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EX-32.1 - EXHIBIT 32.1 - Infinera Corpinfn-09292018xexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Infinera Corpinfn-09292018xexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Infinera Corpinfn-09292018xexhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-33486
INFINERA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
77-0560433
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
140 Caspian Court
Sunnyvale, CA
 
94089
(Address of principal executive offices)
 
(Zip Code)
(408) 572-5200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer  x
 
Accelerated filer  o
Non-accelerated filer o
 
Smaller reporting company  o
Emerging growth company  o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of November 1, 2018, 174,986,726 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.



INFINERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED September 29, 2018
INDEX
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 



PART I. FINANCIAL INFORMATION
 

Item 1.
Condensed Consolidated Financial Statements (Unaudited)
INFINERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
 
September 29,
2018
 
December 30,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
416,406

 
$
116,345

Short-term investments
30,480

 
147,596

Accounts receivable, net of allowance for doubtful accounts of $866 in 2018 and $892 in 2017
153,901

 
126,152

Inventory
211,945

 
214,704

Prepaid expenses and other current assets
43,756

 
43,140

Total current assets
856,488

 
647,937

Property, plant and equipment, net
131,923

 
135,942

Intangible assets
66,144

 
92,188

Goodwill
180,986

 
195,615

Long-term investments
850

 
36,129

Other non-current assets
11,007

 
9,859

Total assets
$
1,247,398

 
$
1,117,670

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
83,249

 
$
58,124

Accrued expenses
43,324

 
39,782

Accrued compensation and related benefits
35,738

 
45,751

Short-term debt, net

 
144,928

Accrued warranty
13,475

 
13,670

Deferred revenue
42,724

 
72,421

Total current liabilities
218,510

 
374,676

Long-term debt, net
262,580

 

Accrued warranty, non-current
17,007

 
17,239

Deferred revenue, non-current
15,790

 
22,502

Deferred tax liability
14,977

 
21,609

Other long-term liabilities
14,217

 
16,279

Commitments and contingencies (Note 16)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value
   Authorized shares – 25,000 and no shares issued and outstanding

 

Common stock, $0.001 par value
Authorized shares – 500,000 as of September 29, 2018 and December 30, 2017
 
 
 
Issued and outstanding shares – 153,988 as of September 29, 2018 and 149,471 as of December 30, 2017
154

 
149

Additional paid-in capital
1,547,451

 
1,417,043

Accumulated other comprehensive income (loss)
(19,785
)
 
6,254

Accumulated deficit
(823,503
)
 
(758,081
)
Total stockholders' equity
704,317

 
665,365

Total liabilities and stockholders’ equity
$
1,247,398

 
$
1,117,670

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Revenue:
 
 
 
 
 
 
 
Product
$
167,030

 
$
159,579

 
$
513,947

 
$
449,992

Services
33,383

 
33,001

 
97,374

 
94,931

Total revenue
200,413

 
192,580

 
611,321

 
544,923

Cost of revenue:
 
 
 
 
 
 
 
Cost of product
117,152

 
111,803

 
335,674

 
311,437

Cost of services
13,075

 
12,951

 
38,945

 
36,772

Restructuring and related
7

 

 
50

 

Total cost of revenue
130,234

 
124,754

 
374,669

 
348,209

Gross profit
70,179

 
67,826

 
236,652

 
196,714

Operating expenses:
 
 
 
 
 
 
 
Research and development
50,658

 
56,616

 
165,497

 
169,076

Sales and marketing
26,073

 
27,824

 
86,286

 
86,662

General and administrative
18,415

 
17,634

 
54,616

 
53,556

Restructuring and related
191

 

 
1,708

 

Total operating expenses
95,337

 
102,074

 
308,107

 
309,294

Loss from operations
(25,158
)
 
(34,248
)
 
(71,455
)
 
(112,580
)
Other income (expense), net:
 
 
 
 
 
 
 
Interest income
292

 
857

 
1,818

 
2,470

Interest expense
(2,160
)
 
(3,549
)
 
(8,344
)
 
(10,408
)
Other gain (loss), net
(5,449
)
 
(80
)
 
(3,514
)
 
(462
)
Total other income (expense), net
(7,317
)
 
(2,772
)
 
(10,040
)
 
(8,400
)
Loss before income taxes
(32,475
)
 
(37,020
)
 
(81,495
)
 
(120,980
)
Provision for (benefit from) income taxes
135

 
211

 
(667
)
 
(459
)
Net loss
(32,610
)
 
(37,231
)
 
(80,828
)
 
(120,521
)
Net loss per common share:
 
 
 
 
 
 
 
Basic
$
(0.21
)
 
$
(0.25
)
 
$
(0.53
)
 
$
(0.82
)
Diluted
$
(0.21
)
 
$
(0.25
)
 
$
(0.53
)
 
$
(0.82
)
Weighted average shares used in computing net loss per common share:
 
 
 
 
 
 
 
Basic
153,492

 
148,777

 
152,028

 
147,367

Diluted
153,492

 
148,777

 
152,028

 
147,367

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
 
September 29,
2018
 
September 30,
2017
Net loss
$
(32,610
)
 
$
(37,231
)
 
$
(80,828
)
 
$
(120,521
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gain (loss) on available-for-sale investments
175

 
87

 
274

 
27

Foreign currency translation adjustment
2,069

 
12,614

 
(26,242
)
 
37,257

Tax related to available-for-sale investment
(45
)
 
(11
)
 
(71
)
 
(11
)
Net change in accumulated other comprehensive income (loss)
2,199

 
12,690

 
(26,039
)
 
37,273

Comprehensive loss
$
(30,411
)
 
$
(24,541
)
 
$
(106,867
)
 
$
(83,248
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

5


INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
September 29,
2018
 
September 30,
2017
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(80,828
)
 
$
(120,521
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
50,339

 
49,391

Non-cash restructuring and related credits
(81
)
 

Amortization of debt discount and issuance costs
6,752

 
8,399

Realized gain on sale of non-marketable equity investments
(1,050
)
 

Impairment on non-marketable equity investment
4,260

 

Stock-based compensation expense
34,394

 
35,424

Other loss
214

 
622

Changes in assets and liabilities:
 
 
 
Accounts receivable
(27,728
)
 
15,078

Inventory
(926
)
 
(9,601
)
Prepaid expenses and other assets
294

 
(15,366
)
Accounts payable
26,254

 
25,840

Accrued liabilities and other expenses
(30,754
)
 
(18,757
)
Deferred revenue
(8,669
)
 
8,575

Net cash used in operating activities
(27,529
)
 
(20,916
)
Cash Flows from Investing Activities:
 
 
 
Purchase of available-for-sale investments
(2,986
)
 
(122,249
)
Proceeds from sales of available-for-sale investments
53,039

 
10,531

Proceeds from maturities of investments
98,112

 
111,970

Proceeds from sale of non-marketable equity investment
1,050

 

Purchase of property and equipment
(27,027
)
 
(50,247
)
Net cash provided by (used in) investing activities
122,188

 
(49,995
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of debt, net
391,431

 

Purchase of capped call transactions
(48,880
)
 

Repayment of debt
(150,000
)
 

Acquisition of noncontrolling interest

 
(471
)
Proceeds from issuance of common stock
17,693

 
17,991

Minimum tax withholding paid on behalf of employees for net share settlement
(1,093
)
 
(963
)
Net cash provided by financing activities
209,151

 
16,557

Effect of exchange rate changes on cash and restricted cash
(3,054
)
 
3,855

Net change in cash, cash equivalents and restricted cash
300,756

 
(50,499
)
Cash, cash equivalents and restricted cash at beginning of period
121,486

 
177,580

Cash, cash equivalents and restricted cash at end of period(1)
$
422,242

 
$
127,081

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
3,320

 
$
4,159

Cash paid for interest
$
1,332

 
$
1,317

Supplemental schedule of non-cash investing activities:
 
 
 
Transfer of inventory to fixed assets
$
1,165

 
$
3,110



6


 
 
 

(1)     Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:
 
September 29, 2018
 
September 30, 2017
 
 
 
 
 
(In thousands)
Cash and cash equivalents
$
416,406

 
$
122,042

Short-term restricted cash
402

 
740

Long-term restricted cash
5,434

 
4,299

Total cash, cash equivalents and restricted cash
$
422,242

 
$
127,081


The accompanying notes are an integral part of these condensed consolidated financial statements.

7


INFINERA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
Infinera Corporation (the “Company”) prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
The Company has made certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, inventory valuation, accrued warranty, business combinations, fair value measurement of investments and accounting for income taxes. Other less significant estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of intangible assets, and property, plant and equipment. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s condensed consolidated financial statements will be affected.
The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.
This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended September 29, 2018, two customers individually accounted for 17% and 14% of the Company's total revenue and for the corresponding period in 2017, two customers individually accounted for 16% and 12% of the Company's total revenue. For the nine months ended September 29, 2018, two customers individually accounted for 22% and 14% of the Company's total revenue and for the corresponding period in 2017, two customers individually accounted for 16% and 11% of the Company's total revenue.
There have been no material changes in the Company’s significant accounting policies for the nine months ended September 29, 2018 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017, with the exception of the Company's revenue recognition policy. Effective December 31, 2017, the Company adopted Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)” (“ASC 606”). See Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements for discussion on the impact of the adoption of these standards on the Company's policy for revenue recognition.
The Company adopted Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), during the first quarter of fiscal 2018, using the retrospective transition approach. Restricted cash in the prior period has been included with cash and cash equivalents when reconciling the beginning and ending total amounts on the statement of cash flows for the nine months ended September 30, 2017, to conform to the current period presentation. The adoption of ASU 2016-18 did not have a material impact on the cash flow activity presented on the Company's condensed consolidated statement of cash flows.
2.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act" (“SAB 118”), which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the U.S. Tax Cuts and

8


Jobs Act (the “Tax Act”) was passed in December 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, the Company considers the accounting of the transition tax and deferred tax re-measurements to be incomplete due to the forthcoming guidance and the ongoing analysis of final year-end data and tax positions. The Company expects to complete the analysis within the measurement period in accordance with SAB 118. In March 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SAB 118” and added such SEC guidance to Accounting Standards Codification 740, “Income Taxes, codified under the title: Income Tax Accounting Implications of the Tax Cuts and Jobs Act.”
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements, and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. The Company's adoption of ASU 2017-09 during its first quarter of 2018 had no impact on its condensed consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. The Company adopted ASU 2016-18 during the first quarter of fiscal 2018, using the retrospective transition approach. See the condensed consolidated statements of cash flows for a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts on the condensed consolidated statements of cash flows.
In May 2016, the FASB issued Accounting Standards Update No. 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)” (“ASU 2016-11”), which rescinds various standards codified as part of Topic 605, Revenue Recognition in relation to the future adoption of Topic 606. These rescissions include changes to topics pertaining to revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. The Company adopted ASU 2016-11 during the first quarter of 2018. See Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements for more information.
In May 2014, the FASB issued ASC 606, which creates a single, joint revenue standard that is consistent across all industries and markets for companies that prepare their financial statements in accordance with U.S. GAAP. Under ASC 606, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards update 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which deferred the effective date of ASC 606 by one year with early adoption permitted beginning after December 15, 2016. The updated standard is effective for interim and annual periods beginning after December 15, 2017. In April 2016, the FASB issued Accounting Standards Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued Accounting Standards Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to increase stakeholders' awareness of the proposals and to expedite improvements to ASC 606. ASC 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs - Contracts with Customers,” which requires the deferral of incremental costs of obtaining a contract with a customer. Collectively, the Company refers to ASC 606 and Subtopic 340-40 as “ASC 606.” The Company adopted ASC 606 as of December 31, 2017 using the modified retrospective transition method applied to those contracts that were not completed as of December 31, 2017. See Note 3, “Revenue Recognition” to the Notes to Condensed Consolidated Financial Statements for more information.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which requires equity investments to be measured at fair value with changes in fair value recognized in the income

9


statement and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The Company adopted ASU 2016-01 during its first quarter of 2018 and the adoption did not have a material impact on its condensed consolidated financial statements. See Note 4, “Fair Value Measurements” to the Notes to Condensed Consolidated Financial Statements for more information.
Accounting Pronouncements Not Yet Effective
In August 2018, the FASB issued Accounting Standards Update No. 2018-15 (“ASU 2018-15”), “Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update provides guidance for determining if a cloud computing arrangement is within the scope of internal-use software guidance, and would require capitalization of certain implementation costs. ASU 2018-15 is effective for the Company in its first quarter of 2020, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (“ASU 2018-13”), “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The update eliminates, adds, and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for the Company in its first quarter of 2020 and early adoption is permitted of the entire standard or only the provisions that eliminate or modify disclosure requirements. The Company is currently evaluating the impact the adoption of ASU 2018-13 will have on its consolidated financial statements.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, “Improvements to Non-employee Share-Based Payment Accounting” (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under ASU 2018-07, certain guidance on such payments to non-employees would be aligned with the requirements for share-based payments granted to employees. The guidance will be effective for the Company's first quarter of 2019 and early adoption is permitted. As the Company does not have material non-employee awards, it does not expect the adoption of ASU 2018-07 to have a material impact on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The guidance eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 will be effective for the Company's annual or any interim goodwill impairment tests in its first quarter of fiscal 2020. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This guidance is effective for the Company in its first quarter of fiscal 2019. ASU 2016-02 is required to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”), which provides lessees an additional (and optional) transition method to apply the new leasing standard to all open leases at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating the impact the adoption of ASU 2016-02 and ASU 2018-11 will have on its consolidated financial statements and expects to have increases in the assets and liabilities of its consolidated balance sheets.

10


3.
Revenue Recognition
Effective December 31, 2017, the Company adopted ASC 606, using the modified retrospective method applied to those contracts that were not completed as of December 31, 2017. Results for the reporting periods after December 31, 2017 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605.
The Company recognizes revenue when control of the promised goods or services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company determines revenue recognition by applying the following five-step approach:
identification of the contract, or contracts, with a customer;
identification of the performance obligations in the contract;
determination of the transaction price;
allocation of the transaction price to the performance obligations in the contract; and
recognition of revenue when, or as, the Company satisfies a performance obligation.
Many of the Company's product sales are sold in combination with installation and deployment services along with initial hardware and software support. The Company's product sales are also sold with spares management, on-site hardware replacement services, network operations management, software subscription services, extended hardware warranty and training. Initial software and hardware support services are generally delivered over a one-year period in connection with the initial purchase. Software warranty provides customers with maintenance releases during the warranty support period and hardware warranty provides replacement or repair of equipment that fails to perform in line with specifications. Software subscription services include software warranty and additionally provides customers with rights to receive unspecified software product upgrades released during the support period.
Spares management and on-site hardware replacement services include the replacement of defective units at customer sites in accordance with specified service level agreements. Network operations management includes the day-to-day operation of a customer's network. These services are generally delivered on an annual basis. The Company evaluates each promised good and service in a contract to determine whether it represents a distinct performance obligation or should be accounted for as a combined performance obligation.
Services revenue includes software subscription services, installation and deployment services, spares management, on-site hardware replacement services, network operations management, extended hardware warranty and training. Revenue from software subscription services, spares management, on-site hardware replacement services, network operations management and extended hardware warranty contracts is deferred and is recognized ratably over the contractual support period, which is generally one year, as services are provided over the course of the entire period. Revenue related to training and installation and deployment services is recognized upon completion of the services.
Contracts and customer purchase orders are generally used to determine the existence of an arrangement. In addition, shipping documents and customer acceptances, when applicable, are used to verify delivery and transfer of title. The Company typically satisfies its performance obligations upon shipment or delivery of product depending on the contractual terms. Payment terms to customers generally range from net 30 to 120 days from invoice, which are considered to be standard payment terms. The Company assesses its ability to collect from its customers based primarily on the creditworthiness and past payment history of the customer.
Customer product returns are approved on a case by case basis. Specific reserve provisions are made based upon a specific review of all the approved product returns where the customer has yet to return the products to generate the related sales return credit at the end of a period. Estimated sales returns are recorded as a reduction to revenue.
For sales to resellers, the same revenue recognition criteria apply. It is the Company’s practice to identify an end-user prior to shipment to a reseller. The Company does not offer rights of return or price protection to its resellers.

11


The Company reports revenue net of any required taxes collected from customers and remitted to government authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.
ASC 606 Adoption
The Company recorded a net reduction to the opening balance of its accumulated deficit of $15.4 million as of December 31, 2017 due to the cumulative impact of adopting ASC 606, with the impact primarily related to its services revenue. The impact to revenue for the three and nine months ended September 29, 2018 was an increase of $0.9 million and a decrease of $0.6 million, respectively, as a result of applying ASC 606. The details of the significant changes and quantitative impact of the Company’s adoption of ASC 606 are set out below.
Customer Purchase Commitments
The Company sells software licenses that provide customers the ability to purchase incremental bandwidth capacity on an already deployed piece of hardware. Infinera Instant Bandwidth (“IB”) enabled systems generally include a specific initial capacity and incremental capacity can be added by the purchase of IB licenses. IB licenses are considered distinct performance obligations because customers can provision additional transmission capacity on demand without the deployment of any incremental equipment.
Some contracts commit the customer to purchase incremental IB licenses within a specified time frame from the initial shipment of the IB enabled hardware. The time frame varies by customer and generally ranges between 12 to 24 months. If the customer does not purchase the additional capacity within the time frame as stated in the contract, the Company has the right to deliver and invoice such IB licenses to the customer. Under ASC 605, the additional incremental licenses were not included as an element of the initial arrangement because fees for the future purchase were not fixed. Under ASC 606, future committed licenses are considered to be additional performance obligations when a minimum purchase obligation is present, as evidenced by enforceable rights and obligations. As such, the Company is required to estimate the variable consideration for future IB licenses as part of determining the contract transaction price.
Contract Termination Rights
The contract term is determined on the basis of the period over which the parties to the contract have present enforceable rights and obligations. Certain customer contracts include a termination for convenience clause that allows the customer to terminate services without penalty, upon advance notification. For such contracts, the service duration is limited to the non-cancellable portion of the contract.
Variable Consideration
The consideration associated with customer contracts is generally fixed. Variable consideration includes discounts, rebates, refunds, credits, incentives, penalties, or other similar items. The amount of consideration that can vary is not a substantial portion of total consideration.
Variable consideration estimates are re-assessed at each reporting period until a final outcome is determined. The changes to the original transaction price due to a change in estimated variable consideration will be applied on a retrospective basis, with the adjustment recorded in the period in which the change occurs. Changes to variable consideration will be tracked and material changes disclosed.
Stand-alone Selling Price
Stand-alone selling price is the price at which an entity would sell a good or service on a stand-alone (or separate) basis at contract inception. Under the model, the observable price of a good or service sold separately provides the best evidence of stand-alone selling price. However, in certain situations, stand-alone selling prices will not be readily observable and the entity must estimate the stand-alone selling price.
When allocating on a relative stand-alone selling price basis, any discount provided in the contract is generally allocated proportionately to all of the performance obligations in the contract.
The majority of products and services offered by the Company have readily observable selling prices. For products and services that do not, the Company generally estimates stand-alone selling price using the market assessment approach based on expected selling price and adjusts those prices as necessary to reflect the Company’s

12


costs and margins. As part of its stand-alone selling price policy, the Company reviews product pricing on a periodic basis to identify any significant changes and revise its expected selling price assumptions as appropriate.
Shipping and Handling
The Company treats shipping and handling activities as costs to fulfill the Company's promise to transfer products. Shipping and handling fees billed to customers are recorded as a reduction to cost of product.
Capitalization of Costs to Obtain a Contract
The Company has assessed the treatment of costs to obtain or fulfill a contract with a customer. Sales commissions have historically been expensed as incurred. Under ASC 606, the Company capitalizes sales commissions related to multi-year service contracts and amortizes the asset over the period of benefit, which is the service period. Sales commissions paid on contract renewals, including service contract renewals, is commensurate with the sales commissions paid on the initial contracts.
The Company elected ASC 606's practical expedient to expense sales commissions as incurred when the amortization period of the related contract term is one year or less. These costs are recorded as sales and marketing expense and included on the balance sheet as accrued compensation and related benefits until paid.
As of September 29, 2018, the ending balance of the Company’s capitalized costs to obtain a contract was $0.4 million. The Company's amortization expense was not material for the three and nine months ended September 29, 2018.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by revenue source (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017(1)
 
September 29, 2018
 
September 30, 2017(1)
Product
$
167,030

 
$
159,579

 
$
513,947

 
$
449,992

Services
33,383

 
33,001

 
97,374

 
94,931

Total revenue
$
200,413

 
$
192,580

 
$
611,321

 
$
544,923


The Company sells its products directly to customers who are predominantly service providers and to channel partners that sell on our behalf. The following tables present the Company's revenue disaggregated by geography, based on the shipping address of the customer and by sales channel (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017(1)
 
September 29, 2018
 
September 30, 2017(1)
United States
$
98,097

 
$
113,617

 
$
348,109

 
$
325,593

Other Americas
6,775

 
5,636

 
16,867

 
14,642

Europe, Middle East and Africa
59,131

 
58,391

 
180,492

 
163,714

Asia Pacific
36,410

 
14,936

 
65,853

 
40,974

Total revenue
$
200,413

 
$
192,580

 
$
611,321

 
$
544,923

 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017(1)
 
September 29, 2018
 
September 30, 2017(1)
Direct
$
172,918

 
$
179,300

 
$
557,004

 
$
512,072

Indirect
27,495

 
13,280

 
54,317

 
32,851

Total revenue
$
200,413

 
$
192,580

 
$
611,321

 
$
544,923

 
 
 
(1)
Prior period amounts have not been adjusted under the modified retrospective method.

13


Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
 
September 29, 2018
 
At Adoption
Accounts receivable, net
$
153,901

 
$
135,245

Contract assets
$
6,469

 
$
2,825

Deferred revenue
$
58,516

 
$
75,458

Revenue recognized for the nine months ended September 29, 2018 that was included in the deferred revenue balance at the beginning of the reporting period was $35.2 million. Changes in the contract asset and liability balances during the three and nine months ended September 29, 2018 were not materially impacted by other factors.
Transaction Price Allocated to the Remaining Performance Obligation
The Company’s remaining performance obligations represent the transaction price allocated to performance obligations that are unsatisfied or partially satisfied, consisting of deferred revenue and backlog. The Company’s backlog represents purchase orders received from customers for future product shipments and services. The Company’s backlog is subject to future events that could cause the amount or timing of the related revenue to change, and, in certain cases, may be canceled without penalty. Orders in backlog may be fulfilled several quarters following receipt or may relate to multi-year support service obligations.
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially satisfied) at the end of the reporting period (in thousands):
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Revenue expected to be recognized in the future as of September 29, 2018
$
96,246

 
$
56,853

 
$
18,278

 
$
5,056

 
$
2,536

 
$
2,300

 
$
181,269

Impacts on Financial Statements
The following tables summarize the impact of adopting ASC 606 on the Company's condensed consolidated statement of operations for the three and nine months ended September 29, 2018 and the Company's condensed consolidated balance sheet as of December 31, 2017 (in thousands):
 
Three Months Ended September 29, 2018
 
As Reported
 
Adjustments
 
Balances Without Adoption of ASC 606
Income Statement
 
 
 
 
 
Revenue
 
 
 
 
 
Product
$
167,030

 
$
(1,845
)
 
$
165,185

Services
33,383

 
900

 
34,283

 
$
200,413

 
$
(945
)
 
$
199,468

Costs and expenses
 
 
 
 
 
Cost of revenue
$
130,234

 
$
1,356

 
$
131,590

Net loss
$
(32,610
)
 
$
(2,301
)
 
$
(34,911
)
Net loss per share - basic and diluted
$
(0.21
)
 
$
(0.02
)
 
$
(0.23
)

14


 
Nine Months Ended September 29, 2018
 
As Reported
 
Adjustments
 
Balances Without Adoption of ASC 606
Income Statement
 
 
 
 
 
Revenue
 
 
 
 
 
Product
$
513,947

 
$
(2,740
)
 
$
511,207

Services
97,374

 
3,380

 
100,754

 
$
611,321

 
$
640

 
$
611,961

Costs and expenses
 
 
 
 
 
Cost of revenue
$
374,669

 
$
2,596

 
$
377,265

Net loss
$
(80,828
)
 
$
(1,956
)
 
$
(82,784
)
Net loss per share - basic and diluted
$
(0.53
)
 
$
(0.01
)
 
$
(0.54
)
 
Balance at December 30, 2017
 
Adjustments due to ASC 606
 
As Adjusted Balance at December 31, 2017
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Accounts receivable, net
$
126,152

 
$
9,093

 
$
135,245

Inventory
$
214,704

 
$
(239
)
 
$
214,465

Prepaid expenses and other assets
$
43,339

 
$
2,731

 
$
46,070

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accrued expenses
$
39,782

 
$
15,645

 
$
55,427

Deferred revenue
$
94,923

 
$
(19,465
)
 
$
75,458

 
 
 
 
 
 
Equity
 
 
 
 
 
Accumulated deficit
$
(758,081
)
 
$
15,406

 
$
(742,675
)
4.
Fair Value Measurements
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
Level 1
 
 
Quoted prices in active markets for identical assets or liabilities.
 
 
 
 
 
Level 2
 
 
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
 
 
 
Level 3
 
 
Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
The Company measures its cash equivalents, foreign currency exchange forward contracts and marketable debt securities at fair value and classifies its investments in accordance with the fair value hierarchy. The

15


Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.
The Company classifies its certificates of deposit, commercial paper, U.S. agency notes, corporate bonds and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:
Certificates of Deposit
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data.
Commercial Paper
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par.
U.S. Agency Notes
The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.
Corporate Bonds
The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. If sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end.
Foreign Currency Exchange Forward Contracts
As discussed in Note 5, “Derivative Instruments” to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.

16


The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands): 
 
As of September 29, 2018
 
As of December 30, 2017
 
Fair Value Measured Using
 
Fair Value Measured Using
 
Level 1      
 
Level 2      
 
Total        
 
Level 1      
 
Level 2      
 
Total        
Assets
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
50

 
$

 
$
50

 
$
20,371

 
$

 
$
20,371

Certificates of deposit

 

 

 

 
240

 
240

Commercial paper

 

 

 

 
26,912

 
26,912

Corporate bonds

 
25,490

 
25,490

 

 
118,558

 
118,558

U.S. agency notes

 
2,994

 
2,994

 

 
5,480

 
5,480

U.S. treasuries
1,996

 

 
1,996

 
35,408

 

 
35,408

Foreign currency exchange forward contracts

 
5

 
5

 

 

 

Total assets
$
2,046

 
$
28,489

 
$
30,535

 
$
55,779

 
$
151,190

 
$
206,969

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$

 
$

 
$

 
$

 
$
(204
)
 
$
(204
)
During the three and nine months ended September 29, 2018, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of September 29, 2018 and December 30, 2017, none of the Company’s existing securities were classified as Level 3 securities. The significant reduction in total assets in the above table relates to various investments that were sold in anticipation of the repayment of the Company's 2018 Notes in June 2018, as discussed in Note 11, “Convertible Senior Notes,” to the Notes to Condensed Consolidated Financial Statements.
The Company classifies the following assets and liabilities within Level 3 of the fair value hierarchy and applies fair value accounting on a nonrecurring basis when impairment indicators exist or upon the existence of observable fair values:
Equity Investment
In 2016, the Company invested $7.0 million in a privately-held company. As of September 29, 2018, and December 30, 2017, the Company's equity investment balance was $0.9 million and $5.1 million, respectively. As of December 30, 2017, the Company determined that its non-marketable equity securities were impaired, resulting in an impairment charge of $1.9 million to adjust the carrying value to estimated fair value. During the three months ended September 29, 2018, the Company recorded an additional impairment charge of $4.3 million to adjust the carrying value to estimated fair value.
               Beginning the first quarter of 2018, the Company adopted ASU 2016-01, which requires equity investments to be measured at fair value with changes in fair value recognized in net income. As a result of adopting this new standard, the Company's non-marketable equity securities formerly classified as cost-method investments are measured and recorded using the measurement alternative. Equity securities measured and recorded using the measurement alternative are recorded at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Adjustments resulting from impairments and qualifying observable price changes are recorded in other income (expense), net, in the accompanying condensed consolidated statements of operations. No initial adoption adjustment was recorded for these instruments since the standard was required to be applied prospectively for securities measured using the measurement alternative.
The Company regularly evaluates the carrying value of its equity investment for impairment. When a qualitative assessment indicates that impairment exists, the Company measures the investment at fair value.

17


Facilities-related Charges
In the fourth quarter of 2017, the Company implemented a plan to restructure its worldwide operations (the “2017 Restructuring Plan”). As a result of the 2017 Restructuring Plan, the Company calculated the fair value of its facilities-related charges of $7.3 million, based on estimated future discounted cash flows and unobservable inputs, which included the amount and timing of estimated sublease rental receipts that the Company could reasonably obtain over the remaining lease term and the discount rate. During the first half of 2018, the Company revised the estimates to its facilities-related accruals. See Note 8, “Restructuring and Related Costs” to the Notes to Condensed Consolidated Financial Statements for more information.
Cash, cash equivalents and investments were as follows (in thousands): 
 
September 29, 2018
 
Adjusted
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Cash
$
416,356

 
$

 
$

 
$
416,356

Money market funds
50

 

 

 
50

Total cash and cash equivalents
$
416,406

 
$

 
$

 
$
416,406

Corporate bonds
25,624

 

 
(134
)
 
25,490

U.S. agency notes
3,000

 

 
(6
)
 
2,994

U.S. treasuries
2,000

 

 
(4
)
 
1,996

Total short-term investments
$
30,624

 
$

 
$
(144
)
 
$
30,480

Total cash, cash equivalents and investments
$
447,030

 
$

 
$
(144
)
 
$
446,886


 
December 30, 2017
 
Adjusted
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Cash
$
87,991

 
$

 
$

 
$
87,991

Money market funds
20,371

 

 

 
20,371

U.S. treasuries
7,984

 

 
(1
)
 
7,983

Total cash and cash equivalents
$
116,346

 
$

 
$
(1
)
 
$
116,345

Certificates of deposit
240

 

 

 
240

Commercial paper
26,924

 

 
(12
)
 
26,912

Corporate bonds
90,685

 

 
(155
)
 
90,530

U.S. agency notes
2,500

 

 
(11
)
 
2,489

U.S. treasuries
27,495

 

 
(70
)
 
27,425

Total short-term investments
$
147,844

 
$

 
$
(248
)
 
$
147,596

Corporate bonds
28,186

 

 
(158
)
 
28,028

U.S. agency notes
3,002

 

 
(11
)
 
2,991

Total long-term investments
$
31,188

 
$

 
$
(169
)
 
$
31,019

Total cash, cash equivalents and investments
$
295,378

 
$

 
$
(418
)
 
$
294,960

 As of September 29, 2018, the Company’s available-for-sale investments have contractual maturity terms of up to 12 months. Gross realized gains and losses on investments were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
As of September 29, 2018, the Company had $446.9 million of cash, cash equivalents and short-term investments, including $39.3 million of cash and cash equivalents held by its foreign subsidiaries. The Company's cash in foreign locations is used for operational and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States. 
5.
Derivative Instruments
Foreign Currency Exchange Forward Contracts

18


The Company transacts business in various foreign currencies and has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency exchange forward contracts, primarily short term in nature.
The Company periodically enters into foreign currency exchange forward contracts to manage its exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated receivables and restricted cash balances. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk.
The Company also enters into foreign currency exchange forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and Swedish kronor (“SEK”). The contracts are settled at maturity and at rates agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are recorded to the consolidated statement of operations line item, in the current period, to which the item that is being economically hedged is recorded.
As of September 29, 2018, the Company posted $0.9 million of collateral on its derivative instruments to cover potential credit risk exposure. This amount is classified as other long-term restricted cash on the accompanying condensed consolidated balance sheets.
For the three months ended September 29, 2018 and September 30, 2017, the before-tax effect of the foreign currency exchange forward contracts was a gain of $0.1 million and a loss $1.2 million, respectively, and for the nine months ended September 29, 2018 and September 30, 2017, the before-tax effect of the foreign currency exchange forward contracts was a gain of $0.6 million and a loss of $2.9 million, respectively. In each of these periods, the impact of the gross gains and losses was offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts.
As of September 29, 2018, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes and accordingly, changes in the fair value are recorded in the accompanying condensed consolidated statements of operations. These contracts were entered into with one high-quality institution and the Company consistently monitors the creditworthiness of the counterparties.
The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):
 
As of September 29, 2018
 
As of December 30, 2017
 
Gross Notional(1)  
 
Prepaid Expense and Other Assets
 
Gross Notional(1)  
 
Other Accrued Liabilities
Foreign currency exchange forward contracts
 
 
 
 
 
 
 
Related to euro denominated receivables
$
12,652

 
$
5

 
$
24,794

 
$
(202
)
Related to euro denominated restricted cash
$
244

 

 
$
252

 
(2
)
 


 
$
5

 


 
$
(204
)
 
 
 
(1) 
Represents the face amounts of forward contracts that were outstanding as of the end of the period noted.
6.
Goodwill and Intangible Assets
Goodwill
Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.

19


The following table presents details of the Company’s goodwill during the nine months ended September 29, 2018 (in thousands):
Balance as of December 30, 2017
$
195,615

Foreign currency translation adjustments
(14,629
)
Balance as of September 29, 2018
$
180,986

The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK. To date, the Company has zero accumulated impairment loss on goodwill.
Intangible Assets
The following tables present details of the Company’s intangible assets as of September 29, 2018 and December 30, 2017 (in thousands, except for weighted-average):
 
September 29, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted-Average Remaining Useful Life (In Years)
Intangible assets with finite lives:


 


 


 
 
Customer relationships
$
47,229

 
$
(18,311
)
 
$
28,918

 
4.9
Developed technology
96,871

 
(59,645
)
 
37,226

 
2.0
Total intangible assets
$
144,100

 
$
(77,956
)
 
$
66,144

 
3.3
 
December 30, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
 
 
 
 
 
 
 
Customer relationships
$
51,050

 
$
(15,007
)
 
$
36,043

 
5.6
Developed technology
104,708

 
(48,563
)
 
56,145

 
2.7
Total intangible assets
$
155,758

 
$
(63,570
)
 
$
92,188

 
3.9
The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK. Amortization expense was $6.3 million and $19.7 million for the three and nine months ended September 29, 2018, respectively, and was $7.0 million and $19.9 million, respectively, for the corresponding periods in 2017.
Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories. During 2017, the Company recorded an impairment charge to research and development expenses of $0.3 million for certain intangible assets, which the Company has determined that the carrying value will not be recoverable. During the first quarter of 2017, the Company transferred $0.3 million of its in-process technology to developed technology, which is being amortized over a useful life of five years.
The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of September 29, 2018 (in thousands):
 
 
 
Fiscal Years
 
Total
 
Remainder of 2018
 
2019
 
2020
 
2021
 
2022
 
2023 and Thereafter
Total future amortization expense
$
66,144

 
$
6,381

 
$
24,950

 
$
18,207

 
$
6,656

 
$
6,078

 
$
3,872

7.
Balance Sheet Details
Restricted Cash
The Company’s restricted cash balance is primarily comprised of certificates of deposit and money market funds, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts primarily

20


collateralize the Company’s issuances of standby letters of credit and bank guarantees. Additionally, the Company's restricted cash balance includes amounts pledged as collateral on its derivative instruments.
The following table provides details of selected balance sheet items (in thousands):
 
September 29, 2018
 
December 30, 2017
Inventory
 
 
 
Raw materials
$
33,627

 
$
27,568

Work in process
56,401

 
59,662

Finished goods
121,917

 
127,474

Total inventory
$
211,945

 
$
214,704

Property, plant and equipment, net
 
 
 
Computer hardware
$
14,887

 
$
13,881

Computer software(1)
32,844

 
32,521

Laboratory and manufacturing equipment
263,137

 
246,380

Land and building
12,352

 
12,347

Furniture and fixtures
2,543

 
2,474

Leasehold and building improvements
43,128

 
43,475

Construction in progress
34,688

 
34,816

Subtotal
$
403,579

 
$
385,894

Less accumulated depreciation and amortization
(271,656
)
 
(249,952
)
Total property, plant and equipment, net
$
131,923

 
$
135,942

Accrued expenses
 
 
 
Loss contingency related to non-cancelable purchase commitments
$
7,601

 
$
6,379

Professional and other consulting fees
7,203

 
5,305

Taxes payable
3,668

 
3,707

Restructuring
2,887

 
5,490

Right of return
7,514

 

Other accrued expenses
14,451

 
18,901

Total accrued expenses
$
43,324

 
$
39,782

 
 
 
(1) 
Included in computer software at September 29, 2018 and December 30, 2017 were $13.1 million and $11.4 million, respectively, related to enterprise resource planning (ERP) systems that the Company implemented. The unamortized ERP costs at September 29, 2018 and December 30, 2017 were $4.4 million and $4.7 million, respectively.
8.
Restructuring and Related Costs
In the fourth quarter of 2017, the Company implemented the 2017 Restructuring Plan in order to reduce expenses and establish a more cost-effective structure that better aligns the Company's operations with its long-term strategies.
The following table presents restructuring and related costs (credits) included in cost of revenue and operating expenses in the accompanying consolidated statements of operations under the 2017 Restructuring Plan (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 29, 2018
 
Cost of Revenue
 
Operating Expenses
 
Cost of Revenue
 
Operating Expenses
Severance and related expenses
$
7

 
$
28

 
$
50

 
$
1,873

Facilities

 
163

 

 
(874
)
Asset impairment

 

 

 
(74
)
License impairment

 

 

 
783

Total
$
7

 
$
191

 
$
50

 
$
1,708


21


Restructuring liabilities are reported within accrued expenses and other long-term liabilities in the accompanying consolidated balance sheets (in thousands):
 
 
December 30, 2017
 
Charges (Credits)
 
Cash
 
Non-cash Settlements and Other
 
September 29, 2018
 
 
Severance and related expenses
$
3,672

 
$
1,923

 
$
(4,529
)
 
$
(28
)
 
$
1,038

 
Facilities
6,947

 
(874
)
 
(1,388
)
 
(40
)
 
4,645

 
Asset impairment

 
(74
)
 

 
74

 

 
License impairment

 
783

 

 
(342
)
 
441

 
Total
$
10,619

 
$
1,758

 
$
(5,917
)
 
$
(336
)
 
$
6,124

During the first half of 2018, the Company revised its estimates related to its facilities closures due to the sublease of two restructured facilities and also recorded severance costs for additional impacted employees. Additionally, the Company recorded an impairment of $0.8 million related to term license agreements that were determined to have no future use. The Company expects the payments related to these term license agreements to be fully paid by the third quarter of 2019. As of September 29, 2018, the Company's restructuring liability was comprised of $4.6 million related to facility closures, with leases through January 2022, and $1.0 million of severance and related expenses, which are expected to be substantially paid by the second quarter of 2019.
9.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes certain changes in equity that are excluded from net loss. The following table sets forth the changes in accumulated other comprehensive income (loss) by component for the nine months ended September 29, 2018 (in thousands): 
 
 
Unrealized Loss on Other Available-for-Sale Securities
 
Foreign Currency Translation     
 
Accumulated Tax Effect
 
Total        
Balance at December 30, 2017
 
$
(418
)
 
$
7,551

 
$
(879
)
 
$
6,254

Net current-period other comprehensive loss
 
274

 
(26,242
)
 
(71
)
 
(26,039
)
Balance at September 29, 2018
 
$
(144
)
 
$
(18,691
)
 
$
(950
)
 
$
(19,785
)
10.
Basic and Diluted Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed release of outstanding restricted stock units (“RSUs”) and performance stock units (“PSUs”), and assumed issuance of common stock under the Company's Employee Stock Purchase Plan (“ESPP”) using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of $402.5 million in aggregate principal amount of its 2.125% convertible senior notes due September 1, 2024 (the “2024 Notes”) from the conversion spread (as further discussed in Note 11, “Convertible Senior Notes” to the Notes to Condensed Consolidated Financial Statements), and $150.0 million in aggregate principal amount of its 1.75% convertible senior notes due June 1, 2018 (the “2018 Notes”) from the conversion spread (as further discussed in Note 11, “Convertible Senior Notes” to the Notes to Condensed Consolidated Financial Statements disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017). The Company would include the dilutive effects of the 2024 Notes in the calculation of diluted net income per common share if the average market price is above the conversion price. Upon conversion of the 2024 Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the 2024 Notes being converted, therefore, only the conversion spread relating to the 2024 Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive. The Company includes the common shares underlying PSUs in the calculation of diluted net income per common share only when they become contingently issuable.

22


The following table sets forth the computation of net loss per common share – basic and diluted (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Net loss
$
(32,610
)
 
$
(37,231
)
 
$
(80,828
)
 
$
(120,521
)
Weighted average common shares outstanding - basic and diluted
153,492

 
148,777

 
152,028

 
147,367

Net loss per common share - basic and diluted
$
(0.21
)
 
$
(0.25
)
 
$
(0.53
)
 
$
(0.82
)
The Company incurred net losses during the three and nine months ended September 29, 2018 and September 30, 2017, and as a result, potential common shares from stock options, RSUs, PSUs and the assumed release of outstanding shares under the ESPP were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive. Additionally, due to the net loss position during these periods, the Company excluded the potential shares issuable upon conversion of the 2024 Notes and 2018 Notes in the calculation of diluted earnings per share, s their inclusion would have been anti-dilutive.
The following sets forth the potentially dilutive shares excluded from the computation of the diluted net loss per share because their effect was anti-dilutive (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Stock options
1,115

 
1,406

 
1,140

 
1,482

RSUs
7,406

 
6,359

 
8,141

 
6,877

PSUs
1,219

 
1,434

 
1,336

 
1,437

ESPP shares
1,513

 
1,395

 
1,253

 
1,080

Total
11,253

 
10,594

 
11,870

 
10,876

11.
Convertible Senior Notes
2.125% Convertible Senior Notes due September 1, 2024
In September 2018, the Company issued the 2024 Notes due on September 1, 2024, unless earlier repurchased, redeemed or converted. The 2024 Notes are governed by a base indenture dated as of September 11, 2018 and a first supplemental indenture dated as of September 11, 2018 (together, the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The 2024 Notes are unsecured, and the Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of the Company's other securities by the Company.
Interest is payable semi-annually in arrears on March 1 and September 1 of each year, commencing March 1, 2019. The net proceeds to the Company were approximately $391.4 million, of which approximately $48.9 million was used to pay the cost of the capped call transactions with certain financial institutions (“Capped Calls”). The Company also used a portion of the remaining net proceeds to fund the cash portion of the purchase price of the Acquisition (as defined below in Note 17, “Subsequent Event” to the Notes to Condensed Consolidated Financial Statements), including fees and expenses relating thereto, and intends to use the remaining net proceeds for general corporate purposes.
The Capped Calls have an initial strike price of $9.87 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2024 Notes. The Capped Calls have initial cap prices of $15.19 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 40.8 million shares of common stock. The capped call transactions are expected generally to reduce or offset potential dilution to the Company's common stock upon any conversion of the 2024 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2024 Notes, as the case may be, with such reduction and/or offset subject to a cap. The Capped Calls expire on various dates between July 5, 2024 and August 29, 2024. The Capped Calls were recorded as a reduction of the Company’s stockholders' equity in the accompanying condensed consolidated balance sheets.
Upon conversion, it is the Company's 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, the Company intends

23


to pay or deliver, as the case may be, either cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 101.2812 shares of common stock per $1,000 principal amount of 2024 Notes, subject to anti-dilution adjustments, which is equivalent to a conversion price of approximately $9.87 per share of common stock.
Throughout the term of the 2024 Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the 2024 Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a 2024 Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Prior to June 1, 2024, holders may convert their 2024 Notes under the following circumstances:

during any fiscal quarter commencing after the fiscal quarter ended on December 29, 2018 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

if the Company calls the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date;

upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or

at any time on or after June 1, 2024 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances.
If the Company undergoes a fundamental change as defined in the Indenture governing the 2024 Notes, holders may require the Company to repurchase for cash all or any portion of their 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company may, in certain circumstances, be required to increase the conversion rate by a number of additional shares for a holder that elects to convert its 2024 Notes in connection with such make-whole fundamental change.

The net carrying amounts of the debt obligation were as follows (in thousands):
 
September 29, 2018
Principal
$
402,500

Unamortized discount (1)
(131,401
)
Unamortized issuance cost (1)
(8,519
)
Net carrying amount
$
262,580

 
 
 
(1) 
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the 2024 Notes, which is approximately 72 months.

As of September 29, 2018, the carrying amount of the equity component of the 2024 Notes was $128.7 million.
In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component

24


from the par value of the 2024 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (“debt discount”) is amortized to interest expense over the term of the 2024 Notes.
The Company allocated the total issuance costs incurred to the liability and equity components of the 2024 Notes based on their relative values. Issuance costs attributable to the liability component were recorded as a reduction to the liability portion of the Notes and will be amortized as interest expense over the term of the 2024 Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity.
The Company recorded a deferred tax liability of $30.9 million in connection with the issuance of the 2024 Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to stockholders' equity.
The Company determined that the embedded conversion option in the 2024 Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.
The following table sets forth total interest expense recognized related to the 2024 Notes (in thousands): 
 
Three and Nine Months Ended
 
September 29, 2018
Contractual interest expense
$
475

Amortization of debt issuance costs
102

Amortization of debt discount
1,578

Total interest expense
$
2,155

For the three months ended September 29, 2018, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.07%, to interest expense over the term of the 2024 Notes.
As of September 29, 2018, the fair value of the 2024 Notes was $403.5 million. The fair value was determined based on the quoted bid price of the 2024 Notes in an over-the-counter market on September 28, 2018. The 2024 Notes are classified as Level 2 of the fair value hierarchy.
Based on the closing price of the Company’s common stock of $7.30 on September 28, 2018, the if-converted value of the Notes did not exceed their principal amount.

1.75% Convertible Senior Notes due June 1, 2018
In May 2013, the Company issued the 2018 Notes, which matured on June 1, 2018. Upon maturity of the 2018 Notes, the Company repaid in full all $150.0 million in aggregate principal amount and the final coupon interest of $1.3 million.
The net carrying amount of the debt obligation as of December 30, 2017 was as follows (in thousands):

25


Principal
$
150,000

Unamortized discount
(4,670
)
Unamortized issuance cost
(402
)
Net carrying amount
$
144,928


As of December 30, 2017, the carrying amount of the equity component of the 2018 Notes was $43.3 million.
The following table sets forth total interest expense recognized related to the 2018 Notes (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Contractual interest expense
$

 
$
656

 
$
1,094

 
$
1,969

Amortization of debt issuance costs

 
228

 
402

 
665

Amortization of debt discount

 
2,643

 
4,671

 
7,734

Total interest expense
$

 
$
3,527

 
$
6,167

 
$
10,368

The coupon rate was 1.75%. For the nine months ended September 29, 2018 and the three and nine months ended September 30, 2017, the debt discount and debt issuance costs were amortized, using an annual effective interest rate of 10.23%, to interest expense over the term of the 2018 Notes.
12.
Stockholders’ Equity
Stock-based Compensation Plans
The Company has stock-based compensation plans pursuant to which the Company has granted stock options, RSUs and PSUs. The Company also has an ESPP for all eligible employees.
In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan (“2016 Plan”) and the Company's stockholders approved the 2016 Plan in May 2016. In May 2018, the Company's stockholders approved an amendment to the 2016 Plan to increase the number of shares authorized for issuance under the 2016 Plan by 1.5 million shares. As of September 29, 2018, the Company has reserved a total of 15.4 million shares of common stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the Company due to failure to vest. The 2016 Plan has a maximum term of 10 years from the date of adoption, or it can be earlier terminated by the Company's board of directors. The 2007 Plan was canceled; however, it continues to govern outstanding grants under the 2007 Plan.
The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data): 
 
Number of Stock
Options
 
Weighted-Average
Exercise
Price
  Per Share  
 
  Aggregate  
Intrinsic
Value
Outstanding at December 30, 2017
1,397

 
$
8.11

 
$
1

Stock options granted

 
$

 
 
Stock options exercised
(229
)
 
$
7.43

 
$
496

Stock options canceled
(53
)
 
$
11.57

 


Outstanding at September 29, 2018
1,115

 
$
8.09

 
$
53

Exercisable at September 29, 2018
1,115

 
$
8.09

 
$
53

 

26


 
Number of
Restricted
Stock Units
 
Weighted-
Average
 Grant Date 
Fair Value
Per Share
 
  Aggregate  
Intrinsic
Value
Outstanding at December 30, 2017
6,791

 
$
11.55

 
$
42,988

RSUs granted
3,524

 
$
10.84

 


RSUs released
(2,174
)
 
$
13.06

 
$
24,232

RSUs canceled
(735
)
 
$
11.06

 


Outstanding at September 29, 2018
7,406

 
$
10.81

 
$
54,063

 
 
Number of
Performance
Stock Units
 
Weighted-
Average
 Grant Date 
Fair Value
Per Share
 
  Aggregate  
Intrinsic
Value
Outstanding at December 30, 2017
1,367

 
$
16.28

 
$
8,651

PSUs granted
505

 
$
15.87

 

PSUs released
(28
)
 
$
15.93

 
$
273

PSUs canceled
(625
)
 
$
16.01

 

Outstanding at September 29, 2018
1,219

 
$
16.25

 
$
8,901

Expected to vest at September 29, 2018
863

 

 
$
6,301


The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $7.30 at September 28, 2018 (the last trading day of the fiscal quarter) and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price of the underlying stock options.
The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of $7.30 at Septemer 28, 2018 (the last trading day of the fiscal quarter). The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.

The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of September 29, 2018. These costs are expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted-average period):
 
Unrecognized
Compensation
Expense, Net
 
Weighted-
Average Period
(in years)
RSUs
$
64,016

 
2.7
PSUs
$
9,172

 
1.5

27


Employee Stock Options
The Company did not grant any stock options during the three and nine months ended September 29, 2018. Amortization of stock-based compensation related to stock options in the three and nine months ended September 29, 2018 and the corresponding periods in 2017 was insignificant.
Employee Stock Purchase Plan
The fair value of the shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):
 
Three Months Ended
 
Nine Months Ended
Employee Stock Purchase Plan
September 29, 2018
 
September 30, 2017
 
September 29, 2018
 
September 30, 2017
Volatility
48%
 
47%
 
48% - 62%
 
47% - 51%
Risk-free interest rate
2.31%
 
1.16%
 
1.90% - 2.31%
 
0.81% - 1.16%
Expected life
0.5 years
 
0.5 years
 
0.5 years
 
0.5 years
Estimated fair value
$2.47
 
$2.44
 
$2.47 - $3.13
 
$2.44 - $3.46
Total stock-based compensation expense
$1,477
 
$1,502
 
$4,369
 
$4,575
Restricted Stock Units
During the three and nine months ended September 29, 2018, the Company granted RSUs to employees and members of the Company's board of directors to receive 0.2 million shares and 3.5 million shares of the Company’s common stock, respectively. All RSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date. The Company accounted for the fair value of the RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of stock-based compensation related to RSUs in the three and nine months ended September 29, 2018 was approximately $7.3 million and $22.7 million, respectively, and was $7.9 million and $24.0 million in the corresponding periods of 2017, respectively.
Performance Stock Units
Pursuant to the 2007 Plan and the 2016 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and other employees. All PSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date and if the performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.
PSUs granted to the Company’s executive officers and senior management under the 2007 Plan during 2016 are based on the total stockholder return (“TSR”) of the Company's common stock price as compared to the TSR of the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) over the span of one year, two years and three years. The number of shares to be issued upon vesting of these PSUs range from zero to two times the target number of PSUs granted depending on the Company’s performance against the SPGIIPTR.
PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during 2017 and the first half of 2018 are based on the TSR of the Company's common stock price relative to the TSR of the individual companies listed in the SPGIIPTR over the span of one year, two years and three years. The number of shares to be issued upon vesting of these PSUs range from zero to two times the target number of PSUs granted depending on the Company’s performance against the individual companies listed in the SPGIIPTR.
The ranges of estimated values of the PSUs granted that are compared to the SPGIIPTR, as well as the assumptions used in calculating these values were based on estimates as follows:
 
 
2018
 
2017
 
2016
Index volatility
 
33%
 
33% - 34%
 
18%
Infinera volatility
 
58% - 59%
 
55% - 56%
 
55%
Risk-free interest rate
 
2.37% - 2.40%
 
1.41% - 1.63%
 
0.95% - 1.07%
Correlation with index/index component
 
0.04 - 0.48
 
0.10 - 0.49
 
0.58 - 0.59
Estimated fair value
 
$14.99 - $19.46
 
$15.23 - $17.35
 
$10.31 - $16.62


28


In addition, certain other PSUs granted to the Company’s executive officers, senior management and certain other employees will only vest upon the achievement of specific financial or operational performance criteria.

The following table summarizes by grant year, the Company’s PSU activity for the nine months ended September 29, 2018 (in thousands):
 
 
 
 
Grant Year
 
 
Total Number of Performance Stock Units
 
2015
 
2016
 
2017
 
2018
Outstanding at December 30, 2017
 
1,367

 
77

 
420

 
870

 

PSUs granted
 
505

 

 

 

 
505

PSUs released
 
(28
)
 

 
(28
)
 

 

PSUs canceled
 
(625
)
 
(77
)
 
(196
)
 
(352
)
 

Outstanding at September 29, 2018
 
1,219

 

 
196

 
518

 
505

Amortization of stock-based compensation related to PSUs in the three and nine months ended September 29, 2018 was approximately $2.2 million and $6.9 million, respectively, and was $2.7 million and $7.3 million in the corresponding periods of 2017, respectively.
Stock-Based Compensation
The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):
 
September 29, 2018
 
December 30, 2017
Stock-based compensation effects in inventory
$
4,827

 
$
5,255

 
 
Three Months Ended
 
Nine Months Ended
 
September 29, 2018