0000936395-18-000024.txt : 20180606 0000936395-18-000024.hdr.sgml : 20180606 20180606154000 ACCESSION NUMBER: 0000936395-18-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 86 CONFORMED PERIOD OF REPORT: 20180430 FILED AS OF DATE: 20180606 DATE AS OF CHANGE: 20180606 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CIENA CORP CENTRAL INDEX KEY: 0000936395 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 232725311 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36250 FILM NUMBER: 18883763 BUSINESS ADDRESS: STREET 1: 7035 RIDGE ROAD CITY: HANOVER STATE: MD ZIP: 21076 BUSINESS PHONE: 4108658500 MAIL ADDRESS: STREET 1: 7035 RIDGE ROAD CITY: HANOVER STATE: MD ZIP: 21076 10-Q 1 a20180430-10q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    
Commission file number: 001-36250
Ciena Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
23-2725311
(I.R.S. Employer Identification No.)
7035 Ridge Road, Hanover, MD
(Address of Principal Executive Offices)
21076
(Zip Code)

(410) 694-5700
(Registrant’s telephone number, including area code)
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 þ NO o
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 þ NO o
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
Emerging growth company o
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act o

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
 
Outstanding at June 4, 2018
common stock, $0.01 par value
 
142,827,652




CIENA CORPORATION
INDEX
FORM 10-Q
 
PAGE
NUMBER
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Products
$
604,226

 
$
584,630

 
$
1,129,835

 
$
1,091,623

Services
125,752

 
122,392

 
246,278

 
236,896

Total revenue
729,978

 
707,022

 
1,376,113

 
1,328,519

Cost of goods sold:
 
 
 
 
 
 
 
Products
372,568

 
327,295

 
685,688

 
614,106

Services
64,103

 
61,487

 
125,353

 
122,388

Total cost of goods sold
436,671

 
388,782

 
811,041

 
736,494

Gross profit
293,307

 
318,240

 
565,072

 
592,025

Operating expenses:
 
 
 
 
 
 
 
Research and development
116,924

 
121,623

 
235,448

 
238,492

Selling and marketing
97,359

 
88,551

 
185,874

 
173,553

General and administrative
38,976

 
34,990

 
77,382

 
70,854

Amortization of intangible assets
3,623

 
10,980

 
7,246

 
25,531

Significant asset impairments and restructuring costs
4,359

 
4,276

 
10,320

 
6,671

Total operating expenses
261,241

 
260,420

 
516,270

 
515,101

Income from operations
32,066

 
57,820

 
48,802

 
76,924

Interest and other income (loss), net
1,296

 
(2,918
)
 
2,871

 
(2,548
)
Interest expense
(13,031
)
 
(13,308
)
 
(26,765
)
 
(28,511
)
Income before income taxes
20,331

 
41,594

 
24,908

 
45,865

Provision for income taxes
6,475

 
3,568

 
484,415

 
3,978

Net income (loss)
$
13,856

 
$
38,026

 
$
(459,507
)
 
$
41,887

Basic net income (loss) per common share
$
0.10

 
$
0.27

 
$
(3.19
)
 
$
0.30

Diluted net income (loss) per potential common share
$
0.09

 
$
0.25

 
$
(3.19
)
 
$
0.29

Weighted average basic common shares outstanding
143,975

 
141,743

 
143,948

 
141,223

Weighted average dilutive potential common shares outstanding
147,973

 
165,273

 
143,948

 
147,842


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



3



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
13,856

 
$
38,026

 
$
(459,507
)
 
$
41,887

Change in unrealized loss on available-for-sale securities, net of tax
(76
)
 
(278
)
 
(337
)
 
(527
)
Change in unrealized gain on foreign currency forward contracts, net of tax
(2,537
)
 
(899
)
 
(35
)
 
526

Change in unrealized gain on forward starting interest rate swap, net of tax
2,299

 
405

 
5,248

 
4,897

Change in cumulative translation adjustments
(7,133
)
 
(2,243
)
 
1,069

 
(1,753
)
Other comprehensive income
(7,447
)
 
(3,015
)
 
5,945

 
3,143

Total comprehensive income (loss)
$
6,409

 
$
35,011

 
$
(453,562
)
 
$
45,030


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.



4



CIENA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

 
April 30,
2018
 
October 31,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
652,096

 
$
640,513

Short-term investments
268,584

 
279,133

Accounts receivable, net of allowance for doubtful accounts of $17.7 million and $17.6 million as of April 30, 2018 and October 31, 2017, respectively.
647,380

 
622,183

Inventories
231,338

 
267,143

Prepaid expenses and other
186,024

 
197,339

Total current assets
1,985,422

 
2,006,311

Long-term investments
58,895

 
49,783

Equipment, building, furniture and fixtures, net
298,631

 
308,465

Goodwill
267,442

 
267,458

Other intangible assets, net
90,573

 
100,997

Deferred tax asset, net
734,824

 
1,155,104

Other long-term assets
70,767

 
63,593

      Total assets
$
3,506,554

 
$
3,951,711

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
264,398

 
$
260,098

Accrued liabilities and other short-term obligations
270,231

 
322,934

Deferred revenue
101,918

 
102,418

Current portion of long-term debt
353,208

 
352,293

Total current liabilities
989,755

 
1,037,743

Long-term deferred revenue
76,725

 
82,589

Other long-term obligations
110,417

 
111,349

Long-term debt, net
585,538

 
583,688

Total liabilities
$
1,762,435

 
$
1,815,369

Commitments and contingencies (Note 17)

 

Stockholders’ equity:
 
 
 
Preferred stock – par value $0.01; 20,000,000 shares authorized; zero shares issued and outstanding

 

Common stock – par value $0.01; 290,000,000 shares authorized; 143,427,976
and 143,043,227 shares issued and outstanding
1,434

 
1,430

Additional paid-in capital
6,810,226

 
6,810,182

Accumulated other comprehensive income (loss)
(5,072
)
 
(11,017
)
Accumulated deficit
(5,062,469
)
 
(4,664,253
)
Total stockholders’ equity
1,744,119

 
2,136,342

Total liabilities and stockholders’ equity
$
3,506,554

 
$
3,951,711



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


5



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended April 30,
 
2018
 
2017
Cash flows provided by operating activities:
 
 
 
Net income (loss)
$
(459,507
)
 
$
41,887

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation of equipment, building, furniture and fixtures, and amortization of leasehold improvements
41,400

 
35,548

Share-based compensation costs
26,559

 
24,830

Amortization of intangible assets
11,824

 
33,466

Deferred tax provision
481,401

 

Provision for inventory excess and obsolescence
14,977

 
19,623

Provision for warranty
10,565

 
2,347

Other
12,645

 
10,416

Changes in assets and liabilities:
 
 
 
Accounts receivable
(28,055
)
 
9,381

Inventories
20,420

 
(95,554
)
Prepaid expenses and other
2,623

 
(15,054
)
Accounts payable, accruals and other obligations
(55,986
)
 
(24,974
)
Deferred revenue
(5,736
)
 
3,832

Net cash provided by operating activities
73,130

 
45,748

Cash flows used in investing activities:
 
 
 
Payments for equipment, furniture, fixtures and intellectual property
(31,946
)
 
(60,328
)
Restricted cash
54

 

Purchase of available for sale securities
(198,026
)
 
(179,833
)
Proceeds from maturities of available for sale securities
200,000

 
180,000

Settlement of foreign currency forward contracts, net
132

 
(2,965
)
Purchase of cost method investment
(767
)
 

Net cash used in investing activities
(30,553
)
 
(63,126
)
Cash flows used in financing activities:
 
 
 
Payment of long-term debt
(2,000
)
 
(47,296
)
Payment for modification of term loans


(93,625
)
Payment of capital lease obligations
(1,868
)
 
(1,528
)
Repurchases of common stock-repurchase program
(38,036
)
 

Proceeds from issuance of common stock
11,804

 
10,345

Net cash used in financing activities
(30,100
)
 
(132,104
)
Effect of exchange rate changes on cash and cash equivalents
(894
)
 
490

Net increase (decrease) in cash and cash equivalents
11,583

 
(148,992
)
Cash and cash equivalents at beginning of period
640,513

 
777,615

Cash and cash equivalents at end of period
$
652,096

 
$
628,623

Supplemental disclosure of cash flow information
 
 
 
Cash paid during the period for interest
$
21,843

 
$
23,439

Cash paid during the period for income taxes, net
$
15,136

 
$
11,379

Non-cash investing activities
 
 
 
Purchase of equipment in accounts payable
$
3,226

 
$
3,818

Building subject to capital lease
$

 
$
20,695

Non-cash financing activities
 
 
 
 Repurchase of common stock in accrued liabilities from repurchase program
$
1,111

 
$


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6



CIENA CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
         
 
Common Stock
Shares
 
Par Value
 
Additional
Paid-in-Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at October 31, 2017
143,043,227

 
$
1,430

 
$
6,810,182

 
$
(11,017
)
 
$
(4,664,253
)
 
$
2,136,342

Net loss

 

 

 

 
(459,507
)
 
(459,507
)
Other comprehensive income

 

 

 
5,945

 

 
5,945

Repurchase of common stock
(1,627,233
)
 
(16
)
 
(39,131
)
 

 

 
(39,147
)
Issuance of shares from employee equity plans
2,011,982

 
20

 
11,784

 

 

 
11,804

Share-based compensation expense

 

 
26,559

 

 

 
26,559

Effect of adoption of new accounting standard

 

 
832

 

 
61,291

 
62,123

Balance at April 30, 2018
143,427,976

 
$
1,434

 
$
6,810,226

 
$
(5,072
)
 
$
(5,062,469
)
 
$
1,744,119


 
Common Stock
Shares
 
Par Value
 
Additional
Paid-in-Capital
 
Accumulated Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at October 31, 2016
139,767,627

 
$
1,398

 
$
6,715,478

 
$
(24,329
)
 
$
(5,926,206
)
 
$
766,341

Net income

 

 

 

 
41,887

 
41,887

Other comprehensive income

 

 

 
3,143

 

 
3,143

Issuance of shares from employee equity plans
2,000,821

 
20

 
10,325

 

 

 
10,345

Share-based compensation expense

 

 
24,830

 

 

 
24,830

Balance at April 30, 2017
141,768,448

 
$
1,418

 
$
6,750,633

 
$
(21,186
)
 
$
(5,884,319
)
 
$
846,546









The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


7



CIENA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(1)
 INTERIM FINANCIAL STATEMENTS
The interim financial statements included herein for Ciena Corporation and its wholly owned subsidiaries (“Ciena”) have been prepared by Ciena, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). In the opinion of management, the financial statements included in this report reflect all normal recurring adjustments that Ciena considers necessary for the fair statement of the results of operations for the interim periods covered and of the financial position of Ciena at the date of the interim balance sheets. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to such rules and regulations. The Condensed Consolidated Balance Sheet as of October 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP. However, Ciena believes that the disclosures are adequate to understand the information presented herein. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. These financial statements should be read in conjunction with Ciena’s audited consolidated financial statements and the notes thereto included in Ciena’s annual report on Form 10-K for the fiscal year ended October 31, 2017.
Ciena has a 52 or 53-week fiscal year, with quarters ending on the Saturday nearest to the last day of January, April, July and October, respectively, of each year. Fiscal 2018 is a 53-week fiscal year with the additional week occurring in the fourth quarter. Fiscal 2017 was a 52-week fiscal year. For purposes of financial statement presentation, each fiscal year is described as having ended on October 31, and the fiscal quarters are described as having ended on January 31, April 30 and July 31 of each fiscal year.

(2)
 SIGNIFICANT ACCOUNTING POLICIES

Except for the changes in certain policies described below, there have been no material changes to Ciena's significant accounting policies, compared to the accounting policies described in Note 1, Ciena Corporation and Significant Accounting Policies and Estimates, in Notes to Consolidated Financial Statements in Item 8 of Part II of Ciena's annual report on Form 10-K for the fiscal year ended October 31, 2017.

Government Grants
Ciena accounts for proceeds from government grants as a reduction of expense when there is reasonable assurance that Ciena has complied with the conditions attached to the grant and that grant proceeds will be received. Grant benefits are recorded to the line item in the Condensed Consolidated Statement of Operations to which the grant activity relates. See Note 17 below.

Newly Issued Accounting Standards - Effective

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01 ("ASU 2017-01"), Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition or disposal of assets or businesses. The amendments in this update provide a screen to determine when a set of assets is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. Ciena will evaluate the effect of the update at the time of any future acquisition or disposal. Ciena adopted ASU 2017-01 during the first quarter of fiscal 2018.

In August 2017, the FASB issued ASU No. 2017-12 ("ASU 2017-12"), Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements and make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. The amendments in this update better align an entity's risk management activities and financial reporting for hedging relationships, through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. Ciena adopted ASU 2017-12 during the first quarter of fiscal 2018. For hedges for which Ciena has elected to exclude the spot-forward difference from assessment of effectiveness, Ciena has elected to amortize the difference on a straight-line basis. Ciena will record amortization in earnings each period with an offsetting entry to other comprehensive income, and all changes in fair value over the term of

8



the derivative in other comprehensive income. The application of this accounting standard did not have a material impact on Ciena's Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09 ("ASU 2016-09")Improvements to Employee Share-Based Payment Accounting, which provides guidance on several aspects of accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows. Ciena adopted ASU 2016-09 during the first quarter of fiscal 2018. In connection with the adoption of this guidance, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. Additionally, the consolidated statements of cash flows will include excess tax benefits as an operating activity, on a prospective basis as a result of the adoption. Finally, Ciena has elected to recognize forfeitures when they occur, rather than to estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the first quarter of fiscal 2018.

Newly Issued Accounting Standards - Not Yet Effective

In May 2014, the FASB issued ASU No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. ASU 2014-09 will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts

For multiple element software arrangements where vendor-specific objective evidence ("VSOE") of undelivered maintenance does not exist, Ciena currently recognizes revenue for the entire arrangement over the maintenance term. Ciena expects that the adoption of ASU 2014-09 will require that it determine the stand alone selling price for each of the software and software-related deliverables at contract inception, and Ciena consequently expects certain software deliverables will be recognized at a point in time rather than over a period of time.

Ciena also expects certain installation and deployment, and consulting and network design services, will be recognized over a period of time rather than at a point in time.

Ciena has considered the impact of the guidance in Accounting Standards Codification ("ASC") 340-40, Other Assets and Deferred Costs; Contracts with Customers, and the interpretations of the FASB Transition Resource Group for Revenue Recognition (TRG) with respect to capitalization and amortization of incremental costs of obtaining a contract. In conjunction with this interpretation, Ciena has elected to implement the practical expedient clause allowing for incremental costs to be recognized as an expense when incurred if the period of the asset recognition is one year or less, and amortized over the period of performance, if the period of the asset recognition is greater than one year.   

Ciena expects to implement ASU 2014-09 using the modified retrospective approach whereby the cumulative effect at adoption will be presented as an adjustment to the opening balance of retained earnings. The comparative information will not be restated and will continue to be reported under the accounting standards in effect for those periods. ASU 2014-09 will be effective for Ciena beginning in the first quarter of fiscal 2019. Ciena is continuing to evaluate other possible impacts of the adoption of this ASU on its Consolidated Financial Statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"), Leases, which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and to provide additional disclosures. ASU 2016-02 is effective for Ciena beginning in the first quarter of fiscal 2020. Under current GAAP, the majority of Ciena’s leases for its properties are considered operating leases, and Ciena expects that the adoption of this ASU will require these leases to be classified as financing leases and to be recognized as assets and liabilities on Ciena’s balance sheet. Ciena is continuing to evaluate other possible impacts of the adoption of ASU 2016-02 on its Consolidated Financial Statements and disclosures.

(3)
RESTRUCTURING COSTS
Ciena has undertaken a number of restructuring activities intended to reduce expense and to better align its workforce and costs with market opportunities, product development and business strategies. The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2018 (in thousands):


9



 
Workforce
reduction
 
Consolidation
of excess
facilities
 
Total
Balance at October 31, 2017
$
1,291

 
$
1,648

 
$
2,939

Additional liability recorded
8,232

(1) 
2,088

(2) 
10,320

Cash payments
(8,211
)
 
(1,896
)
 
(10,107
)
Balance at April 30, 2018
$
1,312

 
$
1,840

 
$
3,152

Current restructuring liabilities
$
1,312

 
$
865

 
$
2,177

Non-current restructuring liabilities
$

 
$
975

 
$
975


(1)
Reflects a global workforce reduction of approximately 150 employees during fiscal 2018 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes.
(2)
Reflects unfavorable lease commitments in connection with a portion of facilities located in Petaluma, California.

The following table sets forth the restructuring activity and balance of the restructuring liability accounts for the six months ended April 30, 2017 (in thousands):

 
Workforce
reduction
 
Consolidation
of excess
facilities
 
Total
Balance at October 31, 2016
$
868

 
$
1,970

 
$
2,838

Additional liability recorded
2,369

(1) 
4,302

(2) 
6,671

Cash payments
(3,084
)
 
(1,133
)
 
(4,217
)
Balance at April 30, 2017
$
153

 
$
5,139

 
$
5,292

Current restructuring liabilities
$
153

 
$
4,928

 
$
5,081

Non-current restructuring liabilities
$

 
$
211

 
$
211

 
(1)
Reflects a global workforce reduction of approximately 50 employees during the first quarter of fiscal 2017 as part of a business optimization strategy to improve gross margin, constrain operating expense and redesign certain business processes and systems.
(2)
Reflects unfavorable lease commitments and relocation costs incurred during the second quarter of fiscal 2017 in connection with the facility transition from Ciena's existing research and development center located at Lab 10 on the former Nortel Carling Campus to a new campus facility in Ottawa, Canada.

(4) INTEREST AND OTHER INCOME (LOSS), NET
The components of interest and other income (loss), net, are as follows (in thousands):
 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Interest income
$
3,212

 
$
1,507

 
$
5,656

 
$
2,789

Gains (losses) on non-hedge designated foreign currency forward contracts
2,868

 
(2,749
)
 
2,169

 
(1,725
)
Foreign currency exchange gain (loss)
(4,804
)
 
1,292

 
(4,791
)
 
(1,125
)
Modification of term loan

 
(2,924
)
 

 
(2,924
)
Other
20

 
(44
)
 
(163
)
 
437

Interest and other income (loss), net
$
1,296

 
$
(2,918
)
 
$
2,871

 
$
(2,548
)
Ciena Corporation, as the U.S. parent entity, uses the U.S. Dollar as its functional currency; however, some of its foreign branch offices and subsidiaries use local currencies as their functional currencies. Ciena recorded $4.8 million and $1.1 million in foreign currency exchange rate losses during the first six months of fiscal 2018 and fiscal 2017, respectively, as a result of monetary assets and liabilities that were transacted in a currency other than the entity's functional currency, and the remeasurement adjustments were recorded in interest and other income (loss), net on the Condensed Consolidated Statements

10



of Operations. From time to time, Ciena uses foreign currency forwards to hedge these balance sheet exposures. These forwards are not designated as hedges for accounting purposes, and any net gain or loss associated with these derivatives is reported in interest and other income (loss), net on the Condensed Consolidated Statements of Operations. During the first six months of fiscal 2018, Ciena recorded gains of $2.2 million from non-hedge designated foreign currency forward contracts. During the first six months of fiscal 2017, Ciena recorded losses of $1.7 million from non-hedge designated foreign currency forward contracts.

(5)
 INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the statutory corporate income tax rate (“federal tax rate”) from 35% to 21% effective January 1, 2018, implementing a modified territorial tax system, and imposing a mandatory one-time transition tax on accumulated earnings of foreign subsidiaries that were previously tax deferred. As a fiscal-year taxpayer, certain provisions of the Tax Act impact Ciena in fiscal 2018, including the change in the federal tax rate and the one-time transition tax, while other provisions will be effective at the beginning of fiscal 2019, including the implementation of a modified territorial tax system, other changes to how foreign earnings are subject to U.S. tax, and adoption of an alternative tax system.
As a result of the decrease in the federal tax rate from 35% to 21% effective January 1, 2018, Ciena has computed its income tax expense for the October 31, 2018 fiscal year using a blended federal tax rate of 23.4%. The 21% federal tax rate is expected to apply to Ciena’s fiscal year ending October 31, 2019 and each year thereafter. Ciena remeasured its deferred tax assets and liabilities ("DTA") using the federal tax rate that will apply when the related temporary differences are expected to reverse.
During the six months ended April 30, 2018, Ciena recorded a provisional tax expense of $484.4 million, primarily related to the Tax Act and consisted of the following: a $431.3 million charge related to the remeasurement of U.S. net deferred tax assets at the lower statutory rate under the Tax Act and a $45.6 million charge related to a transition tax on accumulated historical foreign earnings and its deemed repatriation to the U.S.
In December 2017, the SEC issued Staff Accounting Bulletin No. 118, which addresses how a company recognizes provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes due to the Tax Act. The measurement period ends when a company has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year. The final impact of the Tax Act may differ from the above provisional amounts due to changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes and related interpretations in response to the Tax Act, and any updates or changes to estimates used in the provisional amounts. Ciena has determined that the $45.6 million of tax expense for the U.S. transition tax on accumulated earnings of foreign subsidiaries and the $431.3 million of tax expense for DTA remeasurement were each provisional amounts and reasonable estimates as of April 30, 2018. Estimates used in the provisional amounts include the anticipated reversal pattern of the gross DTA plus the earnings and profits, cash position at the end of fiscal year 2018, foreign taxes and withholding taxes attributable to foreign subsidiaries.
Ciena currently intends to reinvest indefinitely its foreign earnings outside the U.S. However, Ciena intends to further study changes enacted by the Tax Act, costs of repatriation and the current and future cash needs of foreign operations to determine whether there is an opportunity to repatriate these earnings in the future on a tax-efficient basis. If Ciena determines to repatriate these earnings, the provisional amount of unrecognized deferred income tax liability related to these foreign withholding taxes would be approximately $24.0 million. There are no other significant temporary differences for which a deferred tax liability has not been recognized.
The significant components of DTA are as follows (in thousands):

11



 
April 30,
 
October 31,
 
2018
 
2017
Deferred tax assets:
 
 
 
Reserves and accrued liabilities
$
36,115

 
$
56,597

Depreciation and amortization
288,145

 
451,385

NOL and credit carry forward
538,869

 
803,622

Other
18,706

 
29,398

Gross deferred tax assets
881,835

 
1,341,002

Valuation allowance
(147,011
)
 
(185,898
)
Deferred tax asset, net of valuation allowance
$
734,824

 
$
1,155,104

In connection with the adoption of ASU 2016-09, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. See Note 2 above and Note 14 below. As of April 30, 2018, Ciena continues to maintain a valuation allowance of $147.0 million. This valuation allowance is primarily related to state and foreign net operating losses and credits that Ciena estimates it will not be able to use.
 
(6)
SHORT-TERM AND LONG-TERM INVESTMENTS

As of the dates indicated, investments are comprised of the following (in thousands):

 
April 30, 2018
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair
Value
U.S. government obligations:
 
 
 
 
 
 
 
Included in short-term investments
$
239,291

 
$

 
(601
)
 
$
238,690

Included in long-term investments
59,066

 

 
(171
)
 
58,895

 
$
298,357

 
$

 
$
(772
)
 
$
297,585

 
 
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
 
Included in short-term investments
$
29,892

 
2

 

 
$
29,894

 
$
29,892

 
$
2

 
$

 
$
29,894


 
October 31, 2017
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated Fair
Value
U.S. government obligations:
 
 
 
 
 
 
 
Included in short-term investments
$
249,498

 
$

 
$
(305
)
 
$
249,193

Included in long-term investments
49,910

 

 
(127
)
 
49,783

 
$
299,408

 
$

 
$
(432
)
 
$
298,976

 
 
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
 
Included in short-term investments
$
29,939

 
1

 

 
$
29,940

 
$
29,939

 
$
1

 
$

 
$
29,940



The following table summarizes the final legal maturities of debt investments at April 30, 2018 (in thousands):


12



 
Amortized
Cost
 
Estimated
Fair Value
Less than one year
$
269,183

 
$
268,584

Due in 1-2 years
59,066

 
58,895

 
$
328,249

 
$
327,479


(7)
FAIR VALUE MEASUREMENTS

As of the date indicated, the following table summarizes the assets and liabilities that are recorded at fair value on a recurring basis (in thousands):
 
April 30, 2018
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
476,187

 
$

 
$
476,187

U.S. government obligations

 
297,585

 
297,585

Commercial paper

 
99,745

 
99,745

Foreign currency forward contracts

 
97

 
97

Forward starting interest rate swaps

 
6,333

 
6,333

Total assets measured at fair value
$
476,187

 
$
403,760

 
$
879,947

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Foreign currency forward contracts
$

 
$
1,317

 
$
1,317

Total liabilities measured at fair value
$


$
1,317

 
$
1,317


 
October 31, 2017
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
511,355

 
$

 
$
511,355

U.S. government obligations

 
298,976

 
298,976

Commercial paper

 
89,865

 
89,865

Foreign currency forward contracts

 
227

 
227

Forward starting interest rate swaps

 
218

 
218

Total assets measured at fair value
$
511,355

 
$
389,286

 
$
900,641

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Foreign currency forward contracts
$

 
$
2,129

 
$
2,129

Total liabilities measured at fair value
$

 
$
2,129

 
$
2,129


As of the date indicated, the assets and liabilities above are presented on Ciena’s Condensed Consolidated Balance Sheet as follows (in thousands):

13



 
April 30, 2018
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
$
476,187

 
$
69,851

 
$
546,038

Short-term investments

 
268,584

 
268,584

Prepaid expenses and other

 
97

 
97

Long-term investments

 
58,895

 
58,895

Other long-term assets

 
6,333

 
6,333

Total assets measured at fair value
$
476,187

 
$
403,760

 
$
879,947

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accrued liabilities
$

 
$
1,317

 
$
1,317

Total liabilities measured at fair value
$


$
1,317

 
$
1,317


 
October 31, 2017
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Cash equivalents
$
511,355

 
$
59,925

 
$
571,280

Short-term investments

 
279,133

 
279,133

Prepaid expenses and other

 
227

 
227

Long-term investments

 
49,783

 
49,783

Other long-term assets

 
218

 
218

Total assets measured at fair value
$
511,355

 
$
389,286

 
$
900,641

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Accrued liabilities
$

 
$
2,129

 
$
2,129

Total liabilities measured at fair value
$

 
$
2,129

 
$
2,129


Ciena did not have any transfers between Level 1 and Level 2 fair value measurements during the periods presented.


(8)
INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
 
April 30,
2018
 
October 31,
2017
Raw materials
$
48,356

 
$
52,898

Work-in-process
13,253

 
18,623

Finished goods
165,733

 
185,488

Deferred cost of goods sold
55,161

 
61,340

 
282,503

 
318,349

Provision for excess and obsolescence
(51,165
)
 
(51,206
)
 
$
231,338

 
$
267,143


Ciena writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand and market conditions. During the first six months of fiscal 2018, Ciena recorded a provision for excess and obsolescence of $15.0 million, primarily related to a decrease in the forecasted demand for certain Networking Platforms products. Deductions from the provision for excess and obsolete inventory relate primarily to disposal activities.

14




(9)
ACCRUED LIABILITIES AND OTHER SHORT-TERM OBLIGATIONS

As of the dates indicated, accrued liabilities and other short-term obligations are comprised of the following (in thousands):
 
April 30,
2018
 
October 31,
2017
Compensation, payroll related tax and benefits(1)
$
78,744

 
$
113,272

Warranty
43,392

 
42,456

Vacation
42,744

 
39,778

Capital lease obligations
3,828

 
3,772

Interest payable
3,602

 
3,612

Other
97,921

 
120,044

 
$
270,231

 
$
322,934

(1) Reduction is primarily due to the timing of bonus payments to employees under Ciena's annual cash incentive compensation plan.

The following table summarizes the activity in Ciena’s accrued warranty for the fiscal periods indicated (in thousands):

Six Months Ended April 30,
 
Beginning Balance
 
Current Period Provisions (1)
 
Settlements
 
Ending Balance
2017
 
$
52,324

 
2,347

 
(8,646
)
 
$
46,025

2018
 
$
42,456

 
10,565

 
(9,629
)
 
$
43,392

(1) As a result of lower than expected actual failure rates, Ciena adjusted its fiscal 2017 provision for warranty. This adjustment had the effect of reducing warranty provision by $6.3 million for the six months ended April 30, 2017.

(10)
DERIVATIVE INSTRUMENTS

Foreign Currency Derivatives       

As of April 30, 2018 and October 31, 2017, Ciena had forward contracts to hedge its foreign exchange exposure in order to reduce the variability in its Canadian Dollar and Indian Rupee denominated expense, which principally relates to research and development activities, and its Euro denominated revenue. The notional amount of these contracts was approximately $114.2 million and $86.1 million as of April 30, 2018 and October 31, 2017, respectively. These foreign exchange contracts have maturities of 12 months or less and have been designated as cash flow hedges.

During the first six months of fiscal 2018 and fiscal 2017, in order to hedge certain balance sheet exposures, Ciena entered into forward contracts to mitigate risk due to volatility in the Brazilian Real, Canadian Dollar and Mexican Peso. The notional amount of these contracts was approximately $92.5 million and $83.4 million as of April 30, 2018 and October 31, 2017, respectively. These foreign exchange contracts have maturities of 12 months or less and have not been designated as hedges for accounting purposes.

Interest Rate Derivatives

Ciena is exposed to floating rates of LIBOR interest on its term loan borrowings (see Note 12 below) and has hedged such risk by entering into floating to fixed interest rate swap arrangements ("interest rate swaps"). The interest rate swaps fix 98%, 82%, and 77% of the principal value of the 2022 Term Loan from February 2017 through July 2018, July 2018 through June 2020, and June 2020 through January 2021, respectively. The fixed rate on the amounts hedged during these periods will be 4.25%, 4.25% and 4.75%, respectively. The total notional amount of these interest rate swaps in effect as of April 30, 2018 was $387.6 million. The total notional amount of these interest rate swaps in effect as of October 31, 2017 was $389.6 million.

Ciena expects the variable rate payments to be received under the terms of the interest rate swaps to offset exactly the forecasted variable rate payments on the equivalent notional amounts of the term loans. These derivative contracts have been designated as cash flow hedges.

15




Other information regarding Ciena's derivatives is immaterial for separate financial statement presentation. See Note 4 and Note 7 above.

(11) ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated balances of other comprehensive income ("AOCI") for the six months ended April 30, 2018:
 
Unrealized Loss on
 
Unrealized Gain (Loss)
on
 
Unrealized Gain on Forward
 
Cumulative Foreign Currency
 
 
 
Marketable Securities
 
Foreign Currency Contracts
 
Starting Interest Rate Swap
 
Translation Adjustment
 
Total
Balance at October 31, 2017
$
(451
)
 
$
(1,386
)
 
$
218

 
$
(9,398
)
 
$
(11,017
)
Other comprehensive income (loss) before reclassifications
(337
)
 
(440
)
 
4,725

 
1,069

 
5,017

Amounts reclassified from AOCI

 
405

 
523

 

 
928

Balance at April 30, 2018
$
(788
)
 
$
(1,421
)
 
$
5,466

 
$
(8,329
)
 
$
(5,072
)

The following table summarizes the changes in AOCI for the six months ended April 30, 2017:

 
Unrealized Gain/(Loss)
on
 
Unrealized Gain (Loss)
on
 
Unrealized Gain (Loss) on Forward
 
Cumulative Foreign Currency
 
 
 
Marketable Securities
 
Foreign Currency Contracts
 
Starting Interest Rate Swap
 
Translation Adjustment
 
Total
Balance at October 31, 2016
$
139

 
$
(1,091
)
 
$
(5,967
)
 
$
(17,410
)
 
$
(24,329
)
Other comprehensive income (loss) before reclassifications
(527
)
 
52

 
3,556

 
(1,753
)
 
1,328

Amounts reclassified from AOCI

 
474

 
1,341

 

 
1,815

Balance at April 30, 2017
$
(388
)
 
$
(565
)
 
$
(1,070
)
 
$
(19,163
)
 
$
(21,186
)

All amounts reclassified from AOCI related to settlement (gains) losses on foreign currency forward contracts designated as cash flow hedges impacted revenue or research and development expense on the Condensed Consolidated Statements of Operations. All amounts reclassified from AOCI related to settlement (gains) losses on forward starting interest rate swaps designated as cash flow hedges impacted interest and other income (loss), net on the Condensed Consolidated Statements of Operations.


(12)
 SHORT-TERM AND LONG-TERM DEBT

Outstanding Term Loan Payable

2022 Term Loan

The net carrying value of Ciena's Term Loan due January 30, 2022 (the "2022 Term Loan") was comprised of the following for the fiscal periods indicated (in thousands):
 
 
April 30, 2018
 
October 31, 2017
Term Loan Payable due January 30, 2022
 
$
391,566

 
$
392,972



16



Deferred debt issuance costs that were deducted from the carrying amounts of the 2022 Term Loan totaled $2.7 million at April 30, 2018 and $3.1 million at October 31, 2017. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the 2022 Term Loan. The amortization of deferred debt issuance costs for the 2022 Term Loan is included in interest expense, and was $0.4 million and$0.2 million during the first six months of fiscal 2018 and 2017, respectively. The carrying values of the 2022 Term Loan listed above are also net of any unamortized debt discounts.    
The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability components of Ciena's 2022 Term Loan were as follows as of April 30, 2018 (in thousands):
 
 
 
 
 
 
 
 
 
Principal Balance
 
Unamortized Debt Discount
 
Deferred Debt Issuance Costs
 
Net Carrying Value
Term Loan Payable due January 30, 2022
$
396,000

 
$
(1,694
)
 
$
(2,740
)
 
$391,566

The following table sets forth the carrying value and the estimated fair value of Ciena's 2022 Term Loan (in thousands):
 
 
April 30, 2018
 
 
Carrying Value
 
Fair Value(1)
Term Loan Payable due January 30, 2022
 
$
391,566

 
$
397,980


(1)
Ciena's term loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2022 Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

Outstanding Convertible Notes Payable

The net carrying values of Ciena's outstanding convertible notes payable was comprised of the following for the fiscal periods indicated (in thousands):

 
April 30, 2018
 
October 31, 2017
3.75% Convertible Senior Notes due October 15, 2018 (Original)
 
$
61,180

 
$
61,071

3.75% Convertible Senior Notes due October 15, 2018 (New)
 
288,028

 
287,221

4.0% Convertible Senior Notes due December 15, 2020
 
197,972

 
194,717

 
 
$
547,180

 
$
543,009


Deferred debt issuance costs that were deducted from the carrying amounts of the convertible notes payable totaled $1.3 million at April 30, 2018 and $2.1 million at October 31, 2017. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the convertible notes payable. The amortization of deferred debt issuance costs is included in interest expense, and was $0.8 million and $1.0 million during the first six months of fiscal 2018 and 2017, respectively. The carrying values of the convertible notes payable listed above also include accretion of principal and are net of any unamortized debt discounts.

17



The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability and equity components of Ciena's outstanding issues of convertible notes were as follows as of April 30, 2018 (in thousands):
 
Liability Component
 
Equity Component
 
Principal Balance
 
Unamortized Debt Discount
 
Deferred Debt Issuance Costs
 
Net Carrying Value
 
Net Carrying Value
 3.75% Convertible Senior Notes, due October 15, 2018 (Original)
$
61,270

 
$

 
$
(90
)
 
$
61,180

 
$

3.75% Convertible Senior Notes, due October 15, 2018 (New)
$
288,730

 
$
(277
)
 
$
(425
)
 
$
288,028

 
$

4.0% Convertible Senior Notes due December 15, 2020 (1)
$
206,857

 
$
(8,079
)
 
$
(806
)
 
$
197,972

 
$
43,131


(1)
Includes accretion of principal at a rate of 1.85% per year
The following table sets forth, in thousands, the net carrying value and the estimated fair value of Ciena’s outstanding issues of convertible notes as of April 30, 2018:
 
 
April 30, 2018
 
 
 Net Carrying Value
 
Fair Value(1)
3.75% Convertible Senior Notes, due October 15, 2018 (Original)
 
$
61,180

 
$
80,907

3.75% Convertible Senior Notes, due October 15, 2018 (New)
 
288,028

 
381,268

4.0% Convertible Senior Notes due December 15, 2020
 
197,972

 
265,125

 
 
$
547,180

 
$
727,300


(1)
The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimates the fair value of its outstanding convertible notes using a market approach based on observable inputs, such as current market transactions involving comparable securities.

(13)
 EARNINGS PER SHARE CALCULATION
The following table (in thousands except per share amounts) is a reconciliation of the numerator and denominator of the basic net income (loss) per common share (“Basic EPS”) and the diluted net income (loss) per potential common share (“Diluted EPS”). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average number of the following, in each case, to the extent the effect is not anti-dilutive: (i) common shares outstanding; (ii) shares issuable upon vesting of restricted stock units; (iii) shares issuable under Ciena’s employee stock purchase plan and upon exercise of outstanding stock options, using the treasury stock method; (iv) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the treasury stock method (the New Notes); and (v) shares underlying Ciena’s outstanding convertible notes for which Ciena uses the if-converted method.

 
Quarter Ended April 30,
 
Six Months Ended April 30,
Numerator
2018
 
2017
 
2018
 
2017
Net income (loss)
$
13,856

 
$
38,026

 
$
(459,507
)
 
$
41,887

Add: Interest expense associated with 0.875% Convertible Senior Notes due 2017 (1)

 
495

 

 
1,097

Add: Interest expense associated with 3.75% Convertible Senior Notes due 2018 (Original)

 
3,588

 

 

Net income (loss) used to calculate Diluted EPS
$
13,856

 
$
42,109

 
$
(459,507
)
 
$
42,984



18



 
Quarter Ended April 30,
 
Six Months Ended April 30,
Denominator
2018
 
2017
 
2018
 
2017
Basic weighted average shares outstanding
143,975

 
141,743

 
143,948

 
141,223

Add: Shares underlying outstanding stock options and restricted stock units and issuable under employee stock purchase plan
1,345

 
1,317

 

 
1,409

Add: Shares underlying 0.875% Convertible Senior Notes due 2017 (1)

 
4,857

 

 
5,210

Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (New) (2)
2,653

 

 

 

Add: Shares underlying 3.75% Convertible Senior Notes due 2018 (Original)

 
17,356

 

 

Dilutive weighted average shares outstanding
147,973

 
165,273

 
143,948

 
147,842


 
Quarter Ended April 30,
 
Six Months Ended April 30,
EPS
2018
 
2017
 
2018
 
2017
Basic EPS
$
0.10

 
$
0.27

 
$
(3.19
)
 
$
0.30

Diluted EPS
$
0.09

 
$
0.25

 
$
(3.19
)
 
$
0.29


The following table summarizes the weighted average shares excluded from the calculation of the denominator for Diluted EPS due to their anti-dilutive effect for the periods indicated (in thousands):

 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Shares underlying stock options and restricted stock units
304

 
725

 
2,496

 
1,141

3.75% Convertible Senior Notes due October 15, 2018 (Original)
3,038

 

 
3,038

 
17,356

3.75% Convertible Senior Notes due October 15, 2018 (New) (2)

 

 
1,672

 

4.0% Convertible Senior Notes due December 15, 2020
9,198

 
9,198

 
9,198

 
9,198

Total shares excluded due to anti-dilutive effect
12,540

 
9,923

 
16,404

 
27,695


(1) Ciena's 0.875% convertible senior notes were paid at maturity during the third quarter of fiscal 2017.
(2) Upon any conversion of the outstanding 3.75% Convertible Senior Notes due 2018 ("New Notes"), Ciena intends to settle the principal amount thereof in cash. Accordingly, Ciena uses the treasury stock method for calculating any potential dilutive effect of the conversion spread on diluted net income per share, if applicable. The 14.3 million shares underlying the New Notes will have a dilutive impact on diluted net income per share of common stock when the average market price of Ciena common stock for a given period exceeds the conversion price of $20.17 per share for the New Notes. During the second quarter of fiscal 2018, the average market price of Ciena common stock was $24.76. As a result, for the quarter ended April 30, 2018, the conversion spread for the New Notes is 2.7 million shares and included in the calculation of the denominator. For the six months ended April 30, 2018, the conversion spread for the New Notes is 1.7 million shares; however, these shares were excluded from the calculation of the denominator as their inclusion would have had an anti-dilutive effect.

(14)
 STOCKHOLDERS' EQUITY

Adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting
In connection with the adoption of ASU 2016-09, Ciena recognized approximately $62.1 million of deferred tax assets related to previously unrecognized tax benefits. This was recorded as a cumulative-effect adjustment to retained earnings as of the beginning of the first quarter of fiscal 2018. Ciena also elected to recognize forfeitures of stock awards when they occur, rather than estimate the impact of forfeitures when the award is granted. Accordingly, Ciena recognized approximately $0.8 million for this change through a cumulative effect adjustment recorded to opening retained earnings in the period of adoption.

19




Stock Repurchase Program
On December 7, 2017, Ciena announced that its Board of Directors authorized a program to repurchase up to $300 million of Ciena’s common stock through the end of fiscal 2020. Ciena may purchase shares at management’s discretion in the open market, in privately negotiated transactions, in transactions structured through investment banking institutions, or a combination of the foregoing. Ciena may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of its shares under this authorization. The amount and timing of repurchases are subject to a variety of factors, including liquidity, cash flow, stock price, and general business and market conditions. The program may be modified, suspended, or discontinued at any time.
A summary of the stock repurchase program, reported based on trade date, is summarized as follows:
 
Shares Repurchased
 
Weighted-Average Price per Share
 
Amount Repurchased (in thousands)
Cumulative balance at October 31, 2017

 
$

 
$

Repurchase of common stock under the stock repurchase program
1,627,233

 
24.06

 
39,147

Cumulative balance at April 30, 2018
1,627,233

 
$
24.06

 
$
39,147


The purchase price for the shares of Ciena's stock repurchased is reflected as a reduction to stockholders' equity. Ciena is required to allocate the purchase price of the repurchased shares as a reduction of common stock and additional paid-in capital.

(15)
SHARE-BASED COMPENSATION EXPENSE

The following table summarizes share-based compensation expense for the periods indicated (in thousands):
 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Product costs
$
824

 
$
708

 
$
1,496

 
$
1,269

Service costs
722

 
679

 
1,346

 
1,307

Share-based compensation expense included in cost of sales
1,546

 
1,387

 
2,842

 
2,576

Research and development
3,796

 
3,653

 
7,052

 
6,862

Sales and marketing
3,760

 
3,513

 
7,088

 
6,386

General and administrative
5,109

 
3,417

 
9,583

 
8,870

Share-based compensation expense included in operating expense
12,665

 
10,583

 
23,723

 
22,118

Share-based compensation expense capitalized in inventory, net
(45
)
 
35

 
(6
)
 
136

Total share-based compensation
$
14,166

 
$
12,005

 
$
26,559

 
$
24,830


As of April 30, 2018, total unrecognized share-based compensation expense was approximately $93.0 million which relates to unvested restricted stock units and is expected to be recognized over a weighted-average period of 1.6 years.


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(16)
 SEGMENTS AND ENTITY-WIDE DISCLOSURES
Segment Reporting
Ciena manages its business, measures its performance and allocates its resources based on the following operating segments:
Networking Platforms reflects sales of Ciena’s Converged Packet Optical and Packet Networking product lines.
Converged Packet Opticalincludes the 6500 Packet-Optical Platform, the 5430 Reconfigurable Switching System, Waveserver stackable interconnect system, the family of CoreDirector® Multiservice Optical Switches and the OTN configuration for the 5410 Reconfigurable Switching System. This product line also includes sales of the Z-Series Packet-Optical Platform. As of the first quarter of fiscal 2018, sales of Optical Transport products are also reflected within the Converged Packet Optical product line for all periods presented.
Packet Networking includes the 3000 family of service delivery switches and service aggregation switches and the 5000 family of service aggregation switches. This product line also includes the 8700 Packetwave Platform and the Ethernet packet configuration for the 5410 Service Aggregation Switch.
The Networking Platforms segment also includes sales of operating system software and enhanced software features embedded in each of the product lines above. Revenue from this segment is included in product revenue on the Condensed Consolidated Statements of Operations.
Software and Software-Related Services reflects sales of Ciena’s network virtualization, management, control and orchestration software solutions and software-related services, including subscription, installation, support, and consulting services.
This segment includes Ciena’s Blue Planet network virtualization, service orchestration and network management software platform. Ciena's Blue Planet platform includes multi-domain service orchestration (MDSO), network function virtualization (NFV), management and orchestration (NFV MANO), and Ciena's manage, control and plan (MCP) domain controller solution, SDN Multilayer Controller and V-WAN application.
This segment includes Ciena’s element and network management solutions and planning tools, including the OneControl Unified Management System, ON-Center® Network & Service Management Suite, Ethernet Services Manager, Optical Suite Release and Planet Operate. As Ciena seeks adoption of its Blue Planet software platform and transitions features, functionality and customers to this platform, Ciena expects revenue declines for its other element and network management solutions.
Revenue from the software platforms portion of this segment is included in product revenue on the Condensed Consolidated Statements of Operations. Revenue from software-related services is included in services revenue on the Condensed Consolidated Statements of Operations.
Global Services reflects sales of a broad range of Ciena’s services for consulting and network design, installation and deployment, maintenance support and training activities. Revenue from this segment is included in services revenue on the Condensed Consolidated Statements of Operations.
Ciena's long-lived assets, including equipment, building, furniture and fixtures, finite-lived intangible assets and maintenance spares, are not reviewed by Ciena's chief operating decision maker for purposes of evaluating performance and allocating resources. As of April 30, 2018, equipment, building, furniture and fixtures, net totaled $298.6 million primarily supporting asset groups within Ciena's Networking Platforms and Software and Software-Related Services segments and supporting Ciena's unallocated selling and general and administrative activities. As of April 30, 2018, $34.5 million of Ciena's intangible assets, net were assigned to asset groups within Ciena's Networking Platforms segment and $56.1 million of Ciena's intangible assets, net were assigned to asset groups within Ciena's Software and Software-Related Services segment. As of April 30, 2018, all of the maintenance spares, net, totaling $43.2 million, were assigned to asset groups within Ciena's Global Services segment.

Segment Revenue

The table below (in thousands) sets forth Ciena’s segment revenue for the respective periods:


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Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Networking Platforms
 
 
 
 
 
 
 
Converged Packet Optical
$
527,867

 
$
505,161

 
$
955,297

 
$
922,911

Packet Networking
63,815

 
66,326

 
132,418

 
138,520

Total Networking Platforms
591,682

 
571,487

 
1,087,715

 
1,061,431

 
 
 
 
 
 
 
 
Software and Software-Related Services
 
 
 
 
 
 
 
Software Platforms
12,544

 
13,143

 
42,120

 
30,192

Software-Related Services
26,201

 
24,573

 
50,112

 
46,904

Total Software and Software-Related Services
38,745

 
37,716

 
92,232

 
77,096

 
 
 
 
 
 
 
 
Global Services
 
 
 
 
 
 
 
Maintenance Support and Training
60,904

 
58,241

 
116,862

 
113,231

Installation and Deployment
28,209

 
28,695

 
58,225

 
56,614

Consulting and Network Design
10,438

 
10,883

 
21,079

 
20,147

Total Global Services
99,551

 
97,819

 
196,166

 
189,992

 
 
 
 
 
 
 
 
Consolidated revenue
$
729,978

 
$
707,022

 
$
1,376,113

 
$
1,328,519

    
Segment Profit
Segment profit is determined based on internal performance measures used by Ciena's chief executive officer to assess the performance of each operating segment in a given period. In connection with that assessment, the chief executive officer excludes the following items: selling and marketing costs; general and administrative costs; amortization of intangible assets; significant asset impairments and restructuring costs; interest and other income (loss), net; interest expense; and provision for income taxes.
The table below (in thousands) sets forth Ciena’s segment profit and the reconciliation to consolidated net income (loss) during the respective periods indicated:
 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
Segment profit:
 
 
 
 
 
 
 
Networking Platforms
$
126,823

 
$
150,464

 
$
215,392

 
$
264,210

Software and Software-Related Services
8,276

 
4,551

 
31,911

 
12,252

Global Services
41,284

 
41,602

 
82,321

 
77,071

Total segment profit
176,383

 
196,617

 
329,624

 
353,533

Less: Non-performance operating expenses
 
 
 
 
 
 
 
  Selling and marketing
97,359

 
88,551

 
185,874

 
173,553

  General and administrative
38,976

 
34,990

 
77,382

 
70,854

  Amortization of intangible assets
3,623

 
10,980

 
7,246

 
25,531

  Significant asset impairments and restructuring costs
4,359

 
4,276

 
10,320

 
6,671

Add: Other non-performance financial items
 
 
 
 
 
 
 
  Interest expense and other income (loss), net
(11,735
)
 
(16,226
)
 
(23,894
)
 
(31,059
)
Less: Provision for income taxes
6,475

 
3,568

 
484,415

 
3,978

Consolidated net income (loss)
$
13,856

 
$
38,026

 
$
(459,507
)
 
$
41,887





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Entity-Wide Reporting
Ciena's revenue includes $392.8 million and $392.0 million of United States revenue for the second quarter of fiscal 2018 and 2017, respectively. Ciena's revenue includes $79.4 million of India revenue for the second quarter of fiscal 2018. For the six months ended April 30, 2018 and 2017, United States revenue was $776.1 million and $771.7 million, respectively. No other country accounted for 10% or more of total revenue for the periods presented above.
The following table reflects Ciena's geographic distribution of equipment, building, furniture and fixtures, net, with any country accounting for at least 10% of total equipment, building, furniture and fixtures, net, specifically identified. Equipment, building, furniture and fixtures, net, attributable to geographic regions outside of the U.S. and Canada are reflected as “Other International.” For the periods below, Ciena's geographic distribution of equipment, building, furniture and fixtures was as follows (in thousands):
 
April 30,
2018
 
October 31,
2017
Canada
$
197,632

 
$
203,491

United States
81,051

 
90,482

Other International
19,948

 
14,492

Total
$
298,631

 
$
308,465


For the periods below, AT&T was the only customer that accounted for at least 10% of Ciena’s revenue as follows (in thousands):
 
Quarter Ended April 30,
 
Six Months Ended April 30,
 
2018
 
2017
 
2018
 
2017
AT&T
$
85,419

 
$
107,532

 
$
176,065

 
$
203,969


AT&T purchased products and services from each of Ciena's operating segments.

(17)
 COMMITMENTS AND CONTINGENCIES

Canadian Grant

During the second quarter of fiscal 2018, Ciena entered into agreements related to the Evolution of Networking Services through a Corridor in Quebec and Ontario for Research and Innovation ("ENCQOR") project with the Canadian federal government, the government of the province of Ontario and the government of the province of Quebec to develop a 5G technology corridor between Quebec and Ontario to promote research and development, small business enterprises and entrepreneurs in Canada. Under these agreements, Ciena can receive up to an aggregate CAD$57.6 million (approximately $45.0 million) in reimbursement by the three Canadian government entities for eligible costs over a period commencing on February 20, 2017 and ending on March 31, 2022. Ciena anticipates receiving recurring disbursements over this period. Amounts received under the agreements are subject to recoupment in the event that Ciena fails to achieve certain minimum investment, employment and project milestones. During the second quarter of fiscal 2018, Ciena recorded a CAD$10.3 million (approximately $8.1 million) benefit as a reduction in research and development expense, related to eligible costs that it incurred from the commencement date of February 20, 2017 to April 30, 2018, because it believes it has complied with the conditions of the agreements entitling it to this amount. In future periods, through the term of these agreements, Ciena expects to record a quarterly benefit to operating expense of approximately CAD$2.95 million (approximately $2.3 million) related to these grants.

Foreign Tax Contingencies

Ciena is subject to various tax liabilities arising in the ordinary course of business. Ciena does not expect that the ultimate settlement of these tax liabilities will have a material effect on its results of operations, financial position or cash flows.

Litigation

As a result of the acquisition of Cyan in August 2015, Ciena became a defendant in a securities class action lawsuit. On April 1, 2014, a purported stockholder class action lawsuit was filed in the Superior Court of California, County of San Francisco, against Cyan, the members of Cyan’s board of directors, Cyan’s former Chief Financial Officer, and the underwriters of Cyan’s initial public offering. On April 30, 2014, a substantially similar lawsuit was filed in the same court against the same

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defendants. The two cases were consolidated as Beaver County Employees Retirement Fund, et al. v. Cyan, Inc. et al., Case No. CGC-14-538355. The consolidated complaint alleges violations of federal securities laws on behalf of a purported class consisting of purchasers of Cyan’s common stock pursuant or traceable to the registration statement and prospectus for Cyan’s initial public offering in April 2013, and seeks unspecified compensatory damages and other relief. On May 19, 2015, the proposed class was certified. On August 25, 2015, the defendants filed a motion for judgment on the pleadings based on an alleged lack of subject matter jurisdiction over the case, which motion was denied on October 23, 2015. On May 24, 2016, the defendants filed a petition for a writ of certiorari on the jurisdiction issue with the U.S. Supreme Court, which petition was granted on June 27, 2017. The matter was stayed by the Superior Court pending the outcome of the Supreme Court’s decision. On March 20, 2018, the Supreme Court held that the Superior Court had subject matter jurisdiction over the case. A case management conference is scheduled before the Superior Court during the third quarter of fiscal 2018. Ciena believes that the consolidated lawsuit is without merit and intends to defend it vigorously.
Internal Investigations

During fiscal 2017, one of Ciena’s third-party vendors raised allegations about certain questionable payments to one or more individuals employed by a customer in a country in the ASEAN region. Ciena promptly initiated an internal investigation into the matter, with the assistance of outside counsel, which investigation corroborated direct and indirect payments to one such individual and sought to determine whether the payments may have violated applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act (“FCPA”). In September 2017, Ciena voluntarily contacted the SEC and the U.S. Department of Justice (“DOJ”) to advise them of the relevant events and the findings of Ciena’s internal investigation. With the direct oversight of Ciena's Board of Directors, Ciena continues to cooperate fully with the SEC and DOJ in their review of the investigation.
Ciena’s operations in the relevant country have constituted less than 1.5% of consolidated revenues as reported by Ciena in each fiscal year since 2012. Ciena does not currently anticipate that this matter will have a material adverse effect on its business, financial condition or results of operations. However, as discussions with the SEC and DOJ are ongoing, the ultimate outcome of this matter cannot be predicted at this time. As of the filing of this Report, no provision with respect to this matter has been made in Ciena’s consolidated financial statements. Any determination that Ciena’s operations or activities are not in compliance with the FCPA or other applicable laws or regulations could result in the imposition of fines, civil and criminal penalties, and equitable remedies, including disgorgement or injunctive relief.
In addition to the matters described in “Litigation” and “Internal Investigations” above, Ciena is subject to various legal proceedings, claims and other matters arising in the ordinary course of business, including those that relate to employment, commercial, tax and other regulatory matters. Ciena is also subject to intellectual property related claims, including claims against third parties that may involve contractual indemnification obligations on the part of Ciena. Ciena does not expect that the ultimate costs to resolve such matters will have a material effect on its results of operations, financial position or cash flows.


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(18)
SUBSEQUENT EVENTS

Stock Repurchase Program

From the end of the second quarter of fiscal 2018 through June 4, 2018, Ciena repurchased an additional 611,942 shares of its common stock, for an aggregate purchase price of $15.4 million at an average price of $25.15 per share, inclusive of repurchases pending settlement. As of June 4, 2018, Ciena has an aggregate of $245.5 million of authorized funds remaining under its Stock Repurchase Program.

Packet Design Acquisition

On May 30, 2018, Ciena entered into a definitive agreement to acquire privately-held Packet Design, LLC, a provider of network performance management software focused on Layer 3 network optimization, topology and route analytics. The transaction is expected to close during Ciena’s fiscal third quarter 2018 and is subject to customary closing conditions.

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

Cautionary Note Regarding Forward-Looking Statements

This quarterly report contains statements that discuss future events or expectations, projections of results of operations or financial condition, changes in the markets for our products and services, trends in our business, business prospects and strategies and other “forward-looking” information. In some cases, you can identify “forward-looking statements” by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” "projects," "targets," or “continue” or the negative of those words and other comparable words. These statements may relate to, among other things, our competitive landscape; market conditions and growth opportunities; factors impacting our industry; factors impacting the businesses of network operators and their network architectures; adoption of next-generation network technology and software programmability and control of networks; our strategy, including our research and development, supply chain and go-to-market initiatives; efforts to increase application of our solutions in customer networks and to increase the reach of our business into new or growing customer and geographic markets; our backlog and seasonality in our business; expectations for our financial results, revenue, gross margin, operating expense and key operating measures in future periods; the adequacy of our sources of liquidity to satisfy our working capital needs, capital expenditures, and other liquidity requirements; business initiatives including IT transitions or initiatives; the impact of the Tax Cuts and Jobs Act and provisional estimates with respect thereto; and market risks associated with financial instruments and foreign currency exchange rates. These statements are subject to known and unknown risks, uncertainties and other factors, and actual events or results may differ materially due to factors such as: 
    
our ability to execute our business and growth strategies;
fluctuations in our revenue, gross margin and operating results and our financial results generally;
the loss of any of our large customers, a significant reduction in their spending, or a material change in their networking or procurement strategies;
the competitive environment in which we operate; 
market acceptance of products and services currently under development and delays in product or software development;
lengthy sales cycles and onerous contract terms with communications service providers, Web-scale providers and other large customers;
product performance or security problems and undetected errors;
our ability to diversify our customer base beyond our traditional customers and to broaden the application for our solutions in communications networks;
the level of growth in network traffic and bandwidth consumption and the corresponding level of investment in network infrastructures by network operators;
the international scale of our operations and fluctuations in currency exchange rates;
our ability to forecast accurately demand for our products for purposes of inventory purchase practices;
the impact of pricing pressure and price erosion that we regularly encounter in our markets; 
our ability to enforce our intellectual property rights, and costs we may incur in response to intellectual property right infringement claims made against us;
the continued availability, on commercially reasonable terms, of software and other technology under third-party licenses;
the potential failure to maintain the security of confidential, proprietary or otherwise sensitive business information or systems or to protect against cyber attacks;

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the performance of our third-party contract manufacturers;
changes or disruption in components or supplies provided by third parties, including sole and limited source suppliers;
our ability to manage effectively our relationships with third-party service partners and distributors;
unanticipated risks and additional obligations in connection with our resale of complementary products or technology of other companies;
our ability to grow and maintain our new distribution relationships under which we will make available certain technology as a component;
our exposure to the credit risks of our customers and our ability to collect receivables;
modification or disruption of our internal business processes and information systems;
the effect of our outstanding indebtedness on our liquidity and business;
fluctuations in our stock price and our ability to access the capital markets to raise capital;
unanticipated expenses or disruptions to our operations caused by facilities transitions or restructuring activities;
our ability to attract and retain experienced and qualified personnel;
disruptions to our operations caused by strategic acquisitions and investments or the inability to achieve the expected benefits and synergies of newly-acquired businesses;
our ability to grow our software business and address networking strategies including software-defined networking and network function virtualization;
changes in, and the impact of, government regulations, including with respect to: the communications industry generally; the business of our customers; the use, import or export of products; and the environment, potential climate change, and other social initiatives;
the impact of the Tax Cuts & Jobs Act and any adjustments to provisional estimates relating thereto;
future legislation or executive action in the U.S. relating to tax policy or trade regulation;
the write-down of goodwill, long-lived assets, or our deferred tax assets;
our ability to maintain effective internal controls over financial reporting and liabilities that result from the inability to comply with corporate governance requirements; and
adverse results in litigation matters.    

These are only some of the factors that may affect the forward-looking statements contained in this quarterly report. For a discussion identifying additional important factors that could cause actual results to vary materially from those anticipated in the forward-looking statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in this quarterly report. For a more complete understanding of the risks associated with an investment in Ciena’s securities, you should review these risk factors and the rest of this quarterly report in combination with the more detailed description of our business and management’s discussion and analysis of financial condition and risk factors described in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission (the "SEC") on December 22, 2017. However, we operate in a very competitive and rapidly changing environment and new risks and uncertainties emerge, are identified or become apparent from time to time. We cannot predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this quarterly report. You should be aware that the forward-looking statements contained in this quarterly report are based on our current views and assumptions. We undertake no obligation to revise or update any forward-looking statements made in this quarterly report to reflect events or circumstances after the date hereof or to reflect new information or the occurrence of unanticipated events, except as required by law. The forward-looking statements in this quarterly report are intended to be subject to protection afforded by the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Overview

We are a network strategy and technology company, providing solutions that enable a wide range of network operators to deploy and manage next-generation communication architectures that deliver a broad array of services. We provide netw