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 third 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 factors 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; 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 allows us to deliver high-performance transport networking platforms with features that customers care about the 36 -------------------------------------------------------------------------------- Table of Contents 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 endedJune 26, 2021 , no customer accounted for 10% or more of our total revenue. One customer accounted for 13% of our total revenue for the three months endedJune 27, 2020 . For the six months endedJune 26, 2021 , one customer accounted for 10% of our total revenue. The same customer accounted for 12% of our total revenue for the six months endedJune 27, 2020 . 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. 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 37 -------------------------------------------------------------------------------- Table of Contents 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 half 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 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 recent lifting of government restrictions in various jurisdictions, 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 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 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. InMay 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 inBerlin, Germany to the contract manufacturer. The funding was secured against certain foreign assets, carried a fixed interest rate of 6% and 38 -------------------------------------------------------------------------------- Table of Contents repayable in 12 months from the date of each draw down. InOctober 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. As ofJune 26, 2021 , there was no outstanding balance as the loan and accrued interest was fully paid off inApril 2021 . 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 six months endedJune 26, 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
June 26, 2021 June 27, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Revenue:
Product $ 257,441 76 % $ 261,227 79 % $ (3,786) (1) %
Services 80,786 24 % 70,360 21 % 10,426 15 %
Total revenue $ 338,227 100 % $ 331,587 100 % $ 6,640 2 %
Cost of revenue:
Product $ 172,053 51 % $ 186,519 56 % $ (14,466) (8) %
Services 41,446 12 % 36,599 11 % 4,847 13 %
Amortization of intangible assets 4,614 1 % 8,721 3 % (4,107) (47) %
Acquisition and integration costs - - % 750 - % (750) NMF*
Restructuring and related (269) - % 1,591 - % (1,860) (117) %
Total cost of revenue $ 217,844 64 % $ 234,180 70 % $ (16,336) (7) %
Gross profit $ 120,383 35.6 % $ 97,407 29.4 % $ 22,976 24 %
Six Months Ended
June 26, 2021 June 27, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Revenue:
Product $ 511,602 76 % $ 516,419 78 % $ (4,817) (1) %
Services $ 157,532 24 % $ 145,441 22 % 12,091 8 %
Total revenue $ 669,134 100 % $ 661,860 100 % $ 7,274 1 %
Cost of revenue:
Product 337,538 50 % 388,311 59 % $ (50,773) (13) %
Services 84,706 13 % 77,294 12 % 7,412 10 %
Amortization of intangible assets 9,230 1 % 17,349 3 % (8,119) (47) %
Acquisition and integration costs - - % 1,785 - % (1,785) NMF*
Restructuring and related 245 - % 2,748 - % (2,503) (91) %
Total cost of revenue $ 431,719 64 % $ 487,487 74 % $ (55,768) (11) %
Gross profit $ 237,415 35.5 % $ 174,373 26.3 % $ 63,042 36 %
*NMF = Not meaningful
Revenue
Total product revenue decreased by $3.8 million , or 1%, during the three months
ended June 26, 2021 compared to the corresponding period in 2020. Declines in
our cable, Tier 1 and other service provider verticals were partially offset by
increases in our ICP vertical as strong demand was tempered by industry-wide
supply chain challenges. Total product revenue decreased by $4.8 million , or 1%,
during the six months ended June 26, 2021 compared to the corresponding period
in 2020. During the six months ended June 26, 2021 , revenue from a customer who
had spent heavily on a large network deployment in the corresponding period in
2020 was lower, partially offset by revenue increases across the remaining Tier
1 vertical as well as increases across our ICP, cable and other service provider
verticals.
Total services revenue increased by $10.4 million , or 15% for the three months
ended June 26, 2021 compared to the corresponding period in 2020. Total services
revenue increased by $12.1 million , or 8% for the six months ended June 26, 2021
compared to the corresponding period in 2020. For each of these three- and
six-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.
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We expect our total revenue will be higher in the third quarter of 2021 as
compared to the second quarter of 2021, driven primarily by demand growth from
certain ICP and other service provider customers as well as availability of new
products introduced in the second quarter of 2021.
The following table summarizes our revenue by geography and sales channel for
the periods presented (in thousands, except percentage data):
Three Months Ended
June 26, 2021 June 27, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Total revenue by geography:
Domestic $ 175,184 52 % $ 166,223 50 % $ 8,961 5 %
International 163,043 48 % 165,364 50 % (2,321) (1) %
$ 338,227 100 % $ 331,587 100 % $ 6,640 2 %
Total revenue by sales channel:
Direct $ 265,022 78 % $ 268,326 81 % $ (3,304) (1) %
Indirect 73,205 22 % 63,261 19 % 9,944 16 %
$ 338,227 100 % $ 331,587 100 % $ 6,640 2 %
Six Months Ended
June 26, 2021 June 27, 2020
% of total % of total
Amount revenue Amount revenue Change % Change
Total revenue by geography:
Domestic $ 332,833 50 % $ 336,749 51 % $ (3,916) (1) %
International 336,301 50 % 325,111 49 % 11,190 3 %
$ 669,134 100 % $ 661,860 100 % $ 7,274 1 %
Total revenue by sales channel:
Direct $ 536,323 80 % $ 512,677 77 % $ 23,646 5 %
Indirect 132,811 20 % 149,183 23 % (16,372) (11) %
$ 669,134 100 % $ 661,860 100 % $ 7,274 1 %
Domestic revenue increased by $9.0 million , or 5%, during the three months ended
June 26, 2021 compared to the corresponding period in 2020, driven primarily by
increases from certain ICP and Tier 1 customers and partially offset by
decreases in each of our cable and other service provider verticals. Domestic
revenue decreased by $3.9 million , or 1%, during the six months ended June 26,
2021 compared to the corresponding period in 2020, driven primarily by declines
from certain ICP and other service providers, and somewhat offset by an
improvement in our cable vertical and from our Tier 1 customers.
International revenue decreased by $2.3 million , or 1%, during the three months
ended June 26, 2021 compared to the corresponding period in 2020. In this
period, we had decreases from certain Tier 1 customers in APAC and EMEA that was
partially offset by customers in the cable and other service provider verticals.
International revenue increased by $11.2 million , or 3%, during the six months
ended June 26, 2021 compared to the corresponding period in 2020. In this
period, we had strong growth from certain ICP, cable and other service providers
in EMEA and APAC that were partially offset by decreases in Tier 1 customer
revenue in APAC and EMEA.
Direct revenue decreased by $3.3 million , or 1%, and indirect revenue increased
by $9.9 million , or 16% during the three months ended June 26, 2021 compared to
the corresponding period in 2020. The increase in indirect revenue for the
second quarter of 2021 was driven by certain ICP customers who purchased through
our indirect sales channel. Direct revenue increased by $23.6 million , or 5%,
and indirect revenue decreased by $16.4 million , or 11%, during the six months
ended June 26, 2021 compared to the corresponding respective period in 2020. The
increase in direct revenue is attributable to growth in professional services
due to an increase in network installation revenue and product revenue at
certain Tier 1 and other service provider verticals. The decrease in indirect
revenue was driven by certain ICP customers who purchased through our indirect
sales channel.
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Cost of Revenue and Gross Margin Gross profit was$120.4 million during the three months endedJune 26, 2021 , with gross margin increasing to 35.6% compared to 29.4% in the corresponding period in 2020. In the three months endedJune 26, 2021 , we realized an improvement in our product margins stemming from a combination of more favorable product mix, ongoing internal cost improvement initiatives, and lower intangible amortization expenses. Gross profit was$237.4 million during the six months endedJune 26, 2021 , with gross margin increasing to 35.5% compared to 26.3% in the corresponding period in 2020. This increase was primarily attributable to an improvement in our product margins stemming from a combination of more favorable product mix, ongoing internal cost improvement initiatives, and lower intangible amortization expenses. In addition, in the first quarter of 2020, a higher than typical portion of our revenue represented initially lower margin line systems deployments. We currently expect that gross margin in the third quarter of 2021 will be lower than that of the second quarter of 2021, largely due to product mix. In the third quarter of 2021 we anticipate a higher percentage of revenue coming from initially lower margin line systems deployments as well as higher supply-chain related costs. Over time, we believe our margins will continue to 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$4.1 million , or 47%, and$8.1 million , or 47%, during the three- and six-month periods endedJune 26, 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, decreased by$0.8 million and$1.8 million during the three- and six-month periods endedJune 26, 2021 , respectively, compared to the corresponding periods in 2020 as we have completed our integration efforts related to the Acquisition. Restructuring and Related Restructuring and related costs primarily consisting of severance and related costs decreased by$1.9 million , or 117%, and$2.5 million , or 91% during the three- and six-month periods endedJune 26, 2021 , respectively, compared to the corresponding periods in 2020. These decreases primarily reflect the substantial completion of theMunich -related restructuring in fiscal year 2020, which was part of our 2018 Restructuring Plan. Also, during the three months endedJune 26, 2021 , we incurred a$0.3 million credit resulting from lower than expectedMunich severance and related costs. See Note 9, "Restructuring and Related Costs" to the Notes to Condensed Consolidated Financial Statements for more information. 42 -------------------------------------------------------------------------------- Table of Contents Operating Expenses The following tables summarize our operating expenses for the periods presented (in thousands, except percentage data): Three Months Ended June 26, 2021 June 27, 2020 % of total % of total Amount revenue Amount revenue Change % Change Operating expenses: Research and development$ 73,934 22 %$ 67,090 20 %$ 6,844 10 % Sales and marketing 33,782 10 % 31,816 10 % 1,966 6 % General and administrative 32,197 10 % 30,101 9 % 2,096 7 % Amortization of intangible assets 4,392 1 % 4,585 1 % (193) (4) % Acquisition and integration costs - - % 3,344 1 % (3,344) NMF* Restructuring and related (674) - % 5,097 2 % (5,771) (113) % Total operating expenses$ 143,631 43 %$ 142,033 43 %$ 1,598 1 % Six Months Ended June 26, 2021 June 27, 2020 % of total % of total Amount revenue Amount revenue Change % Change Operating expenses: Research and development 147,463 22 % 135,270 20 %$ 12,193 9 % Sales and marketing 66,554 10 % 68,505 10 % (1,951) (3) % General and administrative 58,703 8 % 59,721 9 % (1,018) (2) % Amortization of intangible assets 8,797 1 % 9,140 1 % (343) (4) % Acquisition and integration costs 614 - % 12,566 1 % (11,952) (95) % Restructuring and related 1,645 1 % 10,677 2 % (9,032) (85) % Total operating expenses$ 283,776 42 %$ 295,879 43 %$ (12,103) (4) % *NMF = Not meaningful Research and Development Expenses Research and development expenses increased by$6.8 million , or 10%, during the three months endedJune 26, 2021 , and increased by$12.2 million , or 9%, during the six months endedJune 26, 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 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, depreciation related to older technologies, and lower travel expense. Looking ahead, we expect that development initiatives will continue to support our strategy of expanding our vertically integrated product portfolio, which we believe will drive higher revenue and profitability. Sales and Marketing Expenses Sales and marketing expenses increased by$2.0 million , or 6%, during the three months endedJune 26, 2021 compared to the corresponding period in 2020. This increase was primarily attributable to higher employee compensation expenses. Sales and marketing expense decreased by$2.0 million , or 3%, during the six months endedJune 26, 2021 compared to the corresponding period in 2020. This decrease was primarily attributable to reductions in travel and marketing-related expenses, principally driven by the impact of the COVID-19 pandemic, partially offset by higher employee compensation expenses. While managing costs effectively, we intend to continue 43 -------------------------------------------------------------------------------- Table of Contents making prudent investments in customer trials and general market awareness to maximize future revenue opportunities around new products and technologies. General and Administrative Expenses General and administrative expenses increased by$2.1 million , or 7%, during the three months endedJune 26, 2021 compared to the corresponding period in 2020. The increase was largely due to litigation settlements and related costs as well as higher employee compensation costs and professional fees, partially offset by a reduction of customer credit loss, higher tax credits, and lower facility cost due to site closures. General and administrative expenses decreased by$1.0 million , or 2%, during the six months endedJune 26, 2021 compared to the corresponding period in 2020. The decrease was primarily attributable to higher tax credits, reductions in professional services, lower facility operating costs due to site closures and lower stock compensation expense. The reductions in this period were partially offset by litigation settlements, higher employee compensation costs and software license fees. Amortization of Intangible Assets Amortization of intangible assets decreased by$0.2 million , or 4%, during the three months endedJune 26, 2021 , and decreased by$0.3 million , or 4%, during the six months endedJune 26, 2021 compared to the corresponding periods in 2020, primarily due to lower amortization of customer relationships and backlog. Acquisition and Integration Costs Integration costs decreased by$3.3 million , during the three months endedJune 26, 2021 , and decreased by$12.0 million , during the six months endedJune 26, 2021 compared to the corresponding periods in 2020. We have completed our integration efforts related to the Acquisition. Restructuring and Related Costs Restructuring and related costs decreased by$5.8 million , or 113%, during the three months endedJune 26, 2021 , compared to the corresponding period in 2020. The decrease in the three months endedJune 26, 2021 was primarily due to the substantial completion of restructuring initiatives under the 2018 Restructuring Plan in fiscal year 2020. Also, during the three-month period endedJune 26, 2021 , we incurred a$1.0 million credit resulting from lower than expectedMunich severance and related costs. Restructuring and related costs decreased by$9.0 million , or 85%, during the six months endedJune 26, 2021 , compared to the corresponding period in 2020. The decrease in the six months endedJune 26, 2021 was primarily due to the substantial completion of restructuring initiatives under the 2018 Restructuring Plan in fiscal year 2020. Also, during the six months endedJune 26, 2021 , we incurred a$1.0 million credit resulting from lower than expectedMunich severance and related costs. See Note 9, "Restructuring and Related Costs" to the Notes to Condensed Consolidated Financial Statements for more information. 44 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense), Net Three Months Ended June 26, June 27, 2021 2020 Change % Change Interest income$ 27 $ 54 $ (27) (50) % Interest expense (12,017) (12,436) 419 (3) % Other gain (loss), net 2,719 (1,992) 4,711 (236) % Total other expense, net$ (9,271) $ (14,374) $ 5,103 (36) % Six Months Ended June 26, June 27, 2021 2020 Change % Change Interest income 67 78$ (11) (14) % Interest expense (23,860) (21,230) (2,630) 12 % Other loss, net (9,676) (14,674) 4,998 (34) % Total other expense, net$ (33,469) $ (35,826) $ 2,357 (7) % Interest income during the three- and six-month periods endedJune 26, 2021 andJune 27, 2020 , respectively, was immaterial. Interest expense decreased by$0.4 million , or 3%, during the three months endedJune 26, 2021 compared to the corresponding period in 2020, primarily due to repayment of the Credit Facility inJanuary 2021 and repayment of the Finance Assistance Agreement inApril 2021 . Interest expense increased by$2.6 million , or 12%, during the six months endedJune 26, 2021 compared to the corresponding period in 2020, primarily due to$2.8 million of increased accretion of debt discount and amortization of debt issuance costs on the 2027 Notes and the 2024 Notes, a$1.0 million of increase from contractual interest on the 2027 Notes, and a$1.3 million nonrecurring increase primarily due to interest credit from a supplier in 2020. This increase was offset by a decrease of$1.4 million primarily due to repayment of the Credit Facility inJanuary 2021 , and a decrease of$0.7 million due to the repayment of the Finance Assistance Agreement inApril 2021 , and a decrease of$0.4 million in other interest related charges. Other gain (loss), net, increased by$4.7 million , or 236%, during the three months endedJune 26, 2021 compared to the corresponding period in 2020, primarily due to a decrease in unrealized foreign exchange losses, primarily driven by the foreign currency exchange rate changes. Other loss, net, increased by$5.0 million , or 34%, during the six months endedJune 26, 2021 compared to the corresponding period in 2020, primarily due to a decrease in unrealized foreign exchange losses, primarily driven by the foreign currency exchange rate changes. Income Tax Benefit/Expense Income taxes for the three- and six-month periods endedJune 26, 2021 represented a tax expense of$3.1 million and$4.1 million on pre-tax losses of$32.5 million and$79.8 million , respectively. This compared to a tax expense of$2.6 million and$3.6 million , on pre-tax losses of$59.0 million and$157.3 million for the three- and six-month periods endedJune 27, 2020 , respectively. Provision for income taxes increased by approximately$0.5 million during the six months endedJune 26, 2021 , compared to the corresponding period in 2020 as a result of additional expenses in foreign jurisdictions. 45 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Six Months Ended June 26, 2021 June 27, 2020 (In thousands) Net cash flow provided by (used in): Operating activities$ 39,934 $ (128,089) Investing activities$ (25,789) $ (19,002) Financing activities$ (100,543) $ 240,459 June 26, 2021 December 26, 2020 (In thousands) Cash$ 219,735 $ 298,014 Restricted cash 13,495 17,369$ 233,230 $ 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 six months endedJune 26, 2021 was$39.9 million compared to$128.1 million net cash used in operating activities for the corresponding period in 2020. Net loss during the six months endedJune 26, 2021 was$83.9 million , which included non-cash charges of$92.5 million such as depreciation, amortization of intangibles, restructuring charges and related costs, amortization of debt discount and debt issuance costs, operating lease expense, and stock-based compensation, compared to a net loss during the three months endedJune 27, 2020 of$160.9 million , which included non-cash charges of$104.6 million . Net cash provided by working capital was$31.4 million during the six months endedJune 26, 2021 . Accounts receivable decreased by$36.3 million due to timing of customer billings and collections. Inventory levels increased by$6.1 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$21.3 million primarily due to timing of tax payments and lower customer contract assets 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 decreased by$3.8 million primarily due to lower, restructuring liabilities, and tax liabilities. Deferred revenue decreased by$14.3 million due to the amortization of maintenance renewals and lower renewals during the period, which are typically contracted on an annual or multi-year basis. Net cash used to fund working capital was$71.7 million during the six months endedJune 27, 2020 . Accounts receivable decreased by$54.0 million due to lower revenue and due to cash collections. Inventory levels decreased by$50.2 million due to lower buffer inventory since we completed our manufacturing integration. Accounts payable decreased by$77.4 million primarily due to timing of payment to suppliers and lower purchases. Prepaid and other assets increased by$27.0 million primarily due to timing of tax payments and increase in customer contract assets. Accrued liabilities and other expenses decreased by$59.9 million primarily due to purchases of shares of our common stock under our ESPP inFebruary 2020 . Deferred revenue decreased by$11.6 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 six months endedJune 26, 2021 was$25.8 million primarily for purchase of property and equipment. Net cash used in investing activities during the six months endedJune 27, 2020 was$19.0 million entirely for purchase of property and equipment. 46 -------------------------------------------------------------------------------- Table of Contents Financing Activities Net cash used in financing activities during the six months endedJune 26, 2021 was$100.5 million compared to net cash provided by financing activities of$240.5 million in the corresponding period of 2020. Financing activities during the three months endedJune 26, 2021 included payments of$77.0 million repayment under the Credit Facility and$24.6 million repayment of third party manufacturing funding (as described below),$3.9 million for term license purchase and$0.8 million for finance lease obligations. The period also included net proceeds of$9.3 million from the issuance of shares of our common stock under the ESPP. These proceeds were offset by the minimum tax withholding of$3.4 million paid on behalf of certain employees for net share settlements of RSUs. Net cash provided by financing activities during the six months endedJune 27, 2020 was$240.5 million . Financing activities during the six months endedJune 27, 2020 included proceeds of proceeds of$194.5 million from issuance of the 2027 Notes and$55.0 million from the Credit Facility (as described below). The period also included net proceeds from the issuance of shares of our common stock under the ESPP. 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 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. OnMarch 9, 2020 , we issued the 2027 Notes, which will mature onMarch 1, 2027 , unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, commencing onSeptember 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 ofJune 26, 2021 , long-term debt, net, included$135.9 million outstanding for the 2027 Notes, which represents the liability component of the$200.0 million principal balance, net of$64.1 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 onMarch 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 ofJune 26, 2021 , contractual obligations related to the 2027 Notes are payments of$2.5 million due for the remainder of 2021,$5.0 million due each year from 2022 through 2026 and$202.5 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. OnAugust 1, 2019 , we entered into the Credit Agreement withWells Fargo Bank , and onDecember 23, 2019 we entered into the Amendment to the Credit Agreement withBMO Harris Bank N.A . andWells 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. OnDecember 23, 2019 , we exercised this option to increase the total commitments under the Credit Facility and 47 -------------------------------------------------------------------------------- Table of Contents 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, onMarch 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. InJanuary 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. InMay 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 inBerlin, 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. InOctober 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. InApril 2021 , we repaid the entire outstanding principal balance and accrued interest of$24.6 million and$1.8 million , respectively. InSeptember 2018 , we issued the 2024 Notes, which will mature onSeptember 1, 2024 , unless earlier repurchased, redeemed or converted. Interest is payable semi-annually in arrears onMarch 1 andSeptember 1 of each year, which commenced onMarch 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 ofJune 26, 2021 , long-term debt, net, included$317.5 million for 2024 Notes which represents the liability component of the$402.5 million principal balance, net of$85.0 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 onSeptember 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 ofJune 26, 2021 , contractual obligations related to the 2024 Notes are payments of$4.3 million 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 ofJune 26, 2021 , we had$219.7 million of cash including$101.3 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 inthe 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. 48 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements As ofJune 26, 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 endedDecember 26, 2020 . 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 endedDecember 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 endedDecember 26, 2020 . There have been no other material changes to our market risk during the six months endedJune 26, 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 theSEC'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 ofJune 26, 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. 49 -------------------------------------------------------------------------------- Table of Contents Changes in Internal Control over Financial Reporting During the three months endedJune 26, 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. 50
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