Portions of the registrant’s definitive proxy statementRegistrant’s Annual Report on Form 10-K for itsthe fiscal year ended April 28, 2019 annual meeting of stockholders filed with the Securities and Exchange Commission on June 14, 2019 are incorporated by reference ininto Part III hereof.and Part IV of this Annual Report on Form 10-K.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 28, 2019
FORWARD LOOKING STATEMENTS
EXPLANATORY NOTE
This report contains forward-looking statements withinAmendment No. 1 on Form 10-K/A (this “Amendment”) amends the meaningAnnual Report on Form 10-K of Finisar Corporation (“Finisar”) for the fiscal year ended April 28, 2019, originally filed with the Securities and Exchange Commission (the “SEC”) on June 14, 2019 (the “Original Filing”). We are filing this Amendment for the purpose of providing the information required by and not included in Part III of the Private Securities Litigation Reform ActOriginal Filing because we will not file our definitive proxy statement within 120 days after the end of 1995. We use words like "anticipates", "believes", "plans", "expects", "future", "intends"our fiscal year on April 28, 2019. In connection with the filing of this Amendment and similar expressionspursuant to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operationsthe rules of the SEC, we are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed in "Item 1A. Risk Factors." We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.
PART I
Overview
We are a global technology leader in optical communications, providing components and subsystems to networking equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies. We design products that meet the increasing demands for network bandwidth, data storage and 3D sensing subsystems. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in these networks, including
the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. These products relycertain currently dated certifications with this Amendment.The reference on the usecover of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 400 Gbps, over distances of less than 10 meters to more than 2,000 kilometers, using a wide range of network protocols and physical configurations.
We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiberOriginal Filing to the output fibers. WSS productsincorporation by reference of the Proxy Statement into Part III of the Original Filing is hereby deleted. Except as expressly set forth in this Amendment, we are sometimes combined withnot amending any other components and soldpart of the Original Filing. The Original Filing continues to speak as linecards that plug into a system chassis referred to as a reconfigurable optical add/drop multiplexers, or ROADM.
We have also enteredof the 3D Sensing market. 3D Sensing enables features such as facial recognition, gaming and virtual reality, as well as automotive market applications such as LiDAR and in-cabin recognition. VCSELs (Vertical Cavity Surface Emitting Lasers) are core to 3D Sensing. We leverage our experience in laser technology in our 3D Sensing products.
Our linedate of optical components also includes packaged lasers and photodetectors for data communication and telecommunication applications.
Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, tablet computers, and other mobile devices.
Our manufacturing operations are vertically integratedOriginal Filing, and we produce manyhave not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the key components used in making our products, including lasers, photodetectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.
We sell our products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Broadcom, Ciena, Cisco Systems, Dell EMC, Ericsson, FiberHome, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Juniper, Nokia, QLogic (now a subsidiary of Marvell Technology), and ZTE, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.
We were incorporated in California in April 1987 and reincorporated in Delaware in November 1999. Our principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089, and our telephone number at that location is +1-408-548-1000.
Original Filing.All references to "Finisar", "the Company", "we", "us"“Finisar,” “the Company,” “we,” “us” or "our"“our” are references to Finisar Corporation and its consolidated subsidiaries, collectively, except as otherwise indicated or where the context otherwise requires.
Merger Agreement
On November 8, 2018, the Company, II-VI Incorporated, a Pennsylvania corporation ("Parent" or "II-VI") and Mutation Merger Sub Inc., a Delaware corporation and a wholly owned subsidiaryTable of Parent ("Merger Subsidiary"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, Merger Subsidiary will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the time the Merger becomes effective (the "Effective Time"), each issued and outstanding share of common stock, par value $0.001 per share, of the Company ("Company Stock") (other than shares of Company Stock owned by Parent or Merger Subsidiary or any direct or indirect wholly owned subsidiary of Parent, which will be cancelled without consideration, and holders of Company Stock, if any, who properly exercise their appraisal rights under the General Corporation Law of the State of Delaware) outstanding immediately prior to the Merger will be automatically cancelled and converted into the right to receive, for each share of Company Stock, at the stockholder’s election and subject to proration in the event the cash consideration or Parent Common Stock (as defined below) consideration is oversubscribed, either (i) $26.00 in cash (the "Cash Election Consideration"), (ii) 0.5546 of a share of common stock, no par value, of Parent ("Parent Common Stock") (the "Stock Election Consideration"), or (iii) a combination of (A) 0.2218 of a share of Parent Common Stock (the "Exchange Ratio") and (B) $15.60 in cash, without interest (the "Mixed Election Consideration"). On an average basis across all shares of Company Stock (including the Options (as defined below) and Performance RSUs (as defined below)), at the closing of the Merger, 60% of the aggregate amount of the outstanding shares of Company Stock (including the Options and Performance RSUs) will be converted into the right to receive the Cash Election Consideration, with the remaining 40% converted into the right to receive the Stock Election Consideration.
Pursuant to the Merger Agreement, at the Effective Time, each outstanding and unexercised option to purchase Company Stock (whether vested or unvested) (an "Option") shall automatically be cancelled and terminated and converted into the right to receive an amount of Mixed Election Consideration equal to the product of (i) the excess, if any, of the Cash Election Consideration over the exercise price per share of such Option multiplied by (ii) the number of shares of Company Stock subject to such Option, payable no later than the Company’s next payroll date after the closing of the Merger. Further, as of the Effective Time, each award of restricted stock units of the Company that is outstanding immediately prior to the Effective Time and is subject to a performance-based vesting condition (a "Performance RSU") that relates solely to the value of Company Stock will vest as to a number of shares determined under the terms of the award and will be cancelled and extinguished and converted into the right to receive the Cash Election Consideration, the Stock Election Consideration or the Mixed Election Consideration in accordance with the election made by the holder of such Performance RSU. At the Effective Time, each other award of restricted stock units of the Company that is outstanding and unvested will be assumed by Parent and continue to be subject to substantially the same terms and conditions (including vesting requirements) as in effect immediately prior to the Effective Time, except that the number of shares of Parent Common Stock subject to such assumed restricted stock unit awards will be equal to the product of (i) the number of shares of Company Stock underlying such unvested restricted stock unit award as of immediately prior to the Effective Time multiplied by (ii) the sum of the (A) Exchange Ratio plus (B) the quotient obtained by dividing $15.60 by the Equity Award Measurement Price. The "Equity Award Measurement Price" means the volume weighted average price per share of Parent Common Stock on NASDAQ for the ten (10) consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time.
The Merger Agreement also provides, among other things, that the board of directors of Parent (the "Parent Board") will appoint, at the Effective Time, three members, each of whom are (i) members of the board of directors of the Company (the "Board") as of the date of the Merger Agreement, (ii) mutually agreed to by the Company and Parent, acting in good faith, and (iii) reasonably approved by the Corporate Governance and Nominating Committee of the Parent Board.
The closing of the Merger is subject to, among other things, the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Stock (the "Company Stockholder Approval"), which was obtained on March 26, 2019, and the affirmative vote of at least a majority of the votes cast for the proposal on the issuance of the Parent Common Stock and any restricted units of Parent issuable in connection with the Merger (the "Parent Stockholder Approval"), which was obtained on March 26, 2019. The closing of the Merger is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; receipt of other specified regulatory approvals; the absence of any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction enjoining or otherwise prohibiting the consummation of the Merger; the SEC having declared effective a Form S-4 with respect to, and the approval of the listing on NASDAQ of, the shares of Parent Common Stock issuable in connection with the Merger; the accuracy of the representations and warranties contained in the Merger Agreement (generally subject to a material adverse effect qualification); compliance with the covenants and agreements in the Merger Agreement in all material respects; and no
material adverse effect on either the Company or Parent. The closing of the Merger is also subject to Parent, the Company and Wells Fargo Bank, National Association (the "Trustee"), entering into a supplemental indenture in connection with that certain (i) indenture, dated as of December 16, 2013 (the "2033 Notes Indenture"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2033 (the "2033 Notes"), which was cancelled and discharged on May 1, 2019 in connection with the redemption of all of the remaining outstanding 2033 Notes, and (ii) indenture, dated as of December 21, 2016 (the "2036 Notes Indenture" and, together with the 2033 Notes Indentures, the "Indentures"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2036 (the "2036 Notes" and, together with the 2033 Notes, the "Notes") providing, among other items, (a) at and after the Effective Time, pursuant, and subject to, the terms and conditions of the applicable Indenture, for the change in right to convert each $1,000 principal amount of the 2033 Notes and the 2036 Notes, as applicable, into the amount of shares of Parent Common Stock and cash, or the combination thereof, that a holder of a number of shares of Company Stock equal to the conversion rate of the 2033 Notes and the 2036 Notes immediately prior to the Effective Time would have owned or been entitled to receive upon the Effective Time, and (b) Parent’s full and unconditional guarantee, on a senior unsecured basis, of the 2033 Notes and the 2036 Notes. Though not a condition to Closing, Parent and Merger Subsidiary are also obligated to use its reasonable best efforts to obtain debt financing that, together with the other financial resources of Parent, will be sufficient to satisfy all of Parent’s and Merger Subsidiary’s payment obligations under the Merger Agreement.
Pursuant, and subject, to the terms and conditions of the Indentures, each holder of Notes will have the right, at such holder’s option, to require the Company to repurchase any or all of such holder’s Notes, on the date specified by the Company that is not less than 20 business days and not more than 35 business days after the date of the Company’s notice to holders of the occurrence of the Merger, such notice to be delivered within 20 business days of the Effective Time, at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the repurchase date ("Merger Repurchase Date"). Further pursuant, and subject, to the terms and conditions of the Indentures, all or any portion of a holder’s Notes may be surrendered for conversion at any time from or after the date that is 25 scheduled trading days prior to the anticipated Effective Time (or, if later, the business day after the Company gives holders notice of the Merger) until the Merger Repurchase Date.
The Company has made customary representations and warranties in the Merger Agreement. The Company is also subject to customary covenants, including, among others, covenants (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by Parent, (iii) to convene and hold a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to Parent the recommendation of the Board that the Company’s stockholders adopt the Merger Agreement.
Parent has made customary representations and warranties in the Merger Agreement. Parent is also subject to customary covenants, including, among others, (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by the Company, (iii) to convene and hold a meeting of its shareholders for the purpose of obtaining the Parent Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to the Company the recommendation of the Parent Board that Parent’s shareholders vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger.
The Merger Agreement contains certain termination rights, including the right of the Company to terminate the Merger Agreement under specified circumstances to accept an unsolicited superior proposal from a third party. The Merger Agreement provides that, upon termination of the Merger Agreement by the Company or Parent under specified circumstances (including termination by the Company to accept a superior proposal), a termination fee of $105,200,000 will be payable by the Company to Parent. The Company termination fee is also payable under certain other specified circumstances set forth in the Merger Agreement. Further, the Company has the right to terminate the Merger Agreement if the Parent Board fails to recommend that the shareholders of Parent vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger or if the Parent withdraws, amends or modifies such recommendation. If the Company timely exercises its right to terminate the Merger Agreement after it obtains actual knowledge of such failure to recommend, or withdrawal, amendment or modification of such recommendation, a termination fee of $105,200,000 will be payable by Parent to the Company. The Merger Agreement also provides that each party to the Merger Agreement may compel the other party or parties thereto to specifically perform its or their obligations under the Merger Agreement.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K on November 9, 2018 and is incorporated herein by reference.
ContentsTABLE OF CONTENTS
Products
Our optical subsystems and components are integrated into our customers’ systems and used for fiber optics-based data communication and telecommunication networks.
Our family of optical subsystem products consists of transmitters, receivers, transceivers, transponders, and active optical cables principally based on the Ethernet, Fibre Channel, OTN and SONET/SDH protocols. A transmitter uses a laser plus direct or indirect modulation to convert electrical signals into optical signals for transmission over optical fiber. Receivers incorporating photo detectors convert incoming optical signals into electrical signals. A transceiver combines both transmitter and receiver functions in a single device. An active optical cable combines two transceivers and a fiber optic cable that are built into an integrated, connectorized cable assembly that is sold in various cable lengths. Our optical subsystem products perform these functions with high reliability and data integrity and support a wide range of protocols, transmission speeds, fiber types, wavelengths, transmission distances, physical configurations, and software enhancements.
Our high-speed optical subsystems are engineered to deliver value-added functionality and intelligence. Our optical subsystem products typically include a microprocessor with proprietary embedded software that provides customers real-time monitoring of transmitted and received optical power, temperature, drive current, and other link parameters for each port in their systems.
For data communication applications that rely on the Fibre Channel standard, we currently provide a wide range of optical subsystems for transmission applications at 1 to 28 Gbps. For data communication applications that rely on the Ethernet standard, we provide a broad range of optical subsystems for transmitting signals at 1 to 400 Gbps using the SFP, SFP+, XFP, X2, QSFP, QSFP28, QSFP56-DD, CXP, CFP, CFP2, CFP4, and proprietary form factors. For OTN and SONET/SDH-based telecommunication applications, we supply optical subsystems that are capable of transmitting at 0.155, 0.622, 2.5, 10, 40, 100, 200 and 400 Gbps.
We also offer a full line of optical subsystems for telecommunication applications using wavelength division multiplexing, or WDM technologies. Our products include coarse wavelength division multiplexing, or CWDM, transceivers in the SFP form factor and dense wavelength division multiplexing, or DWDM, transceivers in the SFP, SFP+, XFP, CFP2, CFP4, and proprietary form factors. These products include both fixed wavelength transceivers and tunable transceivers that are capable of dynamically tuning across a range of wavelengths in the C- and L-Bands.
As a result of several acquisitions, we have gained access to leading-edge technology for the manufacture of a number of active and passive optical components including vertical cavity surface emitting lasers, or VCSELs; Fabry-Perot, or FP, lasers; distributed feedback, or DFB, lasers; tunable lasers; positive intrinsic negative, or PIN, detectors; high-speed integrated waveguide detectors; Mach Zehnder Modulators; fused fiber couplers; isolators; filters; polarization beam combiners; and amplifiers. Most of these optical components are used internally in the manufacture of our optical subsystems. We currently sell some of these components in the so-called “merchant market” to other subsystems manufacturers. We are also producing laser and photodetector products for use in emerging consumer and auto applications.
We also offer products used in building access networks including optics for wireless infrastructure and fiber-to-the-home/curb networks and for parallel optics applications such as inter-chassis connections for switches, routers, and high-speed computing systems.
We offer WSS and ROADM linecard products for wavelength management in DWDM telecommunication networks. These capabilities are made possible in part through the use of our liquid crystal on silicon, or LCoS, technology, similar to that used in miniature projectors. This technology provides a highly flexible WSS capable of operating on both 50 and 100 GHz International Telecommunications Union, or ITU, grids, based on our patented FlexgridTM technology. In addition, this LCoS-based architecture offers the capability for in-service upgrades of functionality and integration of additional system functionality, including route and select, drop and continue, channel monitoring, and channel contouring features. Our WSS and ROADM linecard product offering ranges from 1x2, 1x4 and 1x9 products up to higher output fiber port counts in our latest 1x23 and 2x1x20 products.
Customers
Our revenues are principally derived from sales of optical subsystems and components to a broad base of networking equipment manufacturers, data center operators, telecom service providers, consumer electronics, automotive companies, distributors, end customers, and system integrators. Sales of products for data communication applications represented 72%, 78%, and 72% of our total revenues in fiscal 2019, 2018 and 2017, respectively. Sales of products for telecommunication applications represented 28%, 22%, and 28% of our total revenues in fiscal 2019, 2018 and 2017, respectively.
Sales to our ten largest customers represented 58%, 59%, and 56% of our total revenues during fiscal 2019, 2018 and 2017, respectively. Two customers, Cisco Systems and Huawei, represented more than 10% of our total revenues during fiscal 2019. Two customers, Cisco Systems and Google, represented more than 10% of our total revenues during fiscal 2018. Two customers, Cisco Systems and Huawei, represented more than 10% of our total revenues during fiscal 2017. No other customer accounted for more than 10% of our total revenues in any of these years.
Technology
The development of high quality optical subsystems and components for high-speed communications requires multidisciplinary expertise in the following technology areas:
High Frequency Integrated Circuit Design. Our optical subsystems development efforts are supported by an engineering team that specializes in analog/digital IC design. This group utilizes semiconductor technologies such as silicon complementary-metal-oxide-semiconductor, or Si CMOS, and silicon germanium bipolar CMOS, or SiGe BiCMOS, to design high-speed, high performance proprietary ICs such as laser drivers, receiver pre-and post-amplifiers, and microprocessors. These proprietary ICs are incorporated across our transceiver and transponder product portfolio at data rates from 1 to 100 Gbps. We also design the advanced LCoS controller ICs for our WSS and ROADM linecard products. Our in-house IC design capabilities are critical to our ongoing development of future products.
Optical Subassembly and Mechanical Design. We established ourselves as a low-cost design leader beginning with our initial optical subsystems in 1992. From that base we have developed single-mode laser alignment approaches and low-cost, all-metal packaging techniques for improved electromagnetic interference, or EMI, performance and environmental tolerance. We develop our own component and packaging designs and integrate these designs with proprietary manufacturing processes that allow our products to be manufactured in high volume.
System Design. The design of all of our products requires a combination of sophisticated technical competencies, including optical engineering, high-speed electrical design, digital and analog application specific IC, or ASIC, design, and firmware and software engineering. We have built a substantial organization of engineers and scientists with skills in all of these areas. It is the integration and combination of these technical competencies that enables us to design and manufacture optical subsystem and component products that meet the needs of our customers.
Manufacturing System Design. Hardware, firmware, and software design skills are utilized to provide specialized manufacturing test systems for our internal use. These test systems are optimized for test capacity and broad test coverage. We use automated, software-controlled testing to enhance the field reliability of all Finisar products and to reduce the level of capital expenditures that would otherwise be required to purchase these test systems.
Optoelectronic Device Design and Wafer Fabrication. The ability to manufacture our own optical components provides significant cost savings as well as the ability to create unique, high performance components. This enhances our competitive position in terms of performance, time-to-market, and intellectual property. Most significantly, we design and manufacture a number of active components that are used in our optical subsystems. Certain of our past acquisitions provided us with wafer fabrication capability for designing and manufacturing VCSEL components, used in our shorter distance transceivers for data communication applications, PIN detectors and 1310 nm FP and DFB lasers used in our longer distance transceivers, although we continue to rely on third-party suppliers for a portion of our DFB laser requirements, and tunable lasers for use in our tunable XFP and SFP+ transceivers for telecommunication applications.
Competition
The market for optical subsystems and components for use in data communication and telecommunication applications remains highly competitive. We believe the principal competitive factors in these markets are:
product performance, features, functionality, and reliability;
price/performance characteristics;
timeliness of new product introductions;
breadth of product line;
adoption of emerging industry standards;
service and support;
size and scope of distribution network;
brand name;
access to customers; and
size of installed customer base.
Competition in the market for optical subsystems and components varies by market segment. Our principal competitors for optical transceivers sold for data communication applications include Applied Optoelectronics, Foxconn, Innolight, Lumentum, and Sumitomo. Our principal competitors for optical transceivers sold for telecommunication applications include Acacia Communications, Fujitsu Optical Components, Lumentum, and Sumitomo. Our principal competitors for WSS ROADM products include CoAdna, Lumentum, Oplink, and Nistica. We believe we compete favorably with our competitors with respect to most of the foregoing factors based, in part, upon our broad product line, our sizeable installed base, our significant vertical integration, and our lower-cost manufacturing facilities in Ipoh, Malaysia and Wuxi, China.
Sales, Marketing and Technical Support
For sales of our optical subsystems and components, we utilize a direct sales force augmented by five world-wide distributors, eleven international distributors, two domestic distributors, 18 domestic manufacturers’ representatives, and eight international manufacturers’ representatives. Our direct sales force maintains close contact with our customers and provides technical support to our manufacturers’ representatives. In our international markets, our direct sales force works with local resellers who assist us in providing support and maintenance in the territories they cover.
Our marketing efforts are focused on increasing awareness of our product offerings for optical subsystems and our brand name. Key components of our marketing efforts include:
continuing our active participation in industry associations and standards committees to promote and further enhance Ethernet, Fibre Channel and SONET/SDH/OTN technologies, promote standardization in the data communication and telecommunication markets, and increase our visibility as industry experts; and
leveraging major trade show events and conferences to promote our broad product lines.
In addition, our marketing group focuses on product management and product strategy and also provides marketing support services for our direct sales force and our manufacturers’ representatives and resellers. Through our marketing activities, we provide technical and strategic sales support to our direct sales personnel and resellers, including in-depth product presentations, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration, and other support functions.
A high level of continuing service and support is critical to our objective of developing long-term customer relationships. We emphasize customer service and technical support in order to provide our customers and their end users with the knowledge and resources necessary to successfully utilize our product line. Our customer service organization utilizes a technical team of field and factory applications engineers, technical marketing personnel and, when required, product design engineers. We provide extensive customer support throughout the qualification and sale process. In addition, we provide many resources through our World Wide Web site, including product documentation and technical information. We intend to continue to provide our customers with comprehensive product support and believe it is critical to remaining competitive.
Backlog
A substantial portion of our revenues is derived from sales to customers through hub arrangements where revenue is generated as inventory that resides at these customers or their contract manufacturers is drawn down. Visibility as to future customer demand is limited in these situations. Most of our other revenues are derived from sales pursuant to individual purchase orders that remain subject to negotiation with respect to delivery schedules and are generally cancelable without significant penalties. Manufacturing capacity and availability of key components can also impact the timing and amount of revenue ultimately recognized under such sale arrangements. Accordingly, we do not believe that the backlog of undelivered product under these purchase orders at a particular time is a meaningful indicator of our future financial performance.
Manufacturing
We manufacture our optical subsystems at our production facility in Ipoh, Malaysia. This facility consists of 640,000 square feet, of which 240,000 square feet is suitable for clean room operations. We also conduct a portion of our new product introduction operations at our Ipoh facility. This facility is located on 840,000 square feet of land that we are leasing for 60 years, through June 28, 2055. In 2012, we entered into a 50-year lease for 550,000 square feet of land in Wuxi, China, where we built a 800,000 square foot facility. At this facility, we manufacture tunable and parallel transceivers, WSS components, ROADM line cards, passive optical components, coherent receivers, and high-end optical subassemblies used in VCSELs and detectors. In 2017, we entered into a 50-year lease for an additional 280,000 square feet of land adjacent to the above location in Wuxi, China, where we built an additional 300,000 square foot manufacturing facility. We manufacture WSS products at our 100,000 square foot facility in Sydney, Australia. We continue to conduct a substantial portion of our new product introduction activities at our Sunnyvale, California, Horsham, Pennsylvania, Sydney, Australia, and Shanghai, China facilities. In Sunnyvale, we also conduct supply chain management for certain components as well as quality assurance and documentation control operations. We maintain an international purchasing office in Shenzhen, China. We conduct wafer fabrication operations for the manufacture of VCSELs used in short wavelength transceiver products at our facility in Allen, Texas. In 2017, we purchased a 700,000 square foot manufacturing facility in Sherman, Texas, for wafer fabrication operations for the manufacture of VCSELs used in short wavelength transceiver products and 3D sensing products. We conduct wafer fabrication operations for the manufacture of long wavelength FP and DFB lasers at our facility in Fremont, California. We conduct wafer fabrication operations for the manufacture of tunable lasers and photonic integrated circuits, or PICs, at our facility in Jarfalla, Sweden. We manufacture high speed optical receivers and photodetectors at our facility in Berlin, Germany. We expect to continue to use contract manufacturers for a portion of our manufacturing needs, primarily printed circuit board assemblies.
We design and develop a number of the key components of our products, including photodetectors, lasers, ASICs, printed circuit boards, and software. In addition, our manufacturing team works closely with our engineers to manage the supply chain. To assure the quality and reliability of our products, we conduct product testing and burn-in at our facilities in conjunction with inspection and the use of testing and statistical process controls. In addition, most of our optical subsystems have an intelligent interface that allows us to monitor product quality during the manufacturing process. Our facilities in Sunnyvale and Fremont, California; Allen, Texas; Horsham, Pennsylvania; Shanghai, China; Ipoh, Malaysia; Sydney, Australia; Jarfalla, Sweden; and Berlin, Germany are qualified under ISO 9001-9002.
Although we use standard parts and components for our products wherever possible, we currently purchase several key components from single or limited sources. Our principal single source components purchased from external suppliers include ASICs and certain DFB lasers that we do not manufacture internally. Generally, purchase commitments with our single or limited source suppliers are on a purchase order basis. We generally try to maintain a buffer inventory of key components. However, any interruption or delay in the supply of any of these components, or the inability to procure these components from alternate sources at acceptable prices and within a reasonable time, would substantially harm our business. In addition, qualifying additional suppliers can be time-consuming and expensive and may increase the likelihood of errors.
We use a rolling 12-month forecast of anticipated product orders to determine our material requirements. Lead times for materials and components we order vary significantly and depend on factors such as the demand for such components in relation to each supplier’s manufacturing capacity, internal manufacturing capacity, contract terms, and demand for a component at a given time.
Research and Development
In fiscal 2019, 2018 and 2017, our research and development expenses were $217.9 million, $239.0 million, and $217.9 million, respectively. We believe that our future success depends on our ability to continue to enhance the performance and reduce the cost of our existing products and to develop new products that maintain technological and business competitiveness. We focus our product development activities on addressing the evolving needs of our customers within the data communication and telecommunication markets. We also seek opportunities to leverage the technical and product competencies created for our core markets to develop products for other applications, especially products using active optical components that we design and manufacture. We work closely with our customers to monitor changes in the marketplace. We design our products around current industry standards and will continue to support emerging standards that are consistent with our product strategy. Our research and development groups are aligned with our various product lines, and we also have specific groups devoted to ASIC design and test, subsystem design, and software design. Our product development operations include the active involvement of our manufacturing engineers who examine each product for its manufacturability, predicted reliability, expected lifetime, and manufacturing costs.
We believe that our research and development efforts are key to our ability to maintain technical and business competitiveness and to deliver innovative products that address the needs of the market. However, there can be no assurance that our product development efforts will result in commercially successful products, or that our products will not be rendered obsolete by changing technology or new product announcements by other companies.
Intellectual Property
Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We currently own approximately 2,000 issued U.S. and foreign patents and have approximately 400 pending U.S. and foreign patent applications. We cannot assure that any patents will be issued as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark, and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or to deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. We have been involved in extensive litigation to enforce certain of our patents and are currently engaged in such litigation. Additional litigation may be necessary in the future to enforce our intellectual property rights. This litigation could result in substantial costs and diversion of resources and could significantly harm our business.
The optical networking and communications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We have been involved in extensive litigation to protect our products against accusations of infringement. See "Item 3. Legal Proceedings." From time to time, other parties may assert patent, copyright, trademark, and other intellectual property rights to technologies in various jurisdictions that are important to our business, and such claims could result in additional litigation. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.
Employees
As of April 28, 2019, we employed approximately 13,000 full-time employees and contractors, of whom approximately 1,300 were located in the United States and approximately 10,000 were located at our production facilities in Ipoh, Malaysia, and Wuxi, China. We also, from time to time, employ part-time employees. Our employees are not represented by any union, and we have never experienced a work stoppage. Certain of our employees in our Sydney, Australia facility are subject to a collective agreement not involving a union. In addition, we have a works council in our Berlin, Germany facility. We believe that there is a positive employee relations environment within our company.
Segment and Geography Information
The material set forth in Note 14 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
Available Information
Our website is located at www.finisar.com. Electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available, free of charge, on our website as soon as practicable after we electronically file such material with the U.S. Securities and Exchange Commission ("SEC"). The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.
OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.
There are risks and uncertainties associated with the Merger.
The Merger, whether or not consummated, may result in a loss of our key personnel and may disrupt our sales and marketing or other key business activities, including our relationships with customers, suppliers and other third parties, which may have an adverse impact on our financial performance. Our business relationships may be subject to disruption due to uncertainty associated with the Merger, which could have an adverse effect on our results of operations, cash flows and financial condition and, following the completion of the Merger, those of the combined company. Additionally, we have incurred and will continue to incur substantial financial advisory, legal, and other professional fees and expenses in connection with the Merger, which we must pay regardless of whether the Merger is completed. These payments will negatively impact our results of operations, cash flows and financial condition.
Parties with which we do business may be uncertain as to the effects on them from the Merger and the related transactions, including their current or future business relationships with us or the combined company. These relationships may be subject to disruption, as customers, suppliers and other persons with whom we have business relationships may delay or defer certain business decisions or might decide to terminate, change or renegotiate their relationships with us, or consider entering into business relationships with parties other than us or the combined company. Additionally, our current and prospective employees may experience uncertainty about their roles with us or the combined company following the Merger, which may materially adversely affect our ability to attract and retain key personnel during the pendency of the Merger. These disruptions could have an adverse effect on our results of operations, cash flows and financial position or those of the combined company following the completion of the Merger. 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.
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 affirmative vote of the holders of at least a majority of the outstanding shares of Company Stock and the affirmative vote of at least a majority of the votes cast for the proposal on the issuance of the Parent Common Stock and any restricted units of Parent issuable in connection with the Merger, regulatory approvals, including in China, and that certain supplemental indenture being entered into by Parent, the Company and Trustee with respect to the Notes. These conditions are described in more detail in the Merger Agreement, which is included as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on November 9, 2018. The required satisfaction of these 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 us or the combined company not to realize some or all of the benefits that the parties expect us or the combined company to achieve in connection with the Merger. Further, there is no assurance that all of the conditions set forth in the Merger Agreement will be satisfied or waived to the extent permitted by applicable law or that the Merger will occur when or as expected. If the Merger is not completed, the share price of our common stock could decline, for reasons including the loss of the premium over the pre-announcement market price of our common stock that was to be paid upon consummation of the Merger.
Further, until the earlier of the Effective Time and the termination of the Merger Agreement, the Merger Agreement restricts us from taking specified actions without the consent of II-VI, and requires us to generally operate in the ordinary course of business consistent with past practices. These restrictions may prevent us from making appropriate changes to our businesses, retaining its workforce, paying dividends or pursuing attractive business opportunities that may arise prior to the completion of the Merger.
Lawsuits have been filed against us, our Board, II-VI, and Merger Subsidiary, and other lawsuits may be filed against us, II-VI, Merger Subsidiary, and/or their respective boards of directors challenging the Merger. An adverse ruling in any such lawsuit may prevent the Merger from being completed.
In January, 2019, eight lawsuits have been filed by alleged Finisar stockholders challenging the Merger: (i) Hein, et al. v. Finisar Corporation, et al., 19CV340510, in the Superior Court of California, County of Santa Clara; (ii) Tenvold, et al. v. Finisar Corporation, et al., 1:19-cv-00050, in the United States District Court for the District of Delaware; (iii) Klein, et al. v.
Finisar Corporation, et al., 5:19-cv-00155, in the United States District Court for the Northern District of California; (iv) Wheby Jr., et al. v. Finisar Corporation, et al., 1:19-cv-00064, in the United States District Court for the District of Delaware; (v) Sharma v. Finisar Corporation, et al., 5:19-cv-00220, in the United States District Court for the Northern District of California; (vi) Davis, et al. v. Finisar Corporation, et al., 3:19-cv-00271, in the United States District Court for the Northern District of California; (vii) Bushansky, et al. v. Finisar Corporation, et al., 5:19-cv-00446, in the United States District Court for the Northern District of California; and (viii) Pappey, et al. v. Finisar Corporation, et al., 1:19-cv-00167, in the United States District Court for the District of Delaware (collectively, the “Actions”).
Plaintiffs in the Actions named as defendants Finisar and each member of the Finisar Board. In addition, plaintiffs in the Hein, Tenvold, and Klein actions named II-VI and Merger Subsidiary as defendants. Further, plaintiffs in the Hein, Tenvold, Klein, Wheby, Jr., Davis, Bushansky, and Pappey actions sought to recover on behalf of a putative class consisting of all similarly situated Finisar stockholders.
Plaintiff in the Hein action alleged that the Finisar Board breached its fiduciary duties to Finisar stockholders by, among other things, purportedly engaging in an insufficient sales process, obtaining inadequate merger consideration, and filing a materially misleading preliminary proxy statement. The Hein plaintiff further asserted that II-VI and the Merger Subsidiary knowingly aided and abetted the Finisar Board in breaching their fiduciary duties to Finisar stockholders by entering into the Merger. The Hein plaintiff sought a preliminary and permanent injunction of the proposed transaction unless the proxy statement was amended, rescission and unspecified damages if the Merger was consummated, and attorneys’ fees and expert fees and costs.
Plaintiffs in the Tenvold, Klein, Wheby Jr., Sharma, Davis, Bushansky, and Pappey actions purported to state claims for violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 and, in the case of the Davis complaint, Regulation G promulgated thereunder. Plaintiffs in these actions generally alleged that the preliminary proxy statement omits material information with respect to the Merger, and sought, among other things, an order enjoining the defendants from proceeding with closing the Merger; unspecified damages, attorneys’ fees and expert fees, and expenses and costs; and in the event the Merger was consummated before entry of final judgment, rescission of the Merger or rescissory damages. Defendants believe that the complaints are without merit.
Following the filing of the Actions, counsel for Finisar and for the Plaintiffs engaged in arms-length negotiations concerning claims raised in the Actions and took certain actions that resulted in Finisar filing a Schedule DEFA14A on March 11, 2019, with the U.S. Securities and Exchange Commission that contained supplemental disclosures relating to the Merger. On March 12, 2019, Plaintiffs voluntarily dismissed the Actions with prejudice as to the Plaintiffs’ individual claims and without prejudice to claims asserted on behalf of a purported putative class of Finisar stockholders.
The litigation relating to the Merger are discussed in detail in "Part II, Item 8, Financial Statements - Note 15. Legal Matters" in this Form 10-K. There can be no assurance that additional complaints will not be filed with respect to the Merger. One of the conditions to completion of the Merger is the absence of any applicable law (including any order) being in effect that prohibits completion of the Merger. Accordingly, if a plaintiff is successful in obtaining an order prohibiting completion of the Merger, then such order may prevent the Merger from being completed, or from being completed within the expected timeframe.
Our quarterly revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the price of our stock.
Our quarterly operating results have varied significantly due to a number of factors, including:
fluctuation in demand for our products;
the timing of new product introductions or enhancements by us and our competitors;
the level of market acceptance of new and enhanced versions of our products;
the timing of acquisitions that we have undertaken;
the timing or cancellation of large customer orders;
the timing of capital expenditures associated with our new manufacturing facility in Sherman, Texas;
changes in levels of our customers' forecasted demand;
the length and variability of the sales cycle for our products;
pricing policy changes by us and our competitors and suppliers;
the availability of development funding;
changes in the mix of products sold;
inventory changes;
increased competition in product lines, and competitive pricing pressures; and
the evolving and unpredictable nature of the markets for products incorporating our optical components and subsystems.
We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:
fluctuations in manufacturing yields;
the emergence of new industry standards;
failure to anticipate changing customer product requirements;
the loss or gain of important customers;
product obsolescence; and
the amount of research and development expenses associated with new product introductions.
Our operating results could also be harmed by:
adverse changes in economic conditions in various geographic areas where we or our customers do business;
acts of terrorism and international conflicts or domestic crises;
other conditions affecting the timing of customer orders or our ability to fill orders of customers subject to export control or U.S. economic sanctions; or
a downturn in the markets for our customers' products, particularly the data storage and networking and telecommunication components markets.
We may experience a delay in generating or recognizing revenues for a number of reasons. Open orders at the beginning of each quarter are typically lower than expected revenues for that quarter and are generally cancelable with minimal notice. Accordingly, we depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified timeframes without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues or changes in levels of our customers' forecasted demand could significantly harm our business. It is likely that in some future quarters our operating results will again decrease from the previous quarter or fall below the expectations of securities analysts and investors.
As a result of these factors, our operating results may vary significantly from quarter to quarter. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance. Any shortfall in revenues or net income from the previous quarter or from levels expected by the investment community could cause a decline in the trading price of our stock.
We may lose sales if our suppliers or independent contract manufacturers fail to meet our needs or go out of business.
We currently purchase a number of key components used in the manufacture of our products from single or limited sources, and we rely on several independent contract manufacturers to supply us with certain key components and subassemblies, including lasers, modulators, and printed circuit boards. We depend on these sources to meet our production needs. Moreover, we depend on the quality of the components and subassemblies that they supply to us, over which we have limited control. Several of our suppliers are or may become financially unstable as the result of current global market conditions. In addition, from time to time we have encountered shortages and delays in obtaining components, and we may encounter additional shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We generally have no long-term contracts with any of our component suppliers or contract manufacturers. As a result, a supplier or contract manufacturer can discontinue supplying components or subassemblies to us without penalty. If a supplier were to discontinue supplying a key component or cease operations, the resulting product manufacturing and delivery delays could be lengthy, and our business could be substantially harmed. We are also subject to potential delays in the development by our suppliers of key components which may affect our ability to introduce new products. Similarly, disruptions in the operations of our key suppliers or in the services provided by our contract manufacturers, including disruptions due to natural disasters, or the transition to other suppliers of these key components or services could lead to supply chain problems or delays in the delivery of our products. These problems or delays could damage our relationships with our customers and adversely affect our business.
We use rolling forecasts based on anticipated product orders to determine our component and subassembly requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences could significantly harm our business.
If we are unable to realize anticipated cost savings from the transfer of certain manufacturing operations to our overseas locations and increased use of internally-manufactured components our results of operations could be harmed.
As part of our ongoing initiatives to reduce the cost of revenues, we expect to realize significant cost savings through (i) the transfer of certain product manufacturing operations to lower cost off-shore locations and (ii) product engineering changes to enable the broader use of internally-manufactured components. The transfer of production to overseas locations may be more difficult and costly than we currently anticipate which could result in increased transfer costs and time delays. Further, following transfer, we may experience lower manufacturing yields than those historically achieved in our U.S. manufacturing locations. In addition, the engineering changes required for the use of internally-manufactured components may be more technically-challenging than we anticipate and customer acceptance of such changes could be delayed. Adverse changes in currency exchange rates between the U.S. dollar and the applicable local currency and/or unanticipated increases in labor costs at our lower cost manufacturing locations could limit the anticipated benefits of the transfer of certain product manufacturing operations to such lower cost locations. If we fail to achieve the planned product manufacturing transfer and increase in internally-manufactured component use within our currently anticipated timeframe, or if our manufacturing yields decrease as a result, we may be unsuccessful in achieving cost savings or such savings will be less than anticipated, and our results of operations could be harmed.
Continued competition in our markets may lead to an accelerated reduction in our prices, revenues and market share.
The end markets for optical products have experienced significant industry consolidation during the past few years while the industry that supplies these customers has experienced less consolidation. As a result, the markets for optical subsystems and components are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Increased consolidation in our industry, should it occur, will reduce the number of our competitors, but would be likely to further strengthen surviving industry participants. We may not be able to compete successfully against either current or future competitors. Companies competing with us may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances and may be able to react quicker to changing customer requirements and expectations. There is also the risk that network systems vendors may re-enter the subsystem market and begin to manufacture the optical subsystems incorporated in their network systems. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business. Our principal competitors for data communication applications include Applied Optoelectronics, Foxconn, Innolight, Lumentum, and Sumitomo. Our principal competitors for telecommunication applications include Acacia Communications, Fujitsu Optical Components, Lumentum, and Sumitomo. Our competitors continue to introduce improved products and we will have to do the same to remain competitive.
Decreases in average selling prices of our products may reduce our gross margins.
The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, overcapacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices will decrease in the future in response to product introductions by competitors or us, or by other factors, including pricing pressures from significant customers. In particular, we typically conduct pricing negotiations for our existing products with some of our largest telecommunication OEM customers in the last several months of the calendar year. Decreases in our average selling prices resulting from these negotiations typically become effective at the beginning of the next calendar year and generally have an adverse impact on our gross margins in future quarters. This impact is typically most pronounced in our fourth fiscal quarter ending in April, when the impact of the new pricing is first felt over a full quarter. In order to sustain profitable operations, we must continually reduce costs for our existing products and also develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our revenues and gross margins to decline, which would result in additional operating losses and significantly harm our business.
We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures and could adversely affect our margins. In order to remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross margins.
Shifts in our product mix may result in declines in gross margins.
Gross margins on individual products fluctuate over the product's life cycle. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs. These fluctuations are expected to continue in the future.
Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-cancelable purchase commitments.
We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not cancelable, and in some cases we are required to recognize a charge representing the amount of material or capital equipment purchased or ordered which exceeds our actual requirements. In the past, we have periodically experienced significant growth followed by a significant decrease in customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired inventories and entered into purchase commitments in order to meet anticipated increases in demand for our products, which did not materialize. As a result, we recorded significant charges for obsolete and excess inventories and non-cancelable purchase commitments which contributed to substantial operating losses in fiscal 2002. Should revenues in future periods again fall substantially below our expectations, or should we fail again to accurately forecast changes in demand mix, we could again be required to record substantial charges for obsolete or excess inventories or non-cancelable purchase commitments.
If we encounter sustained yield problems or other delays in the production or delivery of our internally-manufactured components or in the final assembly and test of our products, we may lose sales and damage our customer relationships.
Our manufacturing operations are highly vertically integrated. In order to reduce our manufacturing costs, we have acquired a number of companies, and business units of other companies that manufacture optical components incorporated in our optical subsystem products and have developed our own facilities for the final assembly and testing of our products. For example, we design and manufacture many critical components incorporated in transceivers used for data communication and telecommunication applications, including all of the short wavelength VCSEL lasers, at our wafer fabrication facility in Allen, Texas and manufacture a portion of our internal requirements for longer wavelength lasers at our wafer fabrication facility in Fremont, California. We assemble and test most of our transceiver products at our facilities in Ipoh, Malaysia and Wuxi, China. As a result of this vertical integration, we have become increasingly dependent on our internal production capabilities. The manufacture of critical components, including the fabrication of wafers, and the assembly and testing of our products, involve highly complex processes. For example, minute levels of contaminants in the manufacturing environment, difficulties in the fabrication process or other factors can cause a substantial portion of the components on a wafer to be nonfunctional. These problems may be difficult to detect at an early stage of the manufacturing process and often are time-consuming and expensive to correct. From time to time, we have experienced problems achieving acceptable yields at our wafer fabrication facilities, resulting in delays in the availability of components. Moreover, an increase in the rejection rate of products during the quality control process before, during or after manufacture and/or shipping of such products, results in lower yields and margins. In addition, changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines have historically significantly reduced our manufacturing yields, resulting in low or negative margins on those products. Poor manufacturing yields over a prolonged period of time could adversely affect our ability to deliver our subsystem products to our customers and could also affect our sale of components to customers in the merchant market. Our inability to supply components to meet our internal needs could harm our relationships with customers and have an adverse effect on our business.
The markets for our products are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.
The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and evolving industry standards with respect to the protocols used in data communication and telecommunication networks. Our future performance will depend on the successful
development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. For example, the market for optical subsystems is currently characterized by a trend toward the adoption of "pluggable" modules and subsystems that do not require customized interconnections and by the development of more complex and integrated optical subsystems. We expect that new technologies will emerge as competition and the need for higher and more cost-effective bandwidth increases. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products and/or a charge for the impairment of long-lived assets related to such products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such slowdown in demand and delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our operating results would be adversely affected. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:
changing product specifications and customer requirements;
unanticipated engineering complexities;
expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to achieve and sustain profitability;
difficulties in hiring and retaining necessary technical personnel;
difficulties in reallocating engineering resources and overcoming resource limitations; and
changing market or competitive product requirements.
The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate prediction of technological and market trends. The introduction of new products also requires significant investment to ramp up production capacity, for which benefit will not be realized if customer demand does not develop as expected. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of the new product introduction. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Many of these factors are beyond our control. Any failure to respond to technological change would significantly harm our business.
In addition, in order to achieve widespread market acceptance, we must differentiate ourselves from our competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth.
Our entry into the market for components for consumer electronic products, specifically our VCSEL array products for 3D sensing, involves special risks.
We have recently entered into the market for components for consumer electronic products with our VCSEL array products for 3D sensing. We have purchased a facility in Sherman, Texas to expand our production capacity for these products and expect to continue to incur material costs in this expansion during fiscal year 2020. We have not previously participated in this market. The market for components for consumer electronics products and our expansion involve additional risks, including:
We expect our customer base for these products to be highly concentrated. If we are not able to meet the needs of our customers in this area, including with respect to timing and volume of production, performance and quality, we could lose business with our customers. Loss of business with any one customer could have a materially negative impact on our revenue and gross margin.
We have made and continue to make significant investment in the expansion of our production capacity for our VCSEL arrays for 3D sensing, including the development of a high-volume production facility in Sherman, Texas. If we are unable to complete our production expansion plan and have our new production lines qualified by our customers on a timely basis, we could harm our customer relationships and lose business, which could have a materially negative impact on our revenue and gross margin.
We expect revenue from our components for consumer electronic products to have significant seasonal variance due to the timing of new customer product introductions and demand.
Our future success ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure.
We are relying on increasing demand for voice, video and other data delivered over high-bandwidth network systems as well as commitments by network systems vendors to invest in the expansion of the global information network. As network usage and bandwidth demand increase, so does the need for advanced optical networks to provide the required bandwidth. Without network and bandwidth growth, the need for optical subsystems and components, and hence our future growth as a manufacturer of these products, will be jeopardized, and our business would be significantly harmed.
We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in purchases by these customers could harm our business.
A small number of customers have consistently accounted for a significant portion of our revenues. Our success will depend on our continued ability to develop and manage relationships with our major customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers, and our quarterly results may be volatile because we are dependent on large orders from these customers that may be reduced, delayed, or cancelled.
The markets in which we have historically sold our optical subsystems and components products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers. Recent consolidation of portions of our customer base, including telecommunication systems manufacturers, and potential future consolidation, may have a material adverse impact on our business. Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot assure you that we will be able to retain our major customers, attract additional customers, or that our customers will be successful in selling their products that incorporate our products. We have in the past experienced delays and reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us, and we expect that they will continue to do so in the future. Expense reduction measures that we have implemented over the past several years, and additional action we are taking to reduce costs, may adversely affect our ability to introduce new and improved products which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors, or may in certain circumstances produce competitive products themselves. The loss of one or more of our major customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers, or future price concessions that we may make could significantly harm our business.
Because we do not have long-term contracts with our customers, our customers may cease purchasing our products at any time if we fail to meet our customers' needs.
Typically, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly:
our customers can stop purchasing our products at any time without penalty;
our customers are free to purchase products from our competitors; and
our customers are not required to make minimum purchases.
Sales are typically made pursuant to inventory hub arrangements under which customers may draw down inventory to satisfy their demand as needed or pursuant to individual purchase orders, often with extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is likely that we will lose sales and customers. If our major customers stop purchasing our products for any reason, our business, financial condition, and results of operations would be harmed.
Our customers often evaluate our products for long and variable periods, which causes the timing of our revenues and results of operations to be unpredictable.
The period of time between our initial contact with a customer and the receipt of an actual purchase order typically spans over a year. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products before purchasing and using the products in their equipment. These products often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. Our customers do not typically share information on the duration or magnitude of these qualification procedures. The length of
these qualification processes also may vary substantially by product and customer, and, thus, cause our results of operations to be unpredictable. While our potential customers are qualifying our products and before they place an order with us, we may incur substantial research and development and sales and marketing expenses and expend significant management effort. Even after incurring such costs, we ultimately may not be able to sell any products to such potential customers. In addition, these qualification processes often make it difficult to obtain new customers, as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. Once our products have been qualified, the agreements that we enter into with our customers typically contain no minimum purchase commitments. Failure of our customers to incorporate our products into their systems would significantly harm our business.
Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers.
Our products are complex and defects may be found from time to time. Networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with our customers' products, which incorporate a variety of components produced by third parties. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business.
We may not be able to obtain additional capital in the future, and failure to do so may harm our business.
We believe that our existing balances of cash and cash equivalents, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire our outstanding 2036 Notes, in the aggregate principal amount of $575.0 million, which are subject to redemption by the holders in December 2021, 2026 and 2031. Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be able to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders.
Our international business and operations expose us to additional risks.
Products shipped to customers located outside the United States account for a majority of our revenues. In addition, we have significant tangible assets located outside the United States. Our principal manufacturing facilities are located in Malaysia and China. We currently operate smaller facilities in Australia, Korea, Sweden and Germany, and we are further expanding one of our manufacturing facilities in China. We also rely on several contract manufacturers located in Asia for our supply of key subassemblies. Conducting business outside the United States subjects us to a number of additional risks and challenges, including:
periodic changes in a specific country's or region's economic conditions, such as recession;
compliance with a wide variety of domestic and foreign laws and regulations (including those of municipalities or provinces where we have operations) and unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, social insurance contributions and other payroll taxes and fees to governmental entities, tariffs, quotas, export controls, export licenses and other trade barriers;
unanticipated restrictions on our ability to sell to foreign customers where sales of products and the provision of services may require export licenses or are prohibited by government action (for example, in early 2018, the U.S. Department of Commerce prohibited the export and sale of a broad category of U.S. products, as well as the provision of services, to ZTE Corporation, and in 2019, to Huawei, both of which are our customers in China);
certification requirements;
environmental regulations;
fluctuations in foreign currency exchange rates;
inadequate protection of intellectual property rights in some countries;
potential political, legal and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers and contract manufacturers are located;
preferences of certain customers for locally produced products;
difficulties and costs of staffing and managing international operations across different geographic areas and cultures, including assuring compliance with the U.S. Foreign Corrupt Practices Act and other U. S. and foreign anticorruption laws;
seasonal reductions in business activities in certain countries or regions; and
fluctuations in freight rates and transportation disruptions.
These factors, individually or in combination, could impair our ability to effectively operate one or more of our foreign facilities or deliver our products, result in unexpected and material expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Our failure to manage the risks and challenges associated with our international business and operations could have a material adverse effect on our business.
Changes in government trade policies, including the imposition of tariffs and export restrictions, could limit our ability to sell our products to certain customers, which may materially adversely affect our sales and results of operations.
The current U.S. President, members of his administration, and other public officials, including members of the current U.S. Congress, have made public statements indicating possible significant changes in U.S. trade policy and have taken certain actions that may impact U.S. trade policy, including imposing new or increased tariffs on certain goods imported into the United States. Since we manufacture a significant majority of our products outside the United States, such changes, if adopted, could have a disproportionate impact on our business and make our products more expensive and less competitive in domestic markets. Furthermore, changes in U.S. trade policy could trigger retaliatory actions by affected countries, which could impose restrictions on our ability to do business in or with affected countries or prohibit, reduce or discourage purchases of our products by foreign customers, leading to increased costs of components contained in our products, increased costs of manufacturing our products, and higher prices for our products in foreign markets. For example, there are risks that the Chinese government may, among other things, require the use of local suppliers, compel companies that do business in China to partner with local companies to conduct business and provide incentives to government-backed local customers to buy from local suppliers. Changes in, and responses to, U.S. trade policy could reduce the competitiveness of our products and cause our sales and revenues to drop, which could materially and adversely impact our business and results of operations.
The U.S. or foreign governments may take administrative, legislative or regulatory action that could materially interfere with our ability to sell products in certain countries, particularly in China. For example, between July 2018 and May 2019, the Office of the United States Trade Representative imposed 25% tariffs on specified product lists, including certain electronic components and equipment, totaling approximately $250 billion in Chinese imports. In response, China imposed or proposed new or higher tariffs on U.S. products. The U.S. government has also threatened to impose tariffs on an additional $325 billion of Chinese imports, and China has threatened additional retaliatory actions. While the imposition of these tariffs did not have a direct, material adverse impact on our business during fiscal year 2019, the direct and indirect effects of tariffs and other restrictive trade policies are difficult to measure and are only one part of a larger U.S./China economic and trade policy disagreement. For example, the list of proposed U.S. tariffs on Chinese products released in July 2018 includes transceiver and other products manufactured in our facility in Wuxi, China. If these new tariffs are implemented, sales of our products manufactured in China and shipped to the United States could decrease, which would negatively impact our business. The institution 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 for our business. Furthermore, the imposition of tariffs could cause a decrease in the sales of our products to customers located in China or to other customers selling to Chinese end users, which would directly impact our business. In addition, the imposition of tariffs on our customers’ products that are imported from China to the U.S. could harm sales of such products, which would harm our business. We cannot predict what actions may ultimately be taken with respect to tariffs or trade relations between the U.S. and China or other countries, what products may be subject to such actions, or what actions may be taken by the other countries in retaliation.
Furthermore, the U.S. government has in the past issued export restrictions that prohibited American companies from exporting U.S. manufactured products, foreign manufactured products with more than 25% controlled U.S. content, as well as U.S. origin technology, to ZTE, one of our customers, and, while the ZTE restriction have been lifted, in May 2019 the U.S. government imposed a similar prohibition with respect to Huawei, which accounted for 10% of our total revenue during fiscal 2019. While more than 90% of the revenue we received from Huawei in fiscal year 2019 was for products of a type not subject to the current U.S. government prohibition, the prohibition on transfers of U.S. origin technology to Huawei could significantly limit our ability to service certain of our products sold to Huawei and our ability to engage in product development activities with Huawei. In addition, Huawei’s inability to obtain products from other companies in its supply chain may adversely impact Huawei’s demand for our products. These factors could negatively impact Huawei demand for affected products. Even if such restrictions are lifted, any financial or other penalties or continuing export restrictions imposed on Huawei could have a continuing negative impact on our future revenue and results of operations. In addition, Huawei or other foreign customers
affected by future U.S. government sanctions or threats of sanctions may respond by developing their own solutions to replace our products or by adopting our foreign competitors’ solutions.
Moreover, U.S. government actions targeting exports of certain technologies to China are becoming more pervasive. For example, in 2018, the U.S. adopted new laws designed to address concerns about the export of emerging and foundational technologies; these concerns are particularly manifest with respect to China. In addition, in May 2019, President Trump issued an executive order that invoked national emergency economic powers to implement a framework to regulate the acquisition of information communications technology that implicate national security concerns.
The loss or temporary loss of substantial sales to foreign customers or the imposition of restrictions on our ability to sell products to such customers as a result of tariffs, export restrictions or other U.S. regulatory actions could materially adversely affect our sales, business and results of operations.
Our ability to hire and retain employees may be negatively impacted by changes in immigration laws, regulations and procedures.
Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering and product development. Our ability to hire and retain these workers and their ability to remain and work in the United States are impacted by laws and regulations, as well as by procedures and enforcement practices of various government agencies. Changes in immigration laws, regulations or procedures, including those that may be enacted by the new U.S. presidential administration, may adversely affect our ability to hire or retain such workers, increase our operating expenses and negatively impact our ability to deliver our products and services.
Our future operating results may be subject to volatility, as a result of exposure to foreign exchange risks.
We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our revenues and our costs and expenses, which would significantly affect our operating results. More than 99% of our sales worldwide are denominated in U.S. dollars. If there is a significant devaluation of the currency in a specific country relative to the dollar, the prices of our products will increase relative to that country's currency, our products may be less competitive in that country and our revenues may be adversely affected.
Although we price our products in U.S. dollars, portions of both our cost of revenues and operating expenses are incurred in foreign currencies, principally the Malaysian ringgit, the Chinese yuan, the Australian dollar, the Swedish krona, and the Euro. As a result, we bear the risk that the rate of inflation in one or more countries will exceed the rate of the devaluation of that country's currency in relation to the U.S. dollar, which would increase our costs as expressed in U.S. dollars. To date, we have not engaged in currency hedging transactions to decrease the risk of financial exposure from fluctuations in foreign exchange rates.
Our failure to protect our intellectual property may significantly harm our business.
Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. We license certain of our proprietary technology, including our digital diagnostics technology, to customers who include current and potential competitors, and we rely largely on provisions of our licensing agreements to protect our intellectual property rights in this technology. We have obtained a number of issued patents, acquired certain other patents as a result of our acquisitions, and we have filed applications for additional patents; however, we cannot assure you that any pending patent applications will result in issued patents, any issued patents will include claims that are sufficiently broad to cover our products and technologies or to provide sufficient protection from our competitors, or that our issued patents will be upheld. Additionally, significant technology used in our product lines is not the subject of any patent protection, and we may be unable to obtain patent protection on such technology in the future. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, which could result in loss of competitive advantages and decreased revenues to us.
Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and expensive. We are currently engaged in pending litigation to enforce certain of our patents, and additional litigation may be
necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. In connection with the pending litigation, substantial management time has been, and will continue to be, expended. In addition, we have incurred, and we expect to continue to incur, substantial legal expenses in connection with these pending lawsuits. These costs and this diversion of resources could significantly harm our business.
Claims that we or any user of our products infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.
Our industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are currently involved as a defendant in patent infringement litigation and have been involved in the past as a defendant in such lawsuits. From time to time, we have also been accused of patent infringement that is not subject to current lawsuit, some of which accusations are unresolved. In the future, we may be subject to additional litigation alleging infringement of patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Further, claims against a customer and/or end user of our products that the re-sale or use of our products, either alone or in combination with other products, infringes proprietary rights of third parties could cause customers or users to choose to not or be required to not utilize our products alone or in such combination, which could harm our sales of such products. Any claims, against us or any customer or user of our products, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.
Numerous patents in our industry are held by others, including academic institutions, competitors and non-practicing entities. Optical subsystem suppliers may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us. In the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain those licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products. Licenses granting us the right to use third party technology may not be available on commercially reasonable terms, if 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.
If we are unable to retain our key management and technical personnel and attract and retain additional key personnel as required, our business could be significantly harmed.
Our future success is substantially dependent upon the continued contributions of the members of our senior management team, many of whom have years of management, engineering, sales, marketing and manufacturing experience that would be difficult to replace. We also believe our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In particular, we will need to increase the number of our technical staff members with experience in high-speed networking applications as we further develop our product lines. Competition for these highly skilled employees in our industry is intense. In making employment decisions, particularly in the high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our common stock may adversely affect our ability to attract or retain key management and technical personnel. The loss of service of any our key management or technical employees, our inability to attract or retain qualified personnel in the future or delays in hiring key personnel, as required, could significantly harm our business. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have been subject to claims of this type and may be subject to such claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.
Our business and future operating results are subject to a wide range of uncertainties arising out of the continuing threat of terrorist attacks and ongoing military actions in the Middle East.
Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the continuing threat of terrorist attacks on United States' interests, including U.S. companies, in locations worldwide and ongoing military actions in the Middle East, including the economic consequences of the war in Afghanistan or additional terrorist activities and
associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:
increased risks related to the operations of our manufacturing facilities in Malaysia;
greater risks of disruption in the operations of our China and Singapore facilities and our Asian contract manufacturers, including contract manufacturers located in Thailand, and more frequent instances of shipping delays; and
the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.
Future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.
In addition to our combination with Optium in August 2008 and our acquisitions of Ignis in May 2011, Red-C in July 2012 and u2t Photonics AG ("u2t") in January 2014, we have completed the acquisition of 11 privately-held companies and certain businesses and assets from seven other companies since October 2000. We continue to review opportunities to acquire other businesses, product lines or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies.
The Optium merger and several of our other past acquisitions have been material, and acquisitions that we may complete in the future may be material. In 13 of our 22 acquisitions, we issued common stock or notes convertible into common stock as all or a portion of the consideration. The issuance of common stock or other equity securities by us in connection with any future acquisition would dilute our stockholders' percentage ownership.
Other risks associated with acquiring the operations of other companies include:
problems assimilating the purchased operations, technologies or products;
unanticipated costs associated with the acquisition;
diversion of management's attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
risks associated with entering markets in which we have no or limited prior experience; and
potential loss of key employees of purchased organizations.
Not all of our past acquisitions have been successful. In the past, we have subsequently sold some of the assets acquired in prior acquisitions, discontinued product lines and closed acquired facilities. As a result of these activities, we incurred significant restructuring charges and charges for the write-down of assets associated with those acquisitions. Through fiscal 2019, we have written off all of the goodwill associated with our past acquisitions with the exception of the more recently completed acquisitions of Ignis, Red-C and u2t. We cannot assure you that we will be successful in overcoming problems encountered in connection with our past acquisitions or potential future acquisitions, and our inability to do so could significantly harm our business. In addition, to the extent that the economic benefits associated with our past acquisitions or any of our future acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which would adversely affect our operating results.
We have made and may continue to make strategic investments which may not be successful, may result in the loss of all or part of our invested capital and may adversely affect our operating results.
Since inception, we have made minority equity investments in a number of early-stage technology companies, totaling approximately $61.9 million. Our investments in these early stage companies were primarily motivated by our desire to gain early access to new technology. We intend to review additional opportunities to make strategic equity investments in pre-public companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make these strategic, minority equity investments. Each of these investments in pre-public companies involves a high degree of risk. We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives or to raise capital needed on acceptable economic terms could result in a loss of all or part of our invested capital. Between fiscal 2003 and 2019, we wrote off an aggregate of $29.0 million in nine investments which became impaired and reclassified $4.2 million of another investment to goodwill as the investment was deemed to have no value.
Our ability to utilize certain net operating loss carryforwards and tax credit carryforwards may be limited under Sections 382 and 383 of the Internal Revenue Code.
As of April 28, 2019, the Company had federal, state and foreign net operating loss carryforwards of approximately $152.8 million, $13.5 million and $22.5 million, respectively, and federal and state tax credit carryforwards of approximately $43.8 million and $34.8 million, respectively. With the exception of California R&D credit, which can be carried forward indefinitely, the net operating loss and tax credit carryforwards will expire at various dates beginning in fiscal 2020 through 2039, if not utilized. $209,000 of such net operating loss carryforwards and $4.5 million of such tax credit carryforwards will expire in the next five years. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
On December 22, 2017, H.R.1, commonly referred to as the Tax Cuts and Jobs Act ("TCJA"), was signed into law. The TCJA is complex and includes amendments that significantly change the taxation of offshore earnings and the deductibility of interest. The TCJA had a material impact on the value of our deferred tax assets and could increase our future U.S. tax expense. The TCJA implemented a territorial tax system, which includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. The mandatory deemed repatriation of these undistributed earnings has been offset by federal and state net operating loss carryforwards, and state credit carryforwards. Additionally, TCJA introduced new international tax provisions that are effective for our fiscal year 2019, including (i) a new provision designed to currently tax the global low-taxed income of our foreign subsidiaries, together with a deduction of up to 50 percent and a partial credit for foreign taxes incurred by the foreign subsidiaries; (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 will have an impact on our tax expense for fiscal year 2019 and future periods, we expect the minimum tax on certain base erosion payments to have the most significant impact. We have completed our assessment of the effect of the TCJA on our consolidated financial statements. Reference is made to "Part II, Item 8, Financial Statements - Note 13. Income Taxes" for further discussion of the TCJA.
Changes in the application of tax policies may harm our results of operations.
A number of factors may negatively impact the manner in which our existing NOLs are applied as well as our future effective tax rates including, but not limited to:
the jurisdictions in which profits are determined to be earned and taxed;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in stock-based compensation;
changes in tax laws or the interpretation of such tax laws, including by authorities in municipalities where we are subject to social insurance and other payroll taxes and fees, and changes in generally accepted accounting principles in the United States or other countries in which we operate; and
potential changes resulting from the IRS's clarification of the TCJA.
An adverse change that impacts our tax position could negatively impact our operating results. In addition, we are the recipient of tax incentives that provide that certain income earned by our subsidiary in Malaysia is subject to a tax holiday for a limited period of time under the laws of that country. This Malaysian tax holiday is subject to expiration in August 2021. Our ability to realize benefits from tax initiatives could be materially affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction. In addition, although we have successfully received tax holiday extensions in the past, there can be no assurance that future extensions will be granted. If we are not able to extend a tax holiday, our total tax paid on a consolidated basis would be materially increased.
We will lose sales if we are unable to obtain government authorization to export certain of our products, and we would be subject to legal and regulatory consequences if we do not comply with applicable export control laws and regulations.
Exports of certain of our products are subject to export controls imposed by the U.S. Government and administered by the United States Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations, or EAR, administered by the Department of Commerce's Bureau of Industry and Security, the requirement for a license is dependent on
the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the Department of State's Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are subject to EAR and we historically have sold some products, including certain products developed with government funding, which are subject to ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation.
Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments or having one or more of our customers be restricted from receiving exports from us could significantly reduce our revenue and materially adversely affect our business, financial condition and results of operations. Compliance with governmental regulations also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.
We have previously been the subject of inquiries from the Department of State and the Department of Justice regarding compliance with ITAR. Although these inquiries were closed with no action being taken, we expended significant time and resources to resolve them, and future inquiries of this type could also be costly to resolve.
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 are 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. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Furthermore, 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.
Additionally, the European Union recently adopted the General Data Protection Regulation (the "GDPR"), which comprehensively reforms the EU’s data protection laws and took effect in May 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. 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.
We are subject to pending securities class action and shareholder derivative legal proceedings.
Several purported securities class action lawsuits were filed against us and our Chairman of the Board, Chief Executive Officer and Chief Financial Officer following our March 8, 2011 announcement of unaudited financial results for the third quarter of fiscal 2011 and our financial outlook for the fourth quarter of fiscal 2011. We also have been named as a nominal defendant in several shareholder derivative lawsuits filed in 2011 concerning our March 8, 2011 earnings announcement. No specific amounts of damages have been alleged in the class action lawsuits and, by the nature of the lawsuits, no damages will be alleged against Finisar in the derivative lawsuits.
We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuits vigorously, however there can be no assurance that we will be successful in any defense. If any of the lawsuits related to our earnings announcement are adversely decided, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows. Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.
Our business and future operating results may be adversely affected by events outside our control.
Our business and operating results are vulnerable to events outside of our control, such as earthquakes, floods, fire, power loss, telecommunication failures and uncertainties arising out of terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of our manufacturing operations are located in California, and our principal manufacturing operations and those of most of our key suppliers and contract manufacturers are located in Asia. These areas have been vulnerable to natural disasters, such as earthquakes, floods and fires, and other risks which at times have disrupted the local economy and posed physical risks to our property. We are also dependent on communications links with our overseas manufacturing locations and would be significantly harmed if these links were interrupted for any significant length of time. We presently do not have adequate redundant, multiple site capacity if any of these events were to occur, nor can we be certain that the insurance we maintain against these events would be adequate.
The conversion of our outstanding convertible notes would result in substantial dilution to our current stockholders.
As of April 28, 2019, we had outstanding an aggregate principal amount of $1.1 million of our 2033 Notes and an aggregate principal amount of $575.0 million of our 2036 Notes. On May 1, 2019, the Company redeemed all of the remaining $1.1 million of the principal amount of the 2033 Notes. The 2036 Notes are convertible at the option of the holder, under certain circumstances, into shares of our common stock at an initial conversion price of $44.17 per share, subject to adjustments. An aggregate of approximately 13,017,885 shares of common stock would be issued upon the conversion of all outstanding 2036 Notes at the conversion price, which would dilute the voting power and ownership percentage of our existing stockholders. We have previously entered into privately negotiated transactions with certain holders of our convertible notes for the repurchase of notes in exchange for a greater number of shares of our common stock than would have been issued had the principal amount of the notes been converted at the original conversion rate specified in the notes, thus resulting in more dilution. We may enter into similar transactions in the future and, if we do so, there will be additional dilution to the voting power and percentage ownership of our existing stockholders.
Delaware law, our charter documents and our stockholder rights plan 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 additional 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
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% or more of the corporation's outstanding voting securities, or certain affiliated persons.
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.
We do not currently intend to pay dividends on Finisar common stock and, consequently, a stockholder's ability to achieve a return on such stockholder's investment will depend on appreciation in the price of the common stock.
We have never declared or paid any cash dividends on Finisar common stock and we do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, a stockholder is not likely to receive any dividends on such stockholder's common stock for the foreseeable future.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has been and is likely to continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:
trends in our industry and the markets in which we operate;
changes in the market price of the products we sell;
changes in financial estimates and recommendations by securities analysts;
acquisitions and financings;
quarterly variations in our operating results;
the operating and stock price performance of other companies that investors in our common stock may deem comparable; and
purchases or sales of blocks of our common stock.
Part of this volatility is attributable to the current state of the stock market, in which wide price swings are common. This volatility may adversely affect the prices of our common stock, regardless of our operating performance. If any of the foregoing occurs, our stock price could fall and we may be exposed to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure.
We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to our changing needs. In some cases, we may rely upon third-party hosting and support services to meet these needs. Any failure to manage, expand and update our information technology infrastructure, including our Enterprise Resource Planning ("ERP") system and other applications, any failure in the extension or operation of this infrastructure, or any failure by our hosting and support partners in the performance of their services could materially and adversely harm our business. Despite our implementation of security measures, our systems are vulnerable to damage from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruption or security breach results in a loss or damage to our data or in inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, and ultimately harm our business. In addition, we may be required to incur significant costs to protect against or mitigate damage caused by these disruptions or security breaches in the future.
| |
Item 1B. | Unresolved Staff Comments |
None.
Item 2. Properties
Our principal facilities are located in California, Pennsylvania, Texas, Malaysia, and China.
Information regarding our properties as of April 28, 2019 is as follows:
|
| | |
Location | Use | Size |
| | (Square Feet) |
Owned | | |
Wuxi, China | Manufacturing operations | 1,100,000 |
Sherman, Texas | Wafer fabrication operations and administrative operations | 700,000 |
Ipoh, Malaysia | Manufacturing operations | 640,000 |
Shenzhen, China | Administrative operations | 50,000 |
Daejeon, Korea | Research and development | 12,800 |
Leased | | |
Shanghai, China | Research and development, general and administrative, and limited manufacturing operations | 180,000 |
Allen, Texas | Wafer fabrication operations. A portion of this facility is currently subleased. | 160,000 |
Sydney, Australia | Manufacturing, research and development and administrative operations | 100,000 |
Fremont, California | Research and development and manufacturing operations | 121,000 |
Sunnyvale, California | Corporate headquarters, research and development, sales and marketing, general and administrative and NPI manufacturing operations | 92,000 |
Horsham, Pennsylvania | NPI manufacturing, research and development, sales and administration | 64,000 |
Jarfalla, Sweden | Wafer fabrication operations and research and development | 63,000 |
Berlin, Germany | Research and development and manufacturing operations | 22,000 |
Hyderabad, India | Information technology support center | 22,000 |
Singapore | Research and development | 16,000 |
Eugene, Oregon | Research and development and manufacturing operations | 9,000 |
San Diego, California | Research and development | 5,000 |
Champaign, Illinois | Research and development | 3,000 |
The owned property in Wuxi, China, consists of 550,000 square feet of land leased for 50 years where we built a 800,000 square foot manufacturing operations facility and an additional 280,000 square feet of land leased for 50 years where we built an additional 300,000 square foot manufacturing operations facility. The owned property in Ipoh, Malaysia, consists of 840,000 square feet of land leased for 60 years where our 640,000 square foot manufacturing operations facility is located. The owned property in Daejeon, Korea, includes 4,200 square feet of land owned by our subsidiary, Finisar Daejeon Co. Ltd. We believe our properties are in good condition and are suitable for their present uses. We also believe that our existing facilities will be adequate to accommodate our needs for the foreseeable future.
The material set forth in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.
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Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Since our initial public offering on November 11, 1999, our common stock has traded on the NASDAQ Stock Market under the symbol “FNSR.” The following table sets forth the range of high and low sales prices of our common stock for the periods indicated:
|
| | | |
| | High | | Low |
| Fiscal 2019 Quarter Ended: | | | |
| April 28, 2019 | $24.77 | | $21.33 |
| January 27, 2019 | $23.68 | | $15.81 |
| October 28, 2018 | $21.63 | | $15.91 |
| July 29, 2018 | $19.00 | | $15.42 |
| Fiscal 2018 Quarter Ended: | | | |
| April 29, 2018 | $21.73 | | $14.25 |
| January 28, 2018 | $25.41 | | $17.20 |
| October 29, 2017 | $27.97 | | $20.16 |
| July 30, 2017 | $28.99 | | $22.31 |
According to records of our transfer agent, we had 184 stockholders of record as of June 10, 2019 and we believe there is a substantially greater number of beneficial holders. We have never declared or paid dividends on our common stock and currently do not intend to pay dividends in the foreseeable future so that we may reinvest our earnings in the development of our business. The payment of dividends in the future will be at the discretion of the Board of Directors.
COMPARISON OF STOCKHOLDER RETURN
Set forth below is a line graph comparing the yearly percentage change in the cumulative total return on our common stock with the cumulative total returns of the Nasdaq Stock Market (U.S. Companies) and the NYSE Arca Networking Index for the period commencing on April 28, 2014 and ending on April 28, 2019, assuming the reinvestment of dividends, if any.
The graph and table below assume that on April 28, 2014, $100.00 was invested in our common stock (at the market price of our stock on such date) and each index. 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.
COMPARISON OF CUMULATIVE TOTAL RETURN FROM
APRIL 28, 2014 THROUGH APRIL 28, 2019 FOR
FINISAR, NASDAQ STOCK MARKET AND NYSE ARCA NETWORKING INDEX
|
| | | | | | | | | | | |
| | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
| Finisar Corporation | | (24.05 | )% | (21.39 | )% | 38.76 | % | (31.09 | )% | 51.72 | % |
| $100.00 | $75.95 | $59.70 | $82.84 | $57.09 | $86.62 |
| NASDAQ Stock Market (U.S. Companies) | | 24.42 | % | (2.27 | )% | 28.43 | % | 19.33 | % | 16.18 | % |
| $100.00 | $124.42 | $121.59 | $156.15 | $186.34 | $216.49 |
| NYSE Arca Networking Index | | 16.25 | % | (5.35 | )% | 28.28 | % | 20.19 | % | 15.33 | % |
| $100.00 | $116.25 | $110.04 | $141.16 | $169.65 | $195.65 |
| |
Item 6. | Selected Financial Data
|
You should read the following selected financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the notes thereto included elsewhere in this report. The statement of operations data set forth below for the fiscal years ended April 28, 2019, April 29, 2018 and April 30, 2017 and the balance sheet data as of April 28, 2019 and April 29, 2018 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this report. The statement of operations data set forth below for the fiscal years ended May 1, 2016 and May 3, 2015 and the balance sheet data as of April 30, 2017, May 1, 2016 and May 3, 2015 are derived from our audited consolidated financial statements not included in this report.
|
| | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 | | May 1, 2016 | | May 3, 2015 |
| | (In thousands, except per share data) |
| Statement of Operations Data: | | | | | | | | | |
| Revenues | $1,280,480 | | $1,316,483 | | $1,449,303 | | $1,263,166 | | $1,250,944 |
| Consolidated net income (loss) | $(53,216) | | $(48,286) | | $249,346 | | $35,193 | | $11,887 |
| Net income (loss) per share attributable to Finisar Corporation common stockholders: | | | | | | | | | |
| Basic | $(0.45) | | $(0.42) | | $2.26 | | $0.33 | | $0.12 |
| Diluted | $(0.45) | | $(0.42) | | $2.19 | | $0.32 | | $0.11 |
| Balance Sheet Data: | | | | | | | | | |
| Total assets | $2,352,167 | | $2,583,185 | | $2,539,882 | | $1,645,371 | | $1,551,882 |
| Long-term portion of convertible notes | $512,105 | | $488,877 | | $707,782 | | $229,393 | | $221,406 |
| |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
Management’s discussion and analysis of financial condition and results of operation, or MD&A, is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The MD&A is organized as follows:
Forward-looking statements. This section discusses how forward-looking statements made by us in the MD&A and elsewhere in this report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.
Business Overview. This section provides an introductory overview and context for the discussion and analysis that follows in MD&A.
Critical Accounting Estimates. This section discusses those accounting estimates that are both considered to have significant impact on our financial condition and operating results and require significant judgment on the part of management regarding matters that are inherently uncertain.
Results of Operations. This section provides analysis of the Company’s results of operations for the three fiscal years period ended April 28, 2019. A brief description is provided of transactions and events that impact comparability of the results being analyzed.
Financial Condition and Liquidity. This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.
Forward Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A. Risk Factors.” The following discussion should be read together with our consolidated financial statements and related notes thereto included elsewhere in this report.
Business Overview
We are a global technology leader in optical communications, providing components and subsystems to networking equipment manufacturers, data center operators, telecom service providers, consumer electronics and automotive companies. We design products that meet the increasing demands for network bandwidth, data storage and 3D sensing subsystems. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in these networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 400 Gbps, over distances of less than 10 meters to more than 2,000 kilometers, using a wide range of network protocols and physical configurations.
We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as a reconfigurable optical add/drop multiplexers, or ROADM.
We have also entered the 3D Sensing market. 3D Sensing enables features such as facial recognition, gaming and virtual reality, as well as automotive market applications such as LiDAR and in-cabin recognition. VCSELs (Vertical Cavity Surface Emitting Lasers) are core to 3D Sensing. We leverage our experience in laser technology in our 3D Sensing products.
Our line of optical components also includes packaged lasers and photodetectors for data communication and telecommunication applications.
Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, tablet computers, and other mobile devices.
Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products, including lasers, photodetectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.
We sell our products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Broadcom, Ciena, Cisco Systems, Dell EMC, Ericsson, FiberHome, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Juniper, Nokia, QLogic (now subsidiary of Marvell Technology), and ZTE, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.
Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, inventory adjustments for obsolete and excess inventory and the amortization of acquired developed technology associated with acquisitions that we have made. As a result of building a vertically integrated business model, our manufacturing cost structure has become more fixed. While this can be beneficial during periods when demand is strong, it can be more difficult to reduce costs during periods when demand for our products is weak, product mix is unfavorable or selling prices are generally lower. While we have undertaken measures to reduce our operating costs, there can be no assurance that we will be able to reduce our cost of revenues sufficiently to achieve or sustain profitability.
Since October 2000, we have completed the acquisition of two publicly-held companies. We have also completed the acquisition of 13 privately-held companies and certain businesses and assets from seven other companies in order to broaden our product offerings and provide new sources of revenue, production capabilities and access to advanced technologies that we believe will enable us to reduce our product costs and develop innovative and more highly integrated product platforms while accelerating the timeframe required to develop such products.
Merger Agreement
On November 8, 2018, the Company, II-VI Incorporated, a Pennsylvania corporation ("Parent" or "II-VI") and Mutation Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Subsidiary"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other things, Merger Subsidiary will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a wholly owned subsidiary of Parent.
At the time the Merger becomes effective (the "Effective Time"), each issued and outstanding share of common stock, par value $0.001 per share, of the Company ("Company Stock") (other than shares of Company Stock owned by Parent or Merger Subsidiary or any direct or indirect wholly owned subsidiary of Parent, which will be cancelled without consideration, and holders of Company Stock, if any, who properly exercise their appraisal rights under the General Corporation Law of the State of Delaware) outstanding immediately prior to the Merger will be automatically cancelled and converted into the right to receive, for each share of Company Stock, at the stockholder’s election and subject to proration in the event the cash consideration or Parent Common Stock (as defined below) consideration is oversubscribed, either (i) $26.00 in cash (the "Cash Election Consideration"), (ii) 0.5546 of a share of common stock, no par value, of Parent ("Parent Common Stock") (the "Stock Election Consideration"), or (iii) a combination of (A) 0.2218 of a share of Parent Common Stock (the "Exchange Ratio") and (B) $15.60 in cash, without interest (the "Mixed Election Consideration"). On an average basis across all shares of Company Stock (including the Options (as defined below) and Performance RSUs (as defined below)), at the closing of the Merger, 60% of the aggregate amount of the outstanding shares of Company Stock (including the Options and Performance RSUs) will be converted into the right to receive the Cash Election Consideration, with the remaining 40% converted into the right to receive the Stock Election Consideration.
Pursuant to the Merger Agreement, at the Effective Time, each outstanding and unexercised option to purchase Company Stock (whether vested or unvested) (an "Option") shall automatically be cancelled and terminated and converted into the right to receive an amount of Mixed Election Consideration equal to the product of (i) the excess, if any, of the Cash Election Consideration over the exercise price per share of such Option multiplied by (ii) the number of shares of Company Stock subject to such Option, payable no later than the Company’s next payroll date after the closing of the Merger. Further, as of the Effective Time, each award of restricted stock units of the Company that is outstanding immediately prior to the Effective Time
and is subject to a performance-based vesting condition (a "Performance RSU") that relates solely to the value of Company Stock will vest as to a number of shares determined under the terms of the award and will be cancelled and extinguished and converted into the right to receive the Cash Election Consideration, the Stock Election Consideration or the Mixed Election Consideration in accordance with the election made by the holder of such Performance RSU. At the Effective Time, each other award of restricted stock units of the Company that is outstanding and unvested will be assumed by Parent and continue to be subject to substantially the same terms and conditions (including vesting requirements) as in effect immediately prior to the Effective Time, except that the number of shares of Parent Common Stock subject to such assumed restricted stock unit awards will be equal to the product of (i) the number of shares of Company Stock underlying such unvested restricted stock unit award as of immediately prior to the Effective Time multiplied by (ii) the sum of the (A) Exchange Ratio plus (B) the quotient obtained by dividing $15.60 by the Equity Award Measurement Price. The "Equity Award Measurement Price" means the volume weighted average price per share of Parent Common Stock on NASDAQ for the ten (10) consecutive trading days ending on (and including) the third trading day immediately prior to the Effective Time.
The Merger Agreement also provides, among other things, that the board of directors of Parent (the "Parent Board") will appoint, at the Effective Time, three members, each of whom are (i) members of the board of directors of the Company (the "Board") as of the date of the Merger Agreement, (ii) mutually agreed to by the Company and Parent, acting in good faith, and (iii) reasonably approved by the Corporate Governance and Nominating Committee of the Parent Board.
The closing of the Merger is subject to, among other things, the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the outstanding shares of Company Stock (the "Company Stockholder Approval"), which was obtained on March 26, 2019, and the affirmative vote of at least a majority of the votes cast for the proposal on the issuance of the Parent Common Stock and any restricted units of Parent issuable in connection with the Merger (the "Parent Stockholder Approval"), which was obtained on March 26, 2019. The closing of the Merger is also subject to various customary conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; receipt of other specified regulatory approvals; the absence of any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction enjoining or otherwise prohibiting the consummation of the Merger; the SEC having declared effective a Form S-4 with respect to, and the approval of the listing on NASDAQ of, the shares of Parent Common Stock issuable in connection with the Merger; the accuracy of the representations and warranties contained in the Merger Agreement (generally subject to a material adverse effect qualification); compliance with the covenants and agreements in the Merger Agreement in all material respects; and no material adverse effect on either the Company or Parent. The closing of the Merger is also subject to Parent, the Company and Wells Fargo Bank, National Association (the "Trustee"), entering into a supplemental indenture in connection with that certain (i) indenture, dated as of December 16, 2013 (the "2033 Notes Indenture"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2033 (the "2033 Notes"), which was cancelled and discharged on May 1, 2019 in connection with the redemption of all of the remaining outstanding 2033 Notes, and (ii) indenture, dated as of December 21, 2016 (the "2036 Notes Indenture" and, together with the 2033 Notes Indentures, the "Indentures"), by and among the Company and the Trustee governing the Company’s 0.50% Convertible Senior Notes due 2036 (the "2036 Notes" and, together with the 2033 Notes, the "Notes") providing, among other items, (a) at and after the Effective Time, pursuant, and subject to, the terms and conditions of the applicable Indenture, for the change in right to convert each $1,000 principal amount of the 2033 Notes and the 2036 Notes, as applicable, into the amount of shares of Parent Common Stock and cash, or the combination thereof, that a holder of a number of shares of Company Stock equal to the conversion rate of the 2033 Notes and the 2036 Notes immediately prior to the Effective Time would have owned or been entitled to receive upon the Effective Time, and (b) Parent’s full and unconditional guarantee, on a senior unsecured basis, of the 2033 Notes and the 2036 Notes. Though not a condition to Closing, Parent and Merger Subsidiary are also obligated to use its reasonable best efforts to obtain debt financing that, together with the other financial resources of Parent, will be sufficient to satisfy all of Parent’s and Merger Subsidiary’s payment obligations under the Merger Agreement.
Pursuant, and subject, to the terms and conditions of the Indentures, each holder of Notes will have the right, at such holder’s option, to require the Company to repurchase any or all of such holder’s Notes, on the date specified by the Company that is not less than 20 business days and not more than 35 business days after the date of the Company’s notice to holders of the occurrence of the Merger, such notice to be delivered within 20 business days of the Effective Time, at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to, but excluding, the repurchase date ("Merger Repurchase Date"). Further pursuant, and subject, to the terms and conditions of the Indentures, all or any portion of a holder’s Notes may be surrendered for conversion at any time from or after the date that is 25 scheduled trading days prior to the anticipated Effective Time (or, if later, the business day after the Company gives holders notice of the Merger) until the Merger Repurchase Date.
The Company has made customary representations and warranties in the Merger Agreement. The Company is also subject to customary covenants, including, among others, covenants (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by Parent, (iii) to convene and hold a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to Parent the recommendation of the Board that the Company’s stockholders adopt the Merger Agreement.
Parent has made customary representations and warranties in the Merger Agreement. Parent is also subject to customary covenants, including, among others, (i) to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to engage in specified types of transactions during this period unless agreed to in writing by the Company, (iii) to convene and hold a meeting of its shareholders for the purpose of obtaining the Parent Stockholder Approval, which was held and such approval was obtained on March 26, 2019, and (iv) subject to certain exceptions, not to withdraw, amend or modify in a manner adverse to the Company the recommendation of the Parent Board that Parent’s shareholders vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger.
The Merger Agreement contains certain termination rights, including the right of the Company to terminate the Merger Agreement under specified circumstances to accept an unsolicited superior proposal from a third party. The Merger Agreement provides that, upon termination of the Merger Agreement by the Company or Parent under specified circumstances (including termination by the Company to accept a superior proposal), a termination fee of $105,200,000 will be payable by the Company to Parent. The Company termination fee is also payable under certain other specified circumstances set forth in the Merger Agreement. Further, the Company has the right to terminate the Merger Agreement if the Parent Board fails to recommend that the shareholders of Parent vote in favor of the issuance of the Parent Common Stock issuable in connection with the Merger or if the Parent withdraws, amends or modifies such recommendation. If the Company timely exercises its right to terminate the Merger Agreement after it obtains actual knowledge of such failure to recommend, or withdrawal, amendment or modification of such recommendation, a termination fee of $105,200,000 will be payable by Parent to the Company. The Merger Agreement also provides that each party to the Merger Agreement may compel the other party or parties thereto to specifically perform its or their obligations under the Merger Agreement.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K on November 9, 2018 and is incorporated herein by reference.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures require that we make estimates, assumptions and judgments that can have a significant impact on our revenue and operating results, as well as on the value of certain assets and contingent liabilities on our balance sheet. The methods, assumptions, and estimates that we use in applying our accounting policies may require us to apply judgments regarding matters that are inherently uncertain. We consider an accounting policy to be a critical estimate if: (1) we must make assumptions that were uncertain when the judgment was made, and (2) changes in the estimate assumptions, or selection of a different estimate methodology could have a significant impact on our financial position and the results that we report in our consolidated financial statements. While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information available when the estimate was made.
Refer to "Part II, Item 8, Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies." for further information on our critical accounting policies, and estimates, which are as follows:
Inventories - estimation of future demand for inventory on hand;
Property, equipment and improvements - the useful life determination;
Long-lived assets - estimation of projected cash flows associated with impaired long-lived assets;
Income taxes - the identification and measurement of deferred tax assets and liabilities and the provisional estimates associated with the Tax Cuts and Jobs Act.
Recent Accounting Pronouncements
For a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Part II, Item 8, Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies."
Results of Operations
Comparison of Fiscal Years Ended April 28, 2019 and April 29, 2018
Revenues
The following table sets forth the changes in revenues by market application:
|
| | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentages) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Datacom revenue | $ | 926,786 |
| | $ | 1,029,037 |
| | $ | (102,251 | ) | | (10 | )% |
| Telecom revenue | 353,694 |
| | 287,446 |
| | 66,248 |
| | 23 | % |
| Total revenues | $ | 1,280,480 |
| | $ | 1,316,483 |
| | $ | (36,003 | ) | | (3 | )% |
During fiscal 2019, we recognized revenue based on ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)", but during fiscal 2018, we recognized revenue based on Topic 605. Therefore, the periods are not directly comparable. For additional information regarding the impact of the new accounting standard on our revenue, please refer to "Part II, Item 8, Financial Statements - Note 2. Summary of Significant Accounting Policies."
Datacom revenue for the year ended April 28, 2019 decreased approximately $102.3 million compared to the year ended April 29, 2018. During the period, 40 Gbps datacom transceiver revenue decreased approximately $59.4 million primarily due to our customers switching their technology infrastructure to higher speed transceivers. Also during the period, 100 Gbps datacom transceiver revenue decreased approximately $53.3 million primarily due to a decrease in the average selling prices for our products.
Telecom revenue for the year ended April 28, 2019 increased approximately $66.2 million compared to the year ended April 29, 2018 primarily due to an increase in WSS products revenue.
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| | | | | | | | | | | | | | |
| Amortization of Acquired Developed Technology | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Amortization of acquired developed technology | $ | 1,958 |
| | $ | 2,436 |
| | $ | (478 | ) | | (20 | )% |
Amortization of acquired developed technology for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.
|
| | | | | | | | | | | | | | |
| Impairment of Long-lived Assets | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Impairment of long-lived assets | $ | 4,459 |
| | $ | 2,233 |
| | $ | 2,226 |
| | 100 | % |
During fiscal 2019 and 2018, we recorded charges of $4.5 million and $2.2 million, respectively, for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions.
|
| | | | | | | | | | | | | | |
| Gross Profit | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentages) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Gross profit | $ | 348,093 |
| | $ | 362,166 |
| | $ | (14,073 | ) | | (4 | )% |
| As a percentage of revenues | 27 | % | | 28 | % | |
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| | |
Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. The gross profit decline for the year ended April 28, 2019 compared to the year ended April 29, 2018 was attributable to the combination of overall lower revenue and the decline in gross margin.
Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross margin for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 mostly due to decreases in the average selling prices for our products.
Our industry is characterized by products with average selling prices that decrease over time and we expect this trend to continue. Future decreases in average selling prices may have an unfavorable impact on our future gross profit, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold, increasing the number of units sold and/or increasing the sales of products with higher gross margins. Future decreases in average selling prices also may have an unfavorable impact on our future gross margin, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold and/or increasing the sales of products with higher gross margins.
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| | | | | | | | | | | | | | |
| Research and Development Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Research and development expenses | $ | 217,877 |
| | $ | 239,008 |
| | $ | (21,131 | ) | | (9 | )% |
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 allocated facilities and IT support costs. Research and development expenses for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 primarily due to a decrease in employee compensation related expenses as a result of restructuring activities undertaken during the first quarter of fiscal 2019, partially offset by employee severance compensation and other expenses related to restructuring activities undertaken during the first quarter of fiscal 2019.
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| | | | | | | | | | | | | | |
| Sales and Marketing Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Sales and marketing expenses | $ | 49,077 |
| | $ | 49,024 |
| | $ | 53 |
| | — | % |
Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs.
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| | | | | | | | | | | | | | |
| General and Administrative Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| General and administrative expenses | $ | 54,844 |
| | $ | 59,518 |
| | $ | (4,674 | ) | | (8 | )% |
General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 primarily due to approximately $7.5 million of stock-based compensation expense recorded during the third quarter of fiscal 2018 related to the modification of equity awards for our former Chief Executive Officer upon his retirement during the third quarter of fiscal 2018, partially offset by approximately $4.5 million of transaction expenses during fiscal 2019 related to the Merger.
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| | | | | | | | | | | | | | |
| Start-Up Costs | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Start-up costs | $ | 54,517 |
| | $ | 3,535 |
| | $ | 50,982 |
| | 1,442 | % |
Start-up costs consist of operating expenses, including employee compensation, facility maintenance and other expenses, related to our recently purchased 700,000 square foot manufacturing facility in Sherman, Texas during the period while it is being brought to its intended use.
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| | | | | | | | | | | | | | |
| Interest Income | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Interest income | $ | 21,201 |
| | $ | 16,084 |
| | $ | 5,117 |
| | 32 | % |
Interest income for the year ended April 28, 2019 increased compared to the year ended April 29, 2018 due to an increase in interest rates.
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| | | | | | | | | | | | | | |
| Interest Expense | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Interest expense | $ | 33,492 |
| | $ | 36,656 |
| | $ | (3,164 | ) | | (9 | )% |
Interest expense for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 primarily due to the redemption of our 0.50% Convertible Senior Notes due 2033 during the third quarter of fiscal 2019.
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| | | | | | | | | | | | | | |
| Other Income (Expense), Net | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Other income (expense), net | $ | (718 | ) | | $ | (945 | ) | | $ | 227 |
| | (24 | )% |
Other expense, net for the year ended April 28, 2019 decreased as compared to the year ended April 29, 2018 primarily due to a $2.3 million impairment of one of our minority investments, recognized during fiscal 2018, due to this investee's prolonged negative results of operations and cash flows, partially offset by fluctuations of foreign currency exchange rates.
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| | | | | | | | | | | | | | |
| Provision for Income Taxes | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 28, 2019 | | April 29, 2018 | | Change | | % Change |
| Provision for income taxes | $ | 9,667 |
| | $ | 33,283 |
| | $ | (23,616 | ) | | (71 | )% |
The provision for income taxes for the year ended April 28, 2019 decreased compared to the year ended April 29, 2018 primarily due to approximately $49.4 million of the deferred tax expense recorded in fiscal 2018 associated with the revaluation of our net deferred tax assets and the inclusion of the one-time deemed repatriation of accumulated foreign earnings, both as the result of the TCJA, compared to approximately $19.2 million of current tax expense recorded in fiscal 2019 associated with certain international tax provisions of TCJA.
Comparison of Fiscal Years Ended April 29, 2018 and April 30, 2017
Revenues
The following table sets forth the changes in revenues by market application:
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| | | | | | | | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentages) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Datacom revenue | $ | 1,029,037 |
| | $ | 1,041,854 |
| | $ | (12,817 | ) | | (1 | )% |
| Telecom revenue | 287,446 |
| | 407,449 |
| | (120,003 | ) | | (29 | )% |
| Total revenues | $ | 1,316,483 |
| | $ | 1,449,303 |
| | $ | (132,820 | ) | | (9 | )% |
Datacom revenue for the year ended April 29, 2018 decreased approximately $12.8 million compared to the year ended April 30, 2017. During the period, 100 Gbps datacom transceiver revenue increased approximately $100.0 million offset by an approximately $103.1 million decline in 10 and 40 Gbps datacom transceiver revenue. Decline in datacom revenue during fiscal 2018 was primarily due to lower demand for our datacom products from our Chinese OEM customers.
Telecom revenue for the year ended April 29, 2018 decreased approximately $120.0 million compared to the year ended April 30, 2017. During the period, 10 Gbps telecom transceiver revenue declined approximately $24.3 million, 100 Gbps telecom transceiver revenue declined approximately $46.0 million, and ROADM line card revenue declined approximately $21.5 million. Decline in telecom revenue during fiscal 2018 was primarily due to lower demand for our telecom products from our Chinese OEM customers.
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| | | | | | | | | | | | | | |
| Amortization of Acquired Developed Technology | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Amortization of acquired developed technology | $ | 2,436 |
| | $ | 4,492 |
| | $ | (2,056 | ) | | (46 | )% |
Amortization of acquired developed technology for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 primarily due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.
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| | | | | | | | | | | | | | |
| Gross Profit | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentages) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Gross profit | $ | 362,166 |
| | $ | 503,647 |
| | $ | (141,481 | ) | | (28 | )% |
| As a percentage of revenues | 28 | % | | 35 | % | | | | |
Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. The gross profit decline for the year ended April 29, 2018 compared to the year ended April 30, 2017 was attributable to the combination of overall lower revenue and the decline in gross margin.
Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross margin for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 mostly due to decreases in the average selling prices for our products. In addition, gross margin percentage declined approximately 500 basis points due to the negative impact of fixed manufacturing costs relative to lower revenue in the current year and approximately 200 basis points due to increased charges for excess and obsolete inventory.
Our industry is characterized by products with average selling prices that decrease over time and we expect this trend to continue. Future decreases in average selling prices may have an unfavorable impact on our future gross profit, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold, increasing the number of units sold and/or increasing the sales of products with higher gross margins. Future decreases in average selling prices also may have an unfavorable impact on our future gross margin, which may be partially or fully offset in any period in the event that we are successful in decreasing the cost of manufacturing our products being sold and/or increasing the sales of products with higher gross margins.
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| | | | | | | | | | | | | | |
| Research and Development Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Research and development expenses | $ | 239,008 |
| | $ | 217,914 |
| | $ | 21,094 |
| | 10 | % |
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 allocated facilities and IT support costs. Research and development expenses for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to an increase in employee compensation related expenses.
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| | | | | | | | | | | | | | |
| Sales and Marketing Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Sales and marketing expenses | $ | 49,024 |
| | $ | 50,644 |
| | $ | (1,620 | ) | | (3 | )% |
Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs. Sales and marketing expenses for the year ended April 29, 2018 decreased compared to the year ended April 30, 2017 due to a decrease in commissions for our external sales representatives resulting from lower revenue levels.
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| | | | | | | | | | | | | | |
| General and Administrative Expenses | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| General and administrative expenses | $ | 59,518 |
| | $ | 55,442 |
| | $ | 4,076 |
| | 7 | % |
General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 primarily due to approximately $7.5 million of stock based compensation expense related to the modification of equity awards for our former Chief Executive Officer upon his retirement during the third quarter of fiscal 2018 partially offset by lower legal service fees related to on-going litigation in fiscal 2018.
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| | | | | | | | | | | | | | |
| Start-Up Costs | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Start-up costs | $ | 3,535 |
| | $ | — |
| | $ | 3,535 |
| | 100 | % |
Start-up costs consist of operating expenses, including employee compensation, facility maintenance and other expenses, related to our recently purchased 700,000 square foot manufacturing facility in Sherman, Texas during the period while it is being brought to its intended use.
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| | | | | | | | | | | | | | |
| Impairment of Long-lived Assets | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Impairment of long-lived assets | $ | 2,233 |
| | $ | — |
| | $ | 2,233 |
| | 100 | % |
During fiscal 2018, we recorded a $2.2 million charge for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions.
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| | | | | | | | | | | | | | |
| Interest Income | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Interest income | $ | 16,084 |
| | $ | 6,763 |
| | $ | 9,321 |
| | 138 | % |
Interest income for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to higher balances of cash and short-term investments primarily as a result of issuance of $575.0 million in aggregate principal amount of our 0.50% Convertible Senior Notes due 2036 in December 2016.
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| | | | | | | | | | | | | | |
| Interest Expense | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Interest expense | $ | 36,656 |
| | $ | 20,363 |
| | $ | 16,293 |
| | 80 | % |
Interest expense for the year ended April 29, 2018 increased compared to the year ended April 30, 2017 due to the amortization of the debt discount on our 0.50% Convertible Senior Notes due 2036 issued in December 2016.
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| | | | | | | | | | | | | | |
| Other Income (Expense), Net | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Other income (expense), net | $ | (945 | ) | | $ | (91 | ) | | $ | (854 | ) | | 938 | % |
The change in other income (expense), net for the year ended April 29, 2018 as compared to the year ended April 30, 2017 was due to a $2.3 million impairment of one of our minority investments, recognized during fiscal 2018 as a result of this investee's negative results of operations and cash flows, partially offset by fluctuations of foreign currency exchange rates.
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| | | | | | | | | | | | | | |
| Provision for (Benefit from) Income Taxes | | | | | | | |
| | Fiscal Years Ended | | | | |
| (in thousands, except percentage) | April 29, 2018 | | April 30, 2017 | | Change | | % Change |
| Provision for (benefit from) income taxes | $ | 33,283 |
| | $ | (86,152 | ) | | $ | 119,435 |
| | (139 | )% |
The provision for income taxes for the year ended April 29, 2018 increased compared to the benefit from income taxes for the year ended April 30, 2017 primarily due to approximately $49.4 million of the deferred tax expense associated with the revaluation of our net deferred tax assets and the inclusion of the one-time deemed repatriation of accumulated foreign earnings, both as the result of the TCJA, enacted on December 22, 2017, and an approximately $103.3 million release of valuation allowance related to a majority of our U.S. deferred tax assets during the fourth quarter of fiscal 2017, based on sufficient positive objective evidence that we would generate sufficient taxable income in the U.S. to realize the deferred tax assets. The positive evidence as of April 30, 2017 included fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Realization of our deferred tax assets is primarily dependent upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
Liquidity and Capital Resources
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| | | | | |
| | Fiscal Years Ended |
| (in thousands) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Net cash provided by operating activities | $172,163 | | $171,637 | | $227,832 |
| Net cash provided by (used in) investing activities | $579,119 | | $(121,107) | | $(852,783) |
| Net cash (used in) provided by financing activities | $(249,354) | | $1,499 | | $585,958 |
Cash Flows - Operating Activities
Net cash provided by operating activities in fiscal 2019 primarily consisted of our net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling $184.5 million.
Net cash provided by operating activities in fiscal 2018 primarily consisted of our net loss, as adjusted to exclude depreciation, amortization and other non-cash items totaling $221.6 million.
Net cash provided by operating activities in fiscal 2017 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $62.2 million, offset by a $83.7 million increase in working capital primarily related to increases in inventory. Inventory increased by $73.6 million due to increased purchases to support the increase in sales level.
Cash Flows - Investing Activities
Net cash provided by investing activities in fiscal 2019 primarily consisted of $1,719.3 million of proceeds from maturities of short-term marketable securities offset by $930.3 million related to purchases of short-term marketable securities and expenditures of $209.9 million for long-lived assets (property, equipment and improvements).
Net cash used in investing activities in fiscal 2018 primarily consisted of expenditures of $221.5 million for long-lived assets (property, equipment and improvements), and $1,765.7 million related to purchases of short-term marketable securities offset by $1,866.1 million of proceeds from maturities of short-term marketable securities.
Net cash used in investing activities in fiscal 2017 primarily consisted of expenditures of $140.1 million for long-lived assets (property, equipment and improvements), and $1,032.5 million related to purchases of short-term marketable securities offset by $321.2 million of proceeds from maturities of short-term marketable securities.
Cash Flows - Financing Activities
Net cash used in financing activities in fiscal 2019 primarily consisted of the redemption of our 0.50% Convertible Senior Notes due 2033 during the third quarter of fiscal 2019.
Net cash provided by financing activities in fiscal 2018 primarily consisted of proceeds from the issuance of shares under our employee stock option and stock purchase plans, offset by share repurchases for tax withholdings on vesting of restricted stock units.
Net cash provided by financing activities in fiscal 2017 primarily consisted of $569.3 million of proceeds, net of issuance costs, from the issuance of the 2036 Convertible Senior Notes.
Contractual Obligations and Commercial Commitments
Our contractual obligations at April 28, 2019 were as follows (in thousands):
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| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | | | Less than | | | | | | After |
| Contractual Obligations | Total | | 1 year | | 1-3 Years | | 4-5 Years | | 5 Years |
| 0.5% Convertible Senior Notes due 2033 (a) | $ | 1,054 |
| | $ | — |
| | $ | — |
| | $ | 1,054 |
| | $ | — |
|
| 0.5% Convertible Senior Notes due 2036 | 575,000 |
| | — |
| | 575,000 |
| | — |
| | — |
|
| Interest on 2036 Notes (b) | 7,547 |
| | 2,875 |
| | 4,672 |
| | — |
| | — |
|
| Operating leases (c) | 37,572 |
| | 9,990 |
| | 15,310 |
| | 8,357 |
| | 3,915 |
|
| Capital purchase obligations | 45,463 |
| | 45,463 |
| | — |
| | — |
| | — |
|
| Other purchase obligations | 130,123 |
| | 130,123 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | $ | 796,759 |
| | $ | 188,451 |
| | $ | 594,982 |
| | $ | 9,411 |
| | $ | 3,915 |
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_________________
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(a) | Does not include interest on our 0.50% Convertible Senior Notes due 2033 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2018. |
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(b) | Includes interest on our 0.50% Convertible Senior Notes due 2036 through December 2021 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2021. |
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(c) | Includes operating lease obligations that have been accrued as restructuring charges. |
Pursuant to the terms of the 2033 Notes and the 2033 Notes Indenture, holders of the 2033 Notes had an option to require the Company to repurchase on December 15, 2018 (the "Repurchase Date") all or a portion of such holders’ 2033 Notes (the
"Put Option") at a price equal to 100% of the principal amount of such 2033 Notes, plus accrued and unpaid interest to, but excluding, the Repurchase Date. As of the close of business on December 14, 2018, the Company had received valid Put Option exercise notices from holders that required the Company to repurchase approximately $257.7 million aggregate principal amount of 2033 Notes. The Company settled the Put Option on December 17, 2018 and paid an aggregate of approximately $258.3 million to repurchase all of the 2033 Notes for which Put Option exercises notices were validly delivered and not validly withdrawn. Immediately following the settlement of the Put Option, the repurchased 2033 Notes were canceled and approximately $1.1 million principal amount of 2033 Notes remained outstanding as of April 28, 2019. On May 1, 2019, the Company redeemed all of the remaining $1.1 million of the principal amount of the 2033 Notes, and all of the 2033 Notes were cancelled.
The 2036 Notes are convertible into shares of our common stock at specified conversion prices by the holders at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing circumstances have occurred. The 2036 Notes are also subject to redemption by the holders in December 2021, 2026 and 2031. These notes are redeemable by us, in whole or in part, at any time on or after December 22, 2021.
Operating lease obligations consist primarily of base rents for facilities we occupy at various locations.
Capital purchase obligations represent commitments for the construction or purchase of property, equipment and improvements. These capital purchase obligations were not recorded as liabilities on our consolidated balance sheets as of April 28, 2019, as we had not yet received the related goods or taken title to the property.
Other purchase obligations represent all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
Sources of Liquidity and Capital Resource Requirements
At April 28, 2019, our principal sources of liquidity consisted of approximately $914 million of cash and cash equivalents and short-term investments, of which approximately $161 million was held by our foreign subsidiaries.
We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire all of our 2036 Notes, in the aggregate principal amount of $575.0 million, which are subject to redemption by the holders in December 2021, 2026 and 2031. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.
Off-Balance-Sheet Arrangements
At April 28, 2019 and April 29, 2018, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
As of April 28, 2019, we had $576.1 million of aggregate principal amount of convertible notes with a fixed interest rate of 0.5% outstanding. The fair value of this debt as of April 28, 2019 was approximately $565.4 million, based on the market price of the notes in the open market as of or close to April 28, 2019. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the convertible notes. We are subject to significant fluctuations in fair market value of the debt due to the volatility of the stock market. We had no variable interest rate debt outstanding which would expose us to interest rate risk.
We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when our ownership interest is less than 20% and we do not have the ability to exercise significant influence. At April 28, 2019, we had a total of $129,000 of investments in three privately-held companies accounted for under the cost method and one privately-held company accounted for under the equity method. For such non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses when events and circumstances indicate that such assets are impaired. During fiscal 2019, we recorded a $399,000 impairment loss related to one of our cost method minority investments as a result of this investee's negative results of operations and cash flows. During fiscal 2018, we recorded a $2.3 million impairment loss related to our equity method minority investment as a result of this investee's negative results of operations and cash flows. During fiscal 2017, we recorded a $643,000 impairment loss related to one of our cost method minority investments as a result of an equity transaction by the investee at a price per share lower than the value at which the investment was carried by us. If our investment in a privately-held company becomes readily marketable upon the company’s completion of an initial public offering or its acquisition by another company, our investment would be subject to significant fluctuations in fair market value due to the volatility of the stock market.
We have subsidiaries located in China, Malaysia, Israel, Australia, Korea, Sweden, Germany, India and Singapore. Due to the relative volume of transactions through these subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. We currently do not use derivative financial instruments to mitigate this exposure. We continue to review this issue and may consider hedging certain foreign exchange risks through the use of currency forwards or options in future years.
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Item 8. | Financial Statements and Supplementary Data |
FINISAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Finisar Corporation
Sunnyvale, CA
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Finisar Corporation (the “Company”) as of April 28, 2019 and April 29, 2018, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended April 28, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 28, 2019 and April 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2019, 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 April 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated June 14, 2019 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for recognizing revenue from contracts with customers in fiscal year 2019 due to the adoption of new revenue standard.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated 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 audits to obtain reasonable assurance about whether the consolidated 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 consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated 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 consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2015.
San Jose, California
June 14, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
Sunnyvale, California
Opinion on Internal Control over Financial Reporting
We have audited Finisar Corporation’s (the “Company’s”) internal control over financial reporting as of April 28, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 28, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of April 28, 2019 and April 29, 2018, the related consolidated statements of operations, comprehensive income (loss), stockholder’s equity, and cash flows for the each of the three years in the period ended April 28, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated June 14, 2019 expressed an unqualified opinion thereon.
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 “Item 9A, 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting 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, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
San Jose, California
June 14, 2019
FINISAR CORPORATION
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | April 28, 2019 | | April 29, 2018 |
| | (In thousands, except per share data) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 814,185 |
| | $ | 312,257 |
|
| Short-term investments | 100,000 |
| | 884,838 |
|
| Accounts receivable, net of allowance for doubtful accounts of $216 at April 28, 2019 and $269 at April 29, 2018 | 263,394 |
| | 233,529 |
|
| Inventories | 299,028 |
| | 348,527 |
|
| Other current assets | 44,224 |
| | 56,001 |
|
| Total current assets | 1,520,831 |
| | 1,835,152 |
|
| Property, equipment and improvements, net | 622,979 |
| | 520,849 |
|
| Purchased intangible assets, net | 4,182 |
| | 7,878 |
|
| Goodwill | 106,736 |
| | 106,736 |
|
| Other assets | 15,462 |
| | 31,720 |
|
| Deferred tax assets | 81,977 |
| | 80,850 |
|
| Total assets | $ | 2,352,167 |
| | $ | 2,583,185 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 132,440 |
| | $ | 132,161 |
|
| Accrued compensation | 31,804 |
| | 32,525 |
|
| Other current liabilities | 49,495 |
| | 32,824 |
|
| Deferred revenue | — |
| | 9,535 |
|
| Current portion of convertible debt | — |
| | 251,278 |
|
| Total current liabilities | 213,739 |
| | 458,323 |
|
| Long-term liabilities: | | | |
| Convertible debt, net of current portion | 512,105 |
| | 488,877 |
|
| Other non-current liabilities | 12,162 |
| | 12,368 |
|
| Total liabilities | 738,006 |
| | 959,568 |
|
| Commitments and contingencies |
|
| |
|
|
| Stockholders’ equity: | | | |
| Preferred stock, $0.001 par value, 5,000 shares authorized, no shares issued and outstanding at April 28, 2019 and April 29, 2018 | — |
| | — |
|
| Common stock, $0.001 par value, 750,000 shares authorized, 118,006 shares issued and outstanding at April 28, 2019 and 114,813 shares issued and outstanding at April 29, 2018 | 118 |
| | 115 |
|
| Additional paid-in capital | 2,919,305 |
| | 2,850,195 |
|
| Accumulated other comprehensive loss | (48,568 | ) | | (14,660 | ) |
| Accumulated deficit | (1,256,694 | ) | | (1,212,033 | ) |
| Total stockholders' equity | 1,614,161 |
| | 1,623,617 |
|
| Total liabilities and stockholders’ equity | $ | 2,352,167 |
| | $ | 2,583,185 |
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| | (In thousands, except per share data) |
| Revenues | $ | 1,280,480 |
| | $ | 1,316,483 |
| | $ | 1,449,303 |
|
| Cost of revenues | 926,550 |
| | 951,510 |
| | 941,164 |
|
| Amortization of acquired developed technology | 1,958 |
| | 2,436 |
| | 4,492 |
|
| Impairment of long-lived assets | 3,879 |
| | 371 |
| | — |
|
| Gross profit | 348,093 |
| | 362,166 |
| | 503,647 |
|
| Operating expenses: | | | | |
|
|
| Research and development | 217,877 |
| | 239,008 |
| | 217,914 |
|
| Sales and marketing | 49,077 |
| | 49,024 |
| | 50,644 |
|
| General and administrative | 54,844 |
| | 59,518 |
| | 55,442 |
|
| Start-up costs | 54,517 |
| | 3,535 |
| | — |
|
| Amortization of purchased intangibles | 1,738 |
| | 2,705 |
| | 2,762 |
|
| Impairment of long-lived assets | 580 |
| | 1,862 |
| | — |
|
| Total operating expenses | 378,633 |
| | 355,652 |
| | 326,762 |
|
| Income (loss) from operations | (30,540 | ) | | 6,514 |
| | 176,885 |
|
| Interest income | 21,201 |
| | 16,084 |
| | 6,763 |
|
| Interest expense | (33,492 | ) | | (36,656 | ) | | (20,363 | ) |
| Other income (expense), net | (718 | ) | | (945 | ) | | (91 | ) |
| Income (loss) before income taxes | (43,549 | ) | | (15,003 | ) | | 163,194 |
|
| Provision for (benefit from) income taxes | 9,667 |
| | 33,283 |
| | (86,152 | ) |
| Net income (loss) | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| | | | | | |
| Net income (loss) per share: | | | | | |
| Basic | $ | (0.45 | ) | | $ | (0.42 | ) | | $ | 2.26 |
|
| Diluted | $ | (0.45 | ) | | $ | (0.42 | ) | | $ | 2.19 |
|
| Shares used in computing net income (loss) per share: | | | | | |
| Basic | 117,178 |
| | 113,864 |
| | 110,405 |
|
| Diluted | 117,178 |
| | 113,864 |
| | 114,097 |
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | |
| | | Fiscal Years Ended |
| | | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| | | (In thousands) |
| Net income (loss) | | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| Other comprehensive income (loss), net of tax: | | | | | | |
| Change in cumulative foreign currency translation adjustment | | (33,908 | ) | | 43,204 |
| | (32,676 | ) |
| Total other comprehensive income (loss), net of tax | | (33,908 | ) | | 43,204 |
| | (32,676 | ) |
| Total comprehensive income (loss) | | $ | (87,124 | ) | | $ | (5,082 | ) | | $ | 216,670 |
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Finisar Stockholders’ Equity |
| | Shares | | Amount | | | |
| | | | | | (In thousands, except share data) | | |
| Balance at May 1, 2016 | 107,696,314 |
| | $ | 108 |
| | $ | 2,605,859 |
| | $ | (25,188 | ) | | $ | (1,413,093 | ) | | $ | 1,167,686 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 249,346 |
| | 249,346 |
|
| Other comprehensive loss, net | — |
| | — |
| | — |
| | (32,676 | ) | | — |
| | (32,676 | ) |
| Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings | 3,737,832 |
| | 4 |
| | 16,886 |
| | — |
| | — |
| | 16,890 |
|
| Share-based compensation expense | — |
| | — |
| | 49,879 |
| | — |
| | — |
| | 49,879 |
|
| Employer contribution to defined contribution retirement plan | 85,040 |
| | — |
| | 2,782 |
| | — |
| | — |
| | 2,782 |
|
| Equity component of senior convertible notes, net of allocated issuance costs | — |
| | — |
| | 108,798 |
| | — |
| | — |
| | 108,798 |
|
| Balance at April 30, 2017 | 111,519,186 |
| | 112 |
| | 2,784,204 |
| | (57,864 | ) | | (1,163,747 | ) | | 1,562,705 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (48,286 | ) | | (48,286 | ) |
| Other comprehensive income, net | — |
| | — |
| | — |
| | 43,204 |
| | — |
| | 43,204 |
|
| Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings | 3,146,591 |
| | 3 |
| | 1,496 |
| | — |
| | — |
| | 1,499 |
|
| Share-based compensation expense | — |
| | — |
| | 61,164 |
| | — |
| | — |
| | 61,164 |
|
| Employer contribution to defined contribution retirement plan | 146,944 |
| | — |
| | 3,331 |
| | — |
| | — |
| | 3,331 |
|
| Balance at April 29, 2018 | 114,812,721 |
| | 115 |
| | 2,850,195 |
| | (14,660 | ) | | (1,212,033 | ) | | 1,623,617 |
|
| Cumulative effect of change in accounting principle | — |
| | — |
| | — |
| | — |
| | 8,555 |
| | 8,555 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | (53,216 | ) | | (53,216 | ) |
| Other comprehensive loss, net | — |
| | — |
| | — |
| | (33,908 | ) | | — |
| | (33,908 | ) |
| Issuance of shares pursuant to employee stock purchase plan and equity plans, net of tax withholdings | 3,061,894 |
| | 3 |
| | 8,339 |
| | — |
| | — |
| | 8,342 |
|
| Share-based compensation expense | — |
| | — |
| | 57,991 |
| | — |
| | — |
| | 57,991 |
|
| Employer contribution to defined contribution retirement plan | 131,162 |
| | — |
| | 2,780 |
| | — |
| | — |
| | 2,780 |
|
| Balance at April 28, 2019 | 118,005,777 |
| | $ | 118 |
| | $ | 2,919,305 |
| | $ | (48,568 | ) | | $ | (1,256,694 | ) | | $ | 1,614,161 |
|
See accompanying notes.
FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| | (In thousands) |
| Operating activities | | | | | |
| Net income (loss) | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation | 95,434 |
| | 98,769 |
| | 87,016 |
|
| Amortization | 5,005 |
| | 6,680 |
| | 8,203 |
|
| Stock-based compensation expense | 61,292 |
| | 63,120 |
| | 52,598 |
|
| Amortization of discount on held-to-maturity investments | (8,115 | ) | | (8,135 | ) | | (2,045 | ) |
| Equity in losses of equity method investment | — |
| | — |
| | 250 |
|
| Loss on sale or retirement of assets and asset disposal groups | 190 |
| | 103 |
| | 149 |
|
| Impairment of long-lived assets | 4,459 |
| | 2,233 |
| | — |
|
| Impairment of minority investments | 399 |
| | 2,347 |
| | 643 |
|
| Amortization of discount on convertible debt | 28,341 |
| | 30,834 |
| | 16,935 |
|
| Deferred tax expense (benefit) | (2,544 | ) | | 25,614 |
| | (101,534 | ) |
| Changes in operating assets and liabilities: | | | | | |
| Accounts receivable | (26,703 | ) | | 38,848 |
| | (23,120 | ) |
| Inventories | 33,547 |
| | 839 |
| | (73,582 | ) |
| Other assets | 14,775 |
| | (910 | ) | | (8,365 | ) |
| Accounts payable | 3,034 |
| | 1,156 |
| | (1,023 | ) |
| Accrued compensation | (721 | ) | | (21,995 | ) | | 18,436 |
|
| Deferred revenue | — |
| | (3,480 | ) | | (514 | ) |
| Other liabilities | 16,986 |
| | (16,100 | ) | | 4,439 |
|
| Net cash provided by operating activities | 172,163 |
| | 171,637 |
| | 227,832 |
|
| Investing activities | | | | | |
| Additions to property, equipment and improvements | (209,879 | ) | | (221,482 | ) | | (140,106 | ) |
| Proceeds from sale of property and equipment and asset disposal groups | — |
| | — |
| | 504 |
|
| Purchases of short-term investments | (930,277 | ) | | (1,765,687 | ) | | (1,032,474 | ) |
| Maturities of short-term investments | 1,719,275 |
| | 1,866,062 |
| | 321,178 |
|
| Purchase of intangible assets | — |
| | — |
| | (1,885 | ) |
| Net cash provided by (used in) investing activities | 579,119 |
| | (121,107 | ) | | (852,783 | ) |
| Financing activities | | | | | |
| Repayments of term loans | — |
| | — |
| | (234 | ) |
| Repayment of 2033 Notes | (257,696 | ) | | — |
| | — |
|
| Proceeds from issuance of 0.50% Convertible Senior Notes due 2036, net of issuance costs | — |
| | — |
| | 569,302 |
|
| Proceeds from issuance of shares under equity plans and employee stock purchase plan | 11,145 |
| | 11,680 |
| | 20,773 |
|
| Shares repurchased for tax withholdings on vesting of restricted stock units | (2,803 | ) | | (10,181 | ) | | (3,883 | ) |
| Net cash (used in) provided by financing activities | (249,354 | ) | | 1,499 |
| | 585,958 |
|
| Net increase (decrease) in cash and cash equivalents | 501,928 |
| | 52,029 |
| | (38,993 | ) |
| Cash and cash equivalents at beginning of year | 312,257 |
| | 260,228 |
| | 299,221 |
|
| Cash and cash equivalents at end of year | $ | 814,185 |
| | $ | 312,257 |
| | $ | 260,228 |
|
| | | | | | |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest | $ | 4,170 |
| | $ | 4,170 |
| | $ | 1,298 |
|
| Cash paid for taxes | $ | 7,520 |
| | $ | 11,594 |
| | $ | 11,108 |
|
See accompanying notes
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has a 52- or 53-week fiscal year ending on the Sunday closest to the last day of April in each calendar year. Each of fiscal 2019, 2018 and 2017 had 52 weeks, and fiscal 2020 will have 53 weeks. The consolidated financial statements include the accounts of Finisar Corporation and its controlled subsidiaries (collectively “Finisar” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.
Merger Agreement
On November 8, 2018, the Company, II-VI Incorporated, a Pennsylvania corporation (“Parent”) and Mutation Merger Sub Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, among other things, Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. The closing of the Merger is subject to various customary conditions.
| |
2. | Summary of Significant Accounting Policies |
Revenue Recognition
Substantially all of the Company's revenues are derived from sales of products to customers. The Company recognizes revenue when it satisfies performance obligations as evidenced by the transfer of control of its products to customers at the time of product shipment from the Company's facility or delivery to the customer location, as determined by the agreed upon shipping and delivery terms. Delivery of all performance obligations contained within a contract with a customer typically occurs at the same time (or within the same accounting period). Prior to fiscal 2019, revenue and costs relating to sales to certain distributors that were made under agreements providing distributor price adjustments and rights of return under certain circumstances were deferred until products were sold by the distributors to end customers.
The Company measures revenue based on the amount of consideration it expects to be entitled to in exchange for products, reduced by amount of consideration related to products expected to be returned. Any variable consideration is recognized as a reduction of revenue at the time of revenue recognition. The Company determines variable consideration, which primarily consists of distributor sales price reductions resulting from price protection agreements, by estimating the impact of such reductions based on historical analysis of such activity. The Company’s contracts with customers do not typically include extended payment terms and payment terms generally range from 30 to 90 days. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenues. The Company's standard warranty period usually covers twelve months from the date of sale, although it can be for longer periods for certain products. The Company is recognizing the incremental costs of obtaining a contract, specifically commission expenses that have a period of benefit of less than twelve months, as an expense when incurred. The Company recognizes shipping costs that occur after control transfers to the customer as a fulfillment activity.
Segment Reporting
The Financial Accounting Standards Board's (FASB) authoritative guidance regarding segment reporting establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates in one reportable segment comprising optical subsystems and components. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for data communication and telecommunication applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in telecommunication applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers for data communication and telecommunication applications.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of credit risk include cash and cash equivalents, short-term investment and accounts receivable. The Company invests only in high-quality credit instruments and maintains its cash, cash equivalents and short-term investments with several high-quality credit financial institutions. Deposits held with banks, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits.
Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have not been material. The Company’s ten largest customers represented 64% and 62% of total accounts receivable as of April 28, 2019 and April 29, 2018, respectively. Three customers, Huawei, Flextronics, and Jabil, represented 13%, 12%, and 11%, respectively, of total accounts receivable as of April 28, 2019. Two customers, Google and Flextronics, represented 15% and 11% respectively, of total accounts receivable as of April 29, 2018.
Sales to the Company’s ten largest customers represented 58%, 59% and 56% of total revenues during fiscal 2019, 2018 and 2017, respectively. Two customers, Cisco Systems and Huawei, represented 11% and 10%, respectively, of total revenues during fiscal 2019. Two customers, Cisco Systems and Google, represented 14% and 11%, respectively, of total revenues during fiscal 2018. Two customers, Cisco Systems and Huawei, represented 12% and 11%, respectively, of total revenues during fiscal 2017.
The Company relies on single and limited suppliers for a number of key components. The Company relies primarily on a limited number of significant independent contract manufacturers for the production of certain key components and subassemblies, including lasers, modulators, and printed circuit boards.
Included in the Company’s consolidated balance sheet at April 28, 2019 are the net assets of the Company’s operations located at its overseas facilities totaling approximately $617.8 million.
Foreign Currency Translation and Transactions
The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in the determination of net income (loss). Included in the determination of net income (loss) for fiscal 2019, 2018 and 2017 were $(849,000), $1.0 million and $539,000, respectively, of gains (losses) on foreign currency transactions.
Research and Development
Research and development expenditures are charged to operations as incurred.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of sales for all periods presented.
Cash and Cash Equivalents
The Company’s cash equivalents consist of money market funds. The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents.
Minority Investments
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which the Company does have the ability to exercise significant influence, the Company uses the equity method. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and the Company's proportionate share of earnings or losses and distributions. Such proportionate share of earnings or losses is included in other income (expense), net in the consolidated statement of operations. In determining if and when a decline in the market value of these investments below their carrying value is other-than-temporary, the Company evaluates the market conditions, offering prices,
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
trends of earnings and cash flows, price multiples, prospects for liquidity and other key measures of performance. The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an impairment exists. Factors considered in this assessment include (a) the completion of a new equity financing that may indicate a new value for the investment, (b) the failure to complete a new equity financing arrangement after seeking to raise additional funds or (c) the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders. The Company’s minority investments in private companies are generally made in exchange for preferred stock with a liquidation preference that is intended to help protect the underlying value of its investment.
Fair Value Accounting
The FASB authoritative guidance regarding fair valuation defines fair value and establishes a framework for measuring fair value and expands the related disclosure requirements. The guidance requires or permits fair value measurements with certain exclusions. It provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under this guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. It describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
Level 3 inputs are unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities have carrying amounts which approximate fair value due to the short-term maturity of these instruments. See Note 10 for additional details regarding the fair value of the Company’s financial instruments.
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where, subsequent to delivery, the Company becomes aware of a customer’s potential inability to meet its obligations, it records a specific allowance for the doubtful account to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an estimated allowance for doubtful accounts based on the length of time the receivables are past due and historical actual bad debt history. A material adverse change in a major customer’s ability to meet its financial obligations to the Company could result in a material reduction in the estimated amount of accounts receivable that can ultimately be collected and an increase in the Company’s general and administrative expenses for the shortfall. Accounts receivable are charged against the allowance for doubtful accounts when identified as fully uncollectable.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
The Company permanently writes down the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage and is determined using management’s best estimate of future demand, based upon information then available to the Company. The Company also considers: (1) parts and subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are unlikely to be engineered out of the Company’s products, and (3) known design changes which would reduce the Company’s ability to use the inventory as planned. Inventory on hand that is identified and considered to be excess or obsolete is written down to its estimated net realizable value.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally three to ten years, except for buildings which are depreciated over 30 years. Land is carried at acquisition cost and not depreciated. Leased land is depreciated over the life of the lease. Management judgment is required in determining the estimated economic useful lives of our property, plant and equipment, which can materially impact the Company's depreciation expense. Accordingly, the Company evaluates the period over which it expects to recover the economic value of these assets. During the fourth quarter of fiscal 2018, based on considerations including asset replacement cycle, the Company revisited the useful life estimates of certain computer equipment, software, and building and leasehold fixtures. As a result, the Company determined that the useful lives of computer equipment be extended from three to five years, the useful lives of certain software be extended from five to ten years, the useful lives of leasehold improvements be extended from seven to ten years, and the useful lives of certain building fixtures be extended from 15 to 30 years. These assets are depreciated through cost of revenues and operating expenses. The Company accounted for this as a change in estimate that was applied prospectively, effective as of January 29, 2018. This change in depreciable lives did not have a material impact for the quarter or the year ended April 29, 2018, resulted in a reduction of $4.6 million in depreciation expense during fiscal 2019, and will result in a reduction of $2.6 million in depreciation expense during fiscal 2020.
Goodwill and Other Intangible Assets
Goodwill, purchased technology and other intangible assets resulting from acquisitions are accounted for under the acquisition method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been recorded on a straight-line basis over periods ranging from three to 15 years.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred to long-lived assets that would require revision of the remaining estimated useful life of the property, improvements and finite-lived intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. Goodwill is assessed for impairment annually or more frequently when an event occurs or circumstances change between annual impairment tests that would more likely than not reduce the fair value of the reporting unit holding the goodwill below its carrying value.
During fiscal 2019 and 2018, the Company recorded charges of $4.5 million and $2.2 million, respectively, for the impairment of certain long-lived assets due to the planned retirement of such assets resulting from product and facility transitions. In accordance with the guidance for the impairment of long-lived assets, these assets were written down to their estimated fair value of zero.
Stock-Based Compensation Expense
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including restricted stock units, stock options, and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. The Company uses the grant-date fair value of its common stock to determine the fair value of restricted stock units. The Company uses the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase rights. The Company uses the Monte Carlo simulation model to determine the fair value of market-based performance restricted stock units. The fair value of the awards is recognized as expense in the consolidated statements of operations under the single-option approach on a straight-line basis over the requisite service periods, which is generally the vesting period. Forfeitures are accounted for as they occur rather than estimating the number of awards that are expected to ultimately vest.
Income Taxes
The Company computes the provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. The Company measures deferred tax assets and liabilities using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company periodically assesses the likelihood that it will be
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
able to recover its deferred tax assets. If recovery is not likely, the Company must increase its provision for taxes by recording a valuation allowance against the deferred tax assets that the Company estimates will not ultimately be recoverable. The Company recognizes tax benefits from uncertain tax positions only if (based on the technical merits of the position) it is more likely than not that the tax positions will be sustained on examination by the tax authority. The Company's assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, the Company's interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. The Company has established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although the Company believes that its assumptions, judgments and estimates are reasonable, changes in tax laws or interpretation of tax laws and the resolution of any future tax audits could significantly impact the amounts provided for income taxes in the Company's consolidated financial statements. The Company's assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, causing the Company's actual income tax obligations to differ from its estimates, thus materially impacting the Company's financial position and results of operations.
In fiscal 2018, the Company has recorded provisional estimates associated with the December 22, 2017 enactment of the U.S. Tax Cuts and Jobs Act ("TCJA"). During fiscal 2019, the Company completed its accounting for the impact of TCJA on its consolidated financial statements. For more information about TCJA impacts, see "Note 13. Income Taxes."
Recent and Pending Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (the "FASB"), jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company adopted this standard on April 30, 2018, applying it to all contracts, using a modified retrospective approach. The Company's assessment has identified a change in revenue recognition timing on sales made to distributors. Upon adopting this standard, the Company now recognizes revenue upon delivery of products to the distributor (in accordance with agreed upon shipping and delivery terms) rather than deferring recognition until the distributor sells the product to the end customer. On April 30, 2018, the Company removed the deferred revenue (and corresponding deferred cost of sales) on sales to distributors through a cumulative adjustment to accumulated deficit. This resulted in an approximately net $8.6 million reduction of accumulated deficit with a corresponding approximately $9.5 million reduction of deferred revenue, an approximately $535,000 reduction of other non-current liabilities, an approximately $760,000 increase in other current assets, and an approximately $2.3 million reduction of deferred tax assets. Based on the Company's assessment, only minimal changes were required to the Company's existing policies, processes, and controls to support the standard's measurement and disclosure requirements. During fiscal 2018, the Company and certain licensees agreed to modify specific terms of some of the Company's out-licensing agreements by granting licensees cancellation rights to cease future payments in the event that licensees cease using the licensed technology. These licensing agreements provided for a settlement and release of any prior claims and licensing of the Company’s technology over a future period. Prior to the modification, there were no cancellation rights. In accordance with the new accounting standard, the Company utilized one of the practical expedients for adoption that allowed the Company to reflect the aggregate effect of all modifications that have occurred before the beginning of the earliest period presented in accordance with this new accounting standard. Absent these modifications, the Company would have recognized, in addition to the amounts described above, approximately $24.4 million of cumulative effect of adoption of the new accounting standard in the earliest period presented in accordance with this new accounting standard. The Company may provide similar cancellation rights in comparable licensing agreements that may be executed in the future. Because all of the Company’s performance obligations relate to contracts with a duration of less than one year, the Company elected to apply the optional exemption practical expedient provided in this new accounting standard and, therefore, is not required to disclose the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied or partially unsatisfied at the end of the reporting period.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the impacts of adopting the new revenue recognition standard on the Company's condensed consolidated financial statements for the year ended April 28, 2019:
|
| | | | | | | | | | | |
| | Fiscal Year Ended April 28, 2019 |
| (in thousands) | As reported | | Adjustments | | Without new revenue standard |
| Revenues | $ | 1,280,480 |
| | $ | (7,869 | ) | | $ | 1,272,611 |
|
| Cost of revenues | 926,550 |
| | (4,356 | ) | | 922,194 |
|
| Gross profit | 348,093 |
| | (3,513 | ) | | 344,580 |
|
| Net loss | $ | (53,216 | ) | | $ | (3,513 | ) | | $ | (56,729 | ) |
| | | | | | |
| | As of April 28, 2019 |
| (in thousands) | As reported | | Adjustments | | Without new revenue standard |
| Other current assets | $ | 44,224 |
| | $ | (420 | ) | | $ | 43,804 |
|
| Deferred tax assets | $ | 81,977 |
| | $ | 2,259 |
| | $ | 84,236 |
|
| Deferred revenue | $ | — |
| | $ | 13,652 |
| | $ | 13,652 |
|
| Other non-current liabilities | $ | 12,162 |
| | $ | 256 |
| | $ | 12,418 |
|
| Accumulated deficit | $ | (1,256,694 | ) | | $ | (12,069 | ) | | $ | (1,268,763 | ) |
The following table presents the Company's revenues disaggregated by geography, based on the location of the entity purchasing the Company’s products:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| (in thousands) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| United States | $ | 409,195 |
| | $ | 482,601 |
| | $ | 476,763 |
|
| China | 300,116 |
| | 270,040 |
| | 358,561 |
|
| Mexico | 169,189 |
| | 126,664 |
| | 125,556 |
|
| Rest of the world | 401,980 |
| | 437,178 |
| | 488,423 |
|
| Totals | $ | 1,280,480 |
| | $ | 1,316,483 |
| | $ | 1,449,303 |
|
The following table presents the Company's revenues disaggregated by market application:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| (in thousands) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Datacom | $ | 926,786 |
| | $ | 1,029,037 |
| | $ | 1,041,854 |
|
| Telecom | 353,694 |
| | 287,446 |
| | 407,449 |
|
| Totals | $ | 1,280,480 |
| | $ | 1,316,483 |
| | $ | 1,449,303 |
|
In February 2016, the FASB issued an accounting standards update which replaces the current lease accounting standard. The update will require lessees, among other items, to recognize a right-of-use asset and a lease liability for most leases. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain optional practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented, but provides an optional application at the adoption date. The Company expects to adopt this standard in the first quarter of its fiscal 2020 and apply it at the beginning of the period of adoption. Although the Company is currently completing its evaluation of potential effects on its consolidated financial position, results of operations and cash flows from the adoption of this standard, the Company expects that most of its operating lease commitments will be subject to the new standard and will be recognized as operating lease liabilities and right-of-use assets upon adoption of this standard.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed above, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Earnings Per Share
Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options and restricted stock units (under the treasury stock method), 0.50% Convertible Senior Notes due 2033 (under the treasury stock method), and 0.50% Convertible Senior Notes due 2036 (under the treasury stock method) outstanding during the period.
The following table presents the calculation of basic and diluted net income (loss) per share:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| (in thousands, except per share amounts) | April 28, 2019 |
| April 29, 2018 |
| April 30, 2017 |
| Numerator: | | | | | |
| Net income (loss) | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| Numerator for basic income (loss) per share | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| Numerator for diluted income (loss) per share | $ | (53,216 | ) | | $ | (48,286 | ) | | $ | 249,346 |
|
| Denominator: | | | | | |
| Denominator for basic income (loss) per share | 117,178 |
| | 113,864 |
| | 110,405 |
|
| Effect of dilutive securities: | | | | | |
| Stock options and restricted stock units | — |
| | — |
| | 3,692 |
|
| Dilutive potential common shares | — |
| | — |
| | 3,692 |
|
| Denominator for diluted income (loss) per share | 117,178 |
|
| 113,864 |
| | 114,097 |
|
| Net income (loss) per share: | | | | | |
| Basic | $ | (0.45 | ) |
| $ | (0.42 | ) | | $ | 2.26 |
|
| Diluted | $ | (0.45 | ) |
| $ | (0.42 | ) | | $ | 2.19 |
|
The following table presents common shares related to potentially dilutive securities excluded from the calculation of diluted net income (loss) per share as their effect would have been anti-dilutive:
|
| | | | | | | | |
| | Fiscal Years Ended |
| (in thousands) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Stock options and restricted stock units | 3,187 |
| | 4,545 |
| | 207 |
|
0.50% Convertible Senior Notes due 2033 and 0.50% Convertible Senior Notes due 2036 are excluded from the calculation of diluted earnings per share under the treasury stock method for the periods when the conversion price exceeded the average market price for the Company's common stock.
4. Intangible Assets
The following tables reflect intangible assets as of April 28, 2019 and April 29, 2018:
|
| | | | | | | | | | | |
| | April 28, 2019 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Purchased technology | $ | 107,759 |
| | $ | (105,759 | ) | | $ | 2,000 |
|
| Purchased trade name | 1,172 |
| | (1,172 | ) | | — |
|
| Purchased customer relationships | 21,344 |
| | (21,063 | ) | | 281 |
|
| Purchased internal use software and backlog | 2,816 |
| | (2,816 | ) | | — |
|
| Purchased patents | 4,505 |
| | (2,602 | ) | | 1,903 |
|
| Total | $ | 137,596 |
| | $ | (133,412 | ) | | $ | 4,184 |
|
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| | April 29, 2018 |
| (in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Purchased technology | $ | 107,759 |
| | $ | (103,803 | ) | | $ | 3,956 |
|
| Purchased trade name | 1,172 |
| | (1,172 | ) | | — |
|
| Purchased customer relationships | 21,344 |
| | (19,798 | ) | | 1,546 |
|
| Purchased internal use software and backlog | 2,816 |
| | (2,816 | ) | | — |
|
| Purchased patents | 4,505 |
| | (2,129 | ) | | 2,376 |
|
| Total | $ | 137,596 |
| | $ | (129,718 | ) | | $ | 7,878 |
|
Estimated amortization expense for each of the next five fiscal years and thereafter as of April 28, 2019 is as follows:
|
| | | |
| Year | Amount (in thousands) |
| 2020 | $ | 2,224 |
|
| 2021 | 704 |
|
| 2022 | 306 |
|
| 2023 | 306 |
|
| 2024 | 306 |
|
| Beyond 2024 | 338 |
|
| Total | $ | 4,184 |
|
5. Investments
Fixed Income Securities
The Company's portfolio of fixed income securities consists of commercial paper notes and term bank certificates of deposit. All of the Company's investments in fixed income securities have original maturity (maturity at the purchase date) of less than 12 months and are reported as short-term investments in the consolidated balance sheets as of April 28, 2019 and April 29, 2018. All of the Company's investments in fixed income securities are classified as held-to-maturity, since the Company has the positive intent and ability to hold these investments until maturity, and are carried at amortized cost.
The Company's investments in fixed income securities as of April 28, 2019 and April 29, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 28, 2019 | | April 29, 2018 |
| | | Gross Unrealized | | | | Gross Unrealized | |
| (in thousands) | Amortized Cost | Gains | Losses | Fair Value | | Amortized Cost | Gains | Losses | Fair Value |
| Commercial paper | $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 548,010 |
| $ | — |
| $ | — |
| $ | 548,010 |
|
| Certificates of deposit | 100,000 |
| — |
| — |
| 100,000 |
| | 336,828 |
| — |
| — |
| 336,828 |
|
| Total | $ | 100,000 |
| $ | — |
| $ | — |
| $ | 100,000 |
| | $ | 884,838 |
| $ | — |
| $ | — |
| $ | 884,838 |
|
The Company monitors its investment portfolio for impairment on a periodic basis. In order to determine whether a decline in fair value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the Company's financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in its industry; the Company's relative competitive position within the industry; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A decline in the fair value of the security below amortized cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the affected securities. During fiscal 2019, 2018 and 2017, there were no realized gains or losses, and the Company did not recognize any other-than-temporary impairments.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Inventories
|
| | | | | | | |
| Inventories consist of the following (in thousands): | As of |
| | April 28, 2019 | | April 29, 2018 |
| Raw materials | $ | 63,749 |
| | $ | 84,441 |
|
| Work-in-process | 191,479 |
| | 186,160 |
|
| Finished goods | 43,800 |
| | 77,926 |
|
| Total inventories | $ | 299,028 |
| | $ | 348,527 |
|
| Including: inventory consigned to others | $ | 29,784 |
| | $ | 38,366 |
|
7. Property, Equipment and Improvements, Net
|
| | | | | | | |
| Property, equipment and improvements consist of the following (in thousands): | As of |
| | April 28, 2019 | | April 29, 2018 |
| Land and buildings | $ | 112,346 |
| | $ | 113,390 |
|
| Computer equipment | 78,655 |
| | 77,235 |
|
| Office equipment, furniture and fixtures | 5,933 |
| | 6,604 |
|
| Machinery and equipment | 728,061 |
| | 700,421 |
|
| Leasehold property and improvements | 48,328 |
| | 52,135 |
|
| Construction-in-progress (not being depreciated) | 250,619 |
| | 108,091 |
|
| | 1,223,942 |
| | 1,057,876 |
|
| Less: Accumulated depreciation and amortization | (600,963 | ) | | (537,027 | ) |
| Property, equipment and improvements, net | $ | 622,979 |
| | $ | 520,849 |
|
8. Debt
0.50% Convertible Senior Notes Due 2036
In December 2016, the Company issued and sold $575.0 million in aggregate principal amount of 0.50% Convertible Senior Notes due 2036 (the "2036 Notes") at par. The terms of the 2036 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2036 Notes will mature on December 15, 2036, unless earlier repurchased, redeemed or converted. The 2036 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2036 Notes bear interest at a rate of 0.5% per year, payable semi-annually in arrears on June 15 and December 15 each year.
Holders of the 2036 Notes may convert their 2036 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of the 2036 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2036 Notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal 22.6388 shares of common stock per $1,000 principal amount of the 2036 Notes (which is equivalent to an initial conversion price of approximately $44.17 per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2036 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2021, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2036 Notes ("make-whole feature").
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the event of a fundamental change, holders will have the option to require the Company to redeem for cash any 2036 Notes held by them at a purchase price equal to 100% of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2036 Notes held by them on December 15, 2021, December 15, 2026 and December 15, 2031 at a redemption price equal to 100% of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2036 Notes in whole or in part at any time on or after December 22, 2021 at 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2036 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Because of its option to settle conversion of the 2036 Notes in cash, the Company separated the liability and equity components of the 2036 Notes. The carrying amount of the liability component at issuance date of $465.1 million was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2036 Notes of $109.9 million was allocated to the equity component. The resulting debt discount is amortized as interest expense. As of April 28, 2019, the remaining debt discount amortization period was 32 months.
The 2036 Notes consisted of the following:
|
| | | | | | | |
| | As of |
| (in thousands) | April 28, 2019 | | April 29, 2018 |
| Liability component: | | | |
| Principal | $ | 575,000 |
| | $ | 575,000 |
|
| Unamortized debt discount | (61,511 | ) | | (82,765 | ) |
| Unamortized debt issuance costs | (2,438 | ) | | (3,358 | ) |
| Net carrying amount of the liability component | $ | 511,051 |
| | $ | 488,877 |
|
| Carrying amount of the equity component | $ | 109,881 |
| | $ | 109,881 |
|
The Company incurred approximately $5.7 million in transaction costs in connection with the issuance of the 2036 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs of $4.6 million, allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of $1.1 million, allocated to the equity component, were recognized as a reduction of additional paid-in capital.
The following table sets forth interest expense information related to the 2036 Notes:
|
| | | | | | | | | |
| | Fiscal Years Ended |
| (in thousands, except percentages) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Contractual interest expense | $ | 2,875 |
| | $ | 2,875 |
| | $1,001 |
| Amortization of the debt discount | 21,253 |
| | 20,257 |
| | 6,859 |
| Amortization of issuance costs | 923 |
| | 923 |
| | 334 |
| Total interest cost | $ | 25,051 |
| | $ | 24,055 |
| | $8,194 |
| Effective interest rate on the liability component | 4.85 | % | | 4.85 | % | | 4.85% |
The Company applies the treasury stock method to determine the potential dilutive effect of the 2036 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2036 Notes in cash.
0.50% Convertible Senior Notes Due 2033
In December 2013, the Company issued and sold $258.8 million in aggregate principal amount of 0.50% Convertible Senior Notes due 2033 (the "2033 Notes") at par. The terms of the 2033 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2033 Notes will mature on December 15, 2033, unless earlier repurchased, redeemed or converted. The 2033 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2033 Notes bear interest at a rate of 0.5% per year, payable semi-annually in arrears on June 15 and December 15 each year.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Holders of the 2033 Notes may convert their 2033 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2033 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 26, 2014 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of the 2033 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2033 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2033 Notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal 33.1301 shares of common stock per $1,000 principal amount of the 2033 Notes (which is equivalent to an initial conversion price of approximately $30.18 per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2033 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2018, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2033 Notes ("make-whole feature").
Holders will have the option to require the Company to redeem for cash any 2033 Notes held by them in the event of a fundamental change, e.g., a merger or an acquisition, at a purchase price equal to 100% of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2033 Notes held by them on December 15, 2023 and December 15, 2028 at a redemption price equal to 100% of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2033 Notes in whole or in part at any time on or after December 22, 2018 at 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2033 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Because of its option to settle conversion of the 2033 Notes in cash, the Company separated the liability and equity components of the 2033 Notes. The carrying amount of the liability component at issuance date of $209.1 million was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2033 Notes of $49.6 million was allocated to the equity component. The resulting debt discount was amortized as interest expense and was fully amortized as of April 28, 2019.
In December 2018, the holders of the 2033 Notes representing approximately $257.7 million of the principal amount of the 2033 Notes exercised their rights to redeem their 2033 Notes at a redemption price equal to 100% of the principal amount of the notes. All redemptions were in accordance with the original terms of the 2033 Notes and no gain or loss was recognized as a result of the redemption.
The 2033 Notes consisted of the following:
|
| | | | | | | |
| | As of |
| (in thousands) | April 28, 2019 | | April 29, 2018 |
| Liability component: | | | |
| Principal | $ | 1,054 |
| | $ | 258,750 |
|
| Unamortized debt discount | — |
| | (7,086 | ) |
| Unamortized debt issuance costs | — |
| | (386 | ) |
| Net carrying amount of the liability component | $ | 1,054 |
| | $ | 251,278 |
|
| Carrying amount of the equity component | $ | 49,648 |
| | $ | 49,648 |
|
On May 1, 2019, the Company redeemed all remaining $1.1 million of the principal amount of the 2033 Notes at a redemption price equal to 100% of the principal amount of the notes. This redemption was in accordance with the original terms of the 2033 Notes and no gain or loss was recognized as a result of the redemption.
The Company incurred approximately $3.8 million in transaction costs in connection with the issuance of the 2033 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of $3.1 million, allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of $725,000, allocated to the equity component, were recognized as a reduction of additional paid-in capital.
The following table sets forth interest expense information related to the 2033 Notes:
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| (in thousands, except percentages) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Contractual interest expense | $ | 832 |
| | $ | 1,294 |
| | $ | 1,294 |
|
| Amortization of the debt discount | 7,086 |
| | 10,577 |
| | 10,076 |
|
| Amortization of issuance costs | 386 |
| | 616 |
| | 616 |
|
| Total interest cost | $ | 8,304 |
| | $ | 12,487 |
| | $ | 11,986 |
|
| Effective interest rate on the liability component | 4.87 | % | | 4.87 | % | | 4.87 | % |
The Company applies the treasury stock method to determine the potential dilutive effect of the 2033 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2033 Notes in cash.
As explained above, the terms of the 2033 Notes include a provision that allows the holders to require the Company to redeem any of their notes on December 15, 2018. Accordingly, all $251.3 million of the net carrying amount of the liability component of the 2033 Notes outstanding as of April 29, 2018 was classified as a current liability as of that date.
9. Commitments
The Company’s future commitments at April 28, 2019 included minimum payments under non-cancelable operating lease agreements, including operating lease obligations that have been accrued as restructuring charges, as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | After 5 Years |
| Operating leases | $ | 37,572 |
| | $ | 9,990 |
| | $ | 15,310 |
| | $ | 8,357 |
| | $ | 3,915 |
|
Rent expense under the non-cancelable operating leases was approximately $9.3 million, $9.9 million and $9.0 million for the years ended April 28, 2019, April 29, 2018 and April 30, 2017, respectively. The Company subleases a portion of its facilities that it considers to be in excess of its requirements. Sublease income was $345,000, $292,000 and $373,000 for the years ended April 28, 2019, April 29, 2018 and April 30, 2017, respectively. Certain leases have scheduled rent increases which have been included in the above table and recorded as rent expense on a straight-line basis. Other leases contain provisions to adjust rental rates for inflation during their terms, most of which are based on to-be-published indices. Rents subject to these adjustments are included in the above table based on current rates.
10. Fair Value of Financial Instruments
The Company's financial instruments not measured at fair value on a recurring basis as of April 28, 2019 and April 29, 2018 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 28, 2019 | | April 29, 2018 |
| | Carrying | | Fair Value | | Carrying | | Fair Value |
| (in thousands) | Amount | | Level 1 | Level 2 | Level 3 | Total | | Amount | | Level 1 | Level 2 | Level 3 | Total |
| Commercial paper | $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| | $ | 548,010 |
| | $ | — |
| $ | 548,010 |
| $ | — |
| $ | 548,010 |
|
| Certificates of deposit | $ | 100,000 |
| | $ | — |
| $ | 100,000 |
| $ | — |
| $ | 100,000 |
| | $ | 336,828 |
| | $ | — |
| $ | 336,828 |
| $ | — |
| $ | 336,828 |
|
| 2033 Notes | $ | 1,054 |
| | $ | 1,063 |
| $ | — |
| $ | — |
| $ | 1,063 |
| | $ | 251,278 |
| | $ | 256,001 |
| $ | — |
| $ | — |
| $ | 256,001 |
|
| 2036 Notes | $ | 511,051 |
| | $ | 564,302 |
| $ | — |
| $ | — |
| $ | 564,302 |
|
| $ | 488,877 |
|
| $ | 520,016 |
| $ | — |
| $ | — |
| $ | 520,016 |
|
The fair values of the Company's investments in commercial papers and certificates of deposit are based on quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data. The fair values of the 2033 Notes and the 2036 Notes are based on the price in the open market as of or close to the respective balance sheet dates. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion as of each respective balance sheet date.
11. Stockholders’ Equity
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Income
Cumulative foreign currency translation adjustment was the only component of the accumulated other comprehensive income as of April 28, 2019 and April 29, 2018.
Common Stock and Preferred Stock
As of April 28, 2019, Finisar is authorized to issue 750,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred stock. The holder of each share of common stock has the right to one vote and is entitled to receive dividends when and as declared by the Company’s Board of Directors. The Company has never declared or paid dividends on its common stock. The Company has authority to issue up to 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be issued in one or more series having such rights, preferences and privileges as may be designated by the Company’s board of directors.
Common stock subject to future issuance as of April 28, 2019 is as follows:
|
| | |
Exercise of outstanding stock options | 822,747 |
|
Vesting of restricted stock awards | 7,202,014 |
|
Available for grant under employee stock incentive plan | 2,865,242 |
|
Available for grant under employee stock purchase plan | 1,815,599 |
|
Total | 12,705,602 |
|
Employee Stock Purchase Plan
In September 2009, the Company’s board of directors adopted the 2009 Employee Stock Purchase Plan (the "ESPP"), which was approved by the stockholders in November 2009. An amended and restated version of ESPP was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated ESPP, 7,000,000 shares of the Company’s common stock have been reserved for issuance, and the term of the ESPP is scheduled to expire on September 1, 2024. The ESPP permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee’s total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower. In connection with the Merger, the ESPP was suspended on December 14, 2018.
Employee Stock Plans
In September 1999, Finisar’s 1999 Stock Option Plan was adopted by the board of directors and approved by the stockholders. An amendment and restatement of the 1999 Stock Option Plan, including renaming it the 2005 Stock Incentive Plan (the “2005 Plan”), was approved by the board of directors in September 2005 and by the stockholders in October 2005. An amended and restated version of the 2005 Plan was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated 2005 Plan, a total of 22,500,000 shares of common stock have been reserved for issuance, and the term of the 2005 Plan is scheduled to expire on September 1, 2024. The types of stock-based awards available under the 2005 Plan includes stock options, stock appreciation rights, restricted stock units (“RSUs”) and other stock-based awards which vest upon the attainment of designated performance goals or the satisfaction of specified service requirements or, in the case of certain RSUs or other stock-based awards, become payable upon the expiration of a designated time period following such vesting events. Options generally vest over four or five years and have a maximum term of 10 years. RSUs generally vest over four years. As of April 28, 2019 and April 29, 2018, no shares were subject to repurchase.
Stock Options
|
| | | | |
| | Number of Shares | | Weighted-Average Exercise Price |
| Stock options outstanding as of April 29, 2018 | 1,097,091 |
| | $17.08 |
| Stock options exercised | (267,902 | ) | | $5.17 |
| Stock options canceled | (6,442 | ) | | $23.96 |
| Stock options outstanding as of April 28, 2019 | 822,747 |
| | $20.90 |
| Stock options outstanding and exercisable as of April 28, 2019 | 273,033 |
| | $18.19 |
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average grant-date fair value of options granted during fiscal 2018 was $9.89. The total intrinsic value of stock options exercised during fiscal 2019, 2018 and 2017 was $3.7 million, $1.7 million and $9.9 million, respectively. The aggregate intrinsic value of stock options outstanding as of April 28, 2019 was $2.4 million. The aggregate intrinsic value of stock options outstanding and exercisable as of April 28, 2019 was $1.6 million. The weighted-average remaining contractual life of stock options outstanding as of April 28, 2019 was 7.9 years. The weighted-average remaining contractual life of stock options outstanding and exercisable as of April 28, 2019 was 6.3 years. As of April 28, 2019, the Company had $5.2 million of unrecognized compensation expense related to stock option grants. These expenses are expected to be recognized over a weighted-average period of approximately 3.1 years.
Restricted Stock Units
|
| | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| RSUs unvested as of April 29, 2018 | 5,954,755 |
| | $21.96 |
| RSUs granted | 4,436,933 |
| | $17.45 |
| RSUs vested | (2,347,430 | ) | | $21.12 |
| RSUs forfeited | (842,244 | ) | | $21.25 |
| RSUs unvested as of April 28, 2019 | 7,202,014 |
| | $19.54 |
Number of RSUs granted during fiscal 2019 in the table above includes 654,382 RSUs with both market and service vesting conditions. The number of common stock shares to be received at vesting of these RSUs is based on the market price for the Company's common stock reaching certain pre-determined levels. The weighted-average grant-date fair value of these RSUs was $18.08. The weighted-average grant-date fair value of RSUs granted during fiscal 2018 and 2017 was $25.65 and $19.77, respectively. The aggregate intrinsic value of RSUs outstanding as of April 28, 2019 was $172.0 million. The total grant-date fair value of RSUs vested during fiscal 2019, 2018 and 2017 was $49.6 million, $56.0 million and $42.0 million, respectively. As of April 28, 2019, the Company had $98.0 million of unrecognized compensation expense related to RSUs grants. These expenses are expected to be recognized over a weighted-average period of approximately 2.2 years.
Share-Based Compensation Cost
The following table sets forth the detailed allocation of the share-based compensation expense for the fiscal years ended April 28, 2019, April 29, 2018 and April 30, 2017 which was reflected in the Company’s operating results:
|
| | | | | | | | |
| | Fiscal Years Ended |
| (in thousands) | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Share-based compensation expense by caption: | | | | | |
| Cost of revenues | $14,472 | | $12,943 | | $11,409 |
| Research and development | 21,945 |
| | 22,767 |
| | 20,425 |
|
| Sales and marketing | 7,937 |
| | 7,619 |
| | 7,170 |
|
| General and administrative | 13,645 |
| | 17,835 |
| | 10,875 |
|
| Total | $57,999 | | $61,164 | | $49,879 |
| | | | | | |
| Share-based compensation expense by type of award: | | | | | |
| RSUs | $53,574 | | $56,965 | | $46,577 |
| Stock options | 1,652 |
| | 490 |
| | — |
|
| Employee stock purchase rights under ESPP | 2,773 |
| | 3,709 |
| | 3,302 |
|
| Total | $57,999 | | $61,164 | | $49,879 |
Total share-based compensation cost capitalized as part of inventory was $3.4 million and $3.9 million as of April 28, 2019 and April 29, 2018, respectively.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of stock options and employee stock purchase rights under the ESPP granted in fiscal 2019, 2018 and 2017 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
|
| | | | | | | | | |
| | | Fiscal Years Ended |
| | | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Stock Purchase Rights: | | | | | | |
| Expected term (in years) | | n/a |
| | 0.75 |
| | 0.75 |
|
| Volatility | | n/a |
| | 56% - 57% |
| | 40% - 43% |
|
| Risk-free interest rate | | n/a |
| | 1.48 - 1.70% |
| | 0.36 - 0.89% |
|
| Dividend yield | | n/a |
| | — | % | | — | % |
| Stock Options: | | | | | | |
| Expected term (in years) | | n/a |
| | 5.2 |
| | n/a |
|
| Volatility | | n/a |
| | 47 | % | | n/a |
|
| Risk-free interest rate | | n/a |
| | 2.3 | % | | n/a |
|
| Dividend yield | | n/a |
| | — | % | | n/a |
|
| Market-based Performance Restricted Stock Units | | | | | | |
| Expected term (in years) | | 3.9 |
| | n/a |
| | n/a |
|
| Volatility | | 46 | % | | n/a |
| | n/a |
|
| Risk-free interest rate | | 2.7 | % | | n/a |
| | n/a |
|
The expected term of employee stock purchase rights is the average of the remaining purchase periods under each offering period. The expected term of stock options is the average term from the Company's historical stock option exercise experience. The expected term of market-based performance restricted stock units is explicit service period based on service vesting conditions of these units. The Company calculated the volatility factor based on the Company’s historical stock prices. The Company bases the risk-free interest rate used in the Black-Scholes option-pricing and Monte Carlo simulation models on constant maturity bonds from the Federal Reserve in which the maturity approximates the expected terms. The Black-Scholes option-pricing model calls for a single expected dividend yield as an input. The Company has not issued and does not expect to issue any dividends.
The weighted-average estimated per share fair value of purchase rights granted under the ESPP in fiscal 2018 and 2017 was $4.43 and $5.34, respectively.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected life of the stock-based award and the stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted above.
During the third quarter of fiscal 2018, Jerry S. Rawls resigned as the Company's Chief Executive Officer and as Chairman of the Company's Board of Directors (the “Board”). Mr. Rawls remains a member of the Board. In connection with Mr. Rawls’ resignation, and in accordance with the terms of the related separation and release agreement between Mr. Rawls and the Company, Mr. Rawls received a lump sum cash severance payment of $300,000, and the vesting of each of Mr. Rawls’ outstanding and unvested awards of restricted stock units granted by the Company was accelerated 100%. Accordingly, during the third quarter of fiscal 2018, the Company recorded approximately $7.5 million of compensation expense related to this acceleration.
12. Employee Benefit Plan
The Company maintains a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code which covers all eligible employees. Employees are eligible to participate in the plan on the first day of the calendar year quarter immediately following completion of eligibility requirements as required by the plan.
Under the plan, each participant may contribute up to 20% of his or her pre-tax gross compensation up to a statutory limit, which is $19,000 for calendar year 2019, $18,500 for calendar year 2018 and $18,000 for calendar year 2017. All amounts contributed by participants and earnings on participant contributions are fully vested at all times. The Company may contribute an amount equal to one-half of the first 6% of each participant’s contribution. The Company may make the matching
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contribution in shares of Finisar common stock in lieu of cash. Contributions made in shares will be allocated to each participant’s account using the share price on the date the Company matching contribution is made to the plan.
The Company made a discretionary matching contribution of 131,162 shares for a total contribution of $2.8 million during the year ended April 28, 2019. The Company’s expenses related to this plan were $2.8 million, $3.3 million and $2.8 million for the fiscal years ended April 28, 2019, April 29, 2018 and April 30, 2017, respectively.
13. Income Taxes
On December 22, 2017, the TCJA was enacted, containing significant changes to the U.S. tax law, including lowering the U.S. corporate income tax rate, implementing a territorial tax system, and imposing a one-time tax on deemed repatriation of earnings of foreign subsidiaries.
The TCJA reduced the U.S. statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. As a result of this rate reduction, the Company revalued its net deferred tax asset as of December 22, 2017, and recorded a reduction in its deferred tax assets and a corresponding deferred tax expense of approximately $30.3 million. For fiscal 2018, the Company's blended corporate income tax rate was 30.4%, which was based on the applicable tax rates before and after the TCJA enactment and the number of days in each period.
The TCJA allows 100% expensing of cost of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. The bonus depreciation percentage is phased down from 100% beginning in 2023 through 2026. The Company elected to claim the 100% bonus depreciation for the assets placed into service after September 27, 2017. The net impact of this provision was not material to the Company's consolidated financial position, results of operations and cash flows.
The TCJA also implements a territorial tax system. In general, under the territorial tax system, the Company’s foreign earnings will no longer be subject to tax in the U.S. As part of transitioning to the territorial tax system, the TCJA includes a mandatory deemed repatriation of all undistributed foreign earnings that are subject to a U.S. income tax. As of December 31, 2017, the Company had approximately $123.0 million of undistributed earnings for certain non-U.S. subsidiaries that have been indefinitely reinvested outside the U.S. The mandatory deemed repatriation of these undistributed earnings resulted in a one-time deferred tax expense of approximately $19.1 million.
The Company has historically asserted its intent to reinvest these earnings in foreign operations indefinitely and continues to do so. The Company does not intend to repatriate these earnings to fund its U.S. operations and, accordingly, it does not provide for the U.S. state income and foreign withholding tax on these earnings.
While the TCJA provides for a territorial tax system, beginning in 2018, it also includes two new U.S. tax base erosion provisions - the global intangible low-taxed income ("GILTI") provision and the base-erosion and anti-abuse tax ("BEAT") provision. The GILTI provision requires the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The BEAT provision eliminates the deduction of certain base-erosion payments made to related foreign corporations and imposes a minimum tax if greater than regular tax. The Company expects that the BEAT provision may result in significant U.S. tax in future periods. In addition, the Company intends to account for the GILTI tax in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its consolidated financial statements for the fiscal 2018 and 2019.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. The Company has recognized the provisional tax impact related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities to the extent needed and included these amounts in its consolidated financial statements for fiscal 2018. During fiscal 2019, the Company completed its accounting for the impact of TCJA on its consolidated financial statements and recorded an additional one-time deferred tax expense of approximately $6.4 million related to the re-measurement of deferred taxes.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of income tax expense (benefit) consist of the following (in thousands):
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Current: | | | | | |
| Federal | $ | 5,080 |
| | $ | — |
| | $ | — |
|
| State | 244 |
| | 189 |
| | 532 |
|
| Foreign | 6,887 |
| | 7,480 |
| | 14,850 |
|
| | 12,211 |
| | 7,669 |
| | 15,382 |
|
| Deferred: | | | | | |
| Federal | (3,172 | ) | | 29,532 |
| | (102,305 | ) |
| State | (670 | ) | | (999 | ) | | (1,008 | ) |
| Foreign | 1,298 |
| | (2,919 | ) | | 1,779 |
|
| | (2,544 | ) | | 25,614 |
| | (101,534 | ) |
| Provision for (benefit from) income taxes | $ | 9,667 |
| | $ | 33,283 |
| | $ | (86,152 | ) |
Income (loss) before income taxes consists of the following (in thousands):
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| U.S. | $ | (95,168 | ) | | $ | (72,730 | ) | | $ | 96,648 |
|
| Foreign | 51,619 |
| | 57,727 |
| | 66,546 |
|
| | $ | (43,549 | ) | | $ | (15,003 | ) | | $ | 163,194 |
|
A reconciliation of the income tax provision at the federal statutory rate and the effective rate is as follows:
|
| | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| Expected income tax provision (benefit) at U.S. federal statutory rate | 21.0 | % | | 30.4 | % | | 35.0 | % |
| Foreign rate differential | 14.1 |
| | 100.6 |
| | (5.0 | ) |
| Share-based compensation expense | (8.9 | ) | | (5.3 | ) | | 0.7 |
|
| Valuation allowance | (2.2 | ) | | (31.7 | ) | | (83.0 | ) |
| Non-deductible transaction costs | (6.4 | ) | | — |
| | — |
|
| Other permanent adjustments | (6.1 | ) | | (32.4 | ) | | 0.7 |
|
| Research and development credits | 10.5 |
| | 43.2 |
| | (2.3 | ) |
| Impact of TCJA - GILTI | (16.9 | ) | | — |
| | — |
|
| Impact of TCJA - BEAT | (11.7 | ) | | — |
| | — |
|
| Impact of TCJA - rate reduction | — |
| | (201.8 | ) | | — |
|
| Impact of TCJA - transition tax | (15.6 | ) | | (127.1 | ) | | — |
|
| Other | — |
| | 2.4 |
| | 1.0 |
|
| | (22.2 | )% | | (221.7 | )% | | (52.9 | )% |
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of deferred taxes consist of the following (in thousands):
|
| | | | | | | |
| As of |
| | April 28, 2019 | | April 29, 2018 |
| Deferred tax assets: | | | |
| Inventory adjustments | $ | 12,633 |
| | $ | 9,870 |
|
| Accruals and reserves | 9,101 |
| | 4,827 |
|
| Tax credits | 56,486 |
| | 49,657 |
|
| Net operating loss carryforwards | 38,676 |
| | 55,926 |
|
| Gain/loss on investments under equity or cost method | 234 |
| | 364 |
|
| Depreciation and amortization | 18,062 |
| | 16,524 |
|
| Purchase accounting for intangible assets | 800 |
| | 1,284 |
|
| Capital loss carryforward | 310 |
| | 2,246 |
|
| Acquired intangibles | 374 |
| | 1,497 |
|
| Stock compensation | 6,229 |
| | 5,432 |
|
| Total deferred tax assets | 142,905 |
| | 147,627 |
|
| Valuation allowance | (32,692 | ) | | (30,213 | ) |
| Net deferred tax assets | 110,213 |
| | 117,414 |
|
| Deferred tax liabilities: | | | |
| Acquired intangibles | (683 | ) | | (1,493 | ) |
| Debt discount | (13,426 | ) | | (20,006 | ) |
| Depreciation and amortization | (15,448 | ) | | (15,590 | ) |
| Total deferred tax liabilities | (29,557 | ) | | (37,089 | ) |
| Total net deferred tax assets (liabilities) | $ | 80,656 |
| | $ | 80,325 |
|
| | | | |
| Reported as: | | | |
| Deferred tax assets | $ | 81,977 |
| | $ | 80,850 |
|
| Deferred tax liabilities | (1,321 | ) | | (525 | ) |
| Total net deferred tax assets (liabilities) | $ | 80,656 |
| | $ | 80,325 |
|
Realization of deferred tax assets is dependent upon future taxable earnings in related tax jurisdictions. In the past, due to U.S. operating losses in previous years and continuing U.S. earnings volatility which did not allow sustainable profitability, management had established and maintained a full valuation allowance for the U.S. deferred tax assets. During the fourth quarter of fiscal 2017, the Company assessed that it is more likely than not that it will realize the majority of the U.S. deferred tax assets, except for deferred tax assets related to California research and development credits and capital losses. The positive evidence, which existed at that time, that outweighed the negative evidence to release the valuation allowance included the fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Accordingly, during the fourth quarter of fiscal 2017, the Company released $103.3 million of valuation allowance on these deferred tax assets. As of April 28, 2019, the valuation allowance comprises approximately 23% of total deferred tax assets and relates to deferred tax assets, for which management believes it is not more likely than not to be realized in future periods. The Company's valuation allowance increased (decreased) from the prior year by approximately $2.5 million, $(0.6) million and $(132.1) million in fiscal 2019, 2018 and 2017, respectively.
As of April 28, 2019, the Company had federal, state and foreign net operating loss carryforwards of approximately $152.8 million, $13.5 million and $22.5 million, respectively, and federal and state tax credit carryforwards of approximately $43.8 million and $34.8 million, respectively. With the exception of California R&D credit, which can be carried forward indefinitely, the net operating loss and tax credit carryforwards will expire at various dates beginning in fiscal 2020 through 2039, if not utilized. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's manufacturing operations in Malaysia operate under a tax holiday which will expire at the beginning of the second quarter of fiscal 2022. In fiscal 2019, the aggregate dollar and per share effect of the tax holiday was $6.5 million and $0.06 per share, respectively.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):
|
| | | | | | | | | | | |
| | Fiscal Years Ended |
| | April 28, 2019 | | April 29, 2018 | | April 30, 2017 |
| | | | | | |
| Beginning balance | $ | 20,578 |
| | $ | 21,458 |
| | $ | 16,411 |
|
| Additions for tax positions related to current year | 1,298 |
| | 1,803 |
| | 1,675 |
|
| Additions for tax positions related to prior years | 427 |
| | 94 |
| | 3,372 |
|
| Reductions for tax positions related to prior years (lapse of statute of limitations) | — |
| | (2,777 | ) | | — |
|
| Ending balance | $ | 22,303 |
| | $ | 20,578 |
| | $ | 21,458 |
|
Excluding the effects of recorded valuation allowances for deferred tax assets, $19.3 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized. It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur within 12 months from April 28, 2019. The Company records interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of April 28, 2019 and April 29, 2018, the Company had accrued $860,000 and $652,000, respectively, for interest and penalties related to uncertain tax positions.
The Company and its subsidiaries are subject to taxation in various state jurisdictions as well as the U.S. The Company's U.S. federal and state income tax returns are generally not subject to examination by the tax authorities for tax years before fiscal 2009. For all federal and state net operating loss and credit carryovers, the statute of limitations does not begin until the carryover items are utilized. The taxing authorities can examine the validity of the carryover items and if necessary, adjustments may be made to the carryover items. The Company's Malaysia, Singapore, China, Australia, Israel, and Sweden income tax returns are generally not subject to examination by the tax authorities for tax years before 2011, 2012, 2011, 2011, 2005 and 2010, respectively. The Company's Australia subsidiary is under audit for tax year 2011 and after. The Company's India subsidiary is under audit for tax year ended March 31, 2016. The Company's Malaysia subsidiary is under audit for tax years 2015 to 2017. Tax audits of the Company's Germany and Sweden subsidiaries were concluded during fiscal 2019 with no impact on the Company's consolidated financial statements.
14. Segmentsand Geography Information
The Company has one reportable segment consisting of optical subsystems and components. Optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic equipment used in building communication networks, including the switches, routers and servers used in wireline networks as well as the antennas and base stations for wireless networks. Optical components consist primarily of packaged lasers, receivers and photodetectors for data communication and telecommunication applications and passive optical components used in telecommunication applications.
The following is a summary of long-lived assets within geographic areas based on the location of the assets:
|
| | | | | | | |
| | As of |
| (in thousands) | April 28, 2019 | | April 29, 2018 |
| United States | $ | 328,085 |
| | $ | 213,745 |
|
| China | 231,955 |
| | 252,179 |
|
| Malaysia | 39,776 |
| | 52,417 |
|
| Rest of the world | 42,808 |
| | 45,850 |
|
| | $ | 642,624 |
| | $ | 564,191 |
|
The increase in long-lived assets was primarily due to the additions of property, improvements and manufacturing equipment to the Company's manufacturing facility in Sherman, Texas.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Legal Matters
The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.
Due to the nature of the Company's business, it is subject to claims alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.
Class Action and Shareholder Derivative Litigation
Several securities class action lawsuits related to the Company's March 8, 2011 earnings announcement alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 have been filed in the United States District Court for the Northern District of California on behalf of a purported class of persons who purchased stock between December 2, 2010 through March 8, 2011. The named defendants are the Company and Jerry Rawls, its former Chief Executive Officer and former Chairman of the Board, and Eitan Gertel, its former Chief Executive Officer. To date, no specific amount of damages has been alleged. The cases were consolidated, a lead plaintiff was appointed and a consolidated complaint was filed. The Company filed a motion to dismiss the case. On January 16, 2013, the District Court granted the Company's motion to dismiss and granted the lead plaintiffs leave to amend the consolidated complaint. An amended consolidated complaint was filed on February 6, 2013. Thereafter, the Company filed a renewed motion to dismiss the case. On September 30, 2013, the District Court granted the Company's motion and dismissed the case with prejudice, and plaintiff appealed. On January 8, 2016, the Ninth Circuit Court of Appeals reversed the judgment in part for further proceedings in the District Court. On July 15, 2016, lead plaintiff filed a Second Amended Complaint in the District Court. On August 19, 2016, the Company moved to dismiss. On May 1, 2017, the District Court denied the motion and a case scheduling order has been issued. On December 5, 2017, the District Court issued an order denying class certification. On February 1, 2018, the plaintiff filed a petition with the Ninth Circuit Court of Appeals for permission to appeal the denial of class certification and, on July 13, 2018, the Ninth Circuit Court of Appeals denied the petition for permission to appeal. On October 10, 2018, the plaintiff filed a new motion for class certification, which the Company opposed. On May 24, 2019, the District Court denied plaintiffs motion for class certification and granted judgement on the pleadings in favor of the Company and the other defendants.
In addition, two purported shareholder derivative lawsuits related to the Company's March 8, 2011 earnings announcement have been filed in the California Superior Court for the County of Santa Clara, and a third derivative lawsuit has been filed in the United States District Court for the Northern District of California. The complaints assert claims for alleged breach of fiduciary duty, unjust enrichment, and waste on behalf of the Company. Named as defendants are the members of the Company's board of directors at the time of the claim and certain officers, including Jerry Rawls, the Company's former Chief Executive Officer and former Chairman of the Board, Eitan Gertel, the Company’s former Chief Executive Officer, and Kurt Adzema, the Company’s Chief Financial Officer. No specific amount of damages has been alleged and, by the derivative nature of the lawsuits, no damages will be alleged against the Company. The state court cases were consolidated, a lead plaintiff was appointed to file a consolidated complaint, and the cases were stayed by the agreement of the parties. On August 7, 2017, the plaintiff in the federal case filed an amended complaint. On September 5, 2018, the court granted the motion to dismiss with leave to amend. The parties agreed to settle the federal case and, on February 20, 2019, plaintiff filed an unopposed motion for preliminary approval of the settlement, under which the Company has agreed to implement a series of enhancements to its corporate governance policies and procedures. On April 18, 2019, the court granted the motion for preliminary approval, and a hearing with respect to final approval is scheduled to be held on June 27, 2019.
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Litigation relating to the Merger
In January, 2019, eight lawsuits have been filed by alleged Finisar stockholders challenging the Merger: (i) Hein, et al. v. Finisar Corporation, et al., 19CV340510, in the Superior Court of California, County of Santa Clara; (ii) Tenvold, et al. v. Finisar Corporation, et al., 1:19-cv-00050, in the United States District Court for the District of Delaware; (iii) Klein, et al. v. Finisar Corporation, et al., 5:19-cv-00155, in the United States District Court for the Northern District of California; (iv) Wheby Jr., et al. v. Finisar Corporation, et al., 1:19-cv-00064, in the United States District Court for the District of Delaware; (v) Sharma v. Finisar Corporation, et al., 5:19-cv-00220, in the United States District Court for the Northern District of California; (vi) Davis, et al. v. Finisar Corporation, et al., 3:19-cv-00271, in the United States District Court for the Northern District of California; (vii) Bushansky, et al. v. Finisar Corporation, et al., 5:19-cv-00446, in the United States District Court for the Northern District of California; and (viii) Pappey, et al. v. Finisar Corporation, et al., 1:19-cv-00167, in the United States District Court for the District of Delaware (collectively, the “Actions”).
Plaintiffs in the Actions named as defendants Finisar and each member of the Finisar Board. In addition, plaintiffs in the Hein, Tenvold, and Klein actions named II-VI and Merger Subsidiary as defendants. Further, plaintiffs in the Hein, Tenvold, Klein, Wheby, Jr., Davis, Bushansky, and Pappey actions sought to recover on behalf of a putative class consisting of all similarly situated Finisar stockholders.
Plaintiff in the Hein action alleged that the Finisar Board breached its fiduciary duties to Finisar stockholders by, among other things, purportedly engaging in an insufficient sales process, obtaining inadequate merger consideration, and filing a materially misleading preliminary proxy statement. The Hein plaintiff further asserted that II-VI and the Merger Subsidiary knowingly aided and abetted the Finisar Board in breaching their fiduciary duties to Finisar stockholders by entering into the Merger. The Hein plaintiff sought a preliminary and permanent injunction of the proposed transaction unless the proxy statement was amended, rescission and unspecified damages if the Merger was consummated, and attorneys’ fees and expert fees and costs.
Plaintiffs in the Tenvold, Klein, Wheby Jr., Sharma, Davis, Bushansky, and Pappey actions purported to state claims for violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 and, in the case of the Davis complaint, Regulation G promulgated thereunder. Plaintiffs in these actions generally alleged that the preliminary proxy statement omits material information with respect to the Merger, and sought, among other things, an order enjoining the defendants from proceeding with closing the Merger; unspecified damages, attorneys’ fees and expert fees, and expenses and costs; and in the event the Merger was consummated before entry of final judgment, rescission of the Merger or rescissory damages. Defendants believe that the complaints are without merit.
Following the filing of the Actions, counsel for Finisar and for the Plaintiffs engaged in arms-length negotiations concerning claims raised in the Actions and took certain actions that resulted in Finisar filing a Schedule DEFA14A on March 11, 2019, with the U.S. Securities and Exchange Commission that contained supplemental disclosures relating to the Merger. On March 12, 2019, Plaintiffs voluntarily dismissed the Actions with prejudice as to the Plaintiffs’ individual claims and without prejudice to claims asserted on behalf of a purported putative class of Finisar stockholders.
Other
In the ordinary course of business, the Company is a party to litigation, claims and assessments in addition to those described above. Based on information currently available, management does not believe the impact of these other matters will have a material adverse effect on its business, financial condition, results of operations or cash flows of the Company.
16. Guarantees and Indemnifications
Upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90 days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid.
The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company’s activities or the use of the Company’s products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of April 28, 2019. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.
17. Financial Information by Quarter (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | April 28, 2019 | | January 27, 2019 | | October 28, 2018 | | July 29, 2018 | | April 29, 2018 | | January 28, 2018 (1) | | October 29, 2017 | | July 30, 2017 |
| | (In thousands, except per share data) |
| Revenues | $310,085 | | $327,636 | | $325,423 | | $317,336 | | $310,069 | | $332,403 | | $332,205 | | $341,806 |
| Gross profit | $87,303 | | $94,423 | | $85,683 | | $80,684 | | $62,594 | | $88,068 | | $96,205 | | $115,299 |
| Income (loss) from operations | $(11,277) | | $533 | | $(4,105) | | $(15,691) | | $(26,736) | | $(6,129) | | $9,467 | | $29,912 |
| Net income (loss) | $(14,154) | | $(15,301) | | $(5,272) | | $(18,489) | | $(18,343) | | $(55,659) | | $5,857 | | $19,859 |
| Net income (loss) per share: | | | | | | | | | | | | | | | |
| Basic | $(0.12) | | $(0.13) | | $(0.04) | | $(0.16) | | $(0.16) | | $(0.49) | | $0.05 | | $0.18 |
| Diluted | $(0.12) | | $(0.13) | | $(0.04) | | $(0.16) | | $(0.16) | | $(0.49) | | $0.05 | | $0.17 |
| Shares used in computing net income (loss) per share: | | | | | | | | | | | | | | | |
| Basic | 117,953 |
| | 117,608 |
| | 117,284 |
| | 115,867 |
| | 114,742 |
| | 114,209 |
| | 113,960 |
| | 112,544 |
|
| Diluted | 117,953 |
| | 117,608 |
| | 117,284 |
| | 115,867 |
| | 114,742 |
| | 114,209 |
| | 115,443 |
| | 115,698 |
|
(1) Net loss in the third quarter of fiscal 2018 includes a $49.4 million deferred income tax expense as a result of the TCJA.
| |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
None.
| |
Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this report are certifications of our Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 28, 2019, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report for the purpose of ensuring that the information required to be disclosed by us in this report is made known to them by others on a timely basis, and that the information is accumulated and communicated to our management in order to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported by us within the time periods specified in the SEC’s rules.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
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
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of April 28, 2019. Management based its assessment on the criteria set forth in Internal Control - Integrated Framework ("2013 framework") issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that we maintained effective internal control over financial reporting as of April 28, 2019.
The effectiveness of internal control over financial reporting as of April 28, 2019 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control
There were no changes in our internal control over financial reporting during the fiscal quarter ended April 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| |
Item 9B. | Other Information |
None.
PART III
The SEC allows us to include information required in this report by referring to other documents or reports we have already filed or will soon be filing. This is called “incorporation by reference.” We intend to file our definitive proxy statement for our 2019 annual meeting of stockholders (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information to be contained therein is incorporated in this report by reference.
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item is incorporated by reference from the sections captioned “Proposal No. 1 – Election of Directors”, “Corporate Governance”, “Executive Officers of the Registrant” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in the Proxy Statement.
| 1 |
Item 11. | Executive Compensation |
The information required by this item is incorporated by reference from the sections captioned “Director Compensation” and “Executive Compensation and Related Matters” to be contained in the Proxy Statement.
The information required by this item is incorporated by reference from the sections captioned “Principal Stockholders and Share Ownership by Management” and “Equity Compensation Plan Information” to be contained in the Proxy Statement.
i
Table of Contents
PART III
Item 10.Directors, Executive Officers and Corporate Governance
OUR DIRECTORS
The following table sets forth information regarding our current directors as of July 1, 2019.
Name | | Position with Finisar | | Class | | Age | | Director Since |
Michael C. Child | | Director | | I | | 64 | | 2010 |
Roger C. Ferguson | | Director | | I | | 76 | | 1999 |
Michael L. Dreyer | | Director | | III | | 55 | | 2015 |
Michael Hurlston | | Director and Chief Executive Officer | | III | | 52 | | 2018 |
Thomas E. Pardun | | Director | | III | | 75 | | 2009 |
Jerry S. Rawls | | Director | | II | | 74 | | 1989 |
Robert N. Stephens | | Chairman of the Board | | II | | 73 | | 2005 |
Helene Simonet | | Director | | II | | 67 | | 2017 |
Directors Continuing in Office until the 2021 Annual Meeting of Stockholders
Michael C. Child has served as a member of our board of directors since June 2010 and previously served on our board from November 1998 until October 2005. Mr. Child has been employed by TA Associates, Inc., a private equity firm, since 1982 where he currently serves as a Senior Advisor. Mr. Child served as a Managing Director of TA Associates from 1987 through 2010. Mr. Child also currently serves on the board of directors of IPG Photonics, which designs and manufactures high performance fiber lasers and amplifiers. Mr. Child served on the board of directors of Ultratech, Inc., which designs and manufactures photolithography and thermal processing equipment, from 1993 to 1997 and April 2012 until May 2017 when it was acquired by Veeco Instruments Inc. Mr. Child was a lecturer at the Stanford Graduate School of Business between September 2011 and 2015. He also served on the board of directors of Eagle Test Systems, a manufacturer of high performance automated test equipment for the semiconductor industry, from 2003 until November 2008 when it was acquired by Teradyne, Inc. Mr. Child holds a B.S. in Electrical Engineering from the University of California at Davis and an M.B.A. from the Stanford Graduate School of Business. Mr. Child has more than 30 years’ experience investing in and acquiring technology and technology-related companies and has served on the boards of directors of numerous public and private companies, including companies in the fiber optics and semiconductor industries. This broad financial and industry experience enables Mr. Child to make a valuable contribution to the board. He also brings significant knowledge regarding the Company and its operations from his previous years of service on our board.
Roger C. Ferguson has served as a member of our board of directors since August 1999. From June 1999 to December 2001, Mr. Ferguson served as Chief Executive Officer of Semio Corp., an early stage software company. Mr. Ferguson served as a principal in VenCraft, LLC, a venture capital partnership, from July 1997 to August 2002. From August 1993 to July 1997, Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database software company. From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer of Network General Inc., a network analysis company. Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A. from the Amos Tuck School at Dartmouth. Mr. Ferguson brings senior leadership experience and strategic and financial expertise to the board from his prior work as a senior executive of a public company and several private companies and as chief financial officer of a public company. Mr. Ferguson has extensive experience in both the hardware and software segments of the computer and telecommunications industries.
Directors Continuing in Office until the 2020 Annual Meeting of Stockholders
Michael L. Dreyer has served as a member of our board of directors since December 2015. Mr. Dreyer is the Chief Operations Officer of Silicon Valley Bank (SVB) and is responsible for bank and non-bank operations worldwide. Mr. Dreyer oversees SVB’s core operations, enterprise project management, client service and information technology teams. Mr. Dreyer is also currently a director of F5 Networks, Inc., a developer and provider of software defined application services. Before joining SVB, Mr. Dreyer was President and Chief Operating Officer of Monitise Americas, LLC, a subsidiary of Monitise plc, a company providing mobile banking and payment services, from August 2014 to September 2015, where he was responsible for the design, build, and operations of its technology globally, and he ran Monitise plc’s Americas business. Prior to Monitise, Mr. Dreyer was the global head of technology and CIO at VISA Inc. from 2005 to 2014, responsible for the company’s systems and technology platforms. Previously, Mr. Dreyer was chief information officer of Inovant, LLC, a company providing electronic payment processing services, where he oversaw the development and management of its global systems technology. He has also held executive positions at VISA USA as senior vice president of processing and emerging products, and senior vice president of commercial solutions. Additionally, Mr. Dreyer held senior positions at American Express Co, Prime Financial, Inc., Federal Deposit Insurance Corporation (FDIC), Downey Savings, Bank of America, and the Fairmont Hotel Management Company. Mr. Dreyer received an M.B.A. and a B.A. in psychology from Washington State University.
Thomas E. Pardun has served as a member of our board of directors since December 2009. Mr. Pardun was formerly the non-executive Chairman of the board of directors of Western Digital Corporation, a manufacturer of hard-disk drives for the personal computer and home entertainment markets. Mr. Pardun served in that capacity from January 2000 until November 2001 and again from April 2007 until his retirement in November 2015. Mr. Pardun was President of MediaOne International, Asia-Pacific (previously US West International, Asia-Pacific, a subsidiary of US West, Inc.), an owner/operator of international properties in cable television, telephone services and wireless communications companies, from May 1996 until his retirement in July 2000. Prior to 1996, Mr. Pardun served as President and CEO of US West Multimedia Communications, a communications company. Before joining US West, Mr. Pardun was President of the Central Group for Sprint, as well as President of Sprint’s West Division, and Senior Vice President of Business Development for United Telecom, a predecessor company to Sprint. Mr. Pardun also held a variety of management positions during a 19-year tenure with IBM, concluding as Director of product-line evaluation. He is also a director of MaxLinear, Inc., and previously served as a director of Calix, Inc. and CalAmp Corporation. Mr. Pardun holds a B.B.A. in Business Administration from the University of Iowa. Mr. Pardun brings to the board extensive management and operations experience in the computer and telecommunications industries, including marketing and product development expertise, as well as his service in senior management positions.
Michael Hurlston has served as our Chief Executive Officer and as a member of our board of directors from January 2018 until August 2019. Mr. Hurlston previously served as Senior Vice President and General Manager of the Mobile Connectivity Products/Wireless Communications and Connectivity Division and held senior leadership positions in sales, marketing and general management at Broadcom Limited from November 2001 until October 2017. Prior to joining Broadcom in 2001, Mr. Hurlston held senior marketing and engineering positions at Oren Semiconductor, Inc., Avasem, Integrated Circuit Systems, Micro Power Systems, Exar and IC Works from 1991 until 2001. Mr. Hurlston is also a member of the board of directors of Ubiquiti Networks, Inc. and a member of the board of advisors of Vilynx Inc. Mr. Hurlston received a B.S.E.E., an M.S.E.E. and an M.B.A. from the University of California, Davis.
Directors Continuing in Office until the 2019 Annual Meeting of Stockholders
Jerry S. Rawls has served as a member of our board of directors since March 1989. Mr. Rawls previously served as our Chief Executive Officer from September 2015 until January 2018 and from August 1999 until August 2008, as our Chairman of the Board from January 2006 until January 2018 and as our Executive Chairman from August 2008 through September 2015. Mr. Rawls also served as our President from April 2003 until August 2008 and previously held that title from April 1989 to September 2002. From September 1968 to February 1989, Mr. Rawls was employed by Raychem Corporation, a materials science and engineering company, where he held various management positions including Division General Manager of the Aerospace Products Division and Interconnection Systems Division. Mr. Rawls holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in Industrial Administration from Purdue University. Mr. Rawls’ tenure with Finisar since 1989, including over 20 years as President, Executive Chairman, Chairman of the Board and/or Chief Executive Officer, provides him personal knowledge of the Company’s history since shortly after its founding. This experience, together with his management and industry experience, enables him to provide the board with a unique perspective on the Company’s business and operations and strategic issues.
Robert N. Stephens has served as a member of our board of directors since August 2005 and as our Chairman of the Board since January 2018. Mr. Stephens previously served as our Lead Director from March 2010 until January 2018. Mr. Stephens served as the Chief Executive Officer from April 1999 and President from October 1998 of Adaptec, Inc., a storage solutions provider, until his retirement in May 2005. Mr. Stephens joined Adaptec in November 1995 as Chief Operating Officer. Before joining Adaptec, Mr. Stephens was the founder and chief executive officer of Power I/O, a company that developed serial interface solutions and silicon expertise for high-speed data networking, that was acquired by Adaptec in 1995. Prior to founding Power I/O, Mr. Stephens was President and CEO of Emulex Corporation, a designer, developer and supplier of Fibre Channel host bus adapters. Before joining Emulex, Mr. Stephens was Senior Vice President, General Manager, and founder of the Microcomputer Products Group at Western Digital Corporation. He began his career at IBM, where he served over 15 years in a variety of human resource management positions. Mr. Stephens holds a B.A. in Philosophy and Psychology and an M.S. in Industrial Psychology from San Jose State University. Mr. Stephens brings to the board executive and industry experience in a number of strategic and operational areas through his service as Chief Executive Officer of Adaptec, Power I/O and Emulex and in executive roles at Western Digital.
Helene Simonet has served as a member of our board of directors since March 2017. Ms. Simonet served as Executive Vice President and Chief Financial Officer of Coherent, Inc., a world leader in providing photonics based solutions to the commercial and scientific research markets, from April 2002 to February 2016. From December 1999 to April 2002, Ms. Simonet served as Vice President of Finance of Coherent’s former Medical Group and Vice President of Finance of its Photonics Division. Prior to joining Coherent, Ms. Simonet spent over twenty years in senior finance positions at Raychem Corporation. She has been a Director of Rogers Corporation since October 2014. Ms. Simonet holds a B.A. and a M.S. in Applied Economics from the University of Leuven, Belgium.
There are no family relationships between any of our directors or executive officers.
OUR EXECUTIVE OFFICERS
The following table sets forth information regarding our current executive officers as of July 1, 2019:
Name |
| Position(s) |
| Age |
Michael Hurlston | | Chief Executive Officer | | 52 |
Kurt Adzema | | Executive Vice President, Finance and Chief Financial Officer | | 50 |
Christopher E. Brown | | Executive Vice President, Chief Counsel and Secretary | | 51 |
Julie S. Eng | | Executive Vice President, Datacom R&D | | 52 |
Todd Swanson | | Chief Operating Officer | | 47 |
Joseph A. Young | | Executive Vice President, Global Operations | | 62 |
For information on the business background of Mr. Hurlston please see “Our Directors” above.
Kurt Adzema has served as the Company’s Executive Vice President, Finance and Chief Financial Officer since January 2011. Mr. Adzema joined the Company in January 2005 and served as the Company’s Vice President of Strategy and Corporate Development until March 2010, when he was appointed Senior Vice President, Finance and Chief Financial Officer. Prior to joining the Company, he held various positions at SVB Alliant, a subsidiary of Silicon Valley Bank which advised technology companies on merger and acquisition transactions, at Montgomery Securities/Banc of America Securities, an investment banking firm, and in the financial restructuring group of Smith Barney. Mr. Adzema holds a B.A. in Mathematics from the University of Michigan and an M.B.A. from the Wharton School at the University of Pennsylvania.
Christopher E. Brown has served as our Executive Vice President, Chief Counsel and Secretary since January 2011 and previously served as our Vice President, General Counsel and Secretary following the completion of the Company’s merger with Optium in August 2008. Mr. Brown served as Optium’s General Counsel and Vice President of Corporate Development from August 2006 through the completion of the merger. Prior to that, Mr. Brown was a partner at the law firms of Goodwin Procter LLP and McDermott, Will & Emery. Mr. Brown holds a B.A. in Economics and a B.A. in Political Science from the University of Massachusetts at Amherst and a J.D. from Boston College Law School.
Julie S. Eng has served as our Executive Vice President, Datacom R&D since October 2015. Dr. Eng has held various senior management positions within our engineering organization since joining Finisar in 2003. From 1995 to 2003, Dr. Eng served in various positions at AT&T/Lucent Technologies/Agere Systems, including Director of Product Development primarily leading Agere’s transmitter, receiver, and transceiver product development for telecom and datacom markets. Dr. Eng holds a B.A. degree, summa cum laude, in physics from Bryn Mawr College and a B.S. degree in Electrical Engineering with honors from the California Institute of Technology (Caltech). She earned M. S. and Ph.D. degrees in Electrical Engineering from Stanford University.
Todd Swanson has served as our Chief Operating Officer since April 2018 and was appointed to a newly formed Interim Office of the Chief Executive in August 2019. Prior to that, Mr. Swanson served as our Executive Vice President, Sales, Marketing, Research and Development from June 2016 through April 2018 and our Executive Vice President, Sales and Marketing from January 2011 through June 2016. Mr. Swanson joined us in 2002 and served as Product Line Manager, Director of Marketing and Vice President, Sales and Marketing for our Optics Division prior to his appointment as Senior Vice President, Sales and Marketing in August 2008. Mr. Swanson served as Product Line Manager for Princeton Lightwave, a laser company, from June 2001 until he joined Finisar. Mr. Swanson served as Director of Marketing (on a part-time basis while he was studying for his M.B.A.) for Aegis Semiconductor, a manufacturer of optical semiconductor devices, from December 2000 through June 2001. From July 1995 to August 1999, Mr. Swanson was employed by Hewlett-Packard Company as project leader and project manager in the Automotive Lighting Group of the Optoelectronics Division. Mr. Swanson holds a B.S. in Mechanical Engineering from the University of Wisconsin and an M.B.A. from the Massachusetts Institute of Technology.
Joseph A. Young has served as our Executive Vice President, Global Operations since January 2011 and was appointed to a newly formed Interim Office of the Chief Executive in August 2019. Mr. Young served as our Senior Vice President and General Manager, Optics Division from June 2005 to August 2008 when he was appointed Senior Vice President, Operations and Engineering. Mr. Young joined us in October 2004 as our Senior Vice President, Operations. Prior to joining the Company, Mr. Young served as Director of Enterprise Products, Optical Platform Division of Intel Corporation from May 2001 to October 2004. Mr. Young served as Vice President of Operations of LightLogic, Inc. from September 2000 to May 2001, when it was acquired by Intel, and as Vice President of Operations of Lexar Media, Inc. from December 1999 to September 2000. Mr. Young was employed from March 1983 to December 1999 by Tyco/ Raychem, where he served in various positions, including his last position as Director of Worldwide Operations for the OEM Electronics Division of Raychem Corporation. Mr. Young holds a B.S. in Industrial Engineering from Rensselaer Polytechnic Institute, an M.S. in Operations Research from the University of New Haven and an M.B.A. from the Wharton School at the University of Pennsylvania.
CORPORATE GOVERNANCE
Independence of Directors
The board of directors has determined that, other than Mr. Hurlston, our former Chief Executive Officer, and Mr. Rawls, our former Chief Executive Officer, each of Messrs. Child, Ferguson, Pardun, Stephens and Dreyer and Ms. Simonet is an “independent director” for purposes of the NASDAQ Listing Rules and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as the term applies to membership on the board of directors and the various committees of the board of directors.
Board of Directors Leadership Structure
Robert N. Stephens serves as Chairman of our board of directors. Michael Hurlston served as our Chief Executive Officer from January 2018 and resigned on August 3, 2019, and Joseph A. Young and Todd Swanson were both appointed to a newly formed Interim Office of the Chief Executive effective August 3, 2019. Given the Chairman of our board of directors is not an executive officer of the Company, the position of Lead Director is no longer needed, and as such Mr. Stephens no longer serves as Lead Director. The board believes that this leadership structure provides the appropriate balance of management and non-management oversight.
Board of Directors’ Role in Risk Oversight
We face a number of risks, including general economic risks, operational risks, financial risks, competitive risks and reputational risks. Management is responsible for the day-to-day management of the risks that we face, while the board of directors, as a whole and through its committees, has responsibility for the oversight of risk management.
While the full board of directors is charged with ultimate oversight responsibility for risk management, committees of the board also have responsibilities with respect to various aspects of risk management oversight. In particular, the Audit Committee plays a significant role in monitoring and assessing our financial and operational risks. The Audit Committee reviews and discusses with management areas of financial risk exposure and steps management has taken to monitor and control such exposure. The Audit Committee also is responsible for establishing and administering our code of ethics and reviewing and approving transactions between Finisar and any related parties. The Compensation Committee monitors and assesses risks associated with our compensation policies, and consults with management and the board, as well as the Compensation Committee’s independent compensation consultant, regarding the development of incentives that encourage a level of risk-taking consistent with our overall strategy. The Nominating and Governance Committee has oversight responsibility for corporate governance risks, including risks associated with director independence.
Our executive management meets regularly to discuss our strategy and the risks that we face. Senior officers attend board meetings where they are available to address questions or concerns raised by the board on risk management-related matters. In 2010, we instituted a comprehensive enterprise risk management (“ERM”) program to assist management in identifying, assessing, monitoring and managing a broad range of risks. The ERM process is overseen by our Chief Financial Officer who periodically reports to the board on risk assessment and management’s plans to manage or mitigate key risks. Our Internal Audit Department also plays an important role in risk management. Our Vice President of Internal Audit reports directly to the Audit Committee, has direct and unrestricted access to the Audit Committee and regularly meets with the Audit Committee in executive session.
Executive Sessions
Non-management directors generally meet in executive session without management present at each regularly scheduled meeting of the board. Mr. Stephens, in his capacity as Chairman of the Board, presides at these executive sessions.
Meetings of the Board of Directors and Committees
The board of directors has three standing committees: an Audit Committee, a Compensation Committee and a Nominating and Governance Committee. The board of directors held 18 meetings during the fiscal year ended April 28, 2019. During the fiscal year ended April 28, 2019, no director attended fewer than 75% of the total number of meetings of the board and all of the committees of the board on which such director served during that period. The following table sets forth the standing committees of the board and the members of each committee as of the date of this Amendment.
Committee Composition | | Audit | | Compensation | | Nominating and
Governance |
Michael C. Child | | 4 | | 4 (Chair) | | 4 |
Michael L. Dreyer | | 4 | | 4 | | 4 |
Roger C. Ferguson | | 4(Chair) | | — | | 4 |
Thomas E. Pardun | | 4 | | 4 | | 4 |
Helene Simonet | | 4 | | 4 | | 4 |
Robert N. Stephens | | — | | 4 | | 4(Chair) |
Number of meetings during fiscal 2019 | | 4 | | 4 | | 4 |
Audit Committee
The members of the Audit Committee during fiscal 2019 were Ms. Simonet, Messrs. Child, Dreyer, Ferguson and Pardun. Ms. Simonet and Messrs. Ferguson and Pardun have been designated as audit committee financial experts, as defined in applicable SEC rules. The functions of the Audit Committee include oversight, review and evaluation of our financial statements, accounting and financial reporting processes, internal control functions and the audits of our financial statements. The Audit Committee is responsible for the appointment, compensation, retention and oversight of our independent registered public accounting firm, and establishing and observing complaint procedures regarding accounting, internal auditing controls and auditing matters. Additional information concerning the Audit Committee is set forth in the Report of the Audit Committee immediately following “Item 14: Principal Accounting Fees and Services”.
Compensation Committee
The members of the Compensation Committee during fiscal 2019 were Ms. Simonet, Messrs. Child, Dreyer, Pardun and Stephens. The Compensation Committee approves the compensation and benefits of our executive officers, reviews and approves equity awards to our employees and consults with management and the board regarding compensation programs for our executive officers. Additional information regarding the Compensation Committee is set forth in “Item 11: Executive Compensation—Compensation Discussion and Analysis” below.
Nominating and Governance Committee
The members of the Nominating and Governance Committee during fiscal 2019 were Ms. Simonet, Messrs. Child, Ferguson, Pardun, Stephens and Dreyer. The Nominating and Governance Committee identifies prospective candidates for appointment and nomination for election to the board of directors and makes recommendations to the board concerning such candidates, develops corporate governance principles for recommendation to the board of directors, makes recommendations to the board of directors regarding board and committee compensation and oversees the evaluation of our directors. The director evaluation process is a self-evaluation under which the Nominating and Governance Committee reviews and evaluates directors’ assessment of the functioning and performance of the board, each committee and the performance of the members of the board and each committee.
Director Nominations
The Nominating and Governance Committee is responsible for, among other things, the selection and recommendation to the board of directors of nominees for election as directors. When considering the nomination of directors for election at an annual meeting, including incumbent and potential nominees, the Nominating and Governance Committee reviews the needs of the board of directors for various skills, background, experience and expected contributions and the qualification standards established from time to time by the Nominating and Governance Committee. The Nominating and Governance Committee also considers the average tenure of incumbent directors and whether refreshment of the board is desirable. The Nominating and Governance Committee also seeks appropriate input from the Chief Executive Officer and other executive officers in assessing the needs of the board of directors for relevant background, experience and skills of its members.
The Nominating and Governance Committee’s goal is to assemble a board of directors that brings to Finisar a diversity of experience at policy-making levels in business and technology, and in areas that are relevant to Finisar’s global activities. Directors should possess the highest personal and professional ethics, integrity and values and be committed to representing the long-term interests of our stockholders. They must have an inquisitive and objective outlook and mature judgment. They must also have experience in positions with a high degree of responsibility and be leaders in the companies or institutions with which they are or have been affiliated. Director candidates must have sufficient time available, in the judgment of the Nominating and Governance Committee, to perform all board and committee responsibilities that will be expected of them. Members of the board of directors are expected to rigorously prepare for, attend and participate in all meetings of the board of directors and applicable committees. While we do not have a specific policy regarding diversity, when considering the nomination of directors, the Nominating and Governance Committee does consider the diversity of its directors and nominees in terms of knowledge, experience, background, skills, expertise and other demographic factors. Other than the foregoing, there are no specific minimum criteria for director nominees, although the Nominating and Governance Committee believes that it is preferable that a majority of the board of directors meet the definition of “independent director” set forth in NASDAQ and SEC rules. The Nominating and Governance Committee also believes it appropriate for one or more key members of the Company’s management, including the Chief Executive Officer, to serve on the board of directors.
The Nominating and Governance Committee will consider candidates for directors proposed by directors or management, and will evaluate any such candidates against the criteria and pursuant to the policies and procedures set forth above. If the Nominating and Governance Committee believes that the board of directors requires additional candidates for nomination, the Nominating and Governance Committee may engage, as appropriate, a third party search firm to assist in identifying qualified candidates. All incumbent directors and nominees will be required to submit a completed directors’ and officers’ questionnaire as part of the nominating process. The process may also include interviews and additional background and reference checks for non-incumbent nominees, at the discretion of the Nominating and Governance Committee.
The Nominating and Governance Committee will also consider candidates for directors recommended by a stockholder, provided that any such recommendation is sent in writing to the board of directors, c/o Corporate Secretary, 1389 Moffett Park Drive, Sunnyvale, California 94089-1113; Fax: (408) 745-6097, at least 120 days prior to the anniversary of the date definitive proxy materials were mailed to stockholders in connection with the prior year’s annual meeting of stockholders and contains the following information:
· the candidate’s name, age, contact information and present principal occupation or employment; and
· a description of the candidate’s qualifications, skills, background and business experience during at least the last five years, including his or her principal occupation and employment and the name and principal business of any company or other organization where the candidate has been employed or has served as a director.
The Nominating and Governance Committee will evaluate any candidates recommended by stockholders against the same criteria and pursuant to the same policies and procedures applicable to the evaluation of candidates proposed by directors or management.
In addition, stockholders may make direct nominations of directors for election at an annual meeting, provided the advance notice requirements set forth in our bylaws have been met. Under our bylaws, written notice of such nomination, including certain information and representations specified in the bylaws, must be received at our principal executive offices not earlier than the close of business on the 120th day nor later than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; except that in the event that the date of the annual meeting is more than 30 days before or more than 70 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by Finisar.
The Board considers succession planning and senior management development to be one of its most important responsibilities. The Board is responsible for reviewing the Company’s succession planning and senior management development, considering, among other factors the Board deems appropriate, the Company’s strategic direction, organizational and operational needs, competitive challenges, leadership/management potential and development, and emergency situations. To assist the Board with its review, the Board has asked the Chief Executive Officer to provide the Board with a performance assessment of senior management and their succession potential to the position of Chief Executive Officer, including in the event of an unexpected emergency, along with a review of any development plans recommended for such individuals. Members of management with high potential to succeed in the Company may be provided with additional responsibilities to expose them to diverse areas within the Company, with the goal of developing well-rounded and experienced senior leaders. The Board and the Chief Executive Officer also have the authority to consider persons outside of the Company and to engage third-party consultants or search firms to assist in the succession planning process.
Communications by Stockholders with Directors
Stockholders may communicate with the board of directors, or any individual director, by transmitting correspondence by mail, facsimile or email, addressed as follows: Board of Directors (or individual director), c/o Corporate Secretary, 1389 Moffett Park Drive, Sunnyvale, California 94089-1113; Fax: (408) 745-6097. The Corporate Secretary will forward such communications to the board of directors or to the identified director(s), although spam, junk mail, mass mailings, solicitations, advertisements and communications that are abusive, in bad taste or that present safety or security concerns may be handled differently, as determined by the Corporate Secretary.
Director Attendance at Annual Meetings
We attempt to schedule our annual meeting of stockholders at a time and date to accommodate attendance by directors, taking into account the directors’ schedules. Directors are encouraged to attend our annual meeting of stockholders, but the board has not adopted a formal policy with respect to such attendance. All of our directors attended our last annual meeting of stockholders.
Committee Charters and Other Corporate Governance Materials
We have a Code of Ethics, or the Code, and Corporate Governance Guidelines that apply to all of our employees, officers and directors. The Code and Corporate Governance Guidelines are available at http://investor.finisar.com/governance.cfm . If we make any substantive amendments to the Code or grant any waiver from a provision of the Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website, as well as via any other means then required by NASDAQ listing standards or applicable law.
Our board of directors has adopted a written charter for each of the Audit Committee, Compensation Committee and Nominating and Governance Committee. Each charter is available on our website at http://investor.finisar.com/documents.cfm .
Compensation Committee Interlocks and Insider Participation
None of the directors who served on the Compensation Committee during fiscal 2019 is or has been an officer or employee of Finisar. During fiscal 2019, no member of the Compensation Committee had any relationship with Finisar requiring disclosure under Item 404 of Regulation S-K. During fiscal 2019, none of Finisar’s executive officers served on the compensation committee (or its equivalent) or board of directors of another entity any of whose executive officers served on Finisar’s Compensation Committee or board of directors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulations to furnish us copies of all Section 16(a) forms filed by such person.
Based solely on our review of such forms furnished to us, and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders during the fiscal year ended April 28, 2019 were satisfied.
Item 11.Executive Compensation
Compensation Discussion and Analysis
Overview
The following discussion explains our philosophy and objectives and our compensation-setting process with respect to our executive officers and provides information regarding the compensation awarded to our Chief Executive Officer, our Chief Financial Officer, and certain of our other executive officers identified in the Summary Compensation Table that follows this Compensation Discussion and Analysis. We refer to these individuals as our “named executive officers.” As noted above, Mr. Hurlston resigned as our Chief Executive Officer effective August 3, 2019, and Messrs. Young and Swanson were both appointed to a newly formed Interim Office of the Chief Executive.
Executive Summary
We believe that the compensation of our executive officers should provide meaningful incentives to create value for our stockholders and achieve strategic corporate objectives. Accordingly, a substantial portion of each named executive officer’s compensation opportunity is “at-risk,” meaning that it is performance-based and/or linked to the value of the Company’s stock price. Specifically, as shown below, approximately 78% of the target total direct compensation for Mr. Hurlston for fiscal 2019, and approximately 80% of the combined target total direct compensation for each of the other named executive officers, was at-risk.
As used in this discussion, “target total direct compensation” means the aggregate amount of the executive’s base salary, target annual incentive bonus, and long-term equity incentive awards based on the grant-date fair value of such awards as determined under the accounting principles used in the Company’s financial reporting. The target total direct compensation information for the named executive officers other than the Chief Executive Officer is presented on an aggregate basis, although the percentages for each individual executive, in general, are not materially different from the aggregate percentages reflected above.
In addition, as outlined below, our executive compensation program includes a number of features that we believe help to align our executives’ interests with those of our stockholders, and does not include features that we believe do not represent best practices in executive compensation:
What We Do: |
|
| What We Don’t Do: |
·Align our Pay with Performance: Under our annual bonus plan for fiscal 2019, our executives’ officers’ bonuses would be based on our revenue, non-GAAP gross margin and non-GAAP operating income for the fiscal year. The Compensation Committee then had discretion to adjust the executives’ bonus amounts based on its assessment of individual performance. Based on the Company’s performance results for fiscal 2019, the Compensation Committee approved awards at 71.5% of each named executive officer’s target bonus (other than Ms. Eng, whose bonus percentage was lower as it included certain business goals that were not achieved). The Compensation Committee also determined that each executive’s bonus would be paid 50% in cash and 50% in RSUs with a one-year vesting period. ·Cap Annual Bonuses: The annual bonus for each executive is capped at 200% of the executive’s target annual bonus opportunity. ·Use Equity Awards to Link Long-Term Interests of Executives Officers and Stockholders: As shown above, equity awards constitute a substantial portion of each executive’s target total direct compensation opportunity. Executive officers were granted equity awards early in fiscal 2019 in the form of restricted stock units (“RSUs”). These awards provide a retention incentive as they vest over a multi-year period and, because the ultimate value of the award depends on our stock price, further link the interests of our executives with those of our stockholders. ·Grant Equity Awards that Vest Based on Stock Price Performance: In addition, we included performance-based vesting requirements in our long-term incentive compensation program for the first time in fiscal 2019, with the vesting of our Chief Executive Officer’s entire fiscal 2019 equity award being tied to our achievement of specified stock price target levels and a significant portion of each other named executive officer’s equity award also vesting based on these stock price target levels. We believe these performance awards further enhance the alignment between our executives’ interests and those of our stockholders. ·Retain Independent Compensation Consultant: The Compensation Committee retains a compensation consultant to provide independent advice and market analysis.
·Maintain Stock Ownership Guidelines: We have adopted stock ownership guidelines that apply to all members of our board (including our Chief Executive Officer). | | | ·No Material Perquisites: We do not provide any material perquisites or other personal benefits to any of our executive officers. ·No Tax Gross-ups: We do not provide tax gross-up or other tax reimbursement payments to our executive officers. ·No Hedging/Pledging: We have adopted anti-hedging and anti-pledging policies that apply to all of our employees and members of our board of directors. ·No Repricing of Stock Options or Stock Appreciation Rights: Our stock incentive plan prohibits the repricing of stock options or stock appreciation rights without the approval of the Company’s stockholders. |
Compensation Philosophy and Objectives
Our fundamental compensation philosophy is to align the compensation of our senior management with our annual and long-term business objectives, performance against those objectives and creation of stockholder value, as well as to offer compensation that will enable us to attract, retain and appropriately reward executive officers whose contributions are necessary for our long-term success. We seek to reward our executive officers’ contributions to achieving our financial and operational goals and appropriate stock price performance. We operate in a very competitive environment for executive talent, and we believe that our compensation packages must be competitive when compared to our peers.
The Compensation Committee of our board of directors oversees the design and administration of our executive compensation program. The principal elements of the program are base salary, annual cash bonuses and equity-based incentives. In general, the Compensation Committee’s policy is that the total compensation paid to our executive officers should be fair and competitive, taking into account, among other factors, compensation paid by peer companies to officers with comparable responsibilities and our success in achieving our financial and operational goals and appropriate stock price performance. However, it is not the Compensation Committee’s policy to adhere to a rigid formula or benchmark executive compensation at specified levels relative to peer companies.
Compensation-Setting Process
Generally, the Compensation Committee reviews the compensation of our executive officers in the early part of each fiscal year and takes action at that time to award cash bonuses for the preceding fiscal year, to set base salaries and target annual bonus opportunities for the current fiscal year and to grant long-term incentives in the form of equity-based awards. In determining the compensation opportunities for each executive officer, the Compensation Committee takes into account the following:
· the recommendations of our Chief Executive Officer (with respect to executives other than himself),
· the Compensation Committee’s assessment of the individual performance of the executive officer during the previous fiscal year, the executive’s experience and responsibilities, and the executive’s expected future contributions to the Company,
· our financial results for the previous fiscal year and the outlook for the current fiscal year, and
· changes in competitive pay levels, based on compensation surveys and other market information regarding compensation paid by comparable companies, including our industry peers, and, in years when a compensation consultant is engaged to assist the Compensation Committee, analyses prepared by such consultant.
Specific additional factors considered by the Compensation Committee with respect to its fiscal 2019 compensation decisions are also noted below.
In reviewing the performance of our Chief Executive Officer, the Compensation Committee reviews assessments prepared by the Chief Executive Officer that address various performance criteria specified by the Compensation Committee. For the other executive officers, the Chief Executive Officer provides the Compensation Committee with a review of each individual’s performance and contributions over the past year and makes recommendations regarding their compensation that the Compensation Committee considers. The Compensation Committee makes the final determination as to the compensation provided to our executive officers.
The Compensation Committee has the authority to engage its own consultants and advisors to assist it in carrying out its responsibilities. The Compensation Committee engaged Compensia, Inc. as its compensation consultant in connection with its annual reviews of executive compensation for fiscal 2019. Other than its services in advising the Compensation Committee and certain advice provided to the Nominating and Governance Committee with respect to non-employee director compensation, Compensia does not provide any services to the Company or any of its subsidiaries. In accordance with SEC rules, the Compensation Committee assessed the independence of Compensia during fiscal 2019 and concluded that no conflicts of interest exist that would affect Compensia’s independence in providing services and advice to the Compensation Committee. During fiscal 2019, representatives of Compensia attended meetings of the Compensation Committee, met and communicated with members of the Compensation Committee outside of its formal meetings and also met with members of the Company’s management to gain management’s perspective on executive compensation issues.
Prior to the beginning of fiscal 2019, the Compensation Committee conducted its annual review of our executive compensation program. With the assistance of Compensia, the Compensation Committee selected a peer group of companies to help the Compensation Committee assess our executive compensation program for fiscal 2019. The Compensation Committee determined that the peer companies generally should have annual revenue between approximately 50% and 200% of the Company’s annual revenue and market capitalization between 50% and 400% of the Company’s market capitalization.
As a result of this process, the Compensation Committee identified the group of peer companies listed below, including our industry peers and similarly-sized companies in the broader technology sector (the “fiscal 2019 Peer Companies”). The fiscal 2019 Peer Companies were largely the same as the peer companies used to assess our executive compensation program in fiscal 2018, except that Cirrus Logic, Inc., EchoStar Corporation, Inphi Corporation, Integrated Device Technology, Inc., NetScout Systems, Inc., and Oclaro, Inc. were added to the group as they met key selection criteria (largely, industry classification and revenue and market capitalization sizing criteria), Arista Networks, Inc. and IPG Photonics Corporation were removed from the group as their market capitalization exceeded the parameters noted above, and Brocade Communications, Inc. and Intersil Corporation were removed from the group as they had been acquired.
Based on publicly available data at the time the group was selected, the fiscal 2019 Peer Companies generally similar in size to the Company, with Finisar ranking at approximately the 62nd percentile of the peer group in terms of revenue and approximately the 42nd percentile in terms of market capitalization. The fiscal 2019 Peer Companies were as follows:
Acacia Communications, Inc. | II-VI Incorporated | NetScout Systems, Inc. |
Ciena Corporation | Infinera Corporation | Oclaro, Inc. |
Cirrus Logic, Inc. | Inphi Corporation | Plantronics, Inc. |
Coherent, Inc. | Integrated Device Technology, Inc. | ViaSat, Inc. |
Cypress Semiconductor Corporation | Lumentum Holdings Inc. | Viavi Solutions Inc. |
Diodes Incorporated | Microsemi Corporation | |
EchoStar Corporation | Netgear, Inc. | |
Compensia prepared a report, including analyses of our executive compensation program, based principally on information drawn from the practices of the fiscal 2019 Peer Companies and from the Radford Global Technology Survey. In considering the Radford survey data, the Compensation Committee did not focus on any particular companies in the survey (other than the fiscal 2019 Peer Companies identified above). The Compensation Committee used the data provided in the Compensia report as a reference point in making its executive compensation decisions, but as noted above, the Compensation Committee does not specifically “benchmark” compensation at any particular level vis-à-vis the market data and retains discretion to set compensation at higher or lower levels as it deems appropriate in the circumstances. Except as otherwise noted in this Compensation Discussion and Analysis, decisions by the Compensation Committee are subjective and the result of the Compensation Committee’s business judgment, which is informed by the experiences of the members of the Compensation Committee as well as analysis and input from, and comparable peer data provided by, the Compensation Committee’s compensation consultant.
In designing our executive compensation program, the Compensation Committee also considers whether the incentive opportunities provided to executives could result in unnecessary or excessive risk-taking. The Compensation Committee has evaluated our compensation policies and programs and believes that our compensation policies and practices provide appropriate incentives and controls and are not reasonably likely to have a material adverse effect on the Company.
Stockholder Say-on-Pay Votes
At our annual meeting of stockholders, we provide our stockholders the opportunity to vote to approve, on an advisory basis, the compensation of our named executive officers for the previous fiscal year, as disclosed in the proxy statement for the meeting (commonly referred to as a “say-on-pay” vote). At our 2018 meeting, approximately 51% of the votes cast were voted in favor of the Company’s executive compensation program. As we would like to see a greater level of support from stockholders for our executive compensation program, we continue to solicit feedback from our stockholders and look for ways to improve our program.
For example, as described below under “Equity-based Incentives,” we included performance-based vesting requirements in our long-term incentive compensation program for the first time in fiscal 2019, with the vesting of our Chief Executive Officer’s entire fiscal 2019 equity award being tied to our achievement of specified stock price target levels and a significant portion of each other named executive officer’s equity award also vesting based on these stock price target levels. We believe these awards further enhance the alignment between our executives’ interests and those of our stockholders.
The Compensation Committee values the opinions of our stockholders and will continue to take into account the outcome of the annual say-on-pay vote when considering future executive compensation policies and decisions.
Components of Compensation
In order to align executive compensation with our compensation philosophy, our executive officer compensation package contains three primary elements: base salary, annual cash bonuses and long-term equity incentives. In addition, we provide to our executive officers a variety of benefits that are available generally to other salaried employees.
Fiscal 2019 Executive Compensation
Base Salaries
Base salaries for our executive officers are initially set based on negotiation with the individual executive officer at the time of his or her recruitment or promotion and with reference to the base salaries for comparable positions at the peer companies for individuals of similar education and background to those of the executive officer being recruited or promoted. We also give consideration to the factors noted above under “Compensation-Setting Process.” Salaries are reviewed annually by the Compensation Committee, typically at the beginning of the fiscal year, and adjustments are made in the Compensation Committee’s judgment based the factors noted above.
Mr. Hurlston’s base salary was set at $700,000 upon his commencing employment with the Company in January 2018. On the basis of its review for fiscal 2019, the Compensation Committee set new base salaries for our other named executive officers, which became effective in July 2018, with increases of approximately 2% over the levels that had been in effect at the end of fiscal 2018. The fiscal 2019 base salaries for the named executive officers were as follows:
Name | | Fiscal 2018
Base Salary ($) | | Fiscal 2019
Base Salary ($) | |
Michael E. Hurlston | | 700,000 | | 700,000 | |
Joseph A. Young | | 454,596 | | 465,000 | |
Todd Swanson | | 454,630 | | 465,000 | |
Kurt Adzema | | 441,468 | | 450,000 | |
Julie S. Eng | | 420,240 | | 430,000 | |
Annual Cash Bonuses
Under our compensation policy, a substantial component of each executive officer’s potential annual compensation takes the form of a performance-based bonus opportunity. The bonuses paid to our executive officers are determined by the Compensation Committee based on recommendations from the Chief Executive Officer (with respect to executives other than himself), the performance of such executive, the target bonus for each executive as described below, the overall amount of the accrued bonus pool, the Company’s financial performance and the specific contributions of the individual executive as described below.
In June 2018, the Compensation Committee adopted an executive bonus plan for fiscal 2019. Under the plan, the target bonus for Mr. Hurlston was 115% of his annual base salary, the target bonuses for Messrs. Young, Swanson and Adzema were 75% of their annual base salaries, and the target bonus for Ms. Eng was 60% of her base salary. Each executive’s bonus awarded for fiscal 2019 would be paid 50% in cash and 50% in the form of an RSU award, with the number of RSUs subject to the award determined by dividing the dollar amount of the stock portion of the bonus by the Company’s stock price on a date established by the Compensation Committee. These RSU awards would have a one-year vesting period.
Under the plan, each executive would be eligible to receive two-thirds of his or her target bonus amount if the Company achieved certain financial performance goals established by the Compensation Committee for fiscal 2019 (and, in the case of Ms. Eng, based on Company performance in Ms. Eng’s area of responsibility, For fiscal 2019, the Compensation Committee determined that revenue, non-GAAP gross margin and non-GAAP operating margin would be used to measure the Company’s performance, with each metric weighted equally and gross margin and operating margin being determined on a non-GAAP basis as described below and calculated prior to giving effect to bonuses for the fiscal year. The Compensation Committee also has discretion to adjust an executive’s bonus between 0% and 150% of the calculated bonus based on the executive’s individual performance during the fiscal year.
For purposes of the executive bonus plan, “non-GAAP gross margin” is calculated as the Company’s gross margin as determined under generally accepted accounting principles and “non-GAAP operating margin” is calculated as the Company’s operating margin as determined under generally accepted accounting principles, in each case as adjusted to exclude certain items such as stock-based compensation expense, amortization of acquisition-related intangible assets and other special charges and gains of a non-cash nature or that occur relatively infrequently and/or that management considers to be outside of our ongoing core operating results, and determined before giving effect to the cost of bonuses under the plan. For more information, please see the “Finisar Non-GAAP Financial Measures” section of our press releases reporting our financial results for each quarter during fiscal 2019, attached to the Company’s current report on Form 8-K furnished with the SEC following each quarter.
In June 2019, the Compensation Committee reviewed the Company’s financial results for fiscal 2019 against the goals for each metric that would result in a payout of two-thirds of the target bonus amounts. The Company’s revenue for fiscal 2019 was approximately $1.2805 billion compared with the revenue goal of $1.3514 billion (or 94.8% achievement); the Company’s pre-bonus non-GAAP gross margin for fiscal 2019 was approximately 29.4% compared with the gross margin goal of 27.4% (or 107.3% achievement); and the Company’s pre-bonus non-GAAP operating margin for fiscal 2019 was 9.6% compared with the operating margin goal of 7.9% (or 120.3% achievement). Based on these results, the Compensation Committee determined that the Company’s overall achievement was 107.3% relative to the performance goals, which would result in a payout for each executive (other than Ms. Eng) at 71.5% of the executive’s target bonus (i.e. two-thirds of the 107.3% achievement level) and 35.75% of the target bonus for Ms. Eng, based on Company performance in Ms. Eng’s area of responsibility.
The Compensation Committee then evaluated the individual performance of each of the executives and determined that no further adjustments would be made. Accordingly, the Compensation Committee approved the following bonus amounts for fiscal 2019 for the named executive officers:
Name | | Fiscal 2019 Bonus
($ Value) | | Fiscal 2019 Bonus
(% of Target) | |
Michael E. Hurlston | | 575.872 | | 71.5 | % |
Joseph A. Young | | 249,485 | | 71.5 | % |
Todd Swanson | | 249,485 | | 71.5 | % |
Kurt Adzema | | 241,437 | | 71.5 | % |
Julie S. Eng | | 92,369 | | 35.8 | % |
As noted above, one-half of each named executive officer’s bonus for fiscal 2019 was paid in cash, and the remaining one-half of the bonus was paid in the form of an RSU award scheduled to vest on June 1, 2020. The number of RSUs subject to the award was determined by dividing the dollar amount to be paid in RSUs by the closing price of our common stock on the grant date. Accordingly, the named executive officers received the following grants in June 2019: Mr. Hurlston - 13,538 RSUs; Mr. Young - 5,865 RSUs; Mr. Swanson - 5,865 RSUs; Mr. Adzema - 5,676 RSUs; and Ms. Eng - 2,172 RSUs. Under SEC rules, an equity award granted to a named executive officer is reported in the executive compensation tables below as compensation for the fiscal year in which the award was granted. Accordingly, these RSU awards granted to the named executive officers under our fiscal 2019 bonus plan are considered to be compensation for fiscal 2020 (as the awards were granted after the end of fiscal 2019) and are not reflected in the tables below.
Equity-based Incentives
Longer term incentives are provided through equity-based awards granted under Finisar’s 2005 Stock Incentive Plan (the “2005 Plan”). The Compensation Committee believes that equity ownership provides an important incentive for employees to build stockholder value and provides each executive officer with a significant incentive to manage the Company from the perspective of an owner with an equity stake in the company. In general, the Compensation Committee believes that RSUs balance competing compensation and retention objectives while providing strong alignment between executive and stockholder interests. Consequently, the annual equity awards granted to our executives in recent years have been comprised solely of RSUs, which are intended to reward our executives for sustaining and increasing our stock price. Our equity awards generally also have multi-year vesting schedules to provide an additional retention incentive for our executives and other employees.
The grant of equity-based awards is generally considered by the Compensation Committee on an annual basis in the early part of each fiscal year, at the same time as other components of executive compensation are reviewed and annual equity-based awards are granted to our non-officer employees. The size of the equity-based awards granted to our executive officers are set by the Compensation Committee at levels that are intended to create a meaningful opportunity for stock ownership based upon the factors noted above under “Compensation-Setting Process.” To help ensure that our equity award program is linked to our performance, the Compensation Committee evaluates the performance of the Company during the prior fiscal year in determining the grant levels for these awards. The Compensation Committee also takes into account the number of unvested equity awards held by the executive officer in order to maintain an appropriate level of retention value for that individual.
We have established a policy whereby equity awards to our employees, including executive officers, are generally granted by the Compensation Committee at regular quarterly meetings with an effective date that is the later of the third trading day following the public announcement of the Company’s financial results for the preceding quarter or the date of the meeting at which the grant is approved. In addition to the annual grant program, the Compensation Committee may approve equity awards at other times as it deems appropriate (for example, in connection with the hiring or promotion of executives or other employees).
In determining the equity awards to be granted to our named executive officers and other key employees in fiscal 2019, the Compensation Committee believed it would be appropriate to include performance-based vesting requirements in our long-term incentive compensation program for the first time. To help further align the interests of our executives with those of our stockholders, the vesting of these performance-based awards is generally contingent on our stock price increasing to pre-established levels described below. Furthermore, the Compensation Committee determined that Mr. Hurlston’s entire grant for fiscal 2019, and 60% of the fiscal 2019 grant for each of the other named executive officers (based on the number of shares subject to each grant), would be subject to these performance-based requirements, with the balance of the grant to each named executive officer (other than Mr. Hurlston) being subject a four-year vesting schedule. The aggregate grant date value of equity awards granted to our executives was calibrated to the 50th percentile of the competitive market based on an analysis of equity compensation practices for our peer companies identified above.
Effective June 19, 2018, the Compensation Committee approved the following RSU grants for each of the named executive officers:
Name | | Time-Based RSUs (#) | | Performance-Based RSUs (#) | |
Michael E. Hurlston | | — | | 150,000 | |
Joseph A. Young | | 46,528 | | 68,750 | |
Todd Swanson | | 46,528 | | 68,750 | |
Kurt Adzema | | 42,806 | | 63,250 | |
Julie S. Eng | | 35,362 | | 52,250 | |
For each executive, the “performance-based RSUs” (“PRSUs”) reported in the table above are eligible to vest over 16 quarterly vesting dates commencing on August 5, 2018 and ending May 5, 2022. The number of PRSUs shown above is the maximum number of PRSUs that can vest and be paid under the award. One-sixteenth of the total number of PRSUs subject to the grant are allocated to each vesting date, and the number of those PRSUs that vest on each date (if any) will be determined based on the average of the closing prices for the Company’s common stock during the last ten trading days of the Company’s most recently completed fiscal quarter before the vesting date (the “Average Stock Price”) as follows:
Average Stock Price as of Last Day
of Prior Fiscal Quarter |
| Vesting Percentage for
PRSUs Allocated to
Applicable Vesting Date |
|
Below $22.50 | | 0% | |
At least $22.50 and Less Than $27.00 | | 33 1/3% | |
At least $27.00 and Less Than $31.50 | | 66 2/3% | |
At least $31.00 | | 100% | |
The $22.50, $27.00 and $31.50 stock price targets for the PRSU awards represent increases of 25%, 50% and 75%, respectively, over the closing price of our common stock on the date the awards were granted (which was $18.00). In addition to the quarterly vesting described above, the PRSU awards include an “annual true-up” feature so that on the May 5 vesting date for each of 2019, 2020, and 2021, an additional number of PRSUs will vest equal to the excess (if any) of (i) the aggregate number of PRSUs that would have been vested on that May 5 vesting date and the immediately preceding August 5, November 5 and February 5 vesting dates if the Average Stock Price determined as of each such vesting date had been the same as the Average Stock Price for the May 5 vesting date, over (ii) the aggregate number of PRSUs that actually vested on each of those four vesting dates as determined under the table above. There will also be a “final true-up” calculation on the May 5, 2022 vesting date so that an additional number of PRSUs will vest on that date equal to the excess (if any) of (i) the aggregate number of PRSUs that would have been vested over all 16 vesting dates for the award if the Average Stock Price determined as of each such vesting date had been the same as the Average Stock Price for the May 5, 2022 vesting date, over (ii) the aggregate number of PRSUs that actually vested on each of those 16 vesting dates as determined under the table above and the annual true-up vesting provisions described above.
In each case, vesting of the PRSUs (including pursuant to the annual true-up and final true-up features) is generally subject to the executive’s continued employment with the Company through the applicable vesting date. However, if the executive’s employment is terminated by the Company without cause prior to May 5, 2022 and prior to any change in control of the Company, the Average Stock Price will be calculated for the period of 10 trading days prior to the executive’s termination date, and the award will vest upon the executive’s termination as to the number of PRSUs that would have vested on each of the next four scheduled vesting dates after the executive’s termination date (or, if less, the number of remaining vesting dates under the award and in each case taking into account any true-up provision that would have applied during that period) based on the greater of that Average Stock Price or $22.50.
If a change of control of the Company occurs before May 5, 2022 and while the executive is still employed with the Company, the Average Stock Price will be calculated for the period of 10 trading days prior to the change in control, and the award will vest on the change in control as to the number of PRSUs that would have vested on each of the remaining scheduled vesting dates under the award (taking into account any true-up provision that would have applied during that period) based on the greater of that Average Stock Price or $22.50.
For each executive, the “time-based RSUs” reported in the table above vest, subject to the executive’s continued service, with respect to 25% of the shares subject to the award on each of the first four anniversaries of June 20, 2018.
Other Benefits
Our executives are generally eligible to receive the same health and welfare benefits offered to all employees in the geographic area in which they are based. They are also eligible to participate in our defined contribution 401(k) plan on the same basis as our other employees. We currently provide no material perquisites to our executive officers. During fiscal 2019, personal benefits accounted for less than 1% of the total compensation of our Chief Executive Officer and our other named executive officers.
Severance and Change in Control Arrangements
Our named executive officers and certain other key employees designated by the Compensation Committee are eligible to participate in the Finisar Executive Retention and Severance Plan (the “Severance Plan”). As in effect at the beginning of fiscal 2019, the Severance Plan provided for participants to receive severance benefits if their employment was actually or constructively terminated by the Company upon or following a change in control of the Company. On June 13, 2018, the Compensation Committee approved an amended and restated version of the Severance Plan pursuant to which participants will also be entitled to receive severance payments and benefits if their employment is terminated by the Company without cause prior to a change in control of the Company. The Compensation Committee determined, taking into account input from Compensia as to market practices generally, that it would be appropriate to amend the plan provide this additional protection to the participants. For a description of the benefits provided under the Severance Plan, please the “Potential Payments Upon Termination or Change in Control” section below.
Our executive officers are not entitled to any tax gross-up or other reimbursement under the Severance Plan or any other agreements with the Company for any parachute payment excise taxes that may be imposed on their benefits.
The Compensation Committee believes that these severance arrangements help us to attract and retain qualified executives and are consistent with competitive practices generally. In particular, the Compensation Committee has determined to provide these arrangements in order to mitigate some of the risk that exists for executives working in an environment where there is a meaningful possibility that the Company could be acquired or the subject of another transaction that would result in a change in its control. The change in control arrangements are also intended to mitigate potential disincentives to the consideration and execution of an acquisition or similar transaction, particularly where the services of these executive officers may not be required by the acquirer.
Fiscal 2020 Compensation Actions
Effective June 3, 2019, the Compensation Committee approved the following RSU grants for fiscal 2020 for each of the named executive officers:
Name |
| RSUs (#) |
|
Michael E. Hurlston | | 112,835 | |
Joseph A. Young | | 25,859 | |
Todd Swanson | | 42,314 | |
Kurt Adzema | | 21,157 | |
Julie S. Eng | | 16,456 | |
For each executive, the RSUs reported in the table above vest, subject to the executive’s continued service, with respect to 25% of the shares subject to the award on each of the first four anniversaries of June 24, 2019. In light of the pending acquisition of the Company by II-VI Corporation and the lack of certainty as to when the closing of the acquisition would occur, the Compensation Committee determined it would be appropriate to grant awards that were subject to time-based vesting only and not to performance-based vesting requirements.
As noted above, Mr. Hurlston resigned as our Chief Executive Officer effective August 3, 2019, and his then-outstanding and unvested equity awards terminated on that date. Following Mr. Hurlston’s resignation, Messrs. Young and Swanson were both appointed to a newly formed Interim Office of the Chief Executive. In connection with their appointment, each of Mr. Young and Mr. Swanson will be eligible for a bonus of $250,000 upon the closing of the pending acquisition of the Company by II-VI Incorporated, in each case subject to the executive’s continued employment with the Company through the closing date of the acquisition.
Tax Considerations
Federal income tax law generally prohibits a publicly-held company from deducting compensation paid to a current or former named executive officer that exceeds $1 million during the tax year. As one of the factors in its consideration of compensation matters, the Compensation Committee notes this deductibility limitation. However, the Compensation Committee has the flexibility to take any compensation-related actions that it determines are in the best interests of the Company and its stockholders, including awarding compensation that may not be deductible for tax purposes. There can be no assurance that any compensation will in fact be deductible.
Other Compensation-Related Policies
We have several policies in effect which apply to shares of our common stock held by our directors and executive officers, including shares issued to them pursuant to equity-based awards.
Stock Ownership Guidelines
Our board of directors believes that directors should be stockholders in order to better align their interests with the long-term interests of the Company’s stockholders. Accordingly, the Board has adopted a policy under which each of our directors (including our Chief Executive Officer) is required to attain ownership of not less than 10,000 shares of the Company’s common stock by the later of three years from the adoption of the policy in 2012 or three years from his or her first election as a director and to retain such minimum stock ownership so long as he or she continues to serve as a director. Directors are required to refrain from selling shares (other than for the purpose of paying federal or state income taxes related to the acquisition of such shares) until such minimum stock ownership is attained.
Anti-Hedging and Anti-Pledging Policies
Our insider trading policy prohibits our directors, executive officers and other employees from, among other things:
· engaging in short sales of our stock;
· engaging in transactions in derivative securities involving our stock;
· hedging their ownership position in our stock; and
· holding our stock in a margin account or pledging our stock as collateral for a loan, except with the prior approval of our Compliance Officer (or, in the case of an executive officer, the prior approval of the Nominating and Governance Committee).
Report of the Compensation Committee
The information required bycontained in this item isreport shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing, except to the extent that Finisar specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended.
The Compensation Committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this Form 10-K/A. Based upon this review and discussion, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Form 10-K/A.
| COMPENSATION COMMITTEE |
| |
| Michael C. Child (Chair) |
| Michael L. Dreyer |
| Thomas E. Pardun |
| Helene Simonet |
| Robert N. Stephens |
Summary Compensation Information
The following table presents certain summary information concerning compensation paid by us for services rendered in all capacities by our Chief Executive Officer, our Chief Financial Officer and our three other most highly compensated executive officers for fiscal 2019 (collectively, the “named executive officers”):
Summary Compensation Table for Fiscal 2019
Name and Principal Position | | Fiscal
Year | | Salary ($) | | Bonus ($)(1) | | Stock
Awards ($)(2) | | Option
Awards ($)(2) | | Non-Equity
Incentive
Plan
Compensation
($) | | All Other
Compensation
($)(3) | | Total ($) | |
Michael E. Hurlston | | 2019 | | 700,000 | | 287,936 | | 1,630,500 | | — | | — | | 13,904 | | 2,632,340 | |
Former Chief Executive Officer(4) | | 2018 | | 193,846 | | — | | 3,000,002 | | 7,317,194 | | — | | 1,615 | | 10,512,657 | |
| | | | | | | | | | | | | | | | | |
Joseph A. Young | | 2019 | | 462,199 | | 124,742 | | 1,584,813 | | — | | — | | 8,340 | | 2,180,094 | |
Executive Vice President, | | 2018 | | 451,031 | | — | | 1,000,021 | | — | | — | | 8,215 | | 1,459,267 | |
Global Operations | | 2017 | | 437,894 | | 662,033 | | 1,500,009 | | — | | — | | 8,061 | | 2,607,997 | |
| | | | | | | | | | | | | | | | | |
Todd Swanson | | 2019 | | 462,208 | | 124,742 | | 1,584,813 | | — | | — | | 8,358 | | 2,180,121 | |
Chief Operating Officer | | 2018 | | 449,922 | | — | | 1,000,021 | | — | | — | | 8,282 | | 1,458,225 | |
| | 2017 | | 430,482 | | 655,716 | | 1,500,009 | | — | | — | | 8,207 | | 2,594,414 | |
| | | | | | | | | | | | | | | | | |
Kurt Adzema | | 2019 | | 447,703 | | 120,719 | | 1,458,028 | | — | | — | | 8,339 | | 2,034,789 | |
Executive Vice President, | | 2018 | | 438,006 | | — | | 885,007 | | — | | — | | 8,234 | | 1,331,247 | |
Chief Financial Officer | | 2017 | | 423,115 | | 642,915 | | 885,014 | | — | | — | | 8,162 | | 1,959,206 | |
| | | | | | | | | | | | | | | | | |
Julie S. Eng | | 2019 | | 422,524 | | 46,184 | | 1,204,458 | | — | | — | | 8,442 | | 1,681,608 | |
Executive Vice President, | | 2018 | | 409,442 | | — | | 750,009 | | — | | — | | 8,831 | | 1,168,282 | |
GM, 3D Sensing | | 2017 | | 405,846 | | 300,000 | | 750,014 | | — | | — | | 8,033 | | 1,463,893 | |
(1)Represents amounts paid in cash pursuant to the executive annual bonus plan for the applicable fiscal year. As noted above, a portion of each named executive officer’s bonus for fiscal 2019 was awarded in the form of a grant of RSUs. Under SEC rules, an equity award granted to a named executive officer is reported in the Summary Compensation Table as compensation for the fiscal year in which the award was granted. Accordingly, the RSU awards granted to the named executive officers under our fiscal 2019 bonus plan are considered to be compensation for fiscal 2020 (as the awards were granted after the end of fiscal 2019) and are not reflected in the table above.
(2)The “Stock Awards” and “Option Awards” columns present the aggregate grant date fair value of restricted stock unit awards and stock options, respectively, granted to each named executive officer during the applicable fiscal year computed in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.” For information on the valuation assumptions used in these computations, refer to Note 11—“Stockholders’ Equity” in the Notes to Consolidated Financial Statements included in our annual report on Form 10-K filed with the SEC on June 14, 2019 (or, for awards granted prior to fiscal 2018, the corresponding footnote in our annual report for the applicable fiscal year).
(3)For fiscal 2019, includes the matching contribution that we made to each executive’s account under Finisar’s 401(k) plan.
(4)Mr. Hurlston was appointed our Chief Executive Officer and commenced employment with us effective January 11, 2018. He resigned as our Chief Executive Officer effective August 3, 2019, and Messrs. Young and Swanson were both appointed to a newly formed Interim Office of the Chief Executive.
CEO Employment Agreement
In connection with his appointment as our Chief Executive Officer in January 2018, Mr. Hurlston entered into an employment offer letter with the Company that provides the following:
· an annual base salary of $700,000;
· a target annual bonus opportunity of 115% of his base salary;
· eligibility to participate in the Company’s employee benefit plans on generally the same terms as the Company’s other senior executive officers;
· the grant of an option to purchase 740,000 shares of the Company’s common stock (with 20% of the option to vest after one year and the remaining 80% to vest in quarterly installments over a period of approximately three and one-half years thereafter); and
· the grant of an award of restricted stock units with a value on the grant date of $3 million (such award to be converted into units based on the closing price of the Company’s common stock on the grant date and to vest in four annual installments following the grant date).
In addition, the employment offer letter provides that if Mr. Hurlston’s employment is terminated by the Company without “cause” or by him for “good reason” (as such terms are defined in the offer letter), he will be entitled to 12 months’ base salary as severance, reimbursement by the Company of his COBRA premiums for up to 12 months, and, if such a termination occurs within one year after his start date with the Company, accelerated vesting of 20% of his option grant and 25% of his restricted stock unit award, each as described above. However, if such an involuntary termination of his employment occurs within 90 days before, or within 18 months after, a change in control of the Company, he would instead be entitled to the severance benefits provided under the Company’s Executive Retention and Severance Plan described below. Mr. Hurlston’s employment with the Company is at-will, and his offer letter does not include any specified term.
Grants of Plan-Based Awards
Grants of Plan-Based Awards in Fiscal 2019
| | | | Estimated Future Payouts
Under
Equity Incentive Plan Awards(1) | | All
Other
Stock
Awards:
Number of
Shares of
Stock or | | All Other
Option
Awards:
Number of
Securities
Underlying | | Exercise
or Base
Price of
Option | | Grant
Date Fair
Value of
Stock and
Option | |
Name | | Grant
Date | | Threshold
(#) | | Target
(#) | | Maximum
(#) | | Units
(#)(2) | | Options
(#) | | Awards
($/Share) | | Awards
($)(3) | |
Michael E. Hurlston | | 6/19/2018 | | 3,125 | | 50,000 | | 150,000 | | — | | — | | — | | 1,630,500 | |
| | | | | | | | | | | | | | | | | |
Joseph A. Young | | 6/19/2018 | | 1,432 | | 22,917 | | 68,750 | | — | | — | | — | | 747,313 | |
| | 6/19/2018 | | — | | — | | — | | 46,528 | | — | | — | | 837,500 | |
| | | | | | | | | | | | | | | | | |
Todd Swanson | | 6/19/2018 | | 1,432 | | 22,917 | | 68,750 | | — | | — | | — | | 747,313 | |
| | 6/19/2018 | | — | | — | | — | | 46,528 | | — | | — | | 837,500 | |
| | | | | | | | | | | | | | | | | |
Kurt Adzema | | 6/19/2018 | | 1,318 | | 21,083 | | 63,250 | | — | | — | | — | | 687,528 | |
| | 6/19/2018 | | — | | — | | — | | 42,806 | | — | | — | | 770,500 | |
| | | | | | | | | | | | | | | | | |
Julie S. Eng | | 6/19/2018 | | 1,089 | | 17,417 | | 52,250 | | — | | — | | — | | 567,958 | |
| | 6/19/2018 | | — | | — | | — | | 35,362 | | — | | — | | 636,500 | |
(1)Represents grants of performance-based RSUs that vest based on our stock price achieving certain specified targets as described in the “Compensation Discussion and Analysis” above under “Equity-Based Incentives.”
(2)Represents grants of time-based RSUs that vest based solely on the executive’s continued employment as described in the “Compensation Discussion and Analysis” above under “Equity-Based Incentives.”
(3)Represents the fair value of these awards on the grant date as determined under FASB ASC Topic 718, which is used to calculate the value of equity awards for purposes of our audited consolidated financial statements. For the assumptions and methodologies used to value the awards reported in this column of the table above, see footnote 2 to the Summary Compensation Table.
Description of Plan-Based Awards
Each of the equity-based awards granted during fiscal 2019 and reported in the Grants of Plan-Based Awards table was granted under, and is subject to, the terms of the 2005 Plan. The 2005 Plan is administered by the Compensation Committee. The Compensation Committee has authority to make all required determinations under the plan. This authority includes making required proportionate adjustments to outstanding awards upon the occurrence of certain corporate events such as reorganizations, mergers and stock splits, and making provision to ensure that any tax withholding obligations incurred in respect of awards are satisfied. Awards granted under the plan are generally only transferable to a beneficiary of a named executive officer upon his or her death or, in certain cases, to family members for tax or estate planning purposes.
Under the terms of the 2005 Plan, a change in control of the Company does not automatically trigger vesting of the awards then outstanding under the plan. If there is a change in control, each participant’s outstanding awards granted under the plan will generally be assumed by the successor company, unless the Compensation Committee provides that the award will not be assumed and will become fully vested and, in the case of options, exercisable. Any options that become vested in connection with a change in control will generally terminate to the extent they are not exercised prior to the change in control. Under the 2005 Plan as in effect at the beginning of fiscal 2019, awards granted under the plan would also generally accelerate if the participant’s employment is involuntarily terminated (including a resignation for good reason) within 12 months following a change in control in which such participant’s awards are assumed or otherwise continued in effect. In June 2018, the Compensation Committee determined that new awards granted to employees generally under the 2005 Plan would not provide for accelerated vesting upon an involuntary termination of the participant’s employment following a change in control.
Each of the grants reported in the table above represents an award of restricted stock units. Each restricted stock unit represents a contractual right to receive one share of our common stock upon vesting. See the “Fiscal 2019 Executive Compensation—Equity-Based Incentives” section of the “Compensation Discussion and Analysis” above for the vesting provisions applicable to these grants. The named executive officer does not have the right to vote or dispose of the restricted stock units or any dividend rights with respect to the restricted stock units.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the number of securities underlying outstanding equity awards held by each of our named executive officers as of the end of our fiscal year on April 28, 2019.
Outstanding Equity Awards at Fiscal Year-End 2019
| | Option Awards | | Stock Awards | |
Name | | Number of
Securities
Underlying
Options (#)
Exercisable | | Number of
Securities
Underlying
Options (#)
Unexercisable | | Exercise
Price per
Share
($/share) | | 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
($)* | | Equity
Incentive
Plan Awards:
Number of
Unearned
Shares, Units
or Other
Rights
That Have
Not Vested
(#) | | Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights
That Have Not
Vested
($)* | |
Michael E. Hurlston | | 190,286 | | 549,714 | (1) | 22.26 | | 1/11/2028 | | — | | — | | — | | — | |
| | — | | — | | — | | — | | 101,078 | (2) | 2,413,743 | | — | | — | |
| | | | | | | | | | 12,500 | (3) | 298,500 | | — | | — | |
| | — | | — | | — | | — | | — | | — | | 87,500 | (4) | 2,089,500 | |
| | | | | | | | | | | | | | | | | |
Joseph A. Young | | — | | — | | — | | — | | 9.479 | (5) | 226,359 | | — | | — | |
| | — | | — | | — | | — | | 40,344 | (6) | 963,415 | | — | | — | |
| | — | | — | | — | | — | | 27,584 | (7) | 658,706 | | — | | — | |
| | — | | — | | — | | — | | 46,528 | (8) | 1,111,089 | | — | | — | |
| | | | | | | | | | 5,732 | (3) | 136,880 | | — | | — | |
| | — | | — | | — | | — | | — | | — | | 40,101 | (4) | 957,612 | |
| | | | | | | | | | | | | | | | | |
Todd Swanson | | 31,086 | | — | | 8.29 | | 12/8/2019 | | — | | — | | — | | — | |
| | — | | — | | — | | — | | 9.479 | (5) | 226,359 | | — | | — | |
| | — | | — | | — | | — | | 40,344 | (6) | 963,415 | | — | | — | |
| | — | | — | | — | | — | | 27,584 | (7) | 658,706 | | — | | — | |
| | — | | — | | — | | — | | 46,528 | (8) | 1,111,089 | | — | | — | |
| | | | | | | | | | 5,732 | (3) | 136,880 | | — | | — | |
| | — | | — | | — | | — | | — | | — | | 40,101 | (4) | 957,612 | |
| | | | | | | | | | | | | | | | | |
Kurt Adzema | | — | | — | | — | | — | | 9.479 | (5) | 226,359 | | — | | — | |
| | — | | — | | — | | — | | 23,803 | (6) | 568,416 | | — | | — | |
| | — | | — | | — | | — | | 24,411 | (7) | 582,935 | | — | | — | |
| | — | | — | | — | | — | | 42,806 | (8) | 1,022,207 | | — | | — | |
| | | | | | | | | | 5,272 | (3) | 125,895 | | — | | — | |
| | — | | — | | — | | — | | — | | — | | 36,895 | (4) | 881,053 | |
| | | | | | | | | | | | | | | | | |
Julie S. Eng | | — | | — | | — | | — | | 6,524 | (5) | 155,793 | | — | | — | |
| | — | | — | | — | | — | | 20,172 | (6) | 481,707 | | — | | — | |
| | — | | — | | — | | — | | 20,688 | (7) | 494,029 | | — | | — | |
| | — | | — | | — | | — | | 35,362 | (8) | 844,445 | | — | | — | |
| | — | | — | | — | | — | | 2,955 | (9) | 70,565 | | — | | — | |
| | | | | | | | | | 4,356 | (3) | 104,021 | | — | | — | |
| | — | | — | | — | | — | | — | | — | | 30,477 | (4) | 727,791 | |
*The dollar amounts shown in this column are determined by multiplying the applicable number of shares or units by $23.88, the closing price of Finisar common stock on the NASDAQ Global Select Market on April 26, 2019 (the last trading day of fiscal 2019).
(1)The option was granted on January 11, 2018. The option vested as to 20% of the shares subject to the option on January 11, 2019 and vests with respect to approximately 5.7% of the shares subject to the option at the end of each of the next 14 three-month periods thereafter (or two months in the case of the final such period), to be fully vested on June 11, 2022, assuming continued employment with Finisar.
(2)The RSU award was granted on January 11, 2018. The RSU vested as to 25% of the shares on January 11, 2019 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on January 11, 2022, assuming continued employment with Finisar.
(3)The RSU award reflects a portion of the performance RSU award described in note (3) below that became eligible to vest as of April 28, 2019 based on Finisar’s stock price levels. These RSUs vested on May 5, 2019.
(4)This performance RSU award was granted on June 19, 2018 and is eligible to vest based on Finisar’s stock price meeting certain pre-established targets over the four-year period ending May 5, 2022. For more information on the stock price goals and other vesting provisions of the award, see the “Fiscal 2019 Executive Compensation—Equity-Based Incentives” section of the “Compensation Discussion and Analysis” above. Pursuant to SEC rules, the amount reported in the table reflects the portion of the award that would vest upon achievement of the next stock price performance target above the performance target that was achieved during fiscal 2019 (i.e. two-thirds of the maximum number of RSUs subject to the award), less the number of RSUs that were no longer subject to performance-based vesting as of April 28, 2019 (which RSUs are referred to in note (2) above).
(5)The RSU award was granted on June 23, 2015. The RSU vested as to 25% of the shares on June 21, 2016 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on June 21, 2019, assuming continued employment with Finisar.
(6)The RSU award was granted on June 21, 2016. The RSU vested as to 25% of the shares on June 19, 2017 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on June 19, 2020, assuming continued employment with Finisar.
(7)The RSU award was granted on June 20, 2017. The RSU vested as to 25% of the shares on June 25, 2018 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on June 25, 2021, assuming continued employment with Finisar.
(8)The RSU award was granted on June 19, 2018. The RSU vested as to 25% of the shares on June 20, 2019 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on June 20, 2022, assuming continued employment with Finisar.
(9)The RSU award was granted on December 15, 2015. The RSU vested as to 25% of the shares on December 15, 2016 and vests with respect to an additional 25% of the shares on each of the next three yearly anniversaries thereafter, to be fully vested on December 15, 2019, assuming continued employment with Finisar.
Option Exercises and Stock Vested
The following table provides information on stock option exercises by our named executive officers and vesting of RSUs held by them during the fiscal year ended April 28, 2019.
Option Exercises and Stock Vested in Fiscal 2019
| | Option Awards | | Restricted Stock
Unit Awards | |
Name | | Number of
Shares
Acquired on
Exercise (#) | | Value
Realized on
Exercise ($)(1) | | Number of
Shares
Acquired on
Vesting (#) | | Value
Realized on
Vesting ($)(2) | |
Michael E. Hurlston | | — | | — | | 33,693 | | 731,138 | |
Joseph A. Young | | — | | — | | 57,999 | | 1,020,955 | |
Todd Swanson | | — | | — | | 57,999 | | 1,020,955 | |
Kurt Adzema | | — | | — | | 39,096 | | 687,984 | |
Julie S. Eng | | — | | — | | 30,380 | | 547,814 | |
(1) Based on the difference between the closing sale price of the Company’s common stock on the date of exercise and the exercise price.
(2) Based on the closing sale price of the Company’s common stock on the vesting date.
Potential Payments Upon Termination or Change in Control
Executive Retention and Severance Plan
Our executive officers, including each of our named executive officers, are eligible to participate in the Finisar Executive Retention and Severance Plan (the “Severance Plan”). As described in the “Compensation Discussion and Analysis” above, the Severance Plan was amended and restated in June 2018 to provide, among other changes, for severance benefits to be payable to participating executives if their employment is terminated by the Company without cause prior to a change in control of the Company.
As amended, the Severance Plan provides that if an executive’s employment is terminated by the Company without cause at any time prior to a change in control (as such terms are defined in the Severance Plan) or more than 18 months after a change in control, the executive would be entitled to receive as severance: (a) a payment equal to 12 months of the executive’s base salary; (b) reimbursement of the executive’s premiums for continued health and life insurance coverage for up to 12 months; and (c) 12 months of acceleration of the executive’s time-based equity awards from the sections captioned “Corporate Governance”Company (with vesting on a pro-rata basis for any partial vesting periods). Any performance-based equity awards held by the executive will be subject to the provisions of the applicable award agreement. The executive’s vested options would generally remain exercisable for one year following the termination date (subject to the maximum term of the option). If the executive has been employed with the Company for more than two years, the executive would also receive an additional cash amount equal to the average of the executive’s annual bonuses for the preceding two years.
In addition, the Severance Plan provides that if, on or within 18 months after a change in control, an executive’s employment is terminated by the Company without cause or by the executive for good reason (as defined in the Severance Plan), the executive would be entitled to receive as severance: (a) a payment equal to 24 months of the executive’s base salary; (b) a payment equal to the executive’s target annual bonus amount most recently determined by the Committee; (c) reimbursement of the executive’s premiums for continued health and “Certainlife insurance coverage for up to 24 months; and (d) full acceleration of the executive’s time-based equity awards from the Company. Any performance-based equity awards held by the executive will be subject to the provisions of the applicable award agreement. The executive’s vested options would generally remain exercisable for one year following the termination date (subject to the maximum term of the option).
In each case, the executive’s right to receive severance benefits under the Severance Plan is subject to the executive’s providing a release of claims in favor of the Company. If the executive would be entitled to benefits under both the Severance Plan and any other arrangement with the Company, the executive’s benefits under the Severance Plan are subject to reduction for the benefits provided under the other arrangement.
If a change in control of the Company occurs and the executive’s employment is not terminated on the change in control in the circumstances described above, the executive would be entitled under the Severance Plan to receive one year’s accelerated vesting of outstanding stock options (but not restricted stock unit awards) if the options are assumed by the acquiring or successor company. As noted above, a change in control of the Company does not automatically trigger vesting of awards granted under the 2005 Plan. However, awards then outstanding under the 2005 Plan will generally accelerate if they are not assumed or continued by the acquiring entity.
If a participant’s benefits under the plan would trigger parachute payment excise taxes, the benefits will either be paid in full and subject to such taxes or reduced to the extent necessary to avoid triggering such taxes, whichever results in a greater after-tax benefits to the participant. Participants are not entitled to any gross-up payment under the plan for such excise taxes. In each case, the benefits provided under the plan described above are contingent on the executive’s providing a release of claims in favor of the Company.
We are not obligated to make any cash payments to our executives officers if their employment is terminated by us for cause or by the executive other than for good reason. No severance or benefits are provided for any of the executive officers in the event of death or disability.
Employment Agreement with Mr. Hurlston
Mr. Hurlston’s offer letter with the Company provides for severance benefits if his employment is actually or constructively terminated by the Company (other than in a “qualifying termination” in connection with a change in control of the Company as contemplated by the Severance Plan described above). These severance provisions are described above under “CEO Employment Agreement.” If Mr. Hurlston is entitled to severance benefits under his offer letter, his benefits under the Severance Plan would be subject to reduction as described above.
Performance-Based RSU Awards
As described in the “Compensation Discussion and Analysis” above, the Company granted awards of performance-based RSUs (“PRSUs”) to each of the named executive officers in June 2018 that are eligible to vest if our stock price attains certain pre-established targets. In general, vesting of the PRSUs is subject to the executive’s continued employment with the Company through the applicable vesting date that follows the fiscal quarter in which the target is achieved. However, if the executive’s employment is terminated by the Company without cause prior to May 5, 2022 and prior to any change in control of the Company, the portion of the award that is eligible to vest over the next four scheduled quarterly vesting dates under the award after the termination date (taking into account any true-up provision that would have applied during that period as described above) will vest as to a number of PRSUs determined based on our stock price at the time of the executive’s termination (or, if greater, the $22.50 stock price target) as described above. In addition, if a change of control of the Company occurs before May 5, 2022 and while the executive is still employed with the Company, the portion of the award that is eligible to vest on the remaining scheduled quarterly vesting dates under the award after the change in control (taking into account any true-up provision that would have applied during that period as described above) will vest as to a number of PRSUs determined based on our stock price in the change in control (or, if greater, the $22.50 stock price target) as described above.
Termination Without Cause Prior to Change in Control
In the event the employment of any of our named executive officers who participate in the Severance Plan had been terminated without cause at any time prior to (or more than 18 months following) a change in control of the Company, each as of April 28, 2019, the named executive officers would have been entitled to payments and benefits under the Severance Plan as then in effect in the amounts set forth opposite their name in the following table:
Name | | Cash Severance ($)(1) | | Continuation of
Health Benefits ($) | | Equity
Acceleration ($)(2) | | Total ($) | |
Michael E. Hurlston | | 700,000 | | 28,754 | | 1,923,570 | | 2,652,324 | |
Joseph A. Young | | 796,016 | | 20,109 | | 2,312,014 | | 3,128,139 | |
Todd Swanson | | 792,858 | | 30,422 | | 2,312,014 | | 3,135,294 | |
Kurt Adzema | | 771,457 | | 29,087 | | 1,836,085 | | 2,636,629 | |
Julie S. Eng | | 580,000 | | 212 | | 1,575,077 | | 2,155,289 | |
(1) These amounts represent the sum of (a) 12 months of the executive’s base salary and (b) for executives employed with us for more than two years as of April 28, 2019, the executive’s average annual bonus for fiscal 2017 and 2018.
(2) These amounts represent (a) in the case of RSUs and PRSUs, (i) the number of the executive’s outstanding and unvested RSUs and PRSUs as of April 28, 2019 that would have vested on the executive’s termination of employment as described above multiplied by (ii) $23.88 (the closing sale price per share of the Company’s common stock as of April 28, 2019); and (ii) in the case of stock options, (a) the number of shares subject to the executive’s outstanding and unvested options as of April 28, 2019 that would have accelerated on such termination multiplied by (ii) the excess of $23.88 over the per-share exercise price of the option.
Change in Control Termination
In the event the employment of any of our named executive officers who participate in the Severance Plan had been terminated without cause or for good reason, within 18 months following a change in control of the Company, each as of April 28, 2019, the named executive officers would have been entitled to payments and benefits under the Severance Plan as then in effect in the amounts set forth opposite their name in the following table:
Name | | Cash Severance
($)(1) | | Continuation of
Health Benefits ($) | | Equity
Acceleration ($)(2) | | Total ($) | |
Michael E. Hurlston | | 2,205,000 | | 57,508 | | 4,168,451 | | 6,430,959 | |
Joseph A. Young | | 1,278,750 | | 40,218 | | 3,506,826 | | 4,825,794 | |
Todd Swanson | | 1,278,750 | | 60,844 | | 3,506,826 | | 4,846,420 | |
Kurt Adzema | | 1,237,500 | | 58,175 | | 2,903,378 | | 4,199,053 | |
Julie S. Eng | | 1,118,000 | | 425 | | 2,462,458 | | 3,580,883 | |
(1) These amounts represent the sum of (a) 24 months of the executive’s base salary and (b) the executive’s target bonus amount for fiscal 2019.
(2) These amounts represent (a) in the case of RSUs and PRSUs, (i) the executive’s total number of outstanding and unvested RSUs and PRSUs as of April 28, 2019 multiplied by (ii) $23.88 (the closing sale price per share of the Company’s common stock as of April 28, 2019), and (ii) in the case of stock options, (a) the total number of shares subject to the executive’s outstanding and unvested options as of April 28, 2019 multiplied by (b) the excess of $23.88 over the per-share exercise price of the option. If a change in control transaction occurred on April 28, 2019 in which a named executive officer’s outstanding awards were not assumed by the successor entity in the transaction, and all the outstanding awards accordingly became vested pursuant to the 2005 Plan provision noted above (other than the PRSUs, which would vest as described above in accordance with the applicable award agreement), the value of the awards that would have accelerated in that transaction is the same as the equity acceleration value presented in this column for the named executive officer.
CEO PAY-RATIO DISCLOSURE
Pursuant to the Securities Exchange Act of 1934, we are required to disclose in this Form 10-K/A the ratio of the total annual compensation of our CEO to the total compensation for the median employee of all of our employees (excluding our CEO). Based on SEC rules for this disclosure and applying the methodology described below, we have determined that our CEO’s total compensation for fiscal 2019 was $2,632,340, and the total compensation for the median employee of all of our employees (excluding our CEO) for fiscal 2019 was $10,218. Based on these amounts, we estimate the ratio of our CEO’s total compensation for fiscal 2019 to the total compensation for the median employee of all of our employees (excluding our CEO) for fiscal 2019 to be 258 to 1.
In evaluating our CEO pay-ratio for fiscal 2019, we believe stockholders should take into account that approximately 80%of our employees as of April 28, 2019 were employed by us in production facilities in China and Malaysia (including the median employee whose compensation was used to calculate the CEO pay-ratio as described above). If we included only our employees based in the U.S. in this analysis, we estimate the total compensation for the median employee of all our U.S. employees for fiscal 2019 would be $115,174, and the ratio of our CEO’s total compensation for fiscal 2019 to the total compensation for the median employee of all our U.S. employees (excluding our CEO) for fiscal 2019 would be 23 to 1.
As permitted under SEC rules, we used the same median employee for this disclosure for fiscal 2019 as we used for fiscal 2018. We believe there have no changes to our employee population or employee compensation arrangements that would significantly impact the pay ratio disclosure. For fiscal 2018, we selected April 29, 2018, which is a date within the last three months of fiscal 2018, as the date we would use to identify our median employee. To find the median employee of all our employees (excluding our CEO), we used the employee’s base compensation from our payroll records. In making this determination, we did not annualize the base compensation for those employees who did not work for the Company for the entire fiscal year. We also did not make any cost-of-living adjustments in identifying the median employee. We believe base compensation for all employees is an appropriate measure because we do not distribute annual equity awards to all employees and most of our employees do not receive other forms of incentive compensation.
This pay ratio is an estimate calculated in a manner consistent with SEC rules based on the methodology described above. The SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions. As such, the pay ratio reported by other companies may not be comparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates and assumptions in calculating their own pay ratios.
DIRECTOR COMPENSATION
Under our director compensation policy, non-employee directors are entitled to receive an annual retainer of $50,000 for serving on the board of directors. Non-employee directors also receive annual retainers for service on board committees as indicated below (except that directors who served on the board prior to December 8, 2015 receive committee retainers only if they were members of the applicable committee as of that date).
The annual retainers for the board committees are listed in the table below. A non-employee director who serves as Chair of the Board (or Lead Independent Director, as applicable) is also entitled to receive an additional annual retainer of $20,000 for serving in that capacity.
Committee | | Chair ($) | | Other
Members ($) | |
Audit | | 28,000 | | 12,500 | |
Compensation | | 16,000 | | 7,500 | |
Nominating and Governance | | 11,000 | | 5,000 | |
All retainer fees are paid on a quarterly basis. We also reimburse our non-employee directors for their reasonable expenses incurred in attending meetings of the board and its committees.
The policy also provides that non-employee directors are entitled to receive a restricted stock unit (“RSU”) award with a value of $200,000 each year at our annual meeting of stockholders. These annual grants vest approximately one year after the grant date. New non-employee directors are entitled to receive a RSU award with a value of $275,000 upon their initial election to the board in addition to either the annual RSU grant made to non-employee directors described above, or, if the new non-employee director joins the board other than on the date of an annual meeting of stockholders, a RSU grant with a value determined by pro-rating the value of the annual grants made at the last annual meeting based on the period that has elapsed since that annual meeting. For example, if a new non-employee director first joins the board three months after the last annual meeting of stockholders, the non-employee director will receive a number of RSUs with a value of $150,000 (a pro-rata portion of the $200,000 regular annual grant amount for the nine months of service until the next annual meeting) based on the closing price of our stock on the effective grant date. These initial RSU awards vest over a period of three years from the date of grant, and the pro-rated RSU awards vest on the same schedule as the annual grants on which they are based. The number of shares subject to each RSU award is determined based on the per-share value of our common stock on the effective date of the grant.
Our non-employee directors are also subject to our director stock ownership guidelines described above under “Stock Ownership Guidelines” in the “Compensation Discussion and Analysis”.
The following table presents the compensation paid to our non-employee directors during or for the fiscal year ended April 28, 2019. Mr. Hurlston, our former Chief Executive Officer, did not receive any additional compensation for his service on the board during fiscal 2019.
Director Compensation Table - Fiscal 2019
Name | | Fees
Earned
or Paid
in Cash | | Stock
Awards(1)(2) | | Option
Awards | | All Other
Compensation | | Total
Compensation | |
Michael C. Child | | $ | 78,500 | | $ | 199,983 | | — | | — | | $ | 278,483 | |
Michael L. Dreyer | | 75,000 | | 199,983 | | — | | — | | 274,983 | |
Roger C. Ferguson | | 83,000 | | 199,983 | | — | | 45,000 | (3) | 327,983 | |
Thomas E. Pardun | | 75,000 | | 199,983 | | — | | — | | 274,983 | |
Jerry S. Rawls | | 50,000 | | 254,773 | | — | | — | | 304,773 | |
Helene Simonet | | 75,000 | | 199,983 | | — | | — | | 274,983 | |
Robert N. Stephens | | 111,000 | | 199,983 | | — | | — | | 310,983 | |
| | | | | | | | | | | | | | |
(1) �� This column reflects the grant date fair value of the equity awards granted to non-employee directors during fiscal 2019 computed in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.” For information on the valuation assumptions used in these computations, refer to Note 11—“Stockholders’ Equity” in the Notes to Consolidated Financial Statements included in our annual report on Form 10-K filed with the SEC on June 14, 2019.
(2) On September 11, 2018, each of our non-employee directors received an annual RSU award , as described above, of 10,136 restricted stock units with a grant date fair value of $199,983. As provided in his separation agreement entered into in connection with his resignation as our Chief Executive Officer in January 2018, Mr. Rawls also received an award of 2,777 RSUs on September 11, 2018 with a grant date fair value of $54,790.
Our non-employee directors held the following stock options and unvested RSUs as of April 28, 2019.
Name | | Number of Shares
Underlying Stock
Options Outstanding | | Unvested
Restricted
Stock Units
Outstanding | |
Michael C. Child | | — | | 10,136 | |
Michael L. Dreyer | | — | | 10,136 | |
Roger C. Ferguson | | — | | 10,136 | |
Thomas E. Pardun | | 8,750 | | 10,136 | |
Jerry S. Rawls | | — | | 10,136 | |
Helene Simonet | | — | | 13,368 | |
Robert N. Stephens | | — | | 10,136 | |
(3) This amount represents a fee for certain consulting services provided by Mr. Ferguson to the Company during fiscal 2019.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
We currently maintain two equity compensation plans: the 2005 Stock Incentive Plan and the 2009 Employee Stock Purchase Plan, each of which has been approved by our stockholders. The following table sets forth information regarding outstanding options and shares reserved for future issuance under the foregoing plans as of April 28, 2019:
Plan Category | | Number of
Shares to be
Issued upon
Exercise of
Outstanding
Options,
Warrants
and Rights
(a) | | Weighted-
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
(b) | | Number of
Shares
Remaining
Available for
Future Issuance
Under Equity
Compensation
Plans (Excluding
Shares Reflected
in Column (a))
(c) (1) | |
Equity compensation plans approved by stockholders | | 8,024,761 | (1) | $ | 20.90 | (2) | 4,680,841 | (3) |
Equity compensation plan not approved by stockholders | | — | | $ | — | | — | |
(1) Of these shares, 822,747 were subject to options then outstanding under the 2005 Stock Incentive Plan, and 7,202,014 were subject to stock unit awards then outstanding under the 2005 Stock Incentive Plan. Awards that are subject to performance-based vesting requirements are reported in the table based on the maximum number of shares issuable pursuant to the award.
(2) This weighted-average exercise price does not reflect the outstanding awards of restricted stock units.
(3) Of the aggregate number of shares that remained available for future issuance, 2,865,242 were available under the 2005 Stock Incentive Plan and 1,815,599 were available under the 2009 Employee Stock Purchase Plan. Subject to certain express limits of the 2005 Stock Incentive Plan, shares available under that plan generally may be used for any type of award authorized under that plan including options, stock appreciation rights, stock, restricted stock, restricted stock units and other stock based awards.
PRINCIPAL STOCKHOLDERS AND SHARE OWNERSHIP BY MANAGEMENT
The following table sets forth information known to us regarding the beneficial ownership of our common stock as of July 1, 2019 by:
· each stockholder who is known by us to beneficially own more than 5% of our common stock;
· each of our current directors;
· each of our executive officers named in the Summary Compensation Table for fiscal 2019 in “Executive Compensation and Related Matters” above; and
· all of our current executive officers and current directors as a group.
| | Shares of Common Stock
Beneficially Owned (1) | |
Name of Beneficial Owner (1) | | Number | | Percentage | |
5% Stockholders | | | | | |
AllianceBernstein L.P. (2) 345 Avenue of the Americas New York NY 10105 | | 7,443,841 | | 6.20 | % |
| | | | | |
The Vanguard Group (3) 100 Vanguard Blvd. Malvern, PA 19355 | | 12,282,215 | | 10.23 | % |
| | | | | |
BlackRock, Inc. (4) 55 East 52nd Street New York, NY 10055 | | 17,825,637 | | 14.85 | % |
| | | | | |
Dimensional Fund Advisors LP (5) Building One 6300 Bee Cave Road Austin, Texas, 78746 | | 9,923,975 | | 8.27 | % |
| | | | | |
Directors | | | | | |
Michael Hurlston(6) | | 261,110 | | * | |
Jerry S. Rawls (7) | | 416,171 | | * | |
Michael C. Child (8) | | 80,322 | | * | |
Michael L. Dreyer (9) | | 55,409 | | * | |
Roger C. Ferguson (10) | | 32,920 | | * | |
Thomas E. Pardun (11) | | 81,166 | | * | |
Helene Simonet (12) | | 29,626 | | * | |
Robert N. Stephens (13) | | 48,211 | | * | |
| | | | | |
Named Executive Officers | | | | | |
Kurt Adzema | | 48,517 | | * | |
Julie S. Eng | | 20,690 | | * | |
Todd Swanson (14) | | 165,993 | | * | |
Joseph A. Young | | 127,568 | | * | |
All current executive officers and current directors as a group (13 persons)(15) | | 1,431,017 | | 1.19 | % |
* Less than 1%.
(1) The address of each of the named individuals is: c/o Finisar Corporation, 1389 Moffett Park Drive, Sunnyvale, CA 94089. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All shares of common stock subject to options exercisable within 60 days following July 1, 2019 and restricted stock units (“RSUs”) that vest within that period are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of that person. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Accordingly, percent ownership is based on 120,079,034 shares of common stock outstanding as of July 1, 2019 plus any shares issuable pursuant to options held by the person or group in question which may be exercised within 60 days following July 1, 2019 and RSUs that vest within that period. Except as indicated in the other footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them.
(2) As reported on a Schedule 13G/A filed on February 13, 2019, as of December 31, 2018, AllianceBernstein L.P. has sole voting power with respect to 6,205,086 shares, sole dispositive power with respect to 7,437,461 shares and shared dispositive power with respect to 6,380 shares.
(3) As reported on a Schedule 13G/A filed on February 11, 2019, as of December 31, 2018, The Vanguard Group has sole voting power with respect to 116,567 shares, shared voting power with respect to 22,145 shares, sole dispositive power with respect to 12,156,007 shares and shared dispositive power with respect to 126,208 shares.
(4) As reported on a Schedule 13G/A filed on February 8, 2019, as of December 31, 2018, BlackRock, Inc. has sole voting power with respect to 17,500,983 shares and sole dispositive power with respect to 17,825,637 shares.
(5) As reported on a Schedule 13G filed on February 8, 2019, as of December 31, 2018, Dimensional Fund Advisors LP has sole voting power with respect to 9,734,715 shares and sole dispositive power with respect to 9,923,975 shares.
(6) Includes 232,572 shares issuable upon exercise of options exercisable within 60 days following July 1, 2019.
(7) Includes 10,136 RSUs that vest within 60 days following July 1, 2019.
(8) Includes (a) 5,061 shares held by the Child Family Trust and (b) 10,136 RSUs that vest within 60 days following July 1, 2019.
(9) Includes 10,136 RSUs that vest within 60 days following July 1, 2019.
(10) Includes 10,136 RSUs that vest within 60 days following July 1, 2019.
(11) Includes (a) 8,750 shares issuable upon exercise of options exercisable within 60 days following July 1, 2019 and (b) 10,136 RSUs that vest within 60 days following July 1, 2019.
(12) Includes 10,136 RSUs that vest within 60 days following July 1, 2019.
(13) Includes 10,136 RSUs that vest within 60 days following July 1, 2019.
(14) Includes 31,086 shares issuable upon exercise of options exercisable within 60 days following July 1, 2019.
(15) Includes (a) 272,408 shares issuable upon exercise of options exercisable within 60 days following July 1, 2019 and (b) 70,952 RSUs that vest within 60 days following July 1, 2019.
Item 13.Certain Relationships and Related Transactions”Transactions, and Director Independence
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to our Code of Ethics, our executive officers, directors and employees are to avoid conflicts of interest, except with the approval of the board of directors. A related party transaction would be a conflict of interest. The board has delegated to the Audit Committee the authority to review and approve related party transactions. In approving or rejecting a proposed transaction, the Audit Committee will consider the relevant facts and circumstances and, if applicable, the impact of the proposed transaction on the director’s independence. The Audit Committee will approve only those transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as the Audit Committee determines in the good faith exercise of its discretion.
We have entered into indemnification agreements with our officers and directors containing provisions that require us, among other things, to indemnify our officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified.
Except as described in the previous paragraphs and except for the compensation arrangements and other arrangements described in “Director Compensation” and “Executive Compensation and Related Matters” elsewhere in this proxy statement, there were no transactions during our fiscal year ended April 28, 2019, and there is not currently proposed any transaction or series of similar transactions to which we were or will be a party, in which the amount involved exceeded or will exceed $120,000 in which any director, any executive officer, any holder of 5% or more of our capital stock or any member of their immediate family had or will have a direct or indirect material interest.
DIRECTOR INDEPENDENCE
The board of directors has determined that, other than Mr. Hurlston, our former Chief Executive Officer, and Mr. Rawls, our former Chief Executive Officer, each of Messrs. Child, Ferguson, Pardun, Stephens and Dreyer and Ms. Simonet is an “independent director” for purposes of the NASDAQ Listing Rules and Rule 10A-3(b)(1) under the Securities Exchange Act of 1934, as the term applies to membership on the board of directors and the various committees of the board of directors.
Item 14.Principal Accounting Fees and Services
BDO USA, LLP’s audit report on Finisar’s consolidated financial statements as of and for the fiscal years ended April 28, 2019 and April 29, 2018 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle.
The following table sets forth the aggregate fees billed to Finisar for the fiscal years ended April 28, 2019 and April 29, 2018 by BDO USA, LLP:
| | Year Ended
April 28, 2019 | | Year Ended
April 29, 2018 | |
Audit fees(1) | | $ | 2,205,611 | | $ | 2,107,752 | |
Audit-related fees(2) | | 182,215 | | 27,375 | |
Tax fees(3) | | 508,055 | | 385,924 | |
Total Fees | | $ | 2,895,882 | | $ | 2,521,051 | |
(1) Audit fees consist of fees billed for professional services rendered for the audit of our annual consolidated financial statements and the effectiveness of our internal control over financial reporting, the review of our interim consolidated financial statements included in quarterly reports, services that are normally provided by BDO USA, LLP and BDO’s international affiliates in connection with statutory and regulatory filings or engagements, consultations in connection with issuances of auditor consents and comfort letters in connection with SEC registration statements and related SEC registered and non-registered securities offerings.
(2) Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit fees.” This category includes fees related to financial due diligence, agreed-upon-procedures engagements and audit of benefit plans.
(3) Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.
The Audit Committee has determined that all services performed by BDO USA, LLP are compatible with maintaining the independence of BDO USA, LLP. The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax and other services provided by the independent registered public accounting firm. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent registered public accounting firm is engaged to perform it. The Audit Committee has delegated to the chair of the Audit Committee the authority to approve permitted services, provided that the chair reports any decisions to the Audit Committee at its next scheduled meeting. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval process.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee currently consists of five directors, each of whom, in the judgment of the board of directors, is an “independent director” as defined in the NASDAQ Listing Rules. The Audit Committee acts pursuant to a written charter that has been adopted by the board of directors. A copy of the charter is available on Finisar’s website at http://investor.finisar.com/documents.cfm.
The Audit Committee oversees Finisar’s financial reporting process on behalf of the board of directors. The Audit Committee is responsible for retaining Finisar’s independent registered public accounting firm, evaluating its independence, qualifications and performance and approving in advance the engagement of the independent registered public accounting firm for all audit and non-audit services. Management has the primary responsibility for the financial statements and the financial reporting process, including internal control systems, and procedures designed to ensure compliance with applicable laws and regulations. Finisar’s independent registered public accounting firm for fiscal 2019, BDO USA, LLP, was responsible for expressing an opinion as to the conformity of our audited financial statements with generally accepted accounting principles.
The Audit Committee has reviewed and discussed with management Finisar’s audited financial statements. The Audit Committee has discussed with the independent registered public accounting firm the matters required to be contained indiscussed under the Proxy Statement.
