INFINERA CORPORATION Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks, estimates and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results and the timing of certain events to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, but are not limited to, our expectations regarding revenue, gross margin, operating expenses, cash flows and other financial items; our expectations regarding industry-wide supply chain challenges; the severity, magnitude, duration and effects of the COVID-19 pandemic; the extent to which the COVID-19 pandemic and related impacts will materially and adversely affect our business operations, financial performance, results of operations, financial position, stock price and personnel; achievement of strategic objectives, including in the fourth quarter of 2021; any statements of the plans, strategies and objectives of management for future operations and personnel; remaining payments under the 2020 Restructuring Plan; estimates of payments related to future restructuring; the impact of new customer network footprint on our gross margin; statements regarding our ERP systems; impacts of changes in policy by the presidential administration inthe United States ; the effects of seasonal patterns in our business; factors that may affect our operating results; anticipated customer acceptance of our solutions; statements concerning new products or services, including new product features; statements related to capital expenditures; statements related to working capital and liquidity; statements related to future economic conditions, performance, market growth or our sales cycle; our ability to identify, attract and retain highly skilled personnel; statements related to our convertible senior notes and credit facility; statements related to the impact of tax regulations; statements related to the effects of litigation on our financial position, results of operations or cash flows; statements related to events beyond our control, such as natural disasters, acts of war or terrorism, epidemics and pandemics; statements related to new accounting standards; statements as to industry trends and other matters that do not relate strictly to historical facts; statements related to the effectiveness or adequacy of our disclosure controls or internal controls over financial reporting; and statements of assumptions underlying any of the foregoing. These statements are often identified using of words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," or "would," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included in Part II, Item 1A. of this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 as filed onMarch 3, 2021 . You should review these risk factors for a more complete understanding of the risks associated with an investment in our securities. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Overview We are a global supplier of networking solutions comprised of networking equipment, software and services. Our portfolio of solutions includes optical transport platforms, compact modular platforms, converged packet-optical transport platforms, optical line systems, disaggregated router platforms, and a suite of networking and automation software offerings, and support and professional services. Our customers include telecommunications service providers, internet content providers ("ICPs"), cable providers, wholesale carriers, research and education institutions, large enterprises and government entities. Our networking solutions enable our customers to deliver high-bandwidth business and consumer communications services. Our comprehensive portfolio of networking solutions also enables our customers to scale their transport networks as end-user services and applications continue to drive growth in demand for network bandwidth. These end-user services and applications include, but are not limited to, high-speed internet access, business ethernet services, 4G/5G mobile broadband, cloud-based services, high-definition video streaming services, virtual and augmented reality and the Internet of Things. Our systems are highly scalable, flexible and designed with open networking principles for ease of deployment. We build our systems using a combination of internally manufactured and third-party components. Our portfolio includes systems that leverage our innovative, vertically integrated optical engine technology, comprised of large-scale photonic integrated circuits ("PICs") and digital signal processors ("DSPs"). We optimize the manufacturing process by using indium phosphide to build our PICs, which enables the integration of hundreds of optical functions onto a set of semiconductor chips. This large-scale integration of our PICs and advanced DSPs 36 -------------------------------------------------------------------------------- Table of Contents allows us to deliver high-performance transport networking platforms with features that customers care about the most, including low cost per bit, low power consumption and space savings. In addition, we design our optical engines to increase the capacity and reach performance of our products by leveraging coherent optical transmission. We believe our vertical integration strategy becomes increasingly more valuable as our customers transition to 800 gigabits per second ("Gb/s") per wavelength transmission speeds and beyond, as the combination of our optical integration, DSP, and tightly integrated packaging enables a leading optical performance at higher optical speeds. Over the past several years, we expanded our portfolio of solutions, evolving from our initial focus on the long-haul and subsea optical transport markets to offer an expanded suite of networking solutions that address multiple markets within the end-to-end transport infrastructure. These markets include metro access, metro aggregation and switching, data center interconnect ("DCI") transport, and long-haul and subsea transport. We have grown our solutions portfolio through internal development as well as acquisitions. In 2014, we introduced the Infinera Cloud Xpress to address the emerging DCI market opportunity. In 2015, we entered the metro market with the acquisition ofTransmode AB . InOctober 2018 , we closed the Acquisition and expanded our product portfolio and customer base by acquiring Coriant, a privately held global supplier of open network solutions for the largest global network operators. The Acquisition has helped position us as one of the largest providers of vertically integrated transport networking solutions in the industry and enhanced our ability to serve a global customer base and accelerate the delivery of the innovative solutions that our customers demand. The Acquisition has also enabled us to expand the breadth of customer applications we can address, including 600 Gb/s optical transport, metro aggregation and switching, disaggregated routing, and software-enabled multi-layer network management and control. In 2021 we announced the expansion of our solutions portfolio with the planned introduction of a suite of coherent optical pluggables designed to support point-to-point and point-to-multipoint transport applications. Our high-speed optical transport platforms and pluggable solutions are differentiated by our photonic components and Infinite Capacity Engine ("ICE") coherent optical engine technology. ICE enables different subsystems that can be customized for a variety of network applications in different transport markets, including metro, DCI, long-haul and subsea. Our latest generation of coherent optical engine technology delivers multi-terabit opto-electronic subsystems powered by our fifth-generation PIC and latest generation DSP (the combination of which we market as ICE6). ICE6 is capable of delivering 800 Gb/s over a single wavelength. ICE6 will be integrated into various networking platforms in our product portfolio. Our products are designed to be managed by a suite of software solutions that enable simplified network management, multi-layer service orchestration, and automated operations. We also provide software-enabled programmability that offers differentiated capabilities such as Instant Bandwidth. Combined with our differentiated hardware solutions, Instant Bandwidth enables our customers to purchase and activate bandwidth as needed through our unique software licensing feature set. This, in turn, allows our customers to accomplish two key objectives: (1) limit their initial network startup costs and investments; and (2) instantly activate new bandwidth as their customers' and their own network needs evolve. We believe our portfolio of solutions benefits our customers by providing a unique combination of highly scalable capacity and features that address various transport applications and ultimately simplify and automate network operations. Our high-performance optical transport solutions leverage the industry shift to open optical network architectures and enable our customers to efficiently and cost-effectively meet bandwidth demand, which continues to grow 30%-35% year over year. For the three months endedSeptember 25, 2021 , no customer accounted for 10% or more of the Company's total revenue. For the three months endedSeptember 26, 2020 , one customer accounted for 15% of the Company's total revenue. For the nine months endedSeptember 25, 2021 , no customer accounted for 10% of the Company's total revenue and for the nine months endedSeptember 26, 2020 , the same customer accounted for 13% of the Company's total revenue. We are headquartered inSan Jose, California , with employees located throughout (i)the United States ; (ii)Canada ,Latin America andSouth America ("OtherAmericas "); (iii)Europe ,Middle East andAfrica ("EMEA"); and (iv)Asia Pacific andJapan ("APAC"). We sell our products both through our direct sales force and indirectly through channel partners. 37 -------------------------------------------------------------------------------- Table of Contents Impact of COVID-19 Pandemic COVID-19 was declared a global pandemic inMarch 2020 . Although the COVID-19 pandemic has impacted our employees, business and financial position for more than a year, its future impact on us remains uncertain. We will continue monitoring and adjusting our operations, as appropriate, in response to the ongoing COVID-19 pandemic. Employees Since the outset of the COVID-19 pandemic, we have taken a number of precautionary steps to safeguard our business and our employees from its effects, including temporarily closing or substantially limiting the presence of personnel in our offices in several impacted locations, implementing travel restrictions and withdrawing from various industry events. Since a large percentage of our workforce is accustomed to online work environments and online collaboration tools, to date we have been able to remain productive and in contact with one another and our customers and vendors. To the extent that pandemic conditions continue to worsen in certain countries in the future and lead to higher rates of infections among the general population and our own workforce, it may be more difficult for us to maintain these levels of productivity. For those employees who may need to be in offices, laboratory and manufacturing environments, or at business partner sites to perform their roles, we continue to take appropriate measures to protect their health and safety and create and maintain a safe working environment. However, sustained restrictions on the ability of our engineers to work in our offices as a result of restrictions imposed by governments, or us, has made and could continue to make it more difficult for them to collaborate as effectively as desired in the development of new products, which can affect development schedules. Business Operations In addition, we have implemented certain business continuity plans in response to the COVID-19 pandemic in order to minimize any business disruption and to protect our supply chain, customer fulfillment sites and support operations. Although we believe these actions have somewhat mitigated the impact of the COVID-19 pandemic on our business, we have experienced some disruption and delays in our supply chain and manufacturing operations, logistics, and customer support operations, including shipping delays, higher transport costs, and certain limitations on our ability to access customer fulfillment and service sites. We are dependent on sole source and limited source suppliers for several key components, and we have experienced capacity issues, longer lead times and increased costs with certain of these component suppliers, impacting our operational processes and results of operations. We have also seen disruptions in customer demand, including due to delays in the customer certification process resulting from customer facility closures or access restrictions. During fiscal 2020 and the first three quarters of fiscal 2021, some of these disruptions negatively impacted our revenue and our results of operations. The impact of the COVID-19 pandemic on our business and results of operations during the remainder of fiscal 2021 and into fiscal 2022 remains uncertain and is dependent in part on future infection rates, the emergence of new strains of the virus, the effectiveness and availability of vaccinations, supply chain resilience and broader global macroeconomic developments. We continue to monitor the COVID-19 pandemic, including the diversity of associated regulatory restrictions being imposed by governmental authorities in theU.S. and abroad, and actively assess potential implications to our business, supply chain and customer demand. If the COVID-19 pandemic or its adverse effects become more severe or prevalent or are prolonged in the locations where we, our customers, suppliers or contract manufacturers conduct business or remain unpredictable, or we experience more pronounced or long-lasting disruptions in our operations, or in economic activity and demand generally, our business and results of operations in future periods could be materially adversely affected. Liquidity and Capital Resources While we believe we have enough cash in combination with our Credit Facility (as defined below) to operate our business for the next 12 months, if the impact of the COVID-19 pandemic to our business and financial position is more extensive or longer lasting than expected, we may need additional capital to enhance liquidity and working capital. We have historically been successful in our ability to secure other sources of financing, such as accessing capital markets, and implementing other cost reduction initiatives such as restructuring, delaying or eliminating discretionary spending to satisfy our liquidity needs. However, our access to these sources of capital could be materially and adversely impacted and we may not be able to receive terms as favorable as we have historically received. Capital markets have been volatile and there is no assurance that we would have access to capital markets at a reasonable cost, or at all, at times when capital is needed. In addition, some of our existing debt has restrictive covenants that may limit our ability to raise new debt, which would limit our ability to access liquidity by those means without obtaining the consent of our lenders. 38 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which we have prepared in accordance with theU.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. An accounting policy is deemed to be critical if it requires a significant accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the nine months endedSeptember 25, 2021 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year endedDecember 26, 2020 . Due to the COVID-19 pandemic, there has been and continues to be uncertainty and disruption in the global economy and financial markets. We are not aware of any specific event or circumstance that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of the date we filed this Quarterly Report on Form 10-Q. These estimates may change as new events occur and additional information is obtained. Actual results could differ from these estimates under different assumptions or conditions. Results of Operations The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentage data): 39
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Three Months Ended
September 25, 2021 September 26, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Revenue:
Product $ 270,818 76 % $ 261,906 77 % $ 8,912 3 %
Services 84,996 24 % 78,305 23 % 6,691 9 %
Total revenue $ 355,814 100 % $ 340,211 100 % $ 15,603 5 %
Cost of revenue:
Product $ 187,956 54 % $ 185,001 55 % $ 2,955 2 %
Services 43,722 12 % 38,100 11 % 5,622 15 %
Amortization of intangible assets 4,609 1 % 7,287 2 % (2,678) (37) %
Acquisition and integration costs - - % 43 - % (43) NMF*
Restructuring and other related costs 1,434 - % 1,504 - % (70) (5) %
Total cost of revenue $ 237,721 67 % $ 231,935 68 % $ 5,786 2 %
Gross profit $ 118,093 33 % $ 108,276 32 % $ 9,817 9 %
Nine Months Ended
September 25, 2021 September 26, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Revenue:
Product $ 782,420 76 % $ 778,325 78 % $ 4,095 1 %
Services $ 242,528 24 % $ 223,746 22 % 18,782 8 %
Total revenue $ 1,024,948 100 % $ 1,002,071 100 % $ 22,877 2 %
Cost of revenue:
Product 525,494 51 % 573,312 57 % $ (47,818) (8) %
Services 128,428 13 % 115,394 12 % 13,034 11 %
Amortization of intangible assets 13,839 1 % 24,636 3 % (10,797) (44) %
Acquisition and integration costs - - % 1,828 - % (1,828) NMF*
Restructuring and other related costs 1,679 - % 4,252 - % (2,573) (61) %
Total cost of revenue $ 669,440 65 % $ 719,422 72 % $ (49,982) (7) %
Gross profit $ 355,508 35 % $ 282,649 28 % $ 72,859 26 %
*NMF = Not meaningful
Revenue
Total product revenue increased by $8.9 million , or 3%, during the three months
ended September 25, 2021 compared to the corresponding period in 2020. Total
product revenue increased by $4.1 million , or 1%, during the nine months ended
September 25, 2021 compared to the corresponding period in 2020. For each of
these three- and nine-month periods, increased revenue from our ICP, other
service provider and cable verticals were partially offset by decreased revenue
from certain Tier 1 customers.
Total services revenue increased by $6.7 million , or 9% for the three months
ended September 25, 2021 compared to the corresponding period in 2020. Total
services revenue increased by $18.8 million , or 8% for the nine months ended
September 25, 2021 compared to the corresponding period in 2020. For each of
these three- and nine-month periods, this increase was attributable to growth in
professional services due to an increase in network installation revenue,
somewhat offset by lower maintenance revenue.
We expect our total revenue will be higher in the fourth quarter of 2021 as
compared to the third quarter of 2021, driven primarily by demand growth from
certain ICP and other service provider customers as well as increased
availability of new products introduced in the second quarter of 2021.
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The following table summarizes our revenue by geography and sales channel for
the periods presented (in thousands, except percentage data):
Three Months Ended
September 25, 2021 September 26, 2020
% of total % of total
Amount revenue Amount revenue Change %Change Total revenue by geography: Domestic$ 163,583 46 %$ 167,043 49 %$ (3,460) (2) % International 192,231 54 % 173,168 51 % 19,063 11 %$ 355,814 100 %$ 340,211 100 %$ 15,603 5 % Total revenue by sales channel: Direct$ 259,349 73 %$ 269,653 79 %$ (10,304) (4) % Indirect 96,465 27 % 70,558 21 % 25,907 37 %$ 355,814 100 %$ 340,211 100 %$ 15,603 5 % Nine Months Ended September 25, 2021 September 26, 2020 % of total % of total Amount revenue Amount revenue Change % Change Total revenue by geography: Domestic $ 496,416 48 % $ 503,792 50 %$ (7,376) (1) % International 528,532 52 % 498,279 50 % 30,253 6 %$ 1,024,948 100 %$ 1,002,071 100 %$ 22,877 2 % Total revenue by sales channel: Direct $ 795,672 78 % $ 782,330 78 %$ 13,342 2 % Indirect 229,276 22 % 219,741 22 % 9,535 4 %$ 1,024,948 100 %$ 1,002,071 100 %$ 22,877 2 % Domestic revenue decreased by$3.5 million , or 2%, during the three months endedSeptember 25, 2021 compared to the corresponding period in 2020, driven primarily by decreased revenue from certain Tier 1 customers, which was partially offset by increased revenue from our ICP, cable and other service provider verticals. Domestic revenue decreased by$7.4 million , or 1%, during the nine months endedSeptember 25, 2021 compared to the corresponding period in 2020, driven primarily by decreased revenue from certain Tier 1 customers, which was partially offset by increased revenue from our ICP and cable verticals. International revenue increased by$19.1 million , or 11%, during the three months endedSeptember 25, 2021 compared to the corresponding period in 2020, driven primarily by increased revenue from our ICP, cable and other service provider verticals, which was partially offset by decreased revenue from certain Tier 1 customers. International revenue increased by$30.3 million , or 6%, during the nine months endedSeptember 25, 2021 compared to the corresponding period in 2020, driven primarily by strong growth from our cable vertical in EMEA and certain ICP and other service providers in EMEA and APAC, which was partially offset by decreased revenue from Tier 1 customers in APAC and EMEA. Direct revenue decreased by$10.3 million , or 4%, and indirect revenue increased by$25.9 million , or 37% during the three months endedSeptember 25, 2021 compared to the corresponding period in 2020. The decrease in direct revenue for the third quarter of 2021 was driven by decreased revenue from certain Tier 1 customers, which was partially offset by increased revenue from our other service provider, ICP and cable verticals. The increase in indirect revenue for the third quarter of 2021 was driven by increased revenue from ICP customers who purchased through our indirect sales channel. Direct revenue increased by$13.3 million , or 2%, and indirect revenue increased by$9.5 million , or 4%, during the nine months endedSeptember 25, 2021 compared to the corresponding respective period in 2020. The increase in direct revenue during this period is attributable to increases in our ICP and other service provider verticals offset by decreases at certain Tier 1 customers. The increase in indirect revenue during this period was driven by increased revenue from certain ICP customers who purchased through our indirect sales channel. 41
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Cost of Revenue and Gross Margin Gross profit was$118.1 million during the three months endedSeptember 25, 2021 , with gross margin increasing to 33% compared to 32% in the corresponding period in 2020. In the three months endedSeptember 25, 2021 , we realized an improvement in our product margins due to a more favorable product mix, ongoing internal cost improvement initiatives, and lower intangible amortization expenses. These factors were partially offset by an$8.6 million charge incurred as a result of the exit from certain product lines. Gross profit was$355.5 million during the nine months endedSeptember 25, 2021 , with gross margin increasing to 35% compared to 28% in the corresponding period in 2020. This increase was primarily attributable to an improvement in our product mix, ongoing internal cost improvement initiatives, and lower intangible amortization expenses. These factors were partially offset by an$8.6 million charge incurred as a result of the exit from certain product lines. We currently expect gross margin in the fourth quarter of 2021 to be lower than the third quarter of 2021 due to increased line system deployment revenues. Over time, we believe our margins will improve as we increase the proportion of revenue derived from sales of our vertically integrated products. Amortization of Intangible Assets Amortization of intangible assets decreased by$2.7 million , or 37%, and$10.8 million , or 44%, during the three- and nine-month periods endedSeptember 25, 2021 , respectively, compared to the corresponding periods in 2020, due to certain technologies being fully amortized in the third quarter of 2020. Acquisition and Integration Costs Integration costs, within cost of revenue, were immaterial for the three months endingSeptember 25, 2021 and remained flat compared to the corresponding period in 2020. Integration costs, within cost of revenue, decreased by$1.8 million during the nine-month period endedSeptember 25, 2021 , compared to the corresponding period in 2020, as we completed our integration efforts related to the Acquisition in the first quarter of 2021. Restructuring and Other Related Costs Restructuring and other related costs primarily consisting of severance and other related costs decreased by$0.1 million , or 5%, and$2.6 million , or 61% during the three- and nine-month periods endedSeptember 25, 2021 , respectively, compared to the corresponding periods in 2020. These decreases primarily reflect the substantial completion of ourMunich -related restructuring activities in 2020, which was part of our 2018 Restructuring Plan, partially offset by expenses associated with the 2021 Restructuring Plan. Also, during the three months endedSeptember 25, 2021 , we incurred a$1.4 million credit resulting from lower than expectedMunich severance and related costs. See Note 9, "Restructuring and Other Related Costs" to the Notes to Condensed Consolidated Financial Statements for more information. 42 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following tables summarize our operating expenses for the periods presented (in thousands, except percentage data): Three Months Ended September 25, 2021 September 26, 2020 % of total % of total Amount revenue Amount revenue Change % Change Operating expenses: Research and development$ 76,648 22 %$ 65,636 19 %$ 11,012 17 % Sales and marketing 33,223 9 % 28,954 9 % 4,269 15 % General and administrative 28,301 8 % 28,183 9 % 118 0 % Amortization of intangible assets 4,351 1 % 4,696 1 % (345) (7) % Acquisition and integration costs - - % 1,045 - % (1,045) NMF* Restructuring and other related costs 6,546 2 % 6,679 2 % (133) (2) % Total operating expenses$ 149,069 42 %$ 135,193 40 %$ 13,876 10 % Nine Months Ended September 25, 2021 September 26, 2020 % of total % of total Amount revenue Amount revenue Change % Change Operating expenses: Research and development 224,111 22 % 200,906 20 %$ 23,205 12 % Sales and marketing 99,777 10 % 97,459 10 % 2,318 2 % General and administrative 87,004 8 % 87,904 9 % (900) (1) % Amortization of intangible assets 13,148 1 % 13,836 1 % (688) (5) % Acquisition and integration costs 614 - % 13,611 1 % (12,997) (95) % Restructuring and other related costs 8,191 1 % 17,356 2 % (9,165) (53) % Total operating expenses$ 432,845 42 %$ 431,072 43 %$ 1,773 0 % *NMF = Not meaningful Research and Development Expenses Research and development expenses increased by$11.0 million , or 17%, during the three months endedSeptember 25, 2021 , and increased by$23.2 million , or 12%, during the nine months endedSeptember 25, 2021 compared to the corresponding period in 2020. These increases were primarily attributable to higher employee-related costs related to bringing our new technologies to market and investments in future technologies. Our equipment and software spend was also slightly higher in the three and nine months endedSeptember 25, 2021 , as we optimized spend to focus on our highest growth opportunities. These increases were partially offset by lower costs related to new products transitioning from development to production, and lower depreciation expense related to older technologies. We expect to increase research and development investments in our vertically integrated product portfolio expansion strategy, which we believe will drive higher revenue and profitability. Sales and Marketing Expenses Sales and marketing expenses increased by$4.3 million , or 15%, during the three months endedSeptember 25, 2021 compared to the corresponding period in 2020. This increase was primarily attributable to higher employee compensation expenses. Sales and marketing expense increased by$2.3 million , or 2%, during the nine months endedSeptember 25, 2021 compared to the corresponding period in 2020. This increase primarily reflects higher employee compensation expenses which were partially offset by decreases attributable to reductions in travel and marketing-related expenses, principally driven by the impact of the COVID-19 pandemic. We expect sales and marketing costs to increase in the fourth quarter 2021, primarily as a result of increased sales commissions. General and Administrative Expenses General and administrative expenses increased by$0.1 million , or immaterial, during the three months endedSeptember 25, 2021 compared to the corresponding period in 2020. The increase was largely due to higher 43 -------------------------------------------------------------------------------- Table of Contents employee compensation related costs partially offset by lower professional fees and lower facility costs due to site closures. General and administrative expenses decreased by$0.9 million , or 1%, during the nine months endedSeptember 25, 2021 compared to the corresponding period in 2020. The decrease was primarily attributable to reductions in professional services, lower facility operating costs due to site closures and higher tax credits, partially offset by litigation settlements, higher employee compensation costs and software license fees. Amortization of Intangible Assets Amortization of intangible assets decreased by$0.3 million , or 7%, during the three months endedSeptember 25, 2021 , and decreased by$0.7 million , or 5%, during the nine months endedSeptember 25, 2021 compared to the corresponding periods in 2020, primarily due to lower amortization of the value of customer relationships and backlog. Acquisition and Integration Costs Integration costs decreased by$1.0 million , during the three months endedSeptember 25, 2021 , and decreased by$13.0 million , during the nine months endedSeptember 25, 2021 compared to the corresponding periods in 2020, primarily due to the completion of our integration efforts related to the Acquisition in the first quarter of 2021. Restructuring and Other Related Costs Restructuring and other related costs decreased by$0.1 million , or 2%, during the three months endedSeptember 25, 2021 , compared to the corresponding period in 2020. The decrease in the three months endedSeptember 25, 2021 was primarily due to the substantial completion of restructuring initiatives under the 2018 Restructuring Plan in 2020, partially offset by expenses associated with the 2021 Restructuring Plan. Also, during the three-month period endedSeptember 25, 2021 , we recognized a$1.0 million credit that resulted from lower than expectedMunich severance and related costs. Restructuring and other related costs decreased by$9.2 million , or 53%, during the nine months endedSeptember 25, 2021 , compared to the corresponding period in 2020. The decrease in the nine months endedSeptember 25, 2021 was primarily due to the substantial completion of restructuring initiatives under the 2018 Restructuring Plan in 2020. Also, during the nine months endedSeptember 25, 2021 , we recognized a$1.0 million credit that resulted from lower than expectedMunich severance and related costs. See Note 9, "Restructuring and Other Related Costs" to the Notes to Condensed Consolidated Financial Statements for more information. Other Income (Expense), Net Three Months Ended September 25, September 26, 2021 2020 Change % Change (In thousands) Interest income $ 22 $ 7$ 15 214 % Interest expense (12,622) (12,645) 23 - % Other gain (loss), net (4,763) 5,018 (9,781) (195) % Total other expense, net$ (17,363) $ (7,620) $ (9,743) 128 % Nine Months Ended September 25, September 26, 2021 2020 Change % Change (In thousands) Interest income 89 85$ 4 5 % Interest expense (36,482) (33,875) (2,607) 8 % Other loss, net (14,439) (9,656) (4,783) 50 % Total other expense, net$ (50,832) $ (43,446) $ (7,386) 17 %
Interest income during the three- and nine-month periods ended
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Interest expense had no significant change during the three months ended
September 25, 2021 compared to the corresponding period in 2020, primarily due
to increased accretion of debt discount and amortization of debt issuance costs
on the 2027 Notes and the 2024 Notes, which was partially offset by a decrease
in interest expense on the Credit Facility, which was repaid in January 2021 ,
and the Finance Assistance Agreement, which was repaid in April 2021 .
Interest expense increased by $2.6 million , or 8%, during the nine months ended
September 25, 2021 compared to the corresponding period in 2020, primarily due
to increased accretion of debt discount and amortization of debt issuance costs
on the 2027 Notes and the 2024 Notes, contractual interest on the 2027 Notes,
and a nonrecurring interest credit from a supplier in 2020. This increase was
partially offset by a decrease in interest expense on the Credit Facility, which
was repaid in January 2021 , and the Finance Assistance Agreement, which was
repaid in April 2021 , and a decrease in other interest related charges.
Other gain (loss), net, increased by $9.8 million , or 195%, during the three
months ended September 25, 2021 compared to the corresponding period in 2020,
primarily due to an increase in unrealized foreign exchange losses driven by
foreign currency exchange rate changes.
Other loss, net, increased by $4.8 million , or 50%, during the nine months ended
September 25, 2021 compared to the corresponding period in 2020, primarily due
to as increase in unrealized foreign exchange losses driven by foreign currency
exchange rate changes.
Income Tax Benefit/Expense
Income tax expense increased by $4.1 million , or 301%, during the three months
ended September 25, 2021 compared to the corresponding period in 2020, primarily
as a result of additional expenses in foreign jurisdictions.
Income tax expense increased by approximately $4.6 million , or 94%, during the
nine months ended September 25, 2021 , compared to the corresponding period in
2020, primarily as a result of additional expenses in foreign jurisdictions.
Liquidity and Capital Resources
Nine Months Ended
September 25, 2021 September 26, 2020
(In thousands)
Net cash flow provided by (used in):
Operating activities $ 26,759 $ (164,516)
Investing activities $ (32,314) $ (27,148)
Financing activities $ (96,729) $ 276,849
September 25, 2021 December 26, 2020
(In thousands)
Cash $ 203,484 $ 298,014
Restricted cash 12,916 17,369
$ 216,400 $ 315,383
Our restricted cash balance amounts are primarily pledged as collateral for
certain standby letters of credit related to customer performance guarantees,
value added tax licenses and property leases.
Operating Activities
Net cash provided by operating activities during the nine months ended
September 25, 2021 was $26.8 million compared to $164.5 million net cash used in
operating activities for the corresponding period in 2020.
Net loss during the nine months ended September 25, 2021 was $137.7 million ,
which included non-cash charges of $139.0 million such as depreciation,
amortization of intangibles, restructuring charges and other related costs,
amortization of debt discount and debt issuance costs, operating lease expense,
and stock-based compensation, compared to a net loss during the nine months
ended September 26, 2020 of $196.8 million , which included non-cash charges of
$152.2 million .
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Net cash provided by working capital was $25.5 million during the nine months
ended September 25, 2021 . Accounts receivable decreased by $42.5 million due to
timing of customer billings and collections. Inventory levels increased by $24.9
million due to our efforts to purchase more inventory to manage lead time due to
the industry semiconductor shortage. Prepaid and other assets decreased by $15.0
million primarily due to timing of tax payments and a lower contract asset
balance due to timing of billings and revenue recognition. Accounts payable
decreased by $2.1 million primarily due to timing of payment to suppliers.
Accrued liabilities and other expenses increased by $19.1 million primarily due
to higher accrued compensation and related benefits. Deferred revenue decreased
by $24.2 million due primarily to the amortization of annual maintenance
renewals during the period.
Net cash used to fund working capital was $119.9 million during the nine months
ended September 26, 2020 . Accounts receivable decreased by $55.3 million due to
strong cash collections. Inventory levels decreased by $63.2 million due to
management's efforts to reduce inventory. Accounts payable decreased by $117.8
million primarily due to the timing of payment to suppliers. Prepaid and other
assets increased by $25.5 million primarily due to timing of tax payments and an
increase in contract assets. Accrued liabilities and other expenses decreased by
$73.5 million primarily due to payment of the fiscal 2019 corporate bonus,
restructuring liabilities, tax liabilities and purchases of shares of our common
stock under our 2007 ESPP in 2020. Deferred revenue decreased by $21.5 million
due to amortization of maintenance renewals and lower renewals during the
quarter, which are typically contracted on an annual or multi-year basis.
Investing Activities
Net cash used in investing activities during the nine months ended September 25,
2021 was $32.3 million primarily for purchase of property and equipment.
Net cash used in investing activities during the nine months ended September 26,
2020 was $27.1 million entirely for purchase of property and equipment.
Financing Activities
Net cash used in financing activities during the nine months ended September 25,
2021 was $96.7 million compared to net cash provided by financing activities of
$276.8 million in the corresponding period of 2020. Financing activities during
the nine months ended September 25, 2021 primarily included payments of $77.0
million towards the Credit Facility, a $24.6 million repayment of the financing
assistance arrangement (as described below), and a $5.5 million term license
purchase. The period also included net proceeds of $16.5 million from the
issuance of shares of our common stock under the ESPP. These proceeds were
offset by tax withholdings in the amount of $4.7 million paid on behalf of
certain employees for net share settlements of RSUs.
Net cash provided by financing activities during the nine months ended
September 26, 2020 was $276.8 million . Financing activities during the nine
months ended September 26, 2020 included proceeds of $31.0 million from our
common stock "at-the-market" offering program, $194.5 million from the issuance
of the 2027 Notes and $55.0 million of proceeds from the Credit Facility (as
described below). The period also included net proceeds of $15.4 million from
the issuance of shares of our common stock under the ESPP. Payments during this
period included $8.0 million towards the Credit Facility, a $5.3 million
repayment of the financing assistance arrangement, $2.4 million in debt issuance
cost, tax withholdings of $2.0 million paid on behalf of certain employees for
net share settlements of RSUs, and $1.1 million for finance lease obligations.
Liquidity
We believe that our current cash, along with the Credit Facility, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures, and the interest payments on the Notes and the Credit Facility for
at least 12 months. If the impact of the COVID-19 pandemic to our business and
financial position is more extensive or longer lasting than expected and our
existing sources of cash are insufficient to satisfy our liquidity requirements,
we may require additional capital from equity or debt financings to fund our
operations, to respond to competitive pressures or strategic opportunities, or
otherwise. In addition, we are continuously evaluating alternatives for
efficiently funding our capital expenditures and ongoing operations. We may,
from time to time engage in a variety of financing transactions for such
purposes. We may not be able to secure timely additional financing on favorable
terms, or at all. The terms of any additional financings may place limits on our
financial and operating flexibility. If we raise additional funds through
further issuances of equity or equity-linked securities, our existing
stockholders could suffer dilution in their percentage ownership of us, and any
new securities we issue could have rights, preferences and privileges senior to
those of holders of our common stock.
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On March 9, 2020 , we issued the 2027 Notes, which will mature on March 1, 2027 ,
unless earlier repurchased, redeemed or converted. Interest is payable
semi-annually in arrears on March 1 and September 1 of each year, commencing on
September 1, 2020 . The net proceeds from the 2027 Notes issuance were
approximately $194.5 million and we intend to use the net proceeds for general
corporate purposes, including working capital to fund growth and potential
strategic projects.
Upon conversion, it is our intention to pay cash equal to the lesser of the
aggregate principal amount or the conversion value of the 2027 Notes. For any
remaining conversion obligation, we intend to pay or deliver, as the case may
be, cash, shares of our common stock, or a combination of cash and shares of our
common stock, at our election. As of September 25, 2021 , long-term debt, net,
included $138.1 million outstanding for the 2027 Notes, which represents the
liability component of the $200.0 million principal balance, net of $61.9
million of unamortized debt discount and debt issuance costs. The debt discount
and debt issuance costs are currently being amortized over the remaining term
until maturity of the 2027 Notes on March 1, 2027 . To the extent that the
holders of the 2027 Notes request conversion during an early conversion window,
we may require funds for repayment of such 2027 Notes prior to their maturity
date.
As of September 25, 2021 , contractual obligations related to the 2027 Notes are
payments of zero due for the remainder of 2021, $5.0 million due each year from
2022 through 2026 and $207.5 million due in 2027. These amounts represent
principal and interest cash payments over the term of the 2027 Notes. Any future
redemption or conversion of the Notes could impact the amount or timing of our
cash payments. For more information regarding the 2027 Notes, see Note 12,
"Debt" to the Notes to Condensed Consolidated Financial Statements.
On August 1, 2019 , we entered into the Credit Agreement with Wells Fargo Bank ,
and on December 23, 2019 we entered into the Amendment to the Credit Agreement
with BMO Harris Bank N.A . and Wells Fargo Bank , as administrative agent. The
Amended Credit Agreement provides for the Credit Facility, a senior secured
asset-based revolving credit facility of up to $150.0 million , which we may draw
upon from time to time. The Credit Agreement provided us with the option to
increase the total commitments under the Credit Facility from the initial $100.0
million amount by up to an additional $50.0 million to $150.0 million , subject
to certain conditions. On December 23, 2019 , we exercised this option to
increase the total commitments under the Credit Facility and entered into the
Amendment to the Credit Agreement. The Amended Credit Agreement provides for a
$50.0 million letter of credit sub-facility and a $10.0 million swing loan
sub-facility.
The proceeds of the loans under the Amended Credit Agreement may be used to pay
the fees, costs and expenses incurred in connection with the Amended Credit
Agreement and for working capital and general corporate purposes. The Credit
Facility matures, and all outstanding loans become due and payable, on March 5,
2024 . Availability under the Credit Facility is based upon periodic borrowing
base certifications valuing certain inventory and accounts receivable, as
reduced by certain reserves. The Credit Facility is secured by first-priority
security interest (subject to certain exceptions) in inventory, certain related
assets, specified deposit accounts, and certain other accounts in certain
domestic subsidiaries.
Loans under the Amended Credit Agreement bear interest, at our option, at either
a rate based on LIBOR for the applicable interest period or a base rate, in each
case plus a margin. The margin ranges from 2.00% to 2.50% for LIBOR rate loans
and 1.00% to 1.50% for base rate loans, depending on the utilization of the
Credit Facility. The commitment fee payable on the unused portion of the Credit
Facility ranges from 0.375% to 0.625% per annum, also based on the current
utilization of the Credit Facility. Letters of credit issued pursuant to the
Credit Facility will accrue a fee at a per annum rate equal to the applicable
LIBOR rate margin times the average amount of the letter of credit usage during
the immediately preceding quarter in addition to the fronting fees, commissions
and other fees.
In January 2021 , we repaid in full the then outstanding principal balance of
$77.0 million . For more information regarding the Credit Facility, see Note 12,
"Debt" to the Notes to Consolidated Financial Statements.
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In May 2019 , we entered into a financing assistance agreement with a third-party
contract manufacturer whereby the contract manufacturer agreed to provide
funding of up to $40.0 million to cover severance, retention and other costs
associated with the transfer of our manufacturing operations in Berlin, Germany
to the contract manufacturer. The funding was secured against certain foreign
assets, carried a fixed interest rate of 6% and repayable in 12 months from the
date of each draw down. In October 2020 , the payment terms were amended to
extend the due date by six months, set the fixed interest rate at 3% during such
period, and allowed for the phased transfer of inventory to offset the amount
due. In April 2021 , we repaid the entire outstanding principal balance and
accrued interest of $24.6 million and $1.8 million , respectively.
In September 2018 , we issued the 2024 Notes, which will mature on September 1,
2024 , unless earlier repurchased, redeemed or converted. Interest is payable
semi-annually in arrears on March 1 and September 1 of each year, which
commenced on March 1, 2019 . The net proceeds from the 2024 Notes issuance were
approximately $391.4 million , of which approximately $48.9 million was used to
pay the cost of the Capped Calls. We also used a portion of the remaining net
proceeds to fund the cash portion of the purchase price of the Acquisition,
including fees and expenses relating thereto, and intend to use the remaining
net proceeds for general corporate purposes.
Upon conversion, it is our intention to pay cash equal to the lesser of the
aggregate principal amount or the conversion value of the 2024 Notes. For any
remaining conversion obligation, we intend to pay or deliver, as the case may
be, cash, shares of our common stock, or a combination of cash and shares of our
common stock, at our election. As of September 25, 2021 , long-term debt, net,
included $323.3 million for 2024 Notes which represents the liability component
of the $402.5 million principal balance, net of $79.2 million of unamortized
debt discount and debt issuance costs. The debt discount and debt issuance costs
are currently being amortized over the remaining term until maturity of the 2024
Notes on September 1, 2024 . To the extent that the holders of the 2024 Notes
request conversion during an early conversion window, we may require funds for
repayment of such 2024 Notes prior to their maturity date.
As of September 25, 2021 , contractual obligations related to the 2024 Notes are
payments of zero due for the remainder of 2021, $8.6 million due each year from
2022 through 2023 and $411.1 million due in 2024. These amounts represent
principal and interest cash payments over the term of the 2024 Notes. Any future
redemption or conversion of the Notes could impact the amount or timing of our
cash payments. For more information regarding the 2024 Notes, see Note 12,
"Debt" to the Notes to Consolidated Financial Statements.
As of September 25, 2021 , we had $203.5 million of cash including $85.0 million
of cash held by our foreign subsidiaries. Our policy with respect to
undistributed foreign subsidiaries' earnings is to consider those earnings to be
indefinitely reinvested. As a result of the enactment in the United States of
the Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"), if and when funds are
actually distributed in the form of dividends or otherwise, we expect minimal
tax consequences, except for foreign withholding taxes, which would be
applicable in some jurisdictions.
Off-Balance Sheet Arrangements
As of September 25, 2021 , we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial position
due to adverse changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in foreign currency exchange
rates and interest rates. We assess these risks on a regular basis and have
established policies that are designed to protect against, but that cannot
entirely eliminate the adverse effects of these and other potential exposures.
Foreign Currency Exchange Rate Risk
There have been no material changes to the foreign currency exchange rate risk
previously disclosed in Part II, Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk," of our Annual Report on Form 10-K for the fiscal
year ended December 26, 2020 .
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Interest Rate Risk
There have been no material changes to the interest rate risk previously
disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk," of our Annual Report on Form 10-K for the fiscal year ended
December 26, 2020 .
Market Risk and Market Interest Risk
For a discussion of our exposure to market risk and market interest risk related
to the 2027 Notes and 2024 Notes, see "Quantitative and Qualitative Disclosures
About Market Risk" in Part II, Item 7A of our Annual Report on Form 10-K for the
fiscal year ended December 26, 2020 . There have been no other material changes
to our market risk during the nine months ended September 25, 2021 .
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was performed by our management, with the participation of our CEO
and our CFO, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d -15(e) under the Exchange Act). Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to management, including our CEO and CFO, as appropriate, to allow timely
decisions regarding required disclosure. Based on this evaluation, our CEO and
CFO concluded that, as of September 25, 2021 , our disclosure controls and
procedures are effective.
Inherent Limitations on Effectiveness of Controls
Our management, including the CEO and CFO, does not expect that our disclosure
controls or our internal controls over financial reporting will prevent or
detect all errors and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system's objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, have been
detected. The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Projections of any evaluation of the effectiveness of
controls to future periods are subject to risks. Over time, controls may become
inadequate because of changes in business conditions or deterioration in the
degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
During the three months ended September 25, 2021 there were no changes in our
internal control over financial reporting which were identified in connection
with management's evaluation required by paragraph (d) of Rules 13a-15 and
15d-15 under the Exchange Act, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting. We
are continually monitoring and assessing the COVID-19 pandemic situation to
minimize the impact, if any, on the design and operating effectiveness on our
internal controls.
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