference.) | ||
Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Nonqualified Stock Option Agreement for Senior Executives (previously filed as Exhibit 10.4A to Opnext, Inc.’s Registration Statement 333-138262 on Amendment Number 1 to Form S-1 filed on December 13, 2006 and incorporated herein by reference.) | ||
Opnext, Inc. 2001 Long-Term Stock Incentive Plan, Stock Appreciation Right Agreement (previously filed as Exhibit 10.4C to Opnext, Inc.’s Registration Statement 333-138262 on Amendment Number 1 to Form S-1 filed on December 13, 2006 and incorporated herein by reference.) | ||
Amended and Restated Variable Pay Program, as amended (previously filed as Annex B to Registrant's Proxy Statement on Schedule 14A, filed on September 21, 2015 and incorporated herein by reference). | ||
Registration Rights Agreement between Oclaro, Inc. and Hitachi, Ltd. (previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on August 24, 2012 and incorporated herein by reference.) | ||
Lease dated December 23, 1999 by and between Silicon Valley Properties, LLC and Oclaro Photonics, Inc., with respect to 2580 Junction Avenue, San Jose, California (previously filed as Exhibit 10.32 to Registrant’s Amendment No. 1 to Transition Report on Form 10-K/A for the for the transition period from January 1, 2004 to July 3, 2004, filed on October 5, 2004 and incorporated herein by reference.) | ||
Second Amendment to Lease dated November 30, 2010 by and between 702/703 Investors LLC and Oclaro, Inc., with respect to 2580 Junction Avenue, San Jose, California (previously filed as Exhibit 10.18 to Registrant’s Annual Report on Form 10-K filed on September 9, 2011 and incorporated herein by reference.) | ||
Pre-emption Agreement dated as of March 10, 2006, by and among Oclaro Technology Ltd, Coleridge (No. 45) Limited and Oclaro, Inc. (previously filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed on May 9, 2006 and incorporated herein by reference.) | ||
Lease dated as of March 10, 2006, by and among Oclaro Technology Ltd, Coleridge (No. 45) Limited and Oclaro, Inc. (previously filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed on May 9, 2006 and incorporated herein by reference.) | ||
Form of Amended and Restated Indemnification Agreement between Oclaro, Inc. and its directors and executive officers (previously filed as Exhibit 10.58 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated Long-Term Stock Incentive Plan, Form of Restricted Stock Agreement for Directors (previously filed as Exhibit 10.59 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated Long-Term Stock Incentive Plan, Form of Restricted Stock Agreement (previously filed as Exhibit 10.60 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated Long-Term Stock Incentive Plan, Form of Restricted Stock Unit Agreement (previously filed as Exhibit 10.61 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated Long-Term Stock Incentive Plan, Form of Stock Option Agreement (previously filed as Exhibit 10.62 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fourth Amended and Restated Long-Term Stock Incentive Plan, Form of Performance Stock Unit Agreement (previously filed as Exhibit 10.63 to Registrant's Quarterly Report on Form 10-Q filed on November 6, 2014 and incorporated herein by reference.) | ||
Settlement Agreement, dated December 30, 2014, entered into by Oclaro Technology Limited, II-VI Incorporated and II-VI Holdings B.V. (previously filed as Exhibit 10.64 to Registrant's Quarterly Report on Form 10-Q filed on February 5, 2015 and incorporated herein by reference.) | ||
Offer Letter of Lisa Paul, Executive Vice President, Human Resources, dated October 8, 2014 (previously filed as Exhibit 10.65 to Registrant's Quarterly Report on Form 10-Q filed on February 5, 2015 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (previously filed as Annex A to to Registrant's Proxy Statement on Schedule 14A, filed on September 22, 2014 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, as amended (previously filed as Annex A to Registrant's Proxy Statement on Schedule 14A, filed on September 21, 2015 and incorporated herein by reference). | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, Form of Restricted Stock Unit Agreement (previously filed as Exhibit 10.67 to Registrant's Quarterly Report on Form 10-Q filed on February 5, 2015 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, Form of Stock Option Agreement (previously filed as Exhibit 10.68 to Registrant's Quarterly Report on Form 10-Q filed on February 5, 2015 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, Form of Performance Stock Unit Agreement (previously filed as Exhibit 10.69 to Registrant's Quarterly Report on Form 10-Q filed on February 5, 2015 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan, Form of Performance Stock Unit Agreement (previously filed as Exhibit 10.46 to Registrant's Annual Report on Form 10-K filed on August 18, 2017 and incorporated herein by reference.) | ||
Form of Executive Severance and Retention Agreement, between Oclaro, Inc. and its executive officers (previously filed as Exhibit 10.1 to Registrant's Current Report on Form 8-K filed on August 1, 2014 and incorporated herein by reference.) | ||
Purchase Agreement, dated February 12, 2015, between Oclaro, Inc. and Jefferies LLC (previously filed as Exhibit 10.70 to Registrant's Quarterly Report on Form 10-Q filed on May 7, 2015 and incorporated herein by reference.) | ||
Registration Rights Agreement, dated February 19, 2015, between Oclaro, Inc. and Jefferies LLC (previously filed as Exhibit 10.72 to Registrant's Quarterly Report on Form 10-Q filed on May 7, 2015 and incorporated herein by reference.) | ||
Consent and First Loan Modification Agreement, dated February 19, 2015, between Oclaro, Inc., Oclaro Technology Limited and Silicon Valley Bank (previously filed as Exhibit 10.73 to Registrant's Quarterly Report on Form 10-Q filed on May 7, 2015 and incorporated herein by reference.) | ||
Second Loan Modification Agreement, dated September 17, 2015, between Oclaro, Inc., Oclaro Technology Limited and Silicon Valley Bank (previously filed as Exhibit 10.49 to Registrant's Quarterly Report on Form 10-Q filed on November 5, 2015 and incorporated herein by reference.) | ||
Lease dated April 21, 2015, by and among Oclaro Technology (Shenzhen) Co., Ltd. and Shenzhen Fangdao Technology Co., Ltd. for the premises at No. 2, Phoenix Road, Futian Free Trade Zone, Shenzhen, China (previously filed as Exhibit 10.47 to Registrant's Annual Report on Form 10-K filed on August 28, 2015 and incorporated herein by reference.) | ||
Supplemental Lease dated April 21, 2015, by and among Oclaro Technology (Shenzhen) Co., Ltd. and Shenzhen Fangdao Technology Co., Ltd. for the premises at No. 2, Phoenix Road, Futian Free Trade Zone, Shenzhen, China (previously filed as Exhibit 10.48 to Registrant's Annual Report on Form 10-K filed on August 28, 2015 and incorporated herein by reference.) | ||
Oclaro, Inc. Fifth Amended and Restated 2001 Long-Term Stock Incentive Plan (previously filed as Annex B to to Registrant's Proxy Statement on Schedule 14A, filed on September 27, 2017 and incorporated herein by reference.) | ||
Oclaro, Inc. Significant Subsidiaries | ||
Consent of Independent Registered Public Accounting Firm | ||
Power of Attorney (included on signature page to this Annual Report). | ||
Certification of Chief Executive Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Financial Officer Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | ||
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | ||
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | ||
Reconciliation of GAAP to Non-GAAP Financial Measures | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
(1) | Portions of this exhibit have been omitted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission. |
(2) | Management contract or compensatory plan or arrangement. |
(3) | Filed herewith. |