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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the fiscal year ended October 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number 0-21969
Ciena Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2725311 |
(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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Identification No.) |
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1201 Winterson Road, Linthicum, MD
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21090-2205 |
(Address of principal executive offices)
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(Zip Code) |
(410) 865-8500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value
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The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.4-5 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act) YES o NO þ
The aggregate market value of the Registrants Common Stock held by non-affiliates of the
Registrant was approximately $1.4 billion based on the closing price of the Common Stock on the
NASDAQ Global Select Market on May 2, 2010.
The number of shares of Registrants Common Stock outstanding as of December 15, 2010 was
94,146,715.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrants
definitive proxy statement for its 2011 Annual Meeting of Stockholders to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by this report.
CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2010
TABLE OF CONTENTS
2
PART I
The information in this annual report contains certain forward-looking statements, including
statements related to our business prospects, the markets for our products and services, and trends
in our business that involve risks and uncertainties. Our actual results may differ materially from
the results discussed in these forward-looking statements. Factors that might cause such a
difference include those discussed in Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations, Business and elsewhere in this annual report.
Item 1. Business
Overview
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our
Packet-Optical Transport, Packet-Optical Switching and Carrier Ethernet Service Delivery products
are used, individually or as part of an integrated solution, in networks operated by communications
service providers, cable operators, governments and enterprises around the globe.
We are a network specialist targeting the transition of disparate, legacy communications
networks to converged, next-generation architectures, optimized to handle increased traffic volumes
and deliver more efficiently a broader mix of high-bandwidth communications services. Our
communications networking products, through their embedded software and our network management
software suites, enable network operators to efficiently and cost-effectively deliver critical
enterprise and consumer-oriented communication services. Together with our comprehensive design,
implementation and support services, our networking solutions offering seeks to enable
software-defined, automated networks that address the business challenges, communications
infrastructure requirements and service delivery needs of our customers. Our customers face a
challenging and rapidly changing environment that requires their networks be robust enough to
address increasing capacity needs from a growing set of consumer and business applications, and
flexible enough to quickly adapt to execute new business strategies and support the delivery of
innovative, revenue-creating services. By improving network productivity and automation, reducing
network costs and providing flexibility to enable differentiated service offerings, our networking
solutions offering creates business and operational value for our customers.
Acquisition of Nortel Metro Ethernet Networks Business (the MEN Acquisition)
On March 19, 2010, we completed our acquisition of substantially all of the optical networking
and Carrier Ethernet assets of Nortels Metro Ethernet Networks business (the MEN Business). The
MEN Business that we acquired is a leading provider of next-generation, communications network
products, with a significant global installed base and a strong technology heritage. The MEN
Business is a leader in high-capacity 40G and 100G coherent optical transport technology that
enables network operators to seamlessly upgrade their existing 2.5G and 10G networks, thereby
enabling a significant increase in network capacity without the need for new fiber deployments or
complex reengineering. The product and technology assets that we acquired include Nortels:
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long-haul optical transport portfolio; |
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metro optical Ethernet switching and transport solutions; |
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Ethernet transport, aggregation and switching technology; |
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multiservice SONET/SDH product families; and |
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network management software products. |
In addition to these products, we also acquired the network implementation and support service
resources related to the MEN Business.
We believe that our acquisition of the MEN Business represents a transformative opportunity
for Ciena. We believe that this transaction strengthens our position as a leader in
next-generation, converged optical Ethernet networking and accelerates the execution of our
corporate and research and development strategies. We believe that the additional geographic reach,
expanded customer relationships, and broader portfolio of complementary network solutions derived
from the MEN Business allow us to better compete with traditional, larger communications network
equipment vendors. We also believe that our broadened product and services portfolio positions us
to address a wider range of customer segments, applications and service delivery opportunities. As
a result of the MEN Acquisition, we added approximately 2,000 employees, including significant
additional engineering talent, which nearly doubled our headcount. We expect our increased scale
will enable additional operating leverage and optimize our research and development investment
toward next-generation technologies and product platforms.
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See Note 2 to the Consolidated Financial Statements found under Item 8 of Part II of this
annual report for additional information relating to the purchase price of the MEN Business, and
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7
of Part II of this annual report, for additional information describing the effect of this
transaction on our business, results of operations and financial position.
Segment Data and Certain Financial Information
Effective upon the completion of the MEN Acquisition, we reorganized our internal
organizational structure and the management of our business. See Note 20 to the Consolidated
Financial Statements found under Item 8 of Part II of this annual report. We currently organize our
operations into four separate operating segments: Packet-Optical Transport, Packet-Optical
Switching, Carrier Ethernet Service Delivery, and Software and Services. The matters discussed
in this Business section should be read in conjunction with the Consolidated Financial Statements
found under Item 8 of Part II of this annual report, which include additional financial information
about our operating segments, total assets, revenue, measures of profit and loss, and financial
information about geographic areas and customers representing greater than 10% of revenue.
We generated revenue of $1,236.6 million in fiscal 2010, as compared to $652.6 million in
fiscal 2009. Annual revenue growth in large part reflects the addition of the MEN Business on March
19, 2010. For more information regarding our results of operations, see Managements Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 of Part II of this annual
report.
Corporate Information and Access to SEC Reports
We were incorporated in Delaware in November 1992, and completed our initial public offering
on February 7, 1997. Our principal executive offices are located at 1201 Winterson Road, Linthicum,
Maryland 21090. Our telephone number is (410) 865-8500, and our web site address is
www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of charge on the
Investor Relations page of our web site as soon as reasonably practicable after we file these
reports with the Securities and Exchange Commission (SEC). We routinely post the reports above,
recent news and announcements, financial results and other important information about our business
on our website at www.ciena.com. Information contained on our web site is not a part of this annual
report.
Industry Background
The markets in which we sell our communications networking solutions have been subject to
dynamic changes in recent years, including increased competition, growth in traffic, broader
service offerings, and evolving technologies, market opportunities and challenges.
Increased Capacity Requirements and Multiservice Traffic Driving Increased Transmission Speeds
Todays networks are experiencing strong traffic growth and new service demands. Increasing
network capacity requirements are being driven by growing use of and reliance upon communications
services by consumer and enterprise end users for a wide range of personal and business tasks, as
well as the expansion of high-bandwidth, wireline and wireless service offerings.
Business customers seeking to improve automation, efficiency and productivity have become
increasingly dependent upon enterprise-oriented communications and data services. Enterprises
require robust networks to facilitate global expansion of operations, enable employee mobility and
utilize video services. As their workforces are becoming more mobile, enterprises are driving
demand for seamless access to critical business applications and data. In addition, enterprise
technology trends such as IT virtualization and cloud computing are also placing new capacity and
service requirements on networks. Growth in enterprise-oriented communications applications has
resulted in expanded carrier-managed offerings of these and other business services. In addition, a
number of large enterprises, government agencies and research and education institutions have
decided to forego these traditional communications service offerings in favor of building their
own, secure private networks.
At the same time, an increasing portion of network traffic is being driven by
consumer-oriented applications. Growing consumer adoption of broadband technologies, including
peer-to-peer Internet applications, residential video services, online gaming and music downloads,
as well as expanding mobile video data services, are dramatically increasing network traffic. This
multiservice traffic growth requires the transition to higher capacity networks with increased
transmission speeds, often with lower latency, such as our 40G and 100G coherent optical transport
technology.
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Multiservice Traffic Growth Requiring Transition to Flexible Network Architectures
A broadening mix of high-bandwidth, data and video communications services, together with
growing mobility and expanding wireless applications, will require upgrades to existing network
infrastructure, including mobile backhaul and traditional wireline networks. The growing mix of
high-bandwidth and latency-sensitive traffic, and an increased focus on controlling network costs,
are driving a transition from multiple, disparate SONET/SDH-based networks to more efficient,
converged, multi-purpose Ethernet/IP-based network architectures. The industry has seen network
technology transitions like this in the past. These large investment cycles tend to happen over
multi-year periods. For instance, from the mid 1980s to the mid 1990s, service providers focused
network upgrades on the transition required to digitize voice traffic. From the mid 1990s to the
mid 2000s, service providers focused network upgrades on the transition to SONET/SDH networks
designed to reliably handle substantially more network traffic. We believe that the industry is
currently in the early stages of network transition to multi-purpose Ethernet/IP-based network
architectures that more efficiently handle a growing mix of multiservice traffic with a greater
concentration of data.
We refer to our implementation of next-generation network architectures that address this
transition as converged optical Ethernet. Our converged optical Ethernet approach brings together
the reliability and capacity of optical networking with the flexibility and economics of Ethernet,
unified by our embedded and network management software. These attributes enable a network that is
resilient, reconfigurable and automated. These network attributes are essential to support
next-generation services and applications at the performance level required by end users. We see
opportunities in providing a portfolio of carrier-class solutions that facilitate this transition
to converged optical Ethernet networks.
Value Transition from Networks to Applications
In the past, enterprises and consumers perceived value in network connectivity. End users of
networks now place a higher value on the services or applications accessed and delivered over the
network. As a result, in order to compete, service providers need to create, market, and sell
profitable services as opposed to simply selling connectivity. Some of the areas that service
providers are pursuing to compete and drive end user value include.
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IT Virtualization. IT Virtualization moves a physical resource from a users desktop
into the network, thereby making more efficient use of information technology
resources. This approach has many appealing attributes such as lowering barriers of
entry into new markets, and adding flexibility to scale certain aspects of a business
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Cloud Services. Cloud services are characterized by the sharing of computing,
storage and network resources to improve economics through higher utilization
efficiencies. IT and network service providers are centralizing these resources in
order to offer usage-based and metered services that are hosted remotely across a
network. Smaller enterprises and consumers can subscribe to cloud services to replace
local, on-site facilities, while larger enterprises and data center operators may use
private clouds to consolidate their own resources and public clouds to accommodate peak
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Mobility. The emergence of smart mobile devices that deliver integrated voice,
audio, photo, video, email and mobile web capabilities, like Apples iPhone and
Android-based smart phones, are rapidly changing the service type and magnitude of
data traffic carried by wireless networks. The increase in availability and improved
ease of use of web-based applications from mobile devices expands the reach of
virtualized services beyond a wireline connection. For instance, consumer-driven video
and gaming are being virtualized, allowing broad access to these applications,
regardless of the device or the network used. |
We believe these shifts, and end user expectations regarding quality of service for these
applications, will require communications network infrastructures to be more automated, robust and
flexible.
Market Conditions and Effect on Network Investment
As a result of the sustained period of economic weakness and uncertainty surrounding global
macroeconomic conditions, our industry has experienced cautious capital expenditures, particularly
among large service provider customers, as they have sought to conserve capital or address
uncertainties or changes in their own business models brought on by broader market challenges.
These dynamics have placed increased scrutiny and more rigid prioritization on network spending.
Our customers seek to create and rapidly deliver new, robust service offerings and dedicated
communications at increasing speeds to differentiate from competitors and grow their business. At
the same time, they are increasingly seeking ways to optimize their network operating and capital
costs. We believe that these dynamics will result in a shift in network spending toward
high-capacity, next-generation network architectures. By utilizing scalable networks that are less
complex, less expensive to operate and more adaptable, network operators can derive increased value
from their network investments through the rapid, efficient and profitable delivery of new
services.
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Strategy
Key components of our corporate strategy are set forth below:
Maintain and extend technology leadership in converged optical Ethernet networking to drive
sales across product portfolio. Through continued investment and innovation, our strategy is to
enhance our leading, next generation coherent transport technology for high capacity long-haul and
metro networks. We intend to extend our technology leadership and leverage our market share in
Packet-Optical Transport products to drive sales of our Packet-Optical Switching and Carrier
Ethernet Service Delivery products. We intend to expand our data-optimized, Packet-Optical
Switching solutions, specifically our ActivFlex 5400 family of Reconfigurable Switching Systems, to
enable an end-to-end OTN and Ethernet-based architecture that offers better cost per bit, more
flexibility, and higher reliability for network operators. We also seek to expand our Carrier
Ethernet Service Delivery portfolio, including high-capacity (terabit scale) Ethernet metro
aggregation switches, for mobile backhaul and business Ethernet services. An important component of
our research and development strategy is to enhance our embedded and network management software.
By creating a common network management software platform across our expanded product portfolio, we
seek to enable service level management across network layers, rapid service provisioning,
increased automation and leverage across our customer solutions.
Diversify our customer segments and customer application of our products. Historically,
service providers have represented the largest portion of our revenue, with their application of
our products largely supporting terrestrial, wireline networks. Part of our strategy is to seek
opportunities to address new customer segments, and increase our sales to wireless providers, cable
and multiservice operators, enterprises, government agencies and research and educational
institutions. We are also seeking to sell our product and service solutions to support additional
network applications, including in submarine networks, content delivery networks, business Ethernet
services and mobile backhaul. While we seek to penetrate new customer segments and broaden the
applications for which customers select our solutions, we also intend to win new service provider
customers in existing markets and expand our market share in existing accounts by cross-selling our
broader portfolio.
Expand our geographic reach. We seek to build upon the broader global presence of our business
provided by the MEN Acquisition through expansion of our geographic reach and market share in
growing markets including Brazil, the Middle East, Russia and India. We intend to penetrate new
geographies through a combination of direct resources and third party channels, such as reseller,
service providers and integrators, for marketing, selling and distributing our solutions. We also
intend, through cross-selling and other sales initiatives, to increase sales of our Packet-Optical
Switching and Carrier Ethernet Service Delivery products in international markets. We also seek to
build the Ciena brand globally through additional marketing initiatives.
Leverage our consultative, network specialist approach. Our close relationship with customers
in the design, development, implementation and support of our solutions offering is a key
differentiator for our business and provides us with unique insight into their business and network
needs. We believe that by offering an expanded portfolio of professional services that meets the
business needs of our customers, we bring strategic value to customer relationships beyond the sale
of our next-generation communications networking products. This service-oriented solutions offering
allows us to work closely with customers in their design, deployment and delivery of new services.
By understanding and addressing their network infrastructure needs, the competitive landscape, and
the evolving and challenging markets in which our customers compete, we believe our customized
solutions offering, including advanced services, creates additional business and operational value
for our customers, enabling them to better compete in a challenging environment.
Successfully complete the integration of the MEN Business and achieve desired operating
leverage. We continue to make significant progress on activities relating to the integration of the
MEN Business. We have completed our organizational structure, sales coverage plans and decisions
regarding the rationalization of our combined product portfolio. We have also realized initial
operating synergies from the combined company and are approaching an exit from the transition
services currently provided by an affiliate of Nortel. We intend to devote the necessary time and
resources toward the successful completion of remaining integration activities. A number of these
are complex, including the rationalization of our supply chain, third party manufacturers and
facilities, the complete integration of our networking equipment offering, the development of a
common network management system across our expanded portfolio, and the winding down of transition
services. We seek to leverage the longer-term opportunities, including improved operating
efficiencies, presented by these activities.
Customers and Markets
Our customer base, and the geographic markets and customer segments into which we sell our
products and services, have expanded in recent years, in part as a result of the acquisition of the
MEN Business. The network infrastructure needs of our customers vary, depending upon their size,
location, the nature of their end users and the applications or services that they
deliver and support. We sell our product and service offerings through our direct sales force and
third party channel partners to end user network operators in the following customer segments:
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Communications Service Providers
Our service provider customers include regional, national and international, wireline and
wireless carriers. These customers include AT&T, Bell Canada, BT, Cable & Wireless, CenturyLink,
Clearwire, France Telecom, Korea Telecom, Qwest, Sprint, Tata Communications, Telefonica, Telmex,
Telus, Verizon and XO Communications. Traditional telecommunications service providers are our
historical customer base and continue to represent the largest contribution to our revenue. We
provide service providers with products, from the network core to its edge, that address growing
bandwidth demand from voice, video and data service applications. Our products enable a flexible,
high-capacity, converged network that enables service providers to increase revenue through new
service offerings and to reduce capital and operating network costs by aggregating multiservice
traffic. Our products also enable service providers to support key applications for enterprise
users, including carrier-managed services, wide area network consolidation, inter-site
connectivity, storage extension, business continuity and Ethernet services.
Cable Operators
Our customers include leading cable and multiservice operators in the U.S. and
internationally. These customers include Comcast, Cox, RCN, Rogers, Time Warner and Cogeco. Our
cable and multiservice operator customers rely upon us for carrier-grade, optical Ethernet
transport and switching products to support enterprise-oriented services. Our platforms allow cable
operators to integrate voice, video and data applications over a converged infrastructure and scale
their networking infrastructure to keep ahead of the bandwidth and application demands of their
subscribers. Our products support key cable applications including broadcast and digital video,
voice over IP, video on demand and broadband data services.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including
participants in the financial, healthcare, transportation, utilities and retail industries. Our
solutions enable enterprises to achieve operational improvements, increased automation and
information technology cost reductions. Our products enable inter-site connectivity between data
centers, sales offices, manufacturing plants, retail stores and research and development centers,
using an owned or leased private fiber network or a carrier-managed service. Our products
facilitate key enterprise applications including data, voice and video transport, Ethernet business
services, storage extension, business continuity, online collaboration, video conferencing, cloud
computing, low latency networking and wide area network (WAN) encryption. Our products also enable
our enterprise customers to prevent unexpected network downtime and ensure the safety, security and
availability of their data.
Government, Research and Education
Our government customers include federal and state agencies in the U.S. as well as government
entities outside of the U.S. Our customers also include domestic and international research and
education institutions seeking to take advantage of technology innovation, improve their
information infrastructure, and facilitate increased collaboration. Our solutions feature
ultra-high capacity, reconfigurability and service flexibility to meet the requirements of
supercomputing systems. Our products, software and services enable these customers to improve
network performance, capacity, security, reliability and flexibility. We collaborate with leading
institutions to provide government and research and education communities with optimized networks
that minimize cost and complexity, through initiatives that support intelligent control plane
technologies, interoperability and scalability.
Products and Services
We offer a portfolio of communications networking products that form the building blocks of
resilient and automated, next-generation networks. Our product portfolio consists of our
Packet-Optical Transport, Packet-Optical Switching and Carrier Ethernet Service Delivery products,
as well as the embedded and network management software that supports these platforms.
We have focused our product and service offerings to address the following network priorities:
core and metro network modernization, managed services and enterprise applications, Carrier
Ethernet-based mobile backhaul and high-capacity submarine networks. In the networks core, we
deliver high-capacity transport and switching products that create an automated, dynamic optical
infrastructure supporting a wide variety of network services. In the metro portion of the network,
we deliver a comprehensive, converged transport and switching solution that manages circuits,
wavelengths and packets. In managed services applications and enterprise networks, we enable
enterprise-oriented services including storage, data connectivity, video and business Ethernet
services. In mobile backhaul applications, we provide wireline and wireless carriers
with the tools to migrate their networks to support mobile data applications and enable
Ethernet-based backhaul. In submarine networks, we enhance existing submarine network fiber assets, increasing bandwidth
capacity and enabling higher-availability services and differentiated customer-focused offerings.
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Packet-Optical Transport
Our Packet-Optical Transport portfolio includes industry leading, high-capacity transport
platforms such as our ActivFlex 6500 Packet-Optical Platform, which features coherent, 40G and 100G
optical transport. Our Packet-Optical Transport platforms include flexible, scalable wavelength
division multiplexing (WDM) solutions that enable cost-effective and efficient transport of voice,
video and data related to a variety of services for core networks as well as regional and metro
networks. We offer scalable Packet-Optical Transport platforms, including several chassis sizes and
a comprehensive set of line cards, that can be utilized from the customer premises, where space and
power are critical, to the metropolitan/regional core, where the need for high capacity and
carrier-class performance are essential. By automating optical infrastructures, our Packet-Optical
Transport products support the efficient delivery of a wide variety of consumer-oriented network
services, as well as key managed service and enterprise applications.
Our Packet-Optical Transport family of products focuses on high-capacity optical transport and
includes reconfigurable optical add-drop multiplexer (ROADM) capability. In addition to our CN
4200® FlexSelect®Advanced Services Platform (now ActivSpan 4200) and our Corestream® Agility
Optical Transport System, our Packet-Optical Transport portfolio includes the following products
acquired from the MEN Business:
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Optical Multiservice Edge 6500 (now ActivFlex 6500 Packet Optical Platform) |
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Optical Multiservice Edge 6110 (now ActivFlex 6110 Multiservice Optical Platform) |
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Optical Metro 5200 (now ActivSpan 5200) |
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Common Photonic Layer (now ActivSpan CPL) |
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Optical Multiservice Edge 1000 series (OME 1000) |
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Optical Metro 3500 (OM 3500) |
Our Packet-Optical Transport solutions also include legacy SONET/SDH products and legacy data
networking products, as well as certain enterprise-oriented transport solutions that support
storage and LAN extension, interconnection of data centers, and virtual private networks.
Packet-Optical Switching
Our Packet-Optical Switching family of products provides TDM switching and packet switching
capability. Our principal Packet-Optical Switching product is our CoreDirector® Multiservice
Optical Switch. CoreDirector is a multiservice, multi-protocol switching system that consolidates
the functionality of an add/drop multiplexer, digital cross-connect and packet aggregator, into a
single, high-capacity intelligent switching system. CoreDirectors mesh capability enables more
efficient and more reliable networks. In addition to its application in core networks, CoreDirector
may also be used in metro networks for aggregation and forwarding of multiple services, including
Ethernet/TDM Private Line, Triple Play and IP services. We are in the early stages of a technology
transition within our Packet-Optical Switching platform, from our CoreDirector platform toward our
ActivFlex 5400 family of Reconfigurable Switching Systems. These multi-terabit OTN and packet
switching systems with integrated transport functionality can be flexibly configured to implement a
broad range of network elements, including a scalable optical cross-connect, feature-rich Carrier
Ethernet switch, or a fully converged packet-optical transport and switching system. These new
platforms provide the capabilities and reliability of CoreDirector, while providing service
providers the ability to scale to higher capacities and transition to packet-based networks.
Carrier Ethernet Service Delivery
Our Carrier Ethernet Service Delivery products have applications from the edge of
metro and core networks to the customer premises. These products allow customers to utilize the
automation and capacity created by our Packet-Optical Transport products in core and metro networks
and deliver new, revenue-generating services to consumers and enterprises. Our Carrier Ethernet
Service Delivery offering primarily consists of our ActivEdge service delivery switching products,
ActivEdge service aggregation platforms and legacy broadband access products for residential
services.
Our ActivEdge service delivery and aggregation switches provide True Carrier Ethernet, a more
reliable and feature rich type of Ethernet that can support a wider variety of services. These
products support the access and aggregation tiers of communications networks, and are typically
deployed in metro and access networks. Service delivery products are often used at customer
premises locations while aggregation platforms are used to combine services to improve network
resource utilization. Employing sophisticated carrier Ethernet switching technology, these products
deliver quality of service capabilities, virtual local area networking and switching functions, and
carrier-grade operations, administration, and maintenance features. In 2010, we introduced several additions to our service delivery and
aggregation offering intended to increase capacity for higher bandwidth user connections and a broader set of aggregation and
switching capabilities, such as enterprise locations, backhaul from wireless cell sites,
multi-tenant unit buildings and outside plant cabinets. Initial deployment of these products have
principally been in support of wireless backhaul deployments, including, in large part, 4G WiMax,
and business data services.
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Our principal product for consumer broadband is our CNX-5 Broadband DSL System. This broadband
access platform allows service providers to transition legacy voice networks to support
next-generation services such as Internet-based (IP) telephony, video services and DSL, and enable
cost-effective migration to higher bandwidth Ethernet network infrastructures.
Unified Software and Service Management Tools
Our Packet-Optical Transport, Packet-Optical Switching and Carrier Ethernet Service Delivery
products include a shared suite of embedded operating system software and network management
software tools that serve to unify our product portfolio and provide the underlying automation and
management features. Our embedded software is a robust, service aware framework that improves
network utilization and availability, while delivering enhanced performance monitoring and
reliability. By increasing network automation, minimizing network downtime and monitoring network
performance and service metrics, our embedded software and network management software tools enable
customers to improve cost effectiveness, while increasing the performance and functionality of
their network operations. To consolidate our software offerings, we have introduced the Ciena One
software suite. This suite will be the framework for harmonizing the embedded software and the
network management software from the pre-acquisition Ciena portfolio and the MEN portfolio.
ON-Center® Network & Service Management Suite, our pre-acquisition Ciena integrated
network and service management software, is designed to simplify network management and operation
across our portfolio. ON-Center can track individual services across multiple product suites,
facilitating planned network maintenance, outage detection and identification of customers or
services affected by network troubles. The MEN Acquisition added network and service management
products, such as OMEA and Preside, which are specific to the products of the MEN Business and are
included in our combined product portfolio.
Consulting and Support Services
To complement our product portfolio, we offer a broad range of consulting and support services
that help our customers design, deploy and operationalize their communications services. We provide
these services through our internal resources as well as through qualified, third party service
partners. Our services and support portfolio includes the following offerings:
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Network analysis, planning and design; |
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Network optimization and tuning; |
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Project management, including staging, site preparation and installation activities; |
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Deployment services, including turnkey installation and turn-up and test services; and |
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Maintenance and support services, including: |
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o |
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helpdesk, technical assistance and training, |
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o |
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spares and logistics management, |
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o |
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engineering dispatch and on-site professional services, |
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o |
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equipment repair and replacement, and |
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o |
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software maintenance and updates. |
We believe that our broad service set of service offerings is an important component of our network
specialist approach and a significant differentiator with customers. We believe that our services
offering enables a solutions-oriented approach to network challenges that builds value in a
customer relationship that extends beyond our product and software offering. We believe that
customers will continue to place significant value on these types of strategic engagements and
assess vendors on their capability to partner with them effectively in these areas.
Product Development
Our industry is subject to rapid technological developments, evolving standards and protocols,
and shifts in customer demand. To remain competitive, we must continually enhance existing product
platforms by adding new features and functionality and introducing new product platforms that
address multiservice traffic growth, enable new service offerings and facilitate the transition to
converged optical Ethernet networking. Within our global products group, we maintain a team of
skilled engineers with extensive experience in the areas of photonics,
9
packet and circuit
switching, network system design, embedded operating system and network management software. Through our acquisition of the MEN
Business, we attained leading 40G and 100G transport technologies and added significant engineering
talent and considerable investment scale to our research and development activities. Our current
development investments are focused upon:
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Extending our Packet-Optical Transport leadership in 40G and 100G long haul
transport through development of our coherent transmission technology; |
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Enhancing our data-optimized, Packet-Optical Switching solutions and the evolution
from our CoreDirector family to our ActivFlex 5400 family of Reconfigurable Switching
Solutions; |
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Expanding our Carrier Ethernet Service Delivery portfolio, including high-capacity
Ethernet metro aggregation switches for mobile backhaul and business Ethernet services;
and |
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Interoperability and creating a common network management software platform across
our expanded product portfolio and enabling service level management across network
layers. |
Product development initiatives also include significant design and development work intended to
enable cost reductions relating to the manufacture of our products.
Our product development investments are driven by market demand and technological innovation,
involving close collaboration among our product development, marketing and global field
organizations, and input from customers. In some cases, we work with third parties pursuant to
technology licenses, OEM arrangements and other strategic technology relationships or investments,
to develop new components or products, modify existing platforms or offer complementary technology
to our customers. In addition, we participate in industry and standards organizations, where
appropriate, and incorporate information from these affiliations throughout the product development
process.
We regularly review our existing product offerings and prospective development projects to
determine their fit within our portfolio and broader corporate strategy. We assess the market
demand, technology evolution, prospective return on investment and growth opportunities, as well as
the costs and resources necessary to develop and support these products. In recent years, our
strategy has been to pursue technology and product convergence that allows us to consolidate
multiple technologies and functionalities on a single platform, or to control and manage multiple
elements throughout the network from a uniform management system, ultimately creating more robust
and cost-effective network tools. We have also shifted our strategic development approach from
delivering point products to comprehensive networking equipment, software and service solutions
that address the current and future business needs of our customers.
Our research and development expense was $175.0 million, $190.3 million and $327.6 million,
for fiscal 2008, 2009 and 2010, respectively. The increased expense in 2010 was driven primarily by
the MEN Acquisition, including the related additions to our product portfolio, expanded development
initiatives and increased engineering headcount and overhead. For more information regarding our
research and development expense, see Managements Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of Part II of this report.
Sales and Marketing
We sell our communications networking products and services through our direct sales resources
as well as through channel relationships. In addition to securing new customers, our sales strategy
has focused on building long-term relationships with existing customers that allow us to leverage
our incumbency by extending existing platforms and cross-selling additional products that help
customers address multiservice traffic growth and facilitate new service offerings.
Within our global field operations team, we maintain a direct sales presence that is organized
geographically around the following markets: (i) U.S. and
Canada; (ii) Caribbean and Latin America;
(iii) Europe, Middle East and Africa; and
(iv) Asia-Pacific. These
regions include sales personnel that focus on one or more of the following customer segments:
communications service providers including wireless providers, cable and multiservice operators,
enterprise customers and government, research and education. Within each geographic area, we
maintain regional, country and/or customer-specific teams, including account salespersons, systems
engineers and strategic marketing, services and commercial management personnel, who ensure we
operate closely with and provide a high level of support to our customers.
We also maintain a global channel program that works with resellers, systems integrators,
service providers, and other third party distributors to market and sell our products and services.
Our third party channel sales and other distribution arrangements enable us to leverage our direct
sales resources and reach additional geographic regions and customer segments. These relationships
also enable us to sell our products as a complement to a broader offering of other vendors or
integrators, or in support of a service providers carrier managed service offering. Our use of
channel partners has been a key component in our sales to government, research and education and
enterprise customers. We believe our channel strategy affords us expanded market opportunities and
reduces the financial risk of entering new markets and pursuing new customer segments.
10
To support our sales efforts, we engage in marketing activities intended to position and
promote both our brand and our product, software and service offerings. Our marketing team supports
sales efforts through direct customer interaction, industry events, public relations, social media,
general business publications, tradeshows, our website and other marketing channels for our
customers and channel partners.
Manufacturing, Operations and Supply Chain Management
Our operations personnel manage our relationships with our third party manufacturers and
manage our supply chain. In addition, this team also addresses component procurement and sourcing,
product testing and quality, and logistics relating to our sales, maintenance and professional
services, and distribution efforts.
We utilize a global sourcing strategy that emphasizes procurement of materials in lower cost
regions. We rely upon third party manufacturers, with facilities in Canada, China, Mexico, Thailand
and the United States, to perform nearly all of the manufacturing of our products. This activity
can include design and prototype development, full production, final assembly, testing and
shipment. We utilize a direct order fulfillment model for certain products, which allows us to rely
on our third party manufacturers to perform final system integration and testing prior to shipment
of products directly from their facilities to our customers. For certain product lines, we continue
to perform a portion of the module assembly, final system integration and testing internally. We
believe that our sourcing and manufacturing strategy allows us to conserve capital, lower costs of
product sales, adjust quickly to changes in market demand, and operate without dedicating
significant resources to manufacturing-related plant and equipment. The integration of
manufacturing, operations and supply chain activities resulting from our acquisition of the MEN
Business, while complex and potentially disruptive, presents longer-term opportunities to further
reduce the cost to manufacture our products, including through higher purchasing volumes and
consolidation of manufacturers, suppliers, warehousing and distribution centers and service
logistics partners.
Our manufacturers procure components necessary for assembly and manufacture of our products
based on our specifications, approved vendor lists, bill of materials and testing and quality
standards. Our manufacturers activity is based on rolling forecasts that we provide to them to
estimate demand for our products. This build-to-forecast purchase model exposes us to the risk that
our customers will not order those products for which we have forecast sales, or will purchase less
than we have forecast. As a result, we may incur carrying charges or obsolete material charges for
components purchased by our manufacturers. We work closely with our manufacturers to manage
material, quality, cost and delivery times, and we continually evaluate their services to ensure
performance on a reliable and cost-effective basis.
Shortages in product components have occurred in the past and remain possible. Our products
include some components that are proprietary in nature and only available from one or a small
number of suppliers. In addition, some of our application-specific integrated circuits (ASICs) are
manufactured by sole or limited sources that are responsible for production. Significant time would
be required to establish relationships with alternate suppliers or providers of critical
components. We do not have long-term contracts with any supplier or manufacturer that guarantees
supply of components or manufacturing services. If component supplies become limited, production at
a manufacturer is disrupted, or if we experience difficulty in our relationship with a key supplier
or manufacturer, we may encounter manufacturing delays that could adversely affect our business.
Backlog
Generally, we make sales pursuant to purchase orders issued under framework agreements that
govern the general commercial terms and conditions of the sale of our products and services. These
agreements do not obligate customers to purchase any minimum or guaranteed order quantities. At any
given time, we have orders for products that have not been shipped and for services that have not
yet been performed. We also have accepted orders relating to products that have been delivered and
services that have been performed that are awaiting customer acceptance under the applicable
purchase terms. We consider both of these situations in our calculation of backlog. Generally, our
customers may cancel or change their orders with limited advance notice, or they may decide not to
accept these products and services. As a result, backlog should not be viewed as an accurate
indicator of future revenue in any particular period. In particular, the completion of the MEN
Acquisition during fiscal 2010 makes the period to period comparisons below less meaningful. As of
October 31, 2009 and 2010, our backlog was approximately
$291.0 million and $591.0 million,
respectively. Backlog includes product and service orders from commercial and government customers
combined. Backlog at October 31, 2010 includes approximately
$56.0 million primarily related to
orders for maintenance and support services that we do not reasonably expect to be filled within
the next fiscal year. Our presentation of backlog may not be comparable with figures presented by
other companies in our industry.
11
Seasonality
Like other companies in our industry, we have experienced quarterly fluctuations in customer
activity due to seasonal considerations. As a result, we have experienced reductions in customer order volume for
product sales toward the end of calendar year and again early in the calendar year as annual
capital budgets of some of our customers are finalized. Conversely, we may experience increased
services order flow late in the calendar year as maintenance service terms are renewed. We have
also experienced reductions in order volume, particularly in Europe, during the late summer months.
As a result of these seasonal effects, we have experienced reduced order activity during our fiscal
first quarter, which ends on January 31 of each year, and our fiscal third quarter, which ends on
July 31 of each year. These seasonal effects do not apply consistently and do not always correlate
to our financial results. Accordingly, they should not be considered a reliable indicator of our
future revenue or results of operations.
Competition
Competition among communications networking solution vendors is intense. In addition to the
effect of broader market conditions, the level of competition we experience has intensified, in
part, due to our increased market share, technology leadership and global presence resulting from
the MEN Acquisition. Competition has also intensified as we and our competitors more aggressively
seek to secure market share, particularly in connection with new network build opportunities, and
displace incumbent vendors at large carrier customers.
The markets for our products and services are characterized by rapidly advancing and
converging technologies. Competition in these markets is based on any one or a combination of the
following factors:
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product functionality, speed, capacity and performance; |
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price; |
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incumbency and existing business relationships; |
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product development plans and the ability of products and services to meet
customers immediate and future network requirements; |
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capacity, flexibility, speed and scalability of products; |
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manufacturing and lead-time capability; and |
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installation, services and support capability. |
Competition for sales of communications networking solutions is dominated by a small number of
very large, multi-national companies. Our competitors have included Alcatel-Lucent, Cisco,
Ericsson, Fujitsu, Huawei, Nokia Siemens Networks and Tellabs. Many of these competitors have
substantially greater financial, operational and marketing resources than Ciena and have
significantly broader product offerings. Many of our competitors also have more extensive customer
bases and well-established relationships with large service providers. In recent years, mergers
among some of our larger competitors have intensified these advantages. Our industry has also
experienced increased competition from larger, low-cost producers in China, who are attempting to
penetrate U.S. markets.
We also compete with several smaller, but established, companies that offer one or more
products that compete directly or indirectly with our offerings or whose products address specific
niches within the markets and customer segments we address. These competitors include ADVA and
Infinera. In addition, there are a variety of earlier-stage companies with products targeted at
specific segments of the communications networking market. These competitors often employ
aggressive competitive and business tactics as they seek to gain entry to certain customers or
markets. Due to these practices and the narrower focus of their development efforts, these
competitors may be able to develop and introduce products more quickly, or offer commercial terms
that are more attractive to customers.
Increased competition could result in pricing pressure, reduced demand, lower gross margins,
and loss of market share that could harm our business and results of operations.
Patents, Trademarks and Other Intellectual Property Rights
The success of our business and technology leadership are significantly dependent upon our
proprietary and internally developed technology. We rely upon patents, copyrights, trademarks, and
trade secret laws to establish and maintain proprietary rights in our technology. We regularly file
applications for patents and trademarks and have a significant number of patents and trademarks in
the United States and other countries where we do business. As of December 1, 2010, we had received
1,244 U.S. patents and had pending 305 U.S. patent applications. We also have over 400 non-U.S.
patents.
We also rely on non-disclosure agreements and other contracts and policies regarding
confidentiality, with employees, contractors and customers to establish proprietary rights and
protect trade secrets and confidential information. Our practice is to require employees and
consultants to execute non-disclosure and proprietary rights
agreements upon commencement of employment or consulting arrangements with us. These agreements acknowledge our ownership of
intellectual property developed by the individual during the course of his or her work with us. The
agreements also require that these persons maintain the confidentiality of all proprietary
information disclosed to them.
Enforcing proprietary rights, especially patents, can be costly and uncertain. Moreover,
monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps
that we are taking will detect or prevent unauthorized use. In recent years, we have filed suit to
enforce our intellectual property rights and have been subject to several claims related to patent
infringement. Third party infringement assertions could cause us to incur substantial costs. If we
are not successful in defending these claims, we could be required to enter into a license
agreement requiring ongoing royalty payments, we may be required to redesign our products, or we
may be prohibited from selling any infringing technology.
12
Our operating system, element and network management software and other products incorporate
software and components under licenses from third parties. We may be required to license additional
technology from third parties in order to develop new products or product enhancements. Failure to
obtain or maintain such licenses or other rights could affect our development efforts, require us
to re-engineer our products or obtain alternate technologies, which could harm our business,
financial condition and operating results.
Among the patent and other third party intellectual property licenses to which we are a party,
in connection with the MEN Acquisition, we obtained a non-exclusive license to use patents and
other intellectual property controlled or exclusively owned by Nortel in connection with our
manufacture, sale and support of a broad range of optical networking and Carrier Ethernet products
and services and natural evolutions of such products and services. This license also provides us
with an exclusive license to use a narrower set of patents and other intellectual property owned by
Nortel in connection with Cienas manufacture, sale and support of optical networking and Carrier
Ethernet products and services within a narrower field of use and subject to certain limitations.
As part of this license, we granted Nortel a non-exclusive license to use the patents and other
intellectual property (except trademarks) that we acquired as part of the MEN Business in
connection with the manufacture and sale of products and services in the fields of Nortels other
businesses (including those businesses sold and to be sold to other parties) and natural evolutions
of such fields.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around
the world, including the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the
Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) regulations
adopted by the European Union. We seek to operate our business in compliance with such laws
relating to the materials and content of our products and product takeback and recycling.
Environmental regulation is increasing, particularly outside of the United States, and we expect
that our domestic and international operations may be subject to additional environmental
compliance requirements, which could expose us to additional costs. To date, our compliance costs
relating to environmental regulations have not resulted in a material cost or effect on our
business, results of operations or financial condition.
Employees
As of October 31, 2010, we had 4,201 employees. We have not experienced any work stoppages and
we consider the relationships with our employees to be good. Competition to attract and retain
highly skilled technical, engineering and other personnel with experience in our industry is
intense. We believe that our future success depends in critical part on our continued ability to
recruit, motivate and retain such qualified personnel. None of our employees is bound by an
employment agreement.
Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive
officers:
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Name |
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Age |
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Position |
Patrick H. Nettles, Ph.D.
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|
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67 |
|
|
Executive Chairman of the Board of Directors |
Gary B. Smith
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50 |
|
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President, Chief Executive Officer and Director |
Stephen B. Alexander
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51 |
|
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Senior Vice President, Chief Technology Officer |
Michael G. Aquino
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54 |
|
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Senior Vice President, Global Field Operations |
James A. Frodsham
|
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44 |
|
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Senior Vice President, Chief Strategy Officer |
Philippe Morin
|
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45 |
|
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Senior Vice President, Global Products Group |
James E. Moylan, Jr.
|
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59 |
|
|
Senior Vice President, Finance and Chief Financial Officer |
Andrew C. Petrik
|
|
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47 |
|
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Vice President and Controller |
David M. Rothenstein
|
|
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42 |
|
|
Senior Vice President, General Counsel and Secretary |
Stephen P. Bradley, Ph.D. (2)(3)
|
|
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69 |
|
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Director |
Harvey B. Cash (1)(3)
|
|
|
72 |
|
|
Director |
Bruce L. Claflin (1)(2)
|
|
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59 |
|
|
Director |
Lawton W. Fitt (2)
|
|
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57 |
|
|
Director |
Judith M. OBrien (1)(3)
|
|
|
60 |
|
|
Director |
Michael J. Rowny (2)
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|
|
60 |
|
|
Director |
Patrick T. Gallagher (2)
|
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55 |
|
|
Director |
|
|
|
(1) |
|
Member of the Compensation Committee |
|
(2) |
|
Member of the Audit Committee |
|
(3) |
|
Member of the Governance and Nominations Committee |
13
Our Directors hold staggered terms of office, expiring as follows: Ms. OBrien and Messrs.
Cash and Smith in 2011; Messrs. Bradley, Claflin and Gallagher in 2012; and Ms. Fitt, Dr. Nettles
and Mr. Rowny in 2013.
Patrick H. Nettles, Ph.D. has served as a Director of Ciena since April 1994 and as Executive
Chairman of the Board of Directors since May 2001. From October 2000 to May 2001, Dr. Nettles was
Chairman of the Board and Chief Executive Officer of Ciena, and he was President and Chief
Executive Officer from April 1994 to October 2000. Dr. Nettles serves as a Trustee for the
California Institute of Technology and serves on the board of directors of Axcelis Technologies,
Inc. and The Progressive Corporation. Dr. Nettles also serves on the board of directors of Optiwind
Corp, a privately held company.
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer
since May 2001. Mr. Smith has served on Cienas Board of Directors since October 2000. Prior to his
current role, his positions with Ciena included Chief Operating Officer, and Senior Vice President,
Worldwide Sales. Mr. Smith previously served as Vice President of Sales and Marketing for INTELSAT
and Cray Communications, Inc. Mr. Smith also serves on the board of directors for CommVault
Systems, Inc. Mr. Smith is a member of the Presidents National Security Telecommunications
Advisory Committee, the Global Information Infrastructure Commission and the Center for Corporate
Innovation (CCI).
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since
September 1998 and as a Senior Vice President since January 2000. Mr. Alexander has previously
served as General Manager of Products & Technology and General Manager of Transport and Switching
and Data Networking.
Michael G. Aquino joined Ciena in June 2002 and has served as Cienas Senior Vice President,
Global Field Operations since October 2008. Mr. Aquino served as Senior Vice President of Worldwide
Sales from April 2006 to October 2008. Mr. Aquino previously held positions as Cienas Vice
President of Americas, with responsibility for sales activities in the region, and Vice President
of Government Solutions, where he focused on supporting Cienas relationships with the U.S. and
Canadian government.
James Frodsham joined Ciena in May 2004 and has served as Senior Vice President and Chief Strategy
Officer since March 2010 with responsibility for our strategic planning and corporate development
activities. In August 2010, Mr. Frodsham also assumed responsibility for our ongoing integration of
the MEN Business. Mr. Frodsham previously served as Senior Vice President, General Manager of Cienas
former Broadband Access Group from October 2004 to October 2005 and Metro and Enterprise Solutions
Group from May 2004 to October 2004. From August 2000 to January 2003, Mr. Frodsham served as chief
operating officer of Innovance Networks, an optical networking company. On December 23, 2003,
Innovance filed a Notice of Intent to make a proposal pursuant to Part III of the Bankruptcy and
Insolvency Act (Canada).
Prior to that, Mr. Frodsham was employed for more than ten years in
senior level positions with Nortel Networks in product development and marketing strategy, lastly as Vice President, Product Line Marketing, Optical Networking
Group, from December 1998 to June 2000. Mr. Frodsham serves on the board of directors of Innovance
Networks.
Philippe Morin joined Ciena in March 2010 in connection with Cienas acquisition of
Nortels MEN Business and has
served as Senior Vice President, Global Products Group since that time. In this capacity, Mr. Morin
oversees our engineering, supply chain, product line management, quality/customer advocacy, product
marketing and solutions organizations on a global basis. Mr. Morin previously served as President
of Nortels MEN Business from May 2006 until Cienas completion of the MEN
Acquisition in March 2010. In January 2009, Nortel Networks Corporation and certain of its
subsidiaries filed voluntary petitions in the United States under Chapter 11 of the U.S. Bankruptcy
Code. From January 2003 to May 2006, Mr. Morin held the position of Nortels General Manager of
Optical Networks. Mr. Morin previously held other positions at Nortel in manufacturing, marketing,
sales and product management both in North America and Europe.
14
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer
since December 2007. From June 2006 to December 2007, Mr. Moylan served as Executive Vice President and Chief
Financial Officer of Swett & Crawford, a wholesale insurance broker. From March 2004 to February
2006, Mr. Moylan served as Executive Vice President and Chief Financial Officer of PRG-Shultz
International, Inc., a publicly held recovery audit and business services firm. From June 2002 to
April 2003, Mr. Moylan served as Executive Vice President in charge of Composite Panels
Distribution and Administration for Georgia-Pacific Corporations building products business. From
November 1999 to May 2002, Mr. Moylan served as Senior Vice President and Chief Financial Officer
of SCI Systems, Inc., an electronics contract manufacturing company.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since
August 1997 and served as Treasurer from August 1997 to October 2008.
David M. Rothenstein joined Ciena in January 2001 and has served as Senior Vice President,
General Counsel and Secretary since November 2008. Mr. Rothenstein served as Vice President and
Associate General Counsel from July 2004 to October 2008 and previously as Assistant General
Counsel.
Stephen P. Bradley, Ph.D. has served as a Director of Ciena since April 1998. Professor
Bradley is the Baker Foundation Professor and William Ziegler Professor of Business Administration
Emeritus at the Harvard Business School. A member of the Harvard faculty since 1968, Professor
Bradley is also Chairman of Harvards Executive Program in Competition and Strategy: Building and
Sustaining Competitive Advantage. Professor Bradley serves on the board of directors of
Transatlantic Reinsurance Holdings and the Risk Management Foundation of the Harvard Medical
Institutions,.
Harvey B. Cash has served as a Director of Ciena since April 1994. Mr. Cash is a general
partner of InterWest Partners, a venture capital firm in Menlo Park, California, which he joined in
1985. Mr. Cash serves on the board of directors of First Acceptance Corp., Silicon Laboratories,
Inc. and Argonaut Group, Inc.
Bruce L. Claflin has served as a Director of Ciena since August 2006. Mr. Claflin served as
President and Chief Executive Officer of 3Com Corporation from January 2001 until his retirement in
February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998.
Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and
Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he
held various sales, marketing and management positions, including general manager of IBM PC
Companys worldwide research and development, product and brand management, as well as president of
IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro
Devices (AMD) where he is currently Chairman of the Board.
Lawton W. Fitt has served as a Director of Ciena since November 2000. From October 2002 to
March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to
October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner
from 1994 to October 2002, and a managing director from 1996 to October 2002. In addition to her
service as a director of non-profit organizations, Ms. Fitt serves on the board of directors of
Thomson Reuters and The Progressive Corporation,
Judith M. OBrien has served as a Director of Ciena since July 2000. Since November 2006, Ms.
OBrien has served as Executive Vice President and General Counsel of Obopay, Inc., a provider of
mobile payment services. From February 2001 until October 2006, Ms. OBrien served as a Managing
Director at Incubic Venture Fund, a venture capital firm. Ms. OBrien was a lawyer with Wilson
Sonsini Goodrich & Rosati, where, from February 1984 to February 2001, she was a partner
specializing in corporate finance, mergers and acquisitions and general corporate matters.
Michael J. Rowny has served as a Director of Ciena since August 2004. Mr. Rowny has been
Chairman of Rowny Capital, a private equity firm, since 1999. From 1994 to 1999, and previously
from 1983 to 1986, Mr. Rowny was with MCI Communications in positions including President and Chief
Executive Officer of MCIs International Ventures, Alliances and Correspondent group, acting Chief
Financial Officer, Senior Vice President of Finance, and Treasurer. Mr. Rownys career in business
and government has also included positions as Chairman and Chief Executive Officer of the Ransohoff
Company, Chief Executive Officer of Hermitage Holding Company, Executive Vice President and Chief
Financial Officer of ICF Kaiser International, Inc., Vice President of the Bendix Corporation, and
Deputy Staff Director of the White House. Mr. Rowny also serves on the board of directors of
Neustar, Inc.
Patrick T. Gallagher has served as a Director of Ciena since May 2009. Mr. Gallagher currently
serves as Chairman of Ubiquisys Ltd., a leading developer and supplier of femtocells for the global
3G mobile wireless market. From January 2008 until February 2009, Mr. Gallagher was Chairman of
Macro 4 plc, a global software solutions company, and from May 2006 until March 2008, served as
Vice Chairman of Golden Telecom Inc., a leading facilities-based provider of integrated
communications in Russia and the CIS. From 2003 until 2006, Mr. Gallagher was Executive Vice
Chairman and served as Chief Executive Officer of FLAG Telecom Group and, prior to that role, held
various senior management positions at British Telecom. Mr. Gallagher also serves on the board of
directors of Harmonic Inc. and Sollers JSC.
15
Item 1A. Risk Factors
Risks relating to our acquisition of the MEN Business
During the second quarter of fiscal 2010, we completed our acquisition of the MEN Business.
Business combinations of the scale and complexity of this transaction involve a high degree of
risk. You should consider the following risk factors before investing in our securities.
We may fail to realize the anticipated benefits and operating synergies expected from the MEN
Acquisition, which could adversely affect our operating results and the market price of our common
stock.
The success of the MEN Acquisition will depend, in significant part, on our ability to
successfully integrate the acquired business, grow the combined businesss revenue and realize the
anticipated strategic benefits and operating synergies from the combination. We believe that the
addition of the MEN Business will accelerate the execution of our corporate and product development
strategy, enable us to compete with larger equipment providers and provide opportunities to
optimize our product development investment. Achieving these goals requires growth of the revenue
of the MEN Business and realization of the targeted sales synergies from our combined customer
bases and solutions offerings. This growth and the anticipated benefits of the transaction may not
be realized fully or at all, or may take longer to realize than we expect. Actual operating,
technological, strategic and sales synergies, if achieved at all, may be less significant than we
expect or may take longer to achieve than anticipated. If we are not able to achieve these
objectives and realize the anticipated benefits and operating synergies of the MEN Acquisition
within a reasonable time, our results of operations and the value of Cienas common stock may be
adversely affected.
The MEN Acquisition will result in significant integration costs and any material delays or
unanticipated additional expense may harm our business and results of operations.
The complexity and magnitude of the integration effort associated with the MEN Acquisition are
significant and require that Ciena fund significant capital and operating expense to support the
integration of the combined operations. As of October 31, 2010, we have incurred $101.4 million in
transaction, consulting and third party service fees, $8.5 million in severance expense, and an
additional $12.4 million, primarily related to purchases of capitalized information technology
equipment. We anticipate that we may incur approximately $58.0 million in additional integration
costs during fiscal 2011. We have incurred and expect to continue to incur additional operating
expense as we build up internal resources, including headcount, facilities and information systems,
or engage third party providers, while we simultaneously continue to rely upon and transition away
from critical transition support services provided by an affiliate of Nortel during a transition
period. In addition to these transition costs, we have incurred and expect to continue to incur
increased expense relating to, among other things, restructuring and increased amortization of
intangibles and inventory obsolescence charges. Any material delays, difficulties or unanticipated
additional expense associated with integration activities may harm our business and results of
operations.
The integration of the MEN Business is a complex undertaking, involving a number of operational
risks, and disruptions or delays could significantly harm our business and results of operations.
Because of the structure of the MEN Acquisition as an asset carve out from Nortel, in a number
of areas we did not acquire back-office systems and processes that support the operation of the
business. The MEN Acquisition therefore requires that we build new organizations, grow Cienas
existing infrastructure, or retain third party services to ensure business continuity and to
support and scale our business. As noted below, we are currently relying upon an affiliate of
Nortel to provide critical business support services for a transition period and will ultimately
have to transfer these activities to internal or other third party resources. As a result,
integrating the operations of the MEN Business will be extremely complex and we could encounter
material disruptions, delays or unanticipated costs. Successful integration involves numerous
risks, including:
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assimilating product offerings and sales and marketing operations; |
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coordinating and implementing a combined research and development strategy; |
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retaining and attracting customers following a period of significant uncertainty
associated with the acquired business; |
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diversion of management attention from business and operational matters; |
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identifying and retaining key personnel; |
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maintaining and transitioning relationships with key vendors, including component
providers, manufacturers and service providers; |
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integrating accounting, information technology, enterprise management and
administrative systems which may be difficult or costly; |
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making significant cash expenditures that may be required to retain personnel or
eliminate unnecessary resources; |
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managing tax costs or liabilities for acquired or acquiring corporate entities; |
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coordinating a broader and more geographically dispersed organization; |
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maintaining uniform standards, procedures and policies to ensure efficient and
compliant administration of the organization; and |
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making any necessary modifications to internal control to comply with the
Sarbanes-Oxley Act of 2002 and related rules and regulations. |
Disruptions or delays associated with these and other risks encountered in the integration
process could have a material adverse effect on our business and results of operations.
We are relying on an affiliate of Nortel for the performance of certain critical business support
services during a transition period following the closing of the MEN Acquisition and there can be
no assurance that such services will be performed timely and effectively.
We currently rely upon an affiliate of Nortel for certain key business support services
related to the operation and continuity of the MEN Business. These services will be transferred to
and taken over by our organization over time as we build up the capability and to do so. These
services include key finance and accounting functions, supply chain and logistics management,
maintenance and product support services, order management and fulfillment, trade compliance, and
information technology services. Cienas administration and oversight of these transition services
is complex, requires significant resources and presents issues related to the segregation of duties
and information among the purchasers. These transition services are costly and we could incur
approximately $94.0 million per year, if all of the transition services are used for a full year.
Relying upon the transition services provider to perform critical operations and services raises a
number of significant business and operational risks. The transition service provider also performs
services on behalf of other purchasers of the businesses that Nortel has recently divested. There
is no assurance the provider will serve as an effective support partner for all of the Nortel
purchasers and we face risks associated with the providers ability to retain experienced and
knowledgeable personnel, particularly as Ciena and other purchasers wind down support services.
Ciena expects to exit critical transition services during the second quarter of fiscal 2011. The
wind down and transfer to Ciena or other third parties of these critical services is a complex
undertaking and may be disruptive to our business and operations. Significant disruption in
business support services, the transfer of these activities to Ciena or unanticipated costs related
to such services could adversely affect our business and results of operations.
The MEN Acquisition may expose us to significant unanticipated liabilities that could adversely
affect our business and results of operations.
Our purchase of the MEN Business may expose us to significant unanticipated liabilities
relating to the operation of the Nortel business. These liabilities could include employment,
retirement or severance-related obligations under applicable law or other benefits arrangements,
legal claims, warranty or similar liabilities to customers, and claims by or amounts owed to
vendors, including as a result of any contracts assigned to Ciena. We may also incur liabilities or
claims associated with our acquisition or licensing of Nortels technology and intellectual
property including claims of infringement. Particularly in international jurisdictions, our
acquisition of the MEN Business, or our decision to independently enter new international markets
where Nortel previously conducted business, could also expose us to tax liabilities and other
amounts owed by Nortel. The incurrence of such unforeseen or unanticipated liabilities, should they
be significant, could have a material adverse affect on our business, results of operations and
financial condition.
The MEN Acquisition may cause dilution to our earnings per share, which may harm the market price
of our common stock.
A number of factors, including lower than anticipated revenue and gross margin of the MEN
Business, or fewer operating synergies of the combined operations, could cause dilution to our
earnings per share or decrease or delay any accretive effect of the MEN Acquisition. We could also
encounter unanticipated or additional integration-related costs or fail to realize all of the
benefits of the MEN Acquisition that underlie our financial model and expectations for future
growth and profitability. These and other factors could cause dilution to our earnings per share or
decrease or delay the expected financial benefits of the MEN Acquisition and cause a decrease in
the price of our common stock.
17
The complexity of the integration and transition associated with the MEN Acquisition, together with
Cienas increased scale and global presence, may affect our internal control over financial
reporting and our ability to effectively and timely report our financial results.
We currently rely upon a combination of Ciena information systems and critical transition
services provided by an affiliate of Nortel to accurately and effectively compile and report our financial results. The
additional scale of our operations, together with the complexity of the integration effort,
including changes to or implementation of critical information technology systems and reliance upon
third party transition services, may adversely affect our ability to report our financial results
on a timely basis. In addition, we have had to train new employees and third party providers, and
assume operations in jurisdictions where we have not previously had operations. We expect that the
MEN Acquisition may necessitate significant modifications to our internal control systems,
processes and information systems, both on a transition basis, and over the longer-term as we fully
integrate the combined company. Due to the complexity of the MEN Acquisition, we cannot be certain
that changes to our internal control over financial reporting during fiscal 2011 will be effective
for any period, or on an ongoing basis. If we are unable to accurately and timely report our
financial results, or are unable to assert that our internal controls over financial reporting are
effective, our business and market perception of our financial condition may be harmed and the
trading price of our stock may be adversely affected.
Risks related to our business and operations
Investing in our securities involves a high degree of risk. In addition to the other
information contained in this report, you should consider the following risk factors before
investing in our securities.
Our business and operating results could be adversely affected by unfavorable macroeconomic and
market conditions and reductions in the level of capital expenditure by our largest customers in
response to these conditions.
Broad macroeconomic weakness has previously resulted in sustained periods of decreased demand
for our products and services that have adversely affected our operating results. In response to
these conditions, many of our customers significantly reduced their network infrastructure
expenditures as they sought to conserve capital, reduce debt or address uncertainties or changes in
their own business models brought on by broader market challenges. We continue to experience
cautious spending among our customers as a result of the recent period of economic weakness and
remain uncertain as to how long these macroeconomic and industry conditions will continue, the pace
of recovery, and the magnitude of the effect of these market conditions on our business and results
of operations. Continued or increased challenging economic and market conditions could result in:
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difficulty forecasting, budgeting and planning due to limited visibility into the
spending plans of current or prospective customers; |
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increased competition for fewer network projects and sales opportunities; |
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increased pricing pressure that may adversely affect revenue and gross margin; |
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higher overhead costs as a percentage of revenue; |
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increased risk of charges relating to excess and obsolete inventories and the write
off of other intangible assets; and |
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customer financial difficulty and increased difficulty in collecting accounts
receivable. |
Our business and operating results could be materially affected by periods of unfavorable
macroeconomic and market conditions, globally or specific to a particular region where we operate,
and any resulting reductions in the level of capital expenditure by our customers.
A small number of communications service providers account for a significant portion of our
revenue. The loss of any of these customers, or a significant reduction in their spending, would
have a material adverse effect on our business and results of operations.
A significant portion of our revenue is concentrated among a relatively small number of
communications service providers. One customer, AT&T, accounted for greater than 10% of revenue
representing approximately 21.6% of fiscal 2010 revenue. Consequently, our financial results are
closely correlated with the spending of a relatively small number of service providers and are
significantly affected by market or industry changes that affect their businesses. The terms of our
frame contracts generally do not obligate these customers to purchase any minimum or specific
amounts of equipment or services. Because their spending may be unpredictable and sporadic, our
revenue and operating results can fluctuate on a quarterly basis. Reliance upon a relatively small
number of customers increases our exposure to changes in their network and purchasing strategies.
Some of our customers are pursuing efforts to outsource the management and operation of their
networks, or have indicated a procurement strategy to reduce or rationalize the number of vendors
from which they purchase equipment. These strategies may present challenges to our business and
could benefit our larger competitors. Our concentration in revenue has increased in recent years,
in part, as a result of consolidations among a number of our largest customers. Consolidations may
increase the likelihood of temporary or indefinite reductions in
customer spending or changes in network strategy that could harm our business and operating results. The loss of one or more
large service provider customers, or a significant reduction in their spending, as a result of the
factors above or otherwise, would have a material adverse effect on our business, financial condition and results of operations.
18
Our revenue and operating results can fluctuate unpredictably from quarter to quarter.
Our revenue and results of operations can fluctuate unpredictably from quarter to quarter. Our
budgeted expense levels depend in part on our expectations of long-term future revenue and gross
margin, and substantial reductions in expense are difficult and can take time to implement.
Uncertainty or lack of visibility into customer spending, and changes in economic or market
conditions, can make it difficult to prepare reliable estimates of future revenue and corresponding
expense levels. Consequently, our level of operating expense or inventory may be high relative to
our revenue, which could harm our ability to achieve or maintain profitability. Given market
conditions and the effect of cautious spending in recent quarters, lower levels of backlog orders
and an increase in the percentage of quarterly revenue relating to orders placed in that quarter
could result in more variability and less predictability in our quarterly results.
Additional factors that contribute to fluctuations in our revenue and operating results
include:
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broader economic and market conditions affecting us and our customers; |
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changes in capital spending by large communications service providers; |
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the timing and size of orders, including our ability to recognize revenue under
customer contracts; |
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the transition from selling legacy to next-generation technology platforms; |
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availability and cost of critical components; |
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variations in the mix between higher and lower margin products and services; and |
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the level of pricing pressure we encounter, particularly for our Packet-Optical
Transport. |
Many factors affecting our results of operations are beyond our control, particularly in the
case of large service provider orders and multi-vendor or multi-technology network infrastructure
builds where the achievement of certain thresholds for acceptance is subject to the readiness and
performance of the customer or other providers, and changes in customer requirements or
installation plans. As a consequence, our results for a particular quarter may be difficult to
predict, and our prior results are not necessarily indicative of results likely in future periods.
The factors above may cause our revenue and operating results to fluctuate unpredictably from
quarter to quarter. These fluctuations may cause our operating results to be below the expectations
of securities analysts or investors, which may cause our stock price to decline.
We face intense competition that could hurt our sales and results of operations.
The markets in which we compete for sales of networking equipment, software and services are
extremely competitive. Competition is particularly intense in attracting large carrier customers
and securing new market opportunities with existing carrier customers. In an effort to secure new
or long-term customers and capture market share, in the past we have and in the future we may agree
to pricing or other terms that result in negative gross margins on a particular order or group of
orders. The level of competition and pricing pressure that we face increases substantially during
periods of macroeconomic weakness, constrained spending or fewer network projects. As a result of
these market conditions, we have experienced significant competition and increased pricing
pressure, particularly for our Packet-Optical Transport products, as we and other vendors have
sought to retain or grow market share.
Competition in our markets, generally, is based on any one or a combination of the following
factors: price, product features, functionality and performance, service offering, manufacturing
capability and lead-times, incumbency and existing business relationships, scalability and the
flexibility of products to meet the immediate and future network requirements of customers. A small
number of very large companies have historically dominated our industry. These competitors have
substantially greater financial and marketing resources, greater manufacturing capacity, broader
product offerings and more established relationships with service providers and other potential
customers than we do. Because of their scale and resources, they may be perceived to be better
positioned to offer network operating or management service for large carrier customers. We expect
that the acquired products and technologies, increased market share and global presence resulting
from the MEN Acquisition will only intensify the level of competition that we face, particularly
from larger vendors. We also compete with a number of smaller companies that provide significant
competition for a specific product, application, customer segment or geographic market. Due to the
narrower focus of their efforts, these competitors may achieve commercial availability of their
products more quickly or may be more attractive to customers.
Increased competition in our markets has resulted in aggressive business tactics, including:
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significant price competition, particularly for our Packet-Optical Transport
platforms; |
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customer financing assistance; |
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early announcements of competing products and extensive marketing efforts; |
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competitors offering equity ownership positions to customers; |
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competitors offering to repurchase our equipment from existing customers; |
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marketing and advertising assistance; and |
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intellectual property assertions and disputes. |
The tactics described above can be particularly effective in an increasingly concentrated base
of potential customers such as communications service providers. If competitive pressures increase
or we fail to compete successfully in our markets, our sales and profitability would suffer.
Our reliance upon third party manufacturers exposes us to risks that could negatively affect our
business and operations.
We rely upon third party contract manufacturers to perform the majority of the manufacturing
of our products and components. We do not have contracts in place with some of our manufacturers,
do not have guaranteed supply of components or manufacturing capacity and in some cases are
utilizing temporary or transitional commercial arrangements intended to facilitate the integration
of the MEN Business. Our reliance upon third party manufacturers could expose us to increased risks
related to lead times, continued supply, on-time delivery, quality assurance and compliance with
environmental standards and other regulations. Reliance upon third parties manufacturers exposes us
to risks related to their operations, financial position, business continuity and continued
viability, which may be adversely affected by broader macroeconomic conditions and difficulties in
the credit markets. In an effort to drive cost reductions, we anticipate rationalizing our supply
chain and third party contract manufacturers as part of the integration of the MEN Business into
Cienas operations. There can be no assurance that these efforts, including any consolidation or
reallocation the third party sourcing and manufacturing, will not ultimately result in additional
costs or disruptions in our operations and business.
We may also experience difficulties as a result of geopolitical events, military actions or
health pandemics in the countries where our products or critical components are manufactured. Our
product manufacturing principally takes place in Mexico, Canada, Thailand and China. Thailand is
undergoing a period of instability and we have in the past experienced product shipment delays
associated with political turmoil in Thailand, including a blockade of its main international
airport. Significant disruptions in these countries affecting supply and manufacturing capacity, or
other difficulties with our contract manufacturers would negatively affect our business and results
of operations.
Investment of research and development resources in technologies for which there is not a matching
market opportunity, or failure to sufficiently or timely invest in technologies for which there is
market demand, would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving
technologies and changes in market demand. We continually invest in research and development to
sustain or enhance our existing products and develop or acquire new products technologies. Our
current development efforts are focused upon the platform evolution of our CoreDirector
Multiservice Optical Switch family to our ActivFlex 5400 family of Reconfigurable Switching
Systems, the expansion of our ActivEdge service delivery and aggregation switches, and our 40G and
100G coherent technologies and capabilities for our Packet-Optical Transport platforms. There is
often a lengthy period between commencing these development initiatives and bringing a new or
improved product to market. During this time, technology preferences, customer demand and the
market for our products may move in directions we had not anticipated. There is no guarantee that
new products or enhancements will achieve market acceptance or that the timing of market adoption
will be as predicted. There is a significant possibility, therefore, that some of our development
decisions, including significant expenditures on acquisitions, research and development costs, or
investments in technologies, will not turn out as anticipated, and that our investment in some
projects will be unprofitable. There is also a possibility that we may miss a market opportunity
because we failed to invest, or invested too late, in a technology, product or enhancement. Changes
in market demand or investment priorities may also cause us to discontinue existing or planned
development for new products or features, which can have a disruptive effect on our relationships
with customers. These product development risks can be compounded in the context of a significant
acquisition such as the MEN Business and decision making regarding our product portfolio and the
significant development work required to integrate the combined product and software offerings. If
we fail to make the right investments or fail to make them at the right time, our competitive
position may suffer and our revenue and profitability could be harmed.
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Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of highly technical and complex communications network
equipment is complicated. Some of our products can be fully tested only when deployed in
communications networks or when carrying traffic with other equipment. As a result, product
performance problems are often more acute for initial deployments of new products and product
enhancements. Our products have contained and may contain undetected hardware or software errors or
defects. These defects have resulted in warranty claims and additional costs to remediate.
Unanticipated problems can relate to the design, manufacturing, installation or integration of our products. Performance problems and
product malfunctions can also relate to defects in components, software or manufacturing services
supplied by third parties. Product performance, reliability and quality problems can negatively
affect our business, including:
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increased costs to remediate software or hardware defects or replace products; |
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payment of liquidated damages or similar claims for performance failures or delays; |
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increased inventory obsolescence; |
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increased warranty expense or estimates resulting from higher failure rates,
additional field service obligations or other rework costs related to defects; |
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delays in recognizing revenue or collecting accounts receivable; and |
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declining sales to existing customers and order cancellations. |
Product performance problems could also damage our business reputation and harm our prospects with
potential customers. These consequences of product defects or quality problems, including any
significant costs to remediate, could negatively affect our business and results of operations.
Network equipment sales to large communications service providers often involve lengthy sales
cycles and protracted contract negotiations and may require us to assume terms or conditions that
negatively affect our pricing, payment terms and the timing of revenue recognition.
Our future success will depend in large part on our ability to maintain and expand our sales
to large communications service providers. These sales typically involve lengthy sales cycles,
protracted and sometimes difficult contract negotiations, and sales to service providers often
involve extensive product testing, and demonstration laboratory or network certification, including
network-specific or region-specific processes. We are sometimes required to agree to contract terms
or conditions that negatively affect pricing, payment terms and the timing of revenue recognition
in order to consummate a sale. During periods of macroeconomic or market weakness, these customers
may request extended payment terms, vendor or third-party financing and other alternative purchase
structures. These terms may, in turn, negatively affect our revenue and results of operations and
increase our risk and susceptibility to quarterly fluctuations in our results. Service providers
may ultimately insist upon terms and conditions that we deem too onerous or not in our best
interest. Moreover, our purchase agreements generally do not require that a customer guarantee any
minimum purchase level and customers often have the right to modify, delay, reduce or cancel
previous orders. As a result, we may incur substantial expense and devote time and resources to
potential relationships that never materialize or result in lower than anticipated sales.
Difficulties with third party component suppliers, including sole and limited source suppliers,
could increase our costs and harm our business and customer relationships.
We depend on third party suppliers for our product components and subsystems, as well as for
equipment used to manufacture and test our products. Our products include key optical and
electronic components for which reliable, high-volume supply is often available only from sole or
limited sources. Increases in market demand or periods of economic weakness have previously
resulted in shortages in availability for important components. Unfavorable economic conditions can
affect our suppliers liquidity level and ability to continue to invest in their business and to
stock components in sufficient quantity. We have experienced increased lead times and a higher
incidence of component discontinuation. These difficulties with suppliers could result in lost
revenue, additional product costs and deployment delays that could harm our business and customer
relationships. We do not have any guarantee of supply from these third parties, and in many cases
relating to the MEN Business, are relying upon temporary or transitional commercial arrangements
intended to facilitate the integration. As a result, there is no assurance that we will be able to
secure the components or subsystems that we require in sufficient quantity and quality on
reasonable terms. The loss of a source of supply, or lack of sufficient availability of key
components, could require that we locate an alternate source or redesign our products, each of
which could increase our costs and negatively affect our product gross margin and results of
operations. Our business and results of operations would be negatively affected if we were to
experience any significant disruption of difficulties with key suppliers affecting the price,
quality, availability or timely delivery of required components.
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We may not be successful in selling our products into new markets and developing and managing new
sales channels.
We expanded our geographic presence significantly as a result of the MEN Acquisition, and we
continue to take steps to sell our products into new geographic markets outside of our traditional
markets and to a broader customer base, including other large communications service providers, enterprises, wireless operators, cable
operators, submarine network operators, content providers, and federal, state and local
governments. In many cases, we have less experience in these markets and customers have less
familiarity with our company. To succeed in some of these markets we believe we must develop and
manage new sales channels and distribution arrangements. We expect these relationships to be an
important part of our business internationally as well as for sales to federal, state and local governments. Failure to
manage additional sales channels effectively would limit our ability to succeed in these new
markets and could adversely affect our ability to expand our customer base and grow our business.
We may experience delays in the development of our products that may negatively affect our
competitive position and business.
Our products are based on complex technology, and we can experience unanticipated delays in
developing, manufacturing or deploying them. Each step in the development life cycle of our
products presents serious risks of failure, rework or delay, any one of which could affect the
cost-effective and timely development of our products. The development of our products, including
the integration of the products acquired from the MEN Business into our portfolio and the
development of an integrated software tool to manage the combined portfolio, present significant
complexity. In addition, intellectual property disputes, failure of critical design elements, and
other execution risks may delay or even prevent the release of these products. Delays in product
development may affect our reputation with customers and the timing and level of demand for our
products. If we do not develop and successfully introduce products in a timely manner, our
competitive position may suffer and our business, financial condition and results of operations
would be harmed.
We may be required to write off significant amounts of inventory as a result of our inventory
purchase practices, the convergence of our product lines or unfavorable macroeconomic or industry
conditions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our
contract manufacturers and suppliers to manufacture components and complete assemblies based in
part on forecasts of customer demand. As a result, our inventory purchases expose us to the risk
that our customers either will not order the products we have forecasted or will purchase fewer
products than forecasted. Unfavorable market or industry conditions can limit visibility into
customer spending plans and compound the difficulty of forecasting inventory at appropriate levels.
Moreover, our customer purchase agreements generally do not guarantee any minimum purchase level,
and customers often have the right to modify, reduce or cancel purchase quantities. As a result, we
may purchase inventory in anticipation of sales that do not occur. Historically, our inventory
write-offs have resulted from the circumstances above. As features and functionalities converge
across our product lines, and we introduce new products, however, we face an additional risk that
customers may forego purchases of one product we have inventoried in favor of another product with
similar functionality. If we are required to write off or write down a significant amount of
inventory, our results of operations for the period would be materially adversely affected.
Restructuring activities could disrupt our business and affect our results of operations.
We have previously taken steps, including reductions in force, office closures, and internal
reorganizations to reduce the size and cost of our operations and to better match our resources
with market opportunities. We may take similar steps in the future, particularly as we seek to
realize operating synergies and cost reductions associated with the MEN Acquisition. These changes
could be disruptive to our business and may result in significant expense including accounting
charges for inventory and technology-related write-offs, workforce reduction costs and charges
relating to consolidation of excess facilities. Substantial expense or charges resulting from
restructuring activities could adversely affect our results of operations in the period in which we
take such a charge.
Our failure to manage effectively our relationships with third party service partners could
adversely impact our financial results and relationship with customers.
We rely on a number of third party service partners, both domestic and international, to
complement our global service and support resources. We rely upon these partners for certain
maintenance and support functions, as well as the installation of our equipment in some large
network builds. In order to ensure the proper installation and maintenance of our products, we must
identify, train and certify qualified service partners. Certification can be costly and
time-consuming, and our partners often provide similar services for other companies, including our
competitors. We may not be able to manage effectively our relationships with our service partners
and cannot be certain that they will be able to deliver services in the manner or time required. If
our service partners are unsuccessful in delivering services:
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our services revenue and gross margin may be adversely affected; and |
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our relationship with customers could suffer. |
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Difficulties with service partners could cause us to transition a larger share of deployment and
other services from third parties to internal resources, thereby increasing our services overhead
costs and negatively affecting our services gross margin and results of operations.
Our intellectual property rights may be difficult and costly to enforce.
We generally rely on a combination of patents, copyrights, trademarks and trade secret laws to
establish and maintain proprietary rights in our products and technology. Although we have been
issued numerous patents and other patent applications are currently pending, there can be no
assurance that any of these patents or other proprietary rights will not be challenged, invalidated
or circumvented or that our rights will provide us with any competitive advantage. In addition,
there can be no assurance that patents will be issued from pending applications or that claims
allowed on any patents will be sufficiently broad to protect our technology. Further, the laws of
some foreign countries may not protect our proprietary rights to the same extent as do the laws of
the United States.
We are subject to the risk that third parties may attempt to use our intellectual property
without authorization. Protecting against the unauthorized use of our products, technology and
other proprietary rights is difficult, time-consuming and expensive, and we cannot be certain that
the steps that we are taking will prevent or minimize the risks of such unauthorized use.
Litigation may be necessary to enforce or defend our intellectual property rights or to determine
the validity or scope of the proprietary rights of others. Such litigation could result in
substantial cost and diversion of management time and resources, and there can be no assurance that
we will obtain a successful result. Any inability to protect and enforce our intellectual property
rights, despite our efforts, could harm our ability to compete effectively.
We may incur significant costs in response to claims by others that we infringe their intellectual
property rights.
From time to time third parties may assert claims or initiate litigation or other proceedings
related to patent, copyright, trademark and other intellectual property rights to technologies and
related standards that are relevant to our business. These assertions have increased over time due
to our growth, the increased number of products and competitors in the communications network
equipment industry and the corresponding overlaps, and the general increase in the rate of patent
claims assertions, particularly in the United States. Asserted claims, litigation or other
proceedings can include claims against us or our manufacturers, suppliers or customers, alleging
infringement of third party proprietary rights with respect our existing or future products and
technology or components of those products. Regardless of the merit of these claims, they can be
time-consuming, divert the time and attention of our technical and management personnel, and result
in costly litigation. These claims, if successful, can require us to:
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pay substantial damages or royalties; |
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comply with an injunction or other court order that could prevent us from offering
certain of our products; |
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seek a license for the use of certain intellectual property, which may not be available
on commercially reasonable terms or at all; |
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develop non-infringing technology, which could require significant effort and expense
and ultimately may not be successful; and |
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indemnify our customers pursuant to contractual obligations and pay damages on their
behalf. |
Any of these events could adversely affect our business, results of operations and financial
condition.
Our exposure to risks associated with the use of intellectual property may be increased as a
result of acquisitions, as we have a lower level of visibility into the development process with
respect to such technology or the steps taken to safeguard against the risks of infringing the
rights of third parties.
Our international operations could expose us to additional risks and expense and adversely affect
our results of operations.
We market, sell and service our products globally and rely upon a global supply chain for
sourcing of important components and manufacturing of our products. International operations are
subject to inherent risks, including:
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effects of changes in currency exchange rates; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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difficulties and costs of staffing and managing foreign operations; |
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the impact of economic conditions in countries outside the United States; |
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less protection for intellectual property rights in some countries; |
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adverse tax and customs consequences, particularly as related to transfer-pricing
issues; |
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social, political and economic instability; |
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higher incidence of corruption; |
23
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trade protection measures, export compliance, domestic preference procurement
requirements, qualification to transact business and additional regulatory requirements;
and |
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natural disasters, epidemics and acts of war or terrorism. |
We expect that we may enter new markets and withdraw from or reduce operations in
others. In some countries, our success will depend in part on our ability to form relationships with local partners. Our inability
to identify appropriate partners or reach mutually satisfactory arrangements could adversely affect
our business and operations. Our global operations may result in increased risk and expense to our
business and could give rise to unanticipated liabilities or difficulties that could adversely
affect our operations and financial results.
Our use and reliance upon development resources in India may expose us to unanticipated costs or
liabilities.
We have a significant development center in India and, in recent years, have increased
headcount and development activity at this facility. There is no assurance that our reliance upon
development resources in India will enable us to achieve meaningful cost reductions or greater
resource efficiency. Further, our development efforts and other operations in India involve
significant risks, including:
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difficulty hiring and retaining appropriate engineering resources due to intense
competition for such resources and resulting wage inflation; |
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exposure to misappropriation of intellectual property and proprietary information; |
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heightened exposure to changes in the economic, regulatory, security and political
conditions of India; and |
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fluctuations in currency exchange rates and tax compliance in India. |
Difficulties resulting from the factors above and other risks related to our operations in
India could expose us to increased expense, impair our development efforts, harm our competitive
position and damage our reputation.
We may be exposed to unanticipated risks and additional obligations in connection with our resale
of complementary products or technology of other companies.
We have entered into agreements with strategic partners that permit us to distribute their
products or technology. We may rely upon these relationships to add complementary products or
technologies, diversify our product portfolio, or address a particular customer or geographic
market. We may enter into additional original equipment manufacturer (OEM), resale or similar
strategic arrangements in the future, including in support of our selection as a domain supply
partner with AT&T. We may incur unanticipated costs or difficulties relating to our resale of third
party products. Our third party relationships could expose us to risks associated with the business
and viability of such partners, as well as delays in their development, manufacturing or delivery
of products or technology. We may also be required by customers to assume warranty, indemnity,
service and other commercial obligations greater than the commitments, if any, made to us by our
technology partners. Some of our strategic partners are relatively small companies with limited
financial resources. If they are unable to satisfy their obligations to us or our customers, we may
have to expend our own resources to satisfy these obligations. Exposure to these risks could harm
our reputation with key customers and negatively affect our business and our results of operations.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect
receivables and could adversely affect our revenue and operating results.
In the course of our sales to customers, we may have difficulty collecting receivables and
could be exposed to risks associated with uncollectible accounts. We may be exposed to similar
risks relating to third party resellers and other sales channel partners. Lack of liquidity in the
capital markets or a sustained period of unfavorable economic conditions may increase our exposure
to credit risks. Our attempts to monitor these situations carefully and take appropriate measures
to protect ourselves may not be sufficient, and it is possible that we may have to write down or
write off doubtful accounts. Such write-downs or write-offs could negatively affect our operating
results for the period in which they occur, and, if large, could have a material adverse effect on
our revenue and operating results.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business
effectively.
Competition to attract and retain highly skilled technical, engineering and other personnel
with experience in our industry is intense and our employees have been the subject of targeted
hiring by our competitors. We may experience difficulty retaining and motivating existing employees
and attracting qualified personnel to fill key positions. Because we rely upon equity awards as a
significant component of compensation, particularly for our executive team, a lack of positive
performance in our stock price, reduced grant levels, or changes to our compensation program may
adversely affect our ability to attract and retain key employees. It may be difficult to replace
members of our management team or other key personnel, and the loss of such individuals could be
disruptive to our business. In addition, none of our executive
officers is bound by an employment agreement for any specific term. If we are unable to attract and retain
qualified personnel, we may be unable to manage our business effectively and our operations and
results of operations could suffer.
24
We may be adversely affected by fluctuations in currency exchange rates.
As a global concern, we face exposure to adverse movements in foreign currency exchange rates.
Historically, our sales have primarily been denominated in U.S. dollars. As a result of our increased global
presence, a larger percentage of our revenue is now non-U.S. dollar denominated and therefore
subject to foreign currency fluctuation. In addition, we face exposure to currency exchange rates
as a result of our non-U.S. dollar denominated operating expense in Europe, Asia, Latin America and
Canada. We have previously hedged against currency exposure associated with anticipated foreign
currency cash flows and may do so in the future. There can be no assurance that these hedging
instruments will be effective and losses associated with these instruments and the adverse effect
of foreign currency exchange rate fluctuation may negatively affect our results of operations.
Our products incorporate software and other technology under license from third parties and our
business would be adversely affected if this technology was no longer available to us on
commercially reasonable terms.
We integrate third-party software and other technology into our embedded operating system,
network management system tools and other products. Licenses for this technology may not be
available or continue to be available to us on commercially reasonable terms. Third party licensors
may insist on unreasonable financial or other terms in connection with our use of such technology.
Difficulties with third party technology licensors could result in termination of such licenses,
which may result in significant costs and require us to obtain or develop a substitute technology.
Difficulty obtaining and maintaining third-party technology licenses may disrupt development of our
products and increase our costs, which could harm our business.
Our business is dependent upon the proper functioning of our internal business processes and
information systems and modifications may disrupt our business, processes and internal controls.
The successful operation of various internal business processes and information systems is
critical to the efficient operation of our business. If these systems fail or are interrupted, our
operations may be adversely affected and operating results could be harmed. Our business processes
and information systems need to be sufficiently scalable to support the integration of the MEN
Business and future growth of our business. The integration of the MEN Business and transfer of
business support services being performed under the transition services agreement will require
significant modifications relating to our internal business processes and information systems.
Significant changes to our processes and systems expose us to a number of operational risks. These
changes may be costly and disruptive, and could impose substantial demands on management time.
These changes may also require the modification of a number of internal control procedures and
significant training of employees. Any material disruption, malfunction or similar problems with
our business processes or information systems, or the transition to new processes and systems,
could have a negative effect on the operation of our business and our results of operations.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make investments in other technology companies, or enter into other
strategic relationships, to expand the markets we address, diversify our customer base or acquire
or accelerate the development of technology or products. To do so, we may use cash, issue equity
that would dilute our current stockholders ownership, or incur debt or assume indebtedness. These
transactions involve numerous risks, including:
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significant integration costs; |
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disruption due to the integration and rationalization of operations, products, technologies and personnel; |
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diversion of managements attention; |
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difficulty completing projects of the acquired company and costs related to in-process
projects; |
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the loss of key employees; |
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ineffective internal controls over financial reporting; |
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dependence on unfamiliar suppliers or manufacturers; |
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exposure to unanticipated liabilities, including intellectual property infringement
claims; and |
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adverse tax or accounting effects including amortization expense related to intangible
assets and charges associated with impairment of goodwill. |
As a result of these and other risks, our acquisitions, investments or strategic transactions
may not reap the intended benefits and may ultimately have a negative impact on our business,
results of operation and financial condition.
25
Changes in government regulation affecting the communications industry and the businesses of our
customers could harm our prospects and operating results.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications
industry and similar agencies have jurisdiction over the communication industries in other
countries. Many of our largest customers are subject to the rules and regulations of these
agencies. Changes in regulatory requirements in the United States or other countries could
inhibit service providers from investing in their communications network infrastructures or
introducing new services. These changes could adversely affect the sale of our products and
services. Changes in regulatory tariff requirements or other regulations relating to pricing or
terms of carriage on communications networks could slow the development or expansion of network
infrastructures and adversely affect our business, operating results, and financial condition.
Governmental regulations affecting the use, import or export of products could negatively affect
our revenue.
The United States and various foreign governments have imposed controls, license requirements
and other restrictions on the usage, import or export of some of the technologies that we sell.
Governmental regulation of usage, import or export of our products, or our failure to obtain
required approvals for our products, could harm our international and domestic sales and adversely
affect our revenue and costs of sales. Failure to comply with such regulations could result in
enforcement actions, fines or penalties and restrictions on export privileges. In addition, costly
tariffs on our equipment, restrictions on importation, trade protection measures and domestic
preference requirements of certain countries could limit our access to these markets and harm our
sales. For example, Indias government has recently implemented certain rules applicable to
non-Indian network equipment vendors and is considering further restrictions that may inhibit sales
of certain communications equipment, including equipment manufactured in China, where certain of
our products are assembled. These and other regulations could adversely affect the sale or use of
our products and could adversely affect our business and revenue.
Governmental regulations related to the environment and potential climate change, could adversely
affect our business and operating results.
Our operations are regulated under various federal, state, local and international laws
relating to the environment and potential climate change. We could incur fines, costs related to
damage to property or personal injury, and costs related to investigation or remediation
activities, if we were to violate or become liable under these laws or regulations. Our product
design efforts, and the manufacturing of our products, are also subject to evolving requirements
relating to the presence of certain materials or substances in our equipment, including regulations
that make producers for such products financially responsible for the collection, treatment and
recycling of certain products. For example, our operations and financial results may be negatively
affected by environmental regulations, such as the Waste Electrical and Electronic Equipment (WEEE)
and Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment
(RoHS) that have been adopted by the European Union. Compliance with these and similar
environmental regulations may increase our cost of designing, manufacturing, selling and removing
our products. These regulations may also make it difficult to obtain supply of compliant components
or require us to write off non-compliant inventory, which could have an adverse effect our business
and operating results.
We may be required to write down long-lived assets and these impairment charges would adversely
affect our operating results.
As of October 31, 2010, our balance sheet includes $600.4 million in long-lived assets, which
includes $426.4 million of intangible assets. Valuation of our long-lived assets requires us to
make assumptions about future sales prices and sales volumes for our products. These assumptions
are used to forecast future, undiscounted cash flows. Given the significant uncertainty and
instability of macroeconomic conditions in recent periods, forecasting future business is
difficult and subject to modification. If actual market conditions differ or our forecasts change,
we may be required to reassess long-lived assets and could record an impairment charge. Any
impairment charge relating to long-lived assets would have the effect of decreasing our earnings
or increasing our losses in such period. If we are required to take a substantial impairment
charge, our operating results could be materially adversely affected in such period.
Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a
report containing managements assessment of the effectiveness of our internal controls over
financial reporting as of the end of our fiscal year and a statement as to whether or not such
internal controls are effective. Compliance with these requirements has resulted in, and is likely
to continue to result in, significant costs and the commitment of time and operational resources.
Changes in our business, including the MEN Acquisition, will necessitate modifications to our
internal control systems, processes and information systems. Our increased global operations and
expansion into new regions could pose additional challenges to our internal control systems. We
cannot be certain that our current design for internal control over financial reporting, or any
additional changes to be made during fiscal 2011, will be sufficient to enable management to determine
that our internal controls
26
are effective for any period, or on an ongoing basis. If we are unable to assert that our internal
controls over financial reporting are effective, our business may be harmed. Market perception of
our financial condition and the trading price of our stock may be adversely affected, and customer
perception of our business may suffer.
Outstanding indebtedness under our convertible notes may adversely affect
our business.
At October 31, 2010, indebtedness on our outstanding convertible notes totaled approximately
$1.4 billion in aggregate principal. Our indebtedness could have important negative consequences, including:
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increasing our vulnerability to adverse economic and industry conditions; |
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limiting our ability to obtain additional financing, particularly in light of
unfavorable conditions in the credit markets; |
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reducing the availability of cash resources for other purposes, including capital
expenditures; |
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limiting our flexibility in planning for, or reacting to, changes in our business and
the markets in which we compete; and |
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placing us at a possible competitive disadvantage to competitors that have better
access to capital resources. |
We may also add additional indebtedness such as equipment loans, working capital lines of
credit and other long-term debt.
Our stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain
volatile in the future. Volatility in our stock price can arise as a result of a number of the
factors discussed in this Risk Factors section. During fiscal 2010, our closing stock price
ranged from a high of $19.24 per share to a low of $10.67 per share. The stock market has
experienced extreme price and volume fluctuations that have affected the market price of many
technology companies, with such volatility often unrelated to the operating performance of these
companies. Divergence between our actual or anticipated financial results and published
expectations of analysts can cause significant swings in our stock price. Our stock price can also
be affected by announcements that we, our competitors, or our customers may make, particularly
announcements related to acquisitions or other significant transactions. Our common stock is
included in a number of market indices and any change in the composition of these indices to
exclude our company would adversely affect our stock price. On December 18, 2009, we were removed
from the S&P 500, a widely-followed index. These factors, as well as conditions affecting the
general economy or financial markets, may materially adversely affect the market price of our
common stock in the future.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Overview. As of October 31, 2010, all of our properties are leased and we do not own any real
property. We lease eighty-five facilities related to the ongoing operations of our four business
segments and related functions. Our principal executive offices are located in Linthicum, Maryland.
We lease six buildings located at various sites near Linthicum, Maryland, including an engineering
facility, two supply chain and logistics facilities, and three administrative and sales facilities.
Our largest engineering facility is located at Nortels Carling campus in Ottawa, Canada. See below
for information regarding the lease associated with this facility. We also have engineering and/or
service facilities located in San Jose, California; Alpharetta, Georgia; Spokane, Washington;
Kanata, Canada; and Gurgaon, India. We maintain a sales and service facility in London, England and
a supply chain logistics facility in Newtonabbey, Northern Ireland. In addition, we lease various
smaller offices in the United States, Mexico, South America, Europe and Asia to support our sales
and services operations. We believe the facilities we are now using are adequate and suitable for
our business requirements.
Restructuring. We lease a number of properties that we no longer occupy. As part of our
restructuring costs, we provide for the estimated cost of the future net lease expense for these
facilities. The cost is based on the fair value of future minimum lease payments under contractual
obligations offset by the fair value of the estimated future sublease payments that we may receive.
As of October 31, 2010, our accrued restructuring liability related to these properties was $6.4
million. If actual market conditions relating to the use of these facilities are less favorable
than those projected by management, additional restructuring costs associated with these facilities
may be required. For additional information regarding our lease obligations, see Note 22 to the
Consolidated Financial Statements in Item 8 of Part II of this annual report.
27
Carling Lease. Upon the completion of the MEN Acquisition, Ciena Canada Inc., a subsidiary of
Ciena, entered into a lease agreement with Nortel Networks Technology Corp. (Landlord) relating
to the Lab 10 building on Nortels Carling Campus in Ottawa, Canada (the Carling lease). This
facility consists of a rentable area of 265,000 square feet for which we incur lease expense of
approximately $7.2 million CAD per year, consisting of both base rent and fixed additional
operating expense, the latter of which will increase 2% per year. The Carling lease has a ten-year
term, subject to early termination provisions that may be exercised by Landlord if the property is purchased by a third party who
requires vacant possession of the premises occupied by us prior to the end of the term. Landlords
exercise of these early termination rights is subject to Landlords payment of an early termination
fee of up to $33.5 million USD.
On October 19, 2010, Nortel issued a press release announcing its entry into an agreement with
Public Works and Government Services Canada (PWGSC) for the sale of the Carling Campus. Nortel
indicated that it targets a closing for this sale transaction at the end of calendar 2010. Nortels
press release further indicated, with respect to the Carling lease, that Nortel is directed by
PWGSC under the sale agreement to exercise, on closing, Nortels early termination rights under the
lease, shortening the lease from 10 years to 5 years. Pursuant to the
terms of the Carling lease, should Nortel exercise its early termination rights as indicated in its
press release, Ciena would be entitled to receive, within three business days of Nortels delivery
of an early termination notice, payment of an early termination fee in the amount of $33.5 million
USD. Such fee would be paid from the escrowed portion of the purchase price paid by Ciena for the
MEN Business. See Note 23 to the Consolidated Financial Statements
in Item 8 of Part II of this annual report for additional information
relating to the sale of the Carling Campus and Cienas receipt
of the early termination fee following the completion of fiscal 2010.
Item 3. Legal Proceedings
On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the
Northern District of Georgia against Ciena and four other defendants, alleging, among other things,
that certain of the parties products infringe U.S. Patent 6,542,673 (the 673 Patent), relating
to an identifier system and components for optical assemblies. The complaint, which seeks
injunctive relief and damages, was served upon Ciena on January 20, 2009. Ciena filed an answer to
the complaint and counterclaims against Graywire on March 26, 2009, and an amended answer and
counterclaims on April 17, 2009. On April 27, 2009, Ciena and certain other defendants filed an
application for inter partes reexamination of the 673 Patent with the U.S. Patent and Trademark
Office (the PTO). On the same date, Ciena and the other defendants filed a motion to stay the
case pending reexamination of all of the patents-in-suit. On July 17, 2009, the district court
granted the defendants motion to stay the case. On July 23, 2009, the PTO granted the defendants
application for reexamination with respect to certain claims of the 673 Patent. We believe that we
have valid defenses to the lawsuit and intend to defend it vigorously in the event the stay of the
case is lifted.
As a result of our June 2002 merger with ONI Systems Corp., we became a defendant in a
securities class action lawsuit filed in the United States District Court for the Southern District
of New York in August 2001. The complaint named ONI, certain former ONI officers, and certain
underwriters of ONIs initial public offering (IPO) as defendants, and alleges, among other things,
that the underwriter defendants violated the securities laws by failing to disclose alleged
compensation arrangements (such as undisclosed commissions or stock stabilization practices) in
ONIs registration statement and by engaging in manipulative practices to artificially inflate
ONIs stock price after the IPO. The complaint also alleges that ONI and the named former officers
violated the securities laws by failing to disclose the underwriters alleged compensation
arrangements and manipulative practices. No specific amount of damages has been claimed. Similar
complaints have been filed against more than 300 other issuers that have had initial public
offerings since 1998, and all of these actions have been included in a single coordinated
proceeding. The former ONI officers have been dismissed from the action without prejudice. In July
2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement. The settlement agreement did not
require Ciena to pay any amount toward the settlement or to make any other payments. While the
partial settlement was pending approval, the plaintiffs continued to litigate their cases against
the underwriter defendants. In October 2004, the district court certified a class with respect to
the Section 10(b) claims in six focus cases selected out of all of the consolidated cases, which
cases did not include Ciena, and which decision was appealed by the underwriter defendants to the
U.S. Court of Appeals for the Second Circuit. On February 15, 2005, the district court granted the
motion for preliminary approval of the settlement agreement, subject to certain modifications, and
on August 31, 2005, the district court issued a preliminary order approving the revised stipulated
settlement agreement. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated
the district courts grant of class certification in the six focus cases. On April 6, 2007, the
Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuits
decision, the parties agreed that the settlement could not be approved. On June 25, 2007, the
district court approved a stipulation filed by the plaintiffs and the issuer defendants terminating
the proposed settlement. On August 14, 2007, the plaintiffs filed second amended complaints against
the defendants in the six focus cases. On September 27, 2007, the plaintiffs filed a motion for
class certification based on their amended complaints and allegations. On March 26, 2008, the
district court denied motions to dismiss the second amended complaints filed by the defendants in
the six focus cases, except as to Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price and those who purchased
28
outside the
previously certified class period. Briefing on the plaintiffs motion for class certification in the focus cases was completed in May 2008. That
motion was withdrawn without prejudice on October 10, 2008. On April 2, 2009, a stipulation and
agreement of settlement between the plaintiffs, issuer defendants and underwriter defendants was
submitted to the Court for preliminary approval. The Court granted the plaintiffs motion for
preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The
settlement fairness hearing was held on September 10, 2009. On October 6, 2009, the Court entered
an opinion granting final approval to the settlement and directing that the Clerk of the Court
close these actions. Notices of appeal of the opinion granting final approval have been
filed. Due to the inherent uncertainties of litigation and because the settlement remains subject
to appeal, the ultimate outcome of the matter is uncertain.
In addition to the matters described above, we are subject to various legal proceedings,
claims and litigation arising in the ordinary course of business. We do not expect that the
ultimate costs to resolve these matters will have a material effect on our results of operations,
financial position or cash flows.
Item 4. Removed and Reserved
PART II
Item 5. Market for Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of
Equity Securities
(a) Our common stock is traded on the NASDAQ Global Select Market under the symbol CIEN. The
following table sets forth the high and low sales prices of our common stock, as reported on the
NASDAQ Global Select Market, for the fiscal periods indicated.
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High |
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Low |
Fiscal Year 2009 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
9.79 |
|
|
$ |
5.07 |
|
Second Quarter ended April 30 |
|
$ |
12.28 |
|
|
$ |
4.98 |
|
Third Quarter ended July 31 |
|
$ |
12.51 |
|
|
$ |
8.45 |
|
Fourth Quarter ended October 31 |
|
$ |
16.64 |
|
|
$ |
11.08 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2010 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
14.02 |
|
|
$ |
10.67 |
|
Second Quarter ended April 30 |
|
$ |
18.59 |
|
|
$ |
12.76 |
|
Third Quarter ended July 31 |
|
$ |
19.24 |
|
|
$ |
12.29 |
|
Fourth Quarter ended October 31 |
|
$ |
15.69 |
|
|
$ |
12.02 |
|
As of December 15, 2010, there were approximately 952 holders of record of our common
stock and 94,146,715 shares of common stock outstanding. We have never paid cash dividends on our
capital stock. We intend to retain earnings for use in our business and we do not anticipate paying
any cash dividends in the foreseeable future.
The following graph shows a comparison of cumulative total returns for an investment in our
common stock, the NASDAQ Telecommunications Index and the NASDAQ Composite Index from October 31,
2005 to October 31, 2010. The NASDAQ Telecommunications Index contains securities of NASDAQ-listed
companies classified according to the Industry Classification Benchmark as Telecommunications and
Telecommunications Equipment. They include providers of fixed-line and mobile telephone services,
and makers and distributors of high-technology communication products. This graph is not deemed to
be filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act
of 1934, and the graph shall not be deemed to be incorporated by reference into any prior or
subsequent filing by us under the Securities Act of 1933 or the Exchange Act.
29
Assumes $100 invested in Ciena Corporation, the NASDAQ Telecommunications Index and the NASDAQ
Composite Index on October 31, 2005 with all dividends reinvested at month-end.
(b) Not applicable.
(c) Not applicable.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the notes thereto included in Item 8, Financial Statements
and Supplementary Data. We have a 52 or 53 week fiscal year, which ends on the Saturday nearest to
the last day of October in each year. For purposes of financial statement presentation, each fiscal
year is described as having ended on October 31. Fiscal 2006, 2008, 2009 and 2010 consisted of 52
weeks and fiscal 2007 consisted of 53 weeks.
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Year Ended October 31, |
|
|
(in thousands) |
|
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
Cash and cash equivalents |
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
$ |
550,669 |
|
|
$ |
485,705 |
|
|
$ |
688,687 |
|
Short-term investments |
|
$ |
628,393 |
|
|
$ |
822,185 |
|
|
$ |
366,336 |
|
|
$ |
563,183 |
|
|
$ |
|
|
Long-term investments |
|
$ |
351,407 |
|
|
$ |
33,946 |
|
|
$ |
156,171 |
|
|
$ |
8,031 |
|
|
$ |
|
|
Total assets |
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
|
$ |
2,024,594 |
|
|
$ |
1,504,383 |
|
|
$ |
2,118,093 |
|
Short-term convertible notes payable |
|
$ |
|
|
|
$ |
542,262 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term convertible notes payable |
|
$ |
842,262 |
|
|
$ |
800,000 |
|
|
$ |
798,000 |
|
|
$ |
798,000 |
|
|
$ |
1,442,705 |
|
Total liabilities |
|
$ |
1,086,087 |
|
|
$ |
1,566,119 |
|
|
$ |
1,025,645 |
|
|
$ |
1,048,545 |
|
|
$ |
1,958,800 |
|
Stockholders equity |
|
$ |
753,626 |
|
|
$ |
850,154 |
|
|
$ |
998,949 |
|
|
$ |
455,838 |
|
|
$ |
159,293 |
|
30
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
(in thousands, except per share data) |
|
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Revenue |
|
$ |
564,056 |
|
|
$ |
779,769 |
|
|
$ |
902,448 |
|
|
$ |
652,629 |
|
|
$ |
1,236,636 |
|
Cost of goods sold |
|
|
306,275 |
|
|
|
417,500 |
|
|
|
451,521 |
|
|
|
367,799 |
|
|
|
739,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
257,781 |
|
|
|
362,269 |
|
|
|
450,927 |
|
|
|
284,830 |
|
|
|
497,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
111,069 |
|
|
|
127,296 |
|
|
|
175,023 |
|
|
|
190,319 |
|
|
|
327,626 |
|
Selling and marketing |
|
|
104,434 |
|
|
|
118,015 |
|
|
|
152,018 |
|
|
|
134,527 |
|
|
|
193,515 |
|
General and administrative |
|
|
44,445 |
|
|
|
50,248 |
|
|
|
68,639 |
|
|
|
47,509 |
|
|
|
102,692 |
|
Acquisition and integration costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,379 |
|
Amortization of intangible assets |
|
|
25,181 |
|
|
|
25,350 |
|
|
|
32,264 |
|
|
|
24,826 |
|
|
|
99,401 |
|
Restructuring (recoveries) costs |
|
|
15,671 |
|
|
|
(2,435 |
) |
|
|
1,110 |
|
|
|
11,207 |
|
|
|
8,514 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,673 |
|
|
|
|
|
Gain on lease settlement |
|
|
(11,648 |
) |
|
|
(4,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
289,152 |
|
|
|
313,603 |
|
|
|
429,054 |
|
|
|
864,061 |
|
|
|
819,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(31,371 |
) |
|
|
48,666 |
|
|
|
21,873 |
|
|
|
(579,231 |
) |
|
|
(321,819 |
) |
Interest and other income, net |
|
|
50,245 |
|
|
|
76,483 |
|
|
|
36,762 |
|
|
|
9,487 |
|
|
|
3,917 |
|
Interest expense |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
|
|
(12,927 |
) |
|
|
(7,406 |
) |
|
|
(18,619 |
) |
Realized loss due to impairment of marketable debt investments |
|
|
|
|
|
|
(13,013 |
) |
|
|
(5,101 |
) |
|
|
|
|
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,328 |
) |
|
|
|
|
Gain on extinguishment of debt |
|
|
7,052 |
|
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
4,948 |
|
Gain on equity investments, net |
|
|
215 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,976 |
|
|
|
85,732 |
|
|
|
41,539 |
|
|
|
(582,478 |
) |
|
|
(331,573 |
) |
Provision (benefit) for income taxes |
|
|
1,381 |
|
|
|
2,944 |
|
|
|
2,645 |
|
|
|
(1,324 |
) |
|
|
1,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
$ |
(333,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per potential common share |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
83,840 |
|
|
|
85,525 |
|
|
|
89,146 |
|
|
|
91,167 |
|
|
|
93,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
85,011 |
|
|
|
99,604 |
|
|
|
110,605 |
|
|
|
91,167 |
|
|
|
93,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This report contains statements that discuss future events or expectations, projections of
results of operations or financial condition, changes in the markets for our products and services,
or other forward-looking information. Our forward-looking information is based on various
factors and was derived using numerous assumptions. In some cases, you can identify these
forward-looking statements by words like may, will, should, expects, plans,
anticipates, believes, estimates, predicts, intends, potential or continue or the
negative of those words and other comparable words. You should be aware that these statements only
reflect our current predictions and beliefs. These statements are subject to known and unknown
risks, uncertainties and other factors, and actual events or results may differ materially.
Important factors that could cause our actual results to be materially different from the
forward-looking statements are disclosed throughout this report, particularly under the heading
Risk Factors in Item 1A of Part I of this annual report. You should review these risk factors for
a more complete understanding of the risks associated with an investment in our securities. We undertake no obligation to revise or update any
forward-looking statements. The following discussion and analysis should be read in conjunction
with our Selected Consolidated Financial Data and consolidated financial statements and notes
thereto included elsewhere in this annual report.
Overview
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our
Packet-Optical Transport, Packet-Optical Switching and Carrier Ethernet Service Delivery products
are used, individually or as part of an integrated solution, in networks operated by communications
service providers, cable operators, governments and enterprises around the globe.
31
We are a network specialist targeting the transition of disparate, legacy communications
networks to converged, next-generation architectures, optimized to handle increased traffic volumes
and deliver more efficiently a broader mix of high-bandwidth communications services. Our
communications networking products, through their embedded software
and our network management software suites, enable network operators to efficiently and cost-effectively
deliver critical enterprise and consumer-oriented communication services. Together with our
comprehensive design, implementation and support services, our networking solutions offering seeks
to enable software-defined, automated networks that address the business challenges, communications
infrastructure requirements and service delivery needs of our customers. Our customers face a
challenging and rapidly changing environment that requires their networks be robust enough to
address increasing capacity needs from a growing set of consumer and business applications, and
flexible enough to quickly adapt to execute new business strategies and support the delivery of
innovative, revenue-creating services. By improving network productivity and automation, reducing
network costs and providing flexibility to enable differentiated service offerings, our networking
solutions offering creates business and operational value for our customers.
Acquisition of Nortel Metro Ethernet Networks Business (the MEN Acquisition)
On March 19, 2010, we completed our acquisition of substantially all of the optical networking
and Carrier Ethernet assets of Nortels Metro Ethernet Networks business (the MEN Business). In
accordance with the agreements for the acquisition, the $773.8 million aggregate purchase price was
subsequently adjusted downward by $80.6 million based upon the amount of net working capital
transferred to us at closing. See Issuance of Convertible Notes during fiscal 2010 below for
information relating to our election to pay the aggregate purchase price in cash. As a result, we
paid $693.2 million in cash for the purchase of the MEN Business.
In connection with the acquisition, we entered into an agreement with Nortel to lease the Lab
10 building on Nortels Carling Campus in Ottawa, Canada (the Carling lease) for a term of ten
years. The lease agreement contained a provision that allowed Nortel to reduce the term of the
lease, and in exchange, we would receive a payment of up to $33.5 million. This amount was placed
into escrow by Nortel in accordance with the acquisition agreements. The fair value of this
contingent refund right was determined by Ciena to be $16.4 million and was recorded as a reduction
to the consideration paid, resulting in a purchase price of $676.8 million. See Item 2 of Part I
of this report for more information regarding the terms of the Carling lease and Nortels recent
announcement regarding the exercise of its early termination feature under the Carling lease, which
resulted in a non-cash, unrealized gain of $13.8 million during the fourth quarter of fiscal 2010.
Rationale for MEN Acquisition
The MEN Business that we acquired is a leading provider of next-generation, communications
network equipment, with a significant global installed base and a strong technology heritage. The
MEN Business is a leader in high-capacity 40G and 100G coherent optical transport technology that
enables network operators to seamlessly upgrade their existing 2.5G and 10G networks, thereby
enabling a significant increase in network capacity without the need for new fiber deployments or
complex re-engineering. The product and technology assets that we acquired include Nortels:
|
|
|
long-haul optical transport portfolio; |
|
|
|
|
metro optical Ethernet switching and transport solutions; |
|
|
|
|
Ethernet transport, aggregation and switching technology; |
|
|
|
|
multiservice SONET/SDH product families; and |
|
|
|
|
network management software products. |
In addition to these hardware and software solutions, we also acquired the network implementation
and support service resources related to the MEN Business.
We believe that the MEN Acquisition represents a transformative opportunity for Ciena. We
believe that this transaction strengthens our position as a leader in next-generation, converged
optical Ethernet networking and will accelerate the execution of our corporate and research and
development strategies set forth in Item 1 Business in Part I of this annual report. We believe
that the additional geographic reach, expanded customer relationships, and broader portfolio of
complementary network solutions derived from the MEN Business allow us to better compete with
traditional, larger network equipment vendors. As a result of the MEN Acquisition, we added
approximately 2,000 employees, including significant additional engineering talent, which nearly
doubled our headcount. We expect that the resulting increased scale to our business will enable
additional operating leverage and provide an opportunity to optimize our research and development
investment toward next-generation technologies and product platforms.
32
Integration Activities and Costs
We continue to make progress on integration-related activities in connection with the MEN
Acquisition. We have completed our organizational structure, sales coverage plans, and decisions
regarding the rationalization of our combined product portfolio. As described in Restructuring Activities below, we have also realized initial
operating synergies from the MEN Acquisition. Significant and complex additional integration
efforts remain, including the rationalization of our supply chain, third party manufacturers and
facilities, the execution of our combined product and software development plan, and our reduced
reliance upon and winding down of transition services currently being provided by an affiliate of
Nortel.
Given the relative size of the MEN Business and the structure of the MEN Acquisition as an
asset carve-out from Nortel, the integration of the MEN Business has been costly and complex. As of
October 31, 2010, we have incurred $101.4 million in transaction, consulting and third party
service fees, $8.5 million in severance expense, and an additional $12.4 million, primarily related
to purchases of capitalized information technology equipment. We have also incurred inventory
obsolescence charges and may incur additional expenses related to, among other things, facilities
restructuring. We anticipate that we will incur approximately $58.0 million in additional
integration costs during fiscal 2011. Any material delays or difficulties in integrating the MEN
Business or additional, unanticipated expense may harm our business and results of operations.
In addition to the integration costs above, we incurred significant transition services
expense during fiscal 2010, and expect to continue to incur significant expense into the second
quarter of fiscal 2011. Transition service costs are reflected as a component of operating expense,
principally general and administrative expense, and cost of goods sold. We are currently relying
upon an affiliate of Nortel to perform certain critical operational and business support functions
during an interim integration period that will continue until we can perform these services
ourselves or locate another provider. These support services include key finance and accounting
functions, supply chain and logistics management, maintenance and product support services, order
management and fulfillment, trade compliance, and information technology services. These services
are estimated to cost approximately $94.0 million per year, were we to utilize all of the
transition services for a full year. The actual transition service expense will depend upon the
scope of the services that Ciena utilizes and the time within which we are able to complete the
planned transfer of these services to internal resources or other providers. We have also incurred
and expect to continue to incur additional costs as we build up internal resources, including
headcount, facilities and information systems, or engage alternate third party providers, while we
simultaneously rely upon and transition away from these transition support services. The wind down
and transfer of critical transition services, which we expect to complete in the second quarter of
fiscal 2011, is a complex undertaking that presents a number of operational risks that could
adversely affect our business and results of operations.
Effect of MEN Acquisition upon Results of Operations and Financial Condition
Due to the relative scale of its operations, the MEN Acquisition has materially affected our
operations, financial results and liquidity. Our revenue and operating expense have increased
materially compared to periods prior to the MEN Acquisition. As a result of the MEN Acquisition, we
recorded $492.4 million in other intangible assets that will be amortized over their useful lives
and increase our operating expense. See Critical Accounting Policies and Estimates- Long-lived
Assets below for information relating to these items. Under acquisition accounting rules, we
revalued the acquired finished goods inventory of the MEN Business to fair value upon closing. This
revaluation increased marketable inventory carrying value by approximately $62.3 million, of which
$48.0 million was recognized in cost of goods sold during fiscal 2010, adversely affecting our
gross margin. See Note 2 of the Consolidated Financial Statements found under Item 8 of Part II of
this report. As expected, our liquidity and cash and investment balance were significantly affected
by our use of cash to fund the purchase price of the MEN Acquisition and resulting acquisition and
integration expense, transition service expense and investments to support working capital related
to the increased scale of our business. In addition, our private placements of convertible notes
during fiscal 2010 resulted in additional indebtedness. See Liquidity and Capital Resources below
and Note 15 of the Consolidated Financial Statements found under Item 8 of Part II of this report
for more information regarding our convertible notes. These and other effects on our financial
statements described below and elsewhere in this report may make period to period comparisons
difficult.
Restructuring Activities
Since the MEN Acquisition, we have undertaken a number of restructuring activities. These
actions are intended to reduce operating expense and better align our workforce and operating costs
with market opportunities and product development and business strategies following the completion
of our MEN Acquisition. In April 2010, we took action to effect a headcount reduction of
approximately 70 employees, with reductions principally affecting our global product group and
global field organization outside of the EMEA region. This action resulted in a restructuring
charge of $2.1 million in fiscal 2010. In May 2010, we announced our reorganization of portions of
our business and operations in the EMEA region. This action resulted in a restructuring charge of
$7.1 million related to the reduction in head count of approximately 82 employees principally in
our global field and supply chain organizations. As we look to manage operating expense and
complete integration activities for the combined operations, we will continue to assess the
allocation of our headcount and other resources toward key growth opportunities for our business
and evaluate additional cost reduction measures.
33
Issuance of Convertible Notes during fiscal 2010
On March 15, 2010, we completed a private placement of $375.0 million in aggregate principal
amount of 4.0% convertible senior notes due March 15, 2015. The net proceeds from the offering were
$364.3 million after deducting the placement agents fees and other fees and expenses. We used
$243.8 million of the net proceeds to replace the contractual obligation to issue convertible notes
to Nortel as part of the purchase price for the MEN Acquisition. The remaining proceeds were used
to reduce the cash on hand required to fund the aggregate purchase price of the MEN Acquisition. On
October 18, 2010, we completed a private placement $350.0 million in aggregate principal amount of
3.75% convertible senior notes due October 15, 2018. The net proceeds from the offering were
approximately $340.4 million after deducting the placement agents fees and other fees and
expenses. We used approximately $76.1 million of the net proceeds of the offering to repurchase in
privately negotiated transactions approximately $81.8 million in aggregate principal amount of our
0.25% convertible senior notes due May 1, 2013. We intend to use the remainder of the net proceeds
for general corporate purposes, which may include the repayment at maturity or further repurchase,
from time to time, of a portion of our outstanding 0.25% convertible senior notes due May 1, 2013.
See Note 15 of the Consolidated Financial Statements found under Item 8 of Part II of this report
for more information regarding our outstanding convertible notes.
Global Market Conditions and Competitive Landscape
We continue to experience cautious customer behavior with respect to spending as a result of
the sustained period of economic weakness and macroeconomic uncertainty. Broad economic weakness
has previously resulted in periods of decreased demand for our products and services that have
adversely affected our results of operations. We remain uncertain as to how long current
macroeconomic and industry conditions will persist, the pace of recovery, and the magnitude of the
effect of these market conditions on our business and results of operations.
At the same time we are experiencing challenging macroeconomic conditions, we have encountered
an increasingly competitive marketplace. Competition has intensified, in part, due to our increased
market share, technology leadership and global presence resulting from the MEN Acquisition.
Following the MEN Acquisition, we have experienced increased customer activity and been afforded
increased consideration and opportunities to participate in competition for network builds and
upgrades, including in emerging geographies and new markets or applications for our products.
Securing these opportunities often requires that we agree to aggressive or less favorable
commercial terms and conditions, including financial commitments, that may require collateralized
standby letters of credit resulting in an increase in our restricted cash. Competition has also
intensified as we and our competitors more aggressively seek to secure market share, particularly
in connection with new network build opportunities, and displace incumbent equipment vendors at
large carrier customers. We expect this level of competition to continue and, as larger Chinese
equipment vendors seek to gain entry into the U.S. market, potentially increase.
Despite challenging and competitive market conditions, we believe that a number of important
underlying drivers represent significant long-term opportunities and growing demand for converged
optical Ethernet networking solutions in our target markets. We believe that market trends
including the proliferation of mobile web applications, prevalence of video applications and shift
of enterprise applications to the cloud or virtualized environments are emblematic of increased use
and dependence by consumers and enterprises upon a growing variety of broadband applications and
services. These services will continue to add network traffic and consume available bandwidth,
requiring our customers to invest in high-capacity, next-generation network infrastructures that
are more efficient and robust, and better able to handle multiservice traffic and increased
transmission rates. See Strategy set forth in Item 1 Business above in this report for
information regarding our strategy and plan to capitalize on these market dynamics.
Financial Results
Revenue for the fourth quarter was $417.6 million, which represented a sequential increase of
7.2% from $389.7 million in the third quarter of fiscal 2010. Fourth quarter revenue reflects $255.6 million in revenue from
the MEN Business and $162.0 million related to Cienas pre-acquisition portfolio. Additional
revenue-related details reflecting sequential changes from the third quarter of fiscal 2010
include:
|
|
|
Product revenue for the fourth quarter of fiscal 2010 increased by $29.0 million,
reflecting a $33.0 million increase in sales of products from the MEN Business and a $4.0
million decrease in sales of Cienas pre-acquisition products. Packet-Optical Transport
revenue increased by $40.3 million, reflecting a $31.2 million increase in sales of
products from the MEN Business and a $9.1 million increase in Cienas pre-acquisition
Packet-Optical Transport products. Product revenue also reflects an increase of $5.9
million in software sales. These increases were partially offset by a $13.4 million
decrease in sales of Packet-Optical Switching products and a $3.8 million decrease in sales
of Carrier Ethernet Service Delivery products. |
34
|
|
|
Service revenue for the fourth quarter of fiscal 2010 decreased by $1.1 million,
reflecting a $1.9 million decrease in sales of Cienas pre-acquisition service offerings
and a $0.8 million increase in service revenue from the MEN Business. |
|
|
|
|
Revenue from the United States for the fourth quarter of fiscal 2010 was $210.1 million,
a decrease from $229.7 million in the third quarter of fiscal 2010. This decline reflects a
decrease of $30.3 million in sales of Cienas pre-acquisition portfolio and a $10.7 million
increase in sales of products and services from the MEN Business. |
|
|
|
|
International revenue for the fourth quarter of fiscal 2010 was $207.6 million, an
increase from $159.9 million in the third quarter of fiscal 2010. This increase reflects an
increase of $32.2 million in sales of products and services from the MEN Business and $15.5
million in sales of Cienas pre-acquisition portfolio. |
|
|
|
|
As a percentage of revenue, international revenue was 49.7% during the fourth quarter of
fiscal 2010, an increase from 41.0% in the third quarter of fiscal 2010. |
|
|
|
|
For the fourth quarter of fiscal 2010, one customer accounted for greater than 10% of
revenue, representing 15.2% of total revenue. This compares to two customers that accounted
for 33.7% of revenue in the aggregate in the third quarter of fiscal 2010. |
Revenue for fiscal 2010 was $1,236.6 million as compared to $652.6 million in fiscal 2009.
Fiscal 2010 revenue consisted of $530.9 million from the MEN Business and $705.7 million in sales
from Cienas pre-acquisition portfolio. Fiscal 2010 revenue reflects increases of $406.5 million in
Packet-Optical Transport, $127.2 million in Software and Services, and $104.0 million in Carrier
Ethernet Service Delivery. These increases were partially offset by a $53.6 million decrease in
Packet-Optical Switching. See Results of Operations- Fiscal 2009 compared to Fiscal 2010 below
for additional information regarding annual results.
Gross margin for the fourth quarter of fiscal 2010 was 40.3%, an increase from 37.0% in the
third quarter of fiscal 2010. Gross margin for the fourth quarter fiscal 2010 benefited from
increased software sales. Gross margin for the third quarter was adversely affected by higher
costs associated with the revaluation of acquired inventory from the MEN Acquisition described
above. Gross margin for fiscal 2010 was 40.2%, as compared to 43.6% in fiscal 2009. Product gross
margin was 40.9% in fiscal 2010, a decrease from 45.9% in fiscal 2009. Gross margin for fiscal 2010
reflects the adverse effect of the valuation of inventory, which resulted in a $48.0 million
increase in cost of goods sold during fiscal 2010. Lower gross margin during fiscal 2010 also
reflects less favorable product and geographic mix. Specifically, fiscal 2010 gross margin was
adversely affected by a $53.6 million decrease in sales of Packet-Optical Switching products and
geographic mix, including a higher concentration of international revenue as a percentage of total
revenue.
Operating expense was $249.6 million for the fourth quarter of fiscal 2010, a slight increase
from $243.6 million in the third quarter of fiscal 2010. Fourth quarter operating expense includes
increased costs associated with variable sales compensation, the acceleration of certain research
and development initiatives, and the build-up of internal resources in preparation for an exit from
key transition services. These increased costs were partially offset by the non-cash, unrealized
gain of $13.8 million related to our contingent refund right associated with the Carling lease
described above. Operating expense for our third and fourth quarters of fiscal 2010 include $17.0
million and $18.1 million, respectively, in acquisition and integration-related costs associated
with the MEN Acquisition. Operating expense for fiscal 2010 was $819.3 million, compared to $864.1
million in fiscal 2009. Operating expense for fiscal 2009 reflects a goodwill impairment charge of
$455.7 million. Excluding the effect of this charge, the significant increase in operating expense
during fiscal 2010 reflects the expanded scale of our business from the MEN Acquisition. Operating
expense for fiscal 2010 also includes $101.4 million in acquisition and integration-related costs
and a $74.6 million increase in amortization of intangible assets, as compared to fiscal 2009, as a
result of the MEN Acquisition.
Our loss from operations was $81.2 million in the fourth quarter of fiscal 2010 and $99.6
million in the third quarter of fiscal 2010. Our loss from operations for fiscal 2010 was $321.8
million. This compares to a loss from operations of $579.2 million in fiscal 2009. Our net loss was
$80.3 million, or $0.86 per share, in the fourth quarter of fiscal 2010, and $109.9 million, or
$1.18 per share, in the third quarter of fiscal 2010. Our net loss for fiscal 2010 was $333.5
million, or $3.58 per share. This compares to a net loss of $581.2 million, or $6.37 per share, in
fiscal 2009. Net loss and operating loss for fiscal 2009 reflect the effect of a goodwill
impairment charge during the second quarter of fiscal 2009 described above.
We used $25.8 million in cash from operations during the fourth quarter of fiscal 2010.
Changes in working capital provided $2.0 million and net losses (adjusted for non-cash charges)
used $27.8 million. Cash used from operations includes payments of $12.7 million related to
acquisition and integration-related expense and restructuring costs, of which $9.9 million was
reflected in changes in working capital and $22.6 million was reflected in net losses (adjusted for
non-cash charges). This compares with the use of $130.0 million in cash from operations during the
third quarter of fiscal 2010, consisting of $108.9 million for changes in working capital and $21.1
million from net losses (adjusted for non-cash charges). Cash used from operations in the third
quarter includes payments of $28.0 million related to
acquisition and integration-related expense and restructuring, of
which $8.8 million was reflected in changes in
working capital and $19.2 million was reflected in net losses (adjusted for non-cash charges).
35
We used $229.0 million in cash from operations during fiscal 2010, consisting of $112.2
million for changes in working capital and $116.8 million from net losses (adjusted for non-cash
charges). Cash used from operations includes payments of $91.7 million related to acquisition and
integration-related expense and restructuring costs, of which $18.2 million was reflected in
changes in working capital and $109.9 million was reflected in net losses (adjusted for non-cash
charges). This compares with cash generated from operations of $7.4 million in fiscal 2009,
consisting of $3.8 million in cash from net income (adjusted for non-cash charges) and cash of $3.6
million from changes in working capital.
At October 31, 2010, we had $688.7 million in cash and cash equivalents. This compares to
$470.2 million in cash and cash equivalents and $0.2 million of short-term investments as of July
31, 2010.
As of October 31, 2010, headcount was 4,201, a decrease from 4,214 at July 31, 2010, and an
increase from 2,163 and 2,203 at October 31, 2009 and 2008, respectively.
Results of Operations
Our results of operations for the periods in fiscal 2010 reflect the operations of the MEN
Business beginning on the March 19, 2010 acquisition date. We reorganized our internal
organizational structure and the management of our business upon the MEN Acquisition, and as
described in Note 20 of the Consolidated Financial Statements found under Item 8 of Part II of this
report, present our results of operations based upon the following operating segments:
|
|
|
Packet-Optical Transport includes optical transport solutions that increase network
capacity and enable more rapid delivery of a broader mix of high-bandwidth services. These
products are used by network operators to facilitate the cost effective and efficient
transport of voice, video and data traffic in core networks, as well as regional, metro and
access networks. Our principal products in this segment include the ActivFlex 6500
Packet-Optical Platform (ActivFlex 6500); ActivFlex 6110 Multiservice Optical Platform
(ActivFlex 6110); ActivSpan 5200 (ActivSpan 5200); ActivSpan Common Photonic Layer (CPL);
Optical Multiservice Edge 1000 series (OME 1000); and Optical Metro 3500 (OM 3500) from the
MEN Business. This segment includes sales of our ActivSpan 4200® FlexSelect®Advanced
Services Platform (ActivSpan 4200) and our Corestream® Agility Optical Transport System
(Corestream) from Cienas pre-acquisition portfolio. This segment also includes sales from
legacy SONET/SDH products and legacy data networking products, as well as certain
enterprise-oriented transport solutions that support storage and LAN extension,
interconnection of data centers, and virtual private networks. This segment also includes
operating system software and enhanced software features embedded in each of these
products. Revenue from this segment is included in product revenue on the Consolidated
Statement of Operations. |
|
|
|
|
Packet-Optical Switching includes optical switching platforms that enable automated
optical infrastructures for the delivery of a wide variety of enterprise and
consumer-oriented network services. Our principal products in this segment include our
CoreDirector® Multiservice Optical Switch, CoreDirector FS; and our ActivFlex 5400 family
of Reconfigurable Switching Systems. These products include multiservice, multi-protocol
switching systems that consolidate the functionality of an add/drop multiplexer, digital
cross-connect and packet switch into a single, high-capacity intelligent switching system.
These products address both the core and metro segments of communications networks and
support key managed service services, Ethernet/TDM Private Line, Triple Play and IP
services. This segment also includes sales of operating system software and enhanced
software features embedded in each of these products. Revenue from this segment is included
in product revenue on the Consolidated Statement of Operations. |
|
|
|
|
Carrier Ethernet Service Delivery - includes the ActivEdge 3900 family of service
delivery switches and service aggregation switches, as well as the ActivEdge 5100 family.
These products support the access and aggregation tiers
of communications networks and have principally been deployed to support wireless backhaul
infrastructures and business data services. Employing sophisticated Carrier Ethernet
switching technology, these products deliver quality of service capabilities, virtual local
area networking and switching functions, and carrier-grade operations, administration, and
maintenance features. This segment includes the metro Ethernet routing switch (MERS) product
line from the MEN Business and our legacy broadband products, including our CNX-5 Broadband
DSL System (CNX-5), that transitions legacy voice networks to support Internet-based (IP)
telephony, video services and DSL. This segment also includes sales of operating system
software and enhanced software features embedded in each of these products. Revenue from
this segment is included in product revenue on the Consolidated Statement of Operations. |
|
|
|
|
Software and Services - includes our integrated network and service management software
designed to automate and simplify network management and operation, while increasing
network performance and functionality. These software solutions can track individual
services across multiple product suites, facilitating planned network maintenance, outage
detection and identification of customers or services affected by network troubles. This
segment also includes a broad range of consulting and support services, including
installation and deployment, maintenance support, consulting, network design and training activities. Except for revenue from
the software portion of this segment, which is included in product revenue, revenue from this
segment is included in services revenue on the Consolidated Statement of Operations. |
36
Fiscal 2009 compared to Fiscal 2010
Revenue
The table below (in thousands, except percentage data) sets forth the changes in our operating
segment revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packet Optical Transport |
|
$ |
299,088 |
|
|
|
45.8 |
|
|
$ |
705,551 |
|
|
|
57.0 |
|
|
$ |
406,463 |
|
|
|
135.9 |
|
Packet Optical Switching |
|
|
165,705 |
|
|
|
25.4 |
|
|
|
112,058 |
|
|
|
9.1 |
|
|
|
(53,647 |
) |
|
|
(32.4 |
) |
Carrier Ethernet Service Delivery |
|
|
75,125 |
|
|
|
11.5 |
|
|
|
179,083 |
|
|
|
14.5 |
|
|
|
103,958 |
|
|
|
138.4 |
|
Software and Services |
|
|
112,711 |
|
|
|
17.3 |
|
|
|
239,944 |
|
|
|
19.4 |
|
|
|
127,233 |
|
|
|
112.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue |
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
1,236,636 |
|
|
|
100.0 |
|
|
$ |
584,007 |
|
|
|
89.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
Packet-Optical Transport revenue for fiscal 2010 reflects the addition of
$409.6 million in revenue from the MEN Business. The addition of MEN Business revenue
reflects $208.0 million of sales relating to ActivFlex 6500, largely driven by service
provider demand for high-capacity, coherent transport, in support of 40G and 100G network
infrastructures. Packet-Optical Transport revenue also benefited from the addition of
sales from the MEN Business of $115.8 million of ActivSpan 5200, $39.1 million of
CPL, $16.2 million of OM 3500, $15.5 million of legacy and other transport products and
$15.0 million of ActivFlex 6110. Packet-Optical Transport revenue benefited from a $13.2
million increase in ActivSpan 4200 revenue during fiscal 2010, largely driven by metro
network builds and latency sensitive applications. These increases were offset by an $11.5
million decrease in Corestream sales and a $4.8 million decrease in sales of legacy and
other Packet-Optical Transport products. |
|
|
|
|
Packet-Optical Switching revenue decreased reflecting a $53.6 million decline
in CoreDirector revenue. Packet-Optical Switching revenue principally reflects our
CoreDirector platform, which has a concentrated customer base. As a result, revenue can
fluctuate considerably depending upon individual customer purchasing decisions. We believe
Packet-Optical Switching product revenue was also adversely affected in fiscal 2010 by
deferred customer purchasing decisions and the effect of carrier sales cycles as we effect
a platform transition from CoreDirector to
our next-generation, high-capacity ActivFlex 5400 family of Reconfigurable Switching
Systems. |
|
|
|
|
Carrier Ethernet Service Delivery revenue increased significantly, reflecting
an $86.5 million increase in sales of our ActivEdge 3900 service-delivery switches and
ActivEdge 5100 service aggregation switches in support of wireless backhaul deployments.
Quarterly revenue for these products remains subject to fluctuation due to customer
concentration and customer buying cycles. Carrier Ethernet Service Delivery revenue also
benefitted from the addition of $9.6 million in sales of our MERS product from the MEN
Business and an $8.2 million increase in CNX-5 sales in support of residential DSL. |
|
|
|
|
Software and Services revenue increased primarily due to the addition of $86.6
million in maintenance support revenue and $20.8 million in installation and deployment
services from the MEN Business. Segment revenue also benefited from a $14.9 million
increase in maintenance support revenue from Cienas pre-acquisition portfolio and a $4.9
million increase in software revenue. |
37
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. The table below (in thousands, except percentage
data) sets forth the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
419,405 |
|
|
|
64.3 |
|
|
$ |
744,232 |
|
|
|
60.2 |
|
|
$ |
324,827 |
|
|
|
77.4 |
|
International |
|
|
233,224 |
|
|
|
35.7 |
|
|
|
492,404 |
|
|
|
39.8 |
|
|
|
259,180 |
|
|
|
111.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
1,236,636 |
|
|
|
100.0 |
|
|
$ |
584,007 |
|
|
|
89.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
United States revenue increased primarily due to a $189.8 million increase in sales
of Packet-Optical Transport products, principally as a result of the MEN Acquisition, a
$94.1 million increase in sales of Carrier Ethernet Service Delivery products, and a $72.5
million increase in services revenue. These increases offset a $34.3 million decrease in
Packet-Optical Switching revenue. |
|
|
|
|
International revenue increased primarily due to a $216.7 million increase in
Packet-Optical Transport revenue, principally as a result of the MEN Acquisition, a $49.8
million increase in services revenue and a $9.9 million increase in sales of Carrier
Ethernet Service Delivery products. These increases offset a $19.4 million decrease in
Packet-Optical Switching revenue. |
While our concentration in revenue has lessened somewhat as a result of the MEN Acquisition, a
sizable portion of our revenue continues to come from sales to a small number of service providers,
particularly within our Packet-Optical Switching and Carrier-Ethernet Service Delivery businesses.
As a result, our results are significantly affected by spending levels and the business challenges
encountered by our largest customers. Moreover, our contracts do not have terms that obligate these
customers to purchase any minimum or specific amounts of equipment or services. Our concentration
of revenue can be adversely affected by consolidation activity among our large customers. In
addition, some of our customers are pursuing efforts to outsource the management and operation of
their networks, or have indicated a procurement strategy to reduce the number of vendors from which
they purchase equipment. In April 2010, we were selected as a domain network equipment supplier by
AT&T for its optical transport network and metro and core transport domains. Being named as a
vendor in multiple technology domains under this program affords us an opportunity to forge a more
collaborative technology relationship across these product platforms. Sales to AT&T were $128.2
million or 19.6% of our revenue in fiscal 2009 and $267.4 million or 21.6% of our revenue in fiscal
2010. We did not have any other customers accounting for greater than 10% of revenue in fiscal
2009 or 2010.
Cost of Goods Sold and Gross Profit
Product cost of goods sold consists primarily of amounts paid to third-party contract
manufacturers, component costs, employee-related costs and overhead, shipping and logistics costs
associated with manufacturing-related operations, warranty and other contractual obligations,
royalties, license fees, amortization of intangible assets, cost of excess and obsolete inventory
and, when applicable, estimated losses on committed customer contracts.
Services cost of goods sold consists primarily of direct and third-party costs, including
employee-related costs, associated with our provision of services including installation,
deployment, maintenance support, consulting and training activities, and, when applicable,
estimated losses on committed customer contracts.
Gross profit as a percentage of revenue, or gross margin, continues to be susceptible to
quarterly fluctuation due to a number of factors. Gross margin can vary significantly depending
upon the mix and concentration of products, the mix of lower margin common equipment, geographic
mix and the mix of customers and services in a given fiscal quarter. Gross margin can also be
affected by our introduction of new products, charges for excess and obsolete inventory, changes in
warranty costs and sales volume. Gross margin can also be adversely affected by the competitive
environment and level of pricing pressure we encounter. The combination of uncertain market
conditions, recent constraints on customer capital expenditures and increased competition has
resulted in a heightened customer focus on pricing and return on network investment, as customers
address network traffic growth and strive to increase revenue and profit. Our exposure to pricing
pressure has been most severe in metro and core applications for our Packet-Optical Transport
platforms, which we expect will comprise a greater percentage of our overall revenue as a result of
the MEN Acquisition. As a result, and in an effort to retain or secure customers, enter new markets
or capture market share, in the past we have and in the future we may agree to pricing or other
unfavorable commercial terms that result in lower or negative gross margins on a particular order
or group of orders. These arrangements would adversely affect our gross margins and results of
operations. We expect that gross margins will also be subject to fluctuation based on our level of
success in driving cost reductions and rationalizing our supply chain and third party contract
manufacturers as part of the MEN Acquisition integration activities.
38
Service gross margin can be affected by the mix of customers and services, particularly the
mix between deployment and maintenance services, geographic mix and the timing and extent of any
investments in internal resources to support this business.
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Total revenue |
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
1,236,636 |
|
|
|
100.0 |
|
|
$ |
584,007 |
|
|
|
89.5 |
|
Total cost of goods sold |
|
|
367,799 |
|
|
|
56.4 |
|
|
|
739,135 |
|
|
|
59.8 |
|
|
|
371,336 |
|
|
|
101.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
284,830 |
|
|
|
43.6 |
|
|
$ |
497,501 |
|
|
|
40.2 |
|
|
$ |
212,671 |
|
|
|
74.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
547,522 |
|
|
|
100.0 |
|
|
$ |
1,009,239 |
|
|
|
100.0 |
|
|
$ |
461,717 |
|
|
|
84.3 |
|
Product cost of goods sold |
|
|
296,170 |
|
|
|
54.1 |
|
|
|
596,704 |
|
|
|
59.1 |
|
|
|
300,534 |
|
|
|
101.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
251,352 |
|
|
|
45.9 |
|
|
$ |
412,535 |
|
|
|
40.9 |
|
|
$ |
161,183 |
|
|
|
64.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
105,107 |
|
|
|
100.0 |
|
|
$ |
227,397 |
|
|
|
100.0 |
|
|
$ |
122,290 |
|
|
|
116.3 |
|
Service cost of goods sold |
|
|
71,629 |
|
|
|
68.1 |
|
|
|
142,431 |
|
|
|
62.6 |
|
|
|
70,802 |
|
|
|
98.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
33,478 |
|
|
|
31.9 |
|
|
$ |
84,966 |
|
|
|
37.4 |
|
|
$ |
51,488 |
|
|
|
153.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
Gross profit as a percentage of revenue decreased due to lower product gross
margins described below, partially offset by improved service gross margin. |
|
|
|
|
Gross profit on products as a percentage of product revenue decreased due to a
number of items relating to the MEN Acquisition that increased costs of goods sold during
fiscal 2010. These items include the revaluation of inventory described in Overview
above, excess purchase commitment losses on Cienas pre-acquisition inventory relating to
product rationalization decisions, and increased amortization of intangible assets. Fiscal
2010 gross profit was also adversely affected by a lower concentration of Packet-Optical
Switching revenue. These additional costs were offset by lower warranty and excess and
obsolete inventory charges as compared to fiscal 2009. Gross margin for fiscal 2009 was
negatively affected by a $5.8 million charge related to two committed customer sales
contracts that resulted in a negative gross margin on the initial phases of the customers
deployment. |
|
|
|
|
Gross profit on services as a percentage of services revenue increased due to
higher concentration of maintenance support and professional services as a percentage of
revenue, and improved operational efficiencies. |
Operating Expense
Research and development expense primarily consists of salaries and related employee expense
(including share-based compensation expense), prototype costs relating to design, development,
testing of our products, depreciation expense and third-party consulting costs.
39
Sales and marketing expense primarily consists of salaries, commissions and related employee
expense (including share-based compensation expense), and sales and marketing support expense,
including travel, demonstration units, trade show expense, and third-party consulting costs.
General and administrative expense primarily consists of salaries and related employee expense
(including share-based compensation expense), and costs for third-party consulting and other
services.
Amortization of intangible assets primarily reflects purchased technology and customer
relationships from our acquisitions.
Excluding the effect of the goodwill impairment charges in fiscal 2009, increased operating
expense for fiscal 2010 principally reflects the increased scale of our business resulting from the
MEN Acquisition on March 19, 2010. The table below (in thousands, except percentage data) sets
forth the changes in operating expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2009 |
|
|
%* |
|
|
2010 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
190,319 |
|
|
|
29.2 |
|
|
$ |
327,626 |
|
|
|
26.5 |
|
|
$ |
137,307 |
|
|
|
72.1 |
|
Selling and marketing |
|
|
134,527 |
|
|
|
20.6 |
|
|
|
193,515 |
|
|
|
15.6 |
|
|
|
58,988 |
|
|
|
43.8 |
|
General and administrative |
|
|
47,509 |
|
|
|
7.3 |
|
|
|
102,692 |
|
|
|
8.3 |
|
|
|
55,183 |
|
|
|
116.2 |
|
Acquisition and integration costs |
|
|
|
|
|
|
0.0 |
|
|
|
101,379 |
|
|
|
8.2 |
|
|
|
101,379 |
|
|
|
100.0 |
|
Amortization of intangible assets |
|
|
24,826 |
|
|
|
3.8 |
|
|
|
99,401 |
|
|
|
8.0 |
|
|
|
74,575 |
|
|
|
300.4 |
|
Restructuring costs |
|
|
11,207 |
|
|
|
1.7 |
|
|
|
8,514 |
|
|
|
0.7 |
|
|
|
(2,693 |
) |
|
|
(24.0 |
) |
Goodwill impairment |
|
|
455,673 |
|
|
|
69.8 |
|
|
|
|
|
|
|
0.0 |
|
|
|
(455,673 |
) |
|
|
(100.0 |
) |
Change in fair value of contingent consideration |
|
|
|
|
|
|
0.0 |
|
|
|
(13,807 |
) |
|
|
-1.1 |
|
|
|
(13,807 |
) |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
864,061 |
|
|
|
132.4 |
|
|
$ |
819,320 |
|
|
|
66.2 |
|
|
$ |
(44,741 |
) |
|
|
(5.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
Research and development expense was adversely affected by $13.9 million in foreign
exchange rates, primarily due to the weakening of the U.S. dollar in relation to the
Canadian dollar. The $137.3 million increase primarily reflects increases of $65.6 million
in employee compensation and related costs, $34.6 million in professional services and
fees, $17.4 million in facilities and information systems, $12.2 million in depreciation
expense and $4.9 million in prototype expense related to the development initiatives
described above. |
|
|
|
|
Selling and marketing expense benefited by $1.6 million in foreign exchange
rates primarily due to the strengthening of the U.S. dollar in relation to the Euro. The
$59.0 million increase primarily reflects increases of $41.8 million in employee
compensation and related costs, $6.4 million in travel-related expenditures, $4.3 million
in facilities and information systems and $2.8 million in professional services and fees. |
|
|
|
|
General and administrative expense increased by $21.9 million in consulting
service expense, $17.7 million in facilities and information systems expense and $11.7
million in employee compensation and related costs. |
|
|
|
|
Acquisition and integration costs are related to the MEN Acquisition. As of
October 31, 2010, we have incurred $101.4 million in transaction, consulting and third
party service fees. We expect to incur approximately $58.0 million in additional expense
relating to acquisition and integration activities in fiscal 2011, a significant portion of
which will be recognized as operating expense. |
|
|
|
|
Amortization of intangible assets increased due to the acquisition of
additional intangible assets as a result of the MEN Acquisition. See Note 2 to our
Consolidated Financial Statements in Item 8 of Part II of this report. |
|
|
|
|
Restructuring costs for fiscal 2010 primarily reflect the headcount reductions
and restructuring activities described in the Overview Restructuring Activities above. |
|
|
|
|
Goodwill impairment costs reflect the impairment of goodwill and resulting
charge incurred in fiscal 2009 as described in Note 4 to our Consolidated Financial
Statements in Item 8 of Part II of this report. |
|
|
|
|
Change in fair value of contingent consideration is related to the contingent
refund right we received relating to the Carling lease entered into as part of the MEN
Acquisition. As a result of a change in circumstances and outcome probabilities during the
fourth quarter of fiscal 2010, we recorded a $13.8 million
change in fair value. See Notes 2 and 23 to our Consolidated Financial Statements in Item 8 of Part II for additional information
relating to the early termination of the Carling lease. |
40
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
2009 |
|
%* |
|
2010 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
9,487 |
|
|
|
1.5 |
|
|
$ |
3,917 |
|
|
|
0.3 |
|
|
$ |
(5,570 |
) |
|
|
(58.7 |
) |
Interest expense |
|
$ |
7,406 |
|
|
|
1.1 |
|
|
$ |
18,619 |
|
|
|
1.5 |
|
|
$ |
11,213 |
|
|
|
151.4 |
|
Loss on cost method investments |
|
$ |
5,328 |
|
|
|
0.8 |
|
|
$ |
|
|
|
|
0.0 |
|
|
$ |
(5,328 |
) |
|
|
(100.0 |
) |
Gain on extinguishment of debt |
|
$ |
|
|
|
|
0.0 |
|
|
$ |
4,948 |
|
|
|
0.4 |
|
|
$ |
4,948 |
|
|
|
100.0 |
|
Provision (benefit) for income taxes |
|
$ |
(1,324 |
) |
|
|
(0.2 |
) |
|
$ |
1,941 |
|
|
|
0.2 |
|
|
$ |
3,265 |
|
|
|
(246.6 |
) |
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2009 to 2010 |
|
|
|
Interest and other income, net decreased as a result of a $9.5 million decrease in
interest income due to lower interest rates and lower invested balances. Decreased interest
and other income, net also reflects a $2.0 million charge relating to the termination of an
indemnification asset upon the expiration of the statute of limitations
applicable to one of the uncertain tax contingencies acquired as part of the MEN
Acquisition. These items were partially offset by a $3.8 million gain due to the positive
effect of foreign exchange rates on assets and liabilities denominated in currency other
than the relevant functional currency, and a $2.5 million non-cash gain related to the
change in fair value of the redemption feature associated with our 4.0% convertible senior
notes due March 15, 2015. See Notes 7 and 15 to the Consolidated Financial Statements found
under Item 8 of Part II of this report for more information regarding the issuance of these
convertible notes and the fair value of the redemption feature contained therein. |
|
|
|
|
Interest expense increased due to our private placements during fiscal 2010 of
$375.0 million in aggregate principal amount of 4.0% convertible senior notes due March 15,
2015 and $350.0 million in aggregate principal amount of 3.75% convertible senior notes due
October 15, 2018. See Note 15 to the Consolidated Financial Statements found under Item 8
of Part II of this report. |
|
|
|
|
Loss on cost method investments during fiscal 2009 was due to the decline in
value of our investments in two privately held technology companies that were determined to
be other-than-temporary. |
|
|
|
|
Gain on extinguishment of debt for fiscal 2010 resulted from our repurchase of
$81.8 million in aggregate principal amount of our outstanding 0.25% convertible notes in
privately negotiated transactions for $76.1 million. We recorded a gain on the
extinguishment of debt in the amount of $4.9 million, which consists of the $5.7 million
gain from the repurchase of the notes, less $0.8 million of associated debt issuance costs. |
|
|
|
|
Provision (benefit) for income taxes increased primarily due to a decrease in
refundable federal tax credits. |
Fiscal 2008 compared to Fiscal 2009
Revenue
Revenue for fiscal 2009 reflects the weakness, volatility and uncertainty presented by the
global market conditions that we encountered during the year. Our fiscal 2009 revenue reflects
cautious spending, primarily among our largest service provider customers, as they sought to
conserve capital, reduce debt or address uncertainties or changes in their own business models
brought on by broader market challenges.
41
The table below (in thousands, except percentage data) sets forth the changes in our operating
segment revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packet Optical Transport |
|
$ |
447,542 |
|
|
|
49.6 |
|
|
$ |
299,088 |
|
|
|
45.8 |
|
|
$ |
(148,454 |
) |
|
|
(33.2 |
) |
Packet Optical Switching |
|
|
270,458 |
|
|
|
30.0 |
|
|
|
165,705 |
|
|
|
25.4 |
|
|
|
(104,753 |
) |
|
|
(38.7 |
) |
Carrier Ethernet Service Delivery |
|
|
60,499 |
|
|
|
6.7 |
|
|
|
75,125 |
|
|
|
11.5 |
|
|
|
14,626 |
|
|
|
24.2 |
|
Software and Services |
|
|
123,949 |
|
|
|
13.7 |
|
|
|
112,711 |
|
|
|
17.3 |
|
|
|
(11,238 |
) |
|
|
(9.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue |
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
(249,819 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from fiscal 2008 to fiscal 2009 |
|
|
|
Packet-Optical Transport revenue decreased primarily due to decreases of $108.1
million in Corestream and $40.9 million in legacy transport and data networking systems.
These declines were primarily due to unfavorable market conditions as described above. In
spite of these market conditions, revenue from our ActivSpan 4200 was unchanged during
fiscal 2009. |
|
|
|
|
Packet-Optical Switching revenue decreased reflecting a decline in CoreDirector
revenue. We believe the decline in CoreDirector revenue was due to unfavorable market
conditions and constrained spending. Revenue for this segment is subject to significant
fluctuations due to its highly concentrated customer base. |
|
|
|
|
Carrier Ethernet Service Delivery revenue increased due to a $33.8 million
increase in sales of our ActivEdge 3900 service-delivery switches and ActivEdge 5100
service aggregation switches in support of wireless backhaul
deployments. This increase was partially offset by a $19.2 million decrease in CNX-5 sales. |
|
|
|
|
Software and Services revenue decreased primarily due to a $10.9 million
decrease in deployment services due to lower sales volume and installation activity. |
Revenue from sales to customers outside of the United States is reflected as International in
the geographic distribution of revenue below. The table below (in thousands, except percentage
data) sets forth the changes in geographic distribution of revenue for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
590,868 |
|
|
|
65.5 |
|
|
$ |
419,405 |
|
|
|
64.3 |
|
|
$ |
(171,463 |
) |
|
|
(29.0 |
) |
International |
|
|
311,580 |
|
|
|
34.5 |
|
|
|
233,224 |
|
|
|
35.7 |
|
|
|
(78,356 |
) |
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
(249,819 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
United States revenue decreased primarily due to a $90.0 million decrease in sales
of Packet-Optical Transport products, principally as a result of lower Corestream sales, an
$87.0 million decrease in sales of Packet-Optical Switching products and a $4.7 million
decrease in sales of software and services. These decreases were partially offset by a
$10.2 million increase in sales of Carrier Ethernet Service Delivery products. |
|
|
|
|
International revenue decreased primarily due to a $58.5 million decrease in
sales of Packet-Optical Transport products, a $17.8 million decrease in sales of
Packet-Optical Switching products and a $6.5 million decrease in sales of software and
services. These decreases were partially offset by a $4.4 million increase in sales of
Carrier Ethernet Service Delivery products. |
42
Certain customers each accounted for at least 10% of our revenue for the periods indicated (in
thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
AT&T |
|
$ |
227,737 |
|
|
|
25.2 |
|
|
$ |
128,233 |
|
|
|
19.6 |
|
BT |
|
|
113,981 |
|
|
|
12.6 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
341,718 |
|
|
|
37.8 |
|
|
$ |
128,233 |
|
|
|
19.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Gross Profit and Cost of Good Sold
The tables below (in thousands, except percentage data) set forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Total revenue |
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
(249,819 |
) |
|
|
(27.7 |
) |
Total cost of goods sold |
|
|
451,521 |
|
|
|
50.0 |
|
|
|
367,799 |
|
|
|
56.4 |
|
|
$ |
(83,722 |
) |
|
|
(18.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
450,927 |
|
|
|
50.0 |
|
|
$ |
284,830 |
|
|
|
43.6 |
|
|
$ |
(166,097 |
) |
|
|
(36.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
791,415 |
|
|
|
100.0 |
|
|
$ |
547,522 |
|
|
|
100.0 |
|
|
$ |
(243,893 |
) |
|
|
(30.8 |
) |
Product cost of goods sold |
|
|
371,238 |
|
|
|
46.9 |
|
|
|
296,170 |
|
|
|
54.1 |
|
|
|
(75,068 |
) |
|
|
(20.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
420,177 |
|
|
|
53.1 |
|
|
$ |
251,352 |
|
|
|
45.9 |
|
|
$ |
(168,825 |
) |
|
|
(40.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
111,033 |
|
|
|
100.0 |
|
|
$ |
105,107 |
|
|
|
100.0 |
|
|
$ |
(5,926 |
) |
|
|
(5.3 |
) |
Service cost of goods sold |
|
|
80,283 |
|
|
|
72.3 |
|
|
|
71,629 |
|
|
|
68.1 |
|
|
|
(8,654 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
30,750 |
|
|
|
27.7 |
|
|
$ |
33,478 |
|
|
|
31.9 |
|
|
$ |
2,728 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
Gross profit as a percentage of revenue decreased due to lower product gross
margins described below, partially offset by improved service gross margin. |
|
|
|
|
Gross profit on products as a percentage of product revenue decreased due to
less favorable product and geographic mix, including fewer sales of Packet-Optical
Switching products as a percentage of total revenue, increased charges related to losses on
committed customer sales contracts and higher charges relating to warranty. Gross profit
as a percentage of revenue for fiscal 2008 reflects a $5.3 million increase in product cost
of goods sold related to the revaluation of the acquired inventory from our acquisition of
World Wide Packets. See Note 2 to the Consolidated Financial Statements in Item 8 of Part
II of this report. |
|
|
|
|
Gross profit on services as a percentage of services revenue increased due to
higher sales of maintenance contracts as a percentage of services revenue. Services gross
margin remains heavily dependent upon the mix of services in a given period and may
fluctuate from quarter to quarter. |
43
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating
expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
175,023 |
|
|
|
19.4 |
|
|
$ |
190,319 |
|
|
|
29.2 |
|
|
$ |
15,296 |
|
|
|
8.7 |
|
Selling and marketing |
|
|
152,018 |
|
|
|
16.8 |
|
|
|
134,527 |
|
|
|
20.6 |
|
|
|
(17,491 |
) |
|
|
(11.5 |
) |
General and administrative |
|
|
68,639 |
|
|
|
7.6 |
|
|
|
47,509 |
|
|
|
7.3 |
|
|
|
(21,130 |
) |
|
|
(30.8 |
) |
Amortization of intangible assets |
|
|
32,264 |
|
|
|
3.6 |
|
|
|
24,826 |
|
|
|
3.8 |
|
|
|
(7,438 |
) |
|
|
(23.1 |
) |
Restructuring costs |
|
|
1,110 |
|
|
|
0.1 |
|
|
|
11,207 |
|
|
|
1.7 |
|
|
|
10,097 |
|
|
|
909.6 |
|
Goodwill Impairment |
|
|
|
|
|
|
|
|
|
|
455,673 |
|
|
|
69.8 |
|
|
|
455,673 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
429,054 |
|
|
|
47.5 |
|
|
$ |
864,061 |
|
|
|
132.4 |
|
|
$ |
435,007 |
|
|
|
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
Research and development expense benefited by $5.3 million in favorable foreign
exchange rates primarily due to the comparative strength of the U.S. dollar in relation to
the previous year. The resulting $15.3 million net increase principally reflects an
increase in prototype expense of $15.4 million. Other increases include $5.4 million in
facilities and information systems expense, $2.8 million in depreciation expense, and
higher employee compensation cost of $0.6 million, including a $2.6 million increase in
share-based compensation expense. These increases were partially offset by decreases of
$4.8 million in consulting services expense, $2.7 million in technology related expenses
and $0.8 million in travel expense. |
|
|
|
|
Selling and marketing expense benefited by $2.8 million in favorable foreign
exchange rates primarily due to the comparative strength of the U.S. dollar in relation to
the previous year. The resulting $17.5 million net change reflects decreases of $7.8
million in employee compensation cost, $3.0 million in travel-related costs, $2.9 million
in marketing program costs and $2.4 million in consulting services expense. These decreases
were partially offset by a $1.2 million increase in facilities and information systems
expense. |
|
|
|
|
General and administrative expense benefited by $0.5 million in favorable
foreign exchange rates primarily due to the comparative strength of the U.S. dollar in
relation to the previous year. The resulting $21.1 million net change reflects decreases of
$6.1 million in employee compensation cost, $4.1 million in consulting services expense,
$1.7 million in facilities and information systems expense, and $0.7 million in
technology-related expense. Expense for fiscal 2008 included $7.7 million associated with
the settlement of patent litigation. |
|
|
|
|
Amortization of intangible assets decreased due to certain intangible assets
reaching the end of their useful life and becoming fully amortized during fiscal 2009. |
|
|
|
|
Restructuring costs during fiscal 2009 were primarily related to a headcount
reduction of approximately 200 employees, the closure of our Acton, Massachusetts research
and development facility and revisions of estimates related to previously restructured
facilities. Restructuring costs for fiscal 2008 principally reflects costs associated with
a workforce reduction of 56 employees during the fourth quarter. |
|
|
|
|
Goodwill impairment reflects an impairment charge of $455.7 million in the
second quarter of fiscal 2009. Based on a combination of factors, including the
macroeconomic conditions described above and a sustained decline in our common stock price
and market capitalization below our net book value, we conducted an interim impairment
assessment of goodwill during the second quarter of fiscal 2009. The conclusion of this
assessment was the write-off of all goodwill remaining on our balance sheet. |
44
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
2008 |
|
%* |
|
2009 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
36,762 |
|
|
|
4.1 |
|
|
$ |
9,487 |
|
|
|
1.5 |
|
|
$ |
(27,275 |
) |
|
|
(74.2 |
) |
Interest expense |
|
$ |
12,927 |
|
|
|
1.4 |
|
|
$ |
7,406 |
|
|
|
1.1 |
|
|
$ |
(5,521 |
) |
|
|
(42.7 |
) |
Realized loss due to impairment of
marketable debt investments |
|
$ |
5,101 |
|
|
|
0.6 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(5,101 |
) |
|
|
(100.0 |
) |
Loss on cost method investments |
|
$ |
|
|
|
|
|
|
|
$ |
5,328 |
|
|
|
0.8 |
|
|
$ |
5,328 |
|
|
|
100.0 |
|
Gain on extinguishment of debt |
|
$ |
932 |
|
|
|
0.1 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(932 |
) |
|
|
(100.0 |
) |
Provision (benefit) for income taxes |
|
$ |
2,645 |
|
|
|
0.3 |
|
|
$ |
(1,324 |
) |
|
|
(0.2 |
) |
|
$ |
(3,969 |
) |
|
|
(150.1 |
) |
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
Interest and other income, net decreased due to lower average cash and investment
balances and lower interest rates. Lower cash balances primarily relate to the repayment at
maturity of the $542.3 million principal outstanding on our 3.75% convertible notes during
the first quarter of fiscal 2008 and our use of $210.0 million in cash consideration and
related expenses associated with our acquisition of WWP in the second quarter of fiscal
2008. |
|
|
|
|
Interest expense decreased primarily due to the repayment of 3.75% convertible
notes at maturity at the end of the first quarter of fiscal 2008. |
|
|
|
|
Realized loss due to impairment of marketable debt investments for fiscal 2008
reflects a loss related to commercial paper investments in two structured investment
vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007 and
failed to make payment at maturity. These SIVs completed their restructuring activities
during fiscal 2008 and, as of the end of fiscal 2009, we no longer held these investments. |
|
|
|
|
Loss on cost method investments during fiscal 2009 was due to the decline in
value of our investments in two privately held technology companies that were determined to
be other-than-temporary. |
|
|
|
|
Gain on extinguishment of debt reflects our repurchase of $2.0 million in
principal amount of our outstanding 0.25% convertible senior notes due May 1, 2013 in an
open market transaction. We used $1.0 million of our cash to effect this repurchase, which
resulted in a gain of approximately $0.9 million. |
|
|
|
|
Provision (benefit) for income taxes decreased primarily due to refundable
federal tax credits made available by recent economic stimulus tax law changes.
Availability of refundable credits expired on December 31, 2009. |
Operating Segment Profit (Loss)
Segment Profit (Loss)
Segment profit (loss) is determined based on the revenue, cost of goods sold and research and
development costs for the relevant segment. The table below (in thousands, except percentage data)
sets forth the changes in our segment profit (loss) for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
2009 |
|
2010 |
|
(decrease) |
|
%* |
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packet-Optical Transport |
|
$ |
21,535 |
|
|
$ |
67,357 |
|
|
$ |
45,822 |
|
|
|
212.8 |
|
Packet-Optical Switching |
|
|
60,302 |
|
|
|
15,173 |
|
|
|
(45,129 |
) |
|
|
(74.8 |
) |
Carrier Ethernet Service Delivery |
|
|
(9,575 |
) |
|
|
28,074 |
|
|
|
37,649 |
|
|
|
(393.2 |
) |
Software and Services |
|
|
22,249 |
|
|
|
53,432 |
|
|
|
31,183 |
|
|
|
140.2 |
|
|
|
|
* |
|
Denotes % change from 2009 to 2010 |
|
|
|
Packet-Optical Transport segment profit for fiscal 2010 reflects increased
sales volume resulting in additional product gross profit, partially offset by increased
research and development costs due to the MEN Acquisition. |
|
|
|
|
Packet-Optical Switching segment profit declined due to decreased sales volume
resulting in reduced product gross profit, and increased research and development costs. |
|
|
|
|
Carrier Ethernet Service Delivery segment profit improved significantly due to
increased sales volume resulting in additional gross profit, partially offset by increased
research and development costs. |
|
|
|
|
Software and Services segment profit improved due to increased sales volume
and improved gross margin, both of which resulted in additional gross profit, partially
offset by increased research and development costs. |
45
The table below (in thousands, except percentage data) sets forth the changes in our segment
profit (loss), including the presentation of prior periods to reflect the change in reportable
segments, for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
2008 |
|
2009 |
|
(decrease) |
|
%* |
Segment profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Packet-Optical Transport |
|
$ |
110,905 |
|
|
$ |
21,535 |
|
|
$ |
(89,370 |
) |
|
|
(80.6 |
) |
Packet-Optical Switching |
|
|
151,084 |
|
|
|
60,302 |
|
|
|
(90,782 |
) |
|
|
(60.1 |
) |
Carrier Ethernet Service Delivery |
|
|
(17,764 |
) |
|
|
(9,575 |
) |
|
|
8,189 |
|
|
|
46.1 |
|
Software and Services |
|
|
31,679 |
|
|
|
22,249 |
|
|
|
(9,430 |
) |
|
|
(29.8 |
) |
|
|
|
* |
|
Denotes % change from 2008 to 2009 |
|
|
|
Packet-Optical Transport segment profit decreased primarily due to lower sales
volume, increased charges related to losses on committed customer sales contracts and
higher charges relating to warranty resulting in lower gross profit. In addition, segment
profit was reduced by increased research and development costs. |
|
|
|
|
Packet-Optical Switching segment profit decreased primarily due to lower sales
volume, resulting in reduced gross profit, partially offset by decreased research and
development costs. |
|
|
|
|
Carrier Ethernet Service Delivery segment loss improved primarily due to
increased sales volume, resulting in higher gross profit, and decreased research and
development costs. |
|
|
|
|
Software and Services segment profit decreased due to lower sales volume,
resulting in lower gross profit, and increased research and development costs. |
Liquidity and Capital Resources
At October 31, 2010, our principal sources of liquidity were cash and cash equivalents. The
following table summarizes our cash and cash equivalents and investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2010 |
|
|
(decrease) |
|
Cash and cash equivalents |
|
$ |
485,705 |
|
|
$ |
688,687 |
|
|
$ |
202,982 |
|
Short-term investments in marketable debt securities |
|
|
563,183 |
|
|
|
|
|
|
|
(563,183 |
) |
Long-term investments in marketable debt securities |
|
|
8,031 |
|
|
|
|
|
|
|
(8,031 |
) |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments in marketable debt securities |
|
$ |
1,056,919 |
|
|
$ |
688,687 |
|
|
$ |
(368,232 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in total cash and cash equivalents and investments during fiscal 2010 was
primarily related to the following:
|
|
|
$693.2 million related to the purchase price for the MEN Acquisition; |
|
|
|
|
$76.1 million for the repurchase of a portion of our 0.25% convertible senior notes
due May 1, 2013; |
|
|
|
|
$51.2 million for equipment, furniture, fixtures and intellectual property |
|
|
|
|
$24.5 million transferred to restricted cash related to as collateral for our
standby letters of credit; and |
|
|
|
|
$229.0 million cash used from operations, consisting of $112.2 million for changes
in working capital and $116.8 million from net losses (adjusted for non-cash charges).
Cash used from operations includes payments of $91.7 million related to acquisition and
integration-related expense and restructuring costs, of which $18.2 million was
reflected in changes in working capital and $109.9 million was reflected in net losses
(adjusted for non-cash charges). |
These payments were partially offset by our receipt of $364.3 million in net proceeds from the
private placement of $375.0 million in aggregate principal amount of 4.0% convertible senior notes
due March 15, 2015 and $340.4 million in net proceeds from the private placement of $350.0 million
in aggregate principal amount of 3.75% convertible senior notes due October 15, 2018. See Notes 2
and 15 to the Consolidated Financial Statements under Item 8 of Part II of this report for more
information regarding the MEN Acquisition and our issuance of convertible notes during fiscal 2010.
46
Based on past performance and current expectations, we believe that our cash and cash
equivalents and cash generated from operations will satisfy our working capital needs, capital
expenditures, and other liquidity requirements associated with our existing operations through at least the next 12 months. As expected, the investment in working
capital for fiscal 2010 reflects the increased scale of business as the result of the MEN
Acquisition and the lower net working capital transferred to Ciena at closing, which resulted in a
purchase price adjustment following the closing. We regularly evaluate our liquidity position and
the anticipated cash needs of the business to fund our operating plans as well as any capital
raising opportunities that may be available to us.
The following sections set forth the components of our $229.0 million of cash used by
operating activities for fiscal 2010:
Net losses (adjusted for non-cash charges)
The following table sets forth (in thousands) our net losses (adjusted for non-cash charges)
for fiscal 2010:
|
|
|
|
|
|
|
Year ended |
|
|
|
October 31, |
|
|
|
2010 |
|
Net loss |
|
$ |
(333,514 |
) |
Adjustments for non-cash charges: |
|
|
|
|
Gain on extinguishment of debt |
|
|
(4,948 |
) |
Amortization of premium on marketable debt securities |
|
|
574 |
|
Change in fair value of embedded redemption feature |
|
|
(2,510 |
) |
Change in fair value of contingent consideration |
|
|
(13,807 |
) |
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements |
|
|
42,789 |
|
Share-based compensation costs |
|
|
35,560 |
|
Amortization of intangible assets |
|
|
127,018 |
|
Deferred tax provision |
|
|
700 |
|
Provision for inventory excess and obsolescence |
|
|
13,696 |
|
Provision for warranty |
|
|
15,353 |
|
Other |
|
|
2,296 |
|
|
|
|
|
Net losses (adjusted for non-cash charges) |
|
$ |
(116,793 |
) |
|
|
|
|
Working Capital
Accounts Receivable, Net
Excluding
the addition of $7.1 million of unbilled receivables recorded upon completion of the
MEN Acquisition, cash used by accounts receivable, net of allowance for doubtful accounts
receivable, was $218.2 million from the end of fiscal 2009 through the end of fiscal 2010 due to
higher sales volume. Our days sales outstanding (DSOs) increased from 65 days for fiscal 2009 to
100 days for fiscal 2010. The significantly increased DSOs for fiscal 2010 reflect the timing of
the MEN Acquisition and the effect on this calculation of having only a partial year of revenue
from the MEN Business. Utilizing annualized fourth quarter revenue for purposes of this calculation
would have resulted in DSOs of 74 days.
The following table sets forth (in thousands) changes to our accounts receivable, net of
allowance for doubtful accounts receivable, from the end of fiscal 2009 through the end of fiscal
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2010 |
|
|
(decrease) |
|
Accounts receivable, net |
|
$ |
118,251 |
|
|
$ |
343,582 |
|
|
$ |
225,331 |
|
|
|
|
|
|
|
|
|
|
|
Inventory
Excluding the addition of $146.3 million of inventory recorded upon completion of the MEN
Acquisition, cash consumed by inventory for fiscal 2010 was $41.0 million due to increased
inventory levels to support a higher sales volume. Our inventory turns decreased from 3.4 for
fiscal 2009 to 2.3 for fiscal 2010 primarily due to effect of the mid-year MEN Acquisition. The
significantly decreased inventory turns for fiscal 2010 reflect the timing of the MEN Acquisition
and the effect on this calculation of having only a partial year of cost of goods sold from the MEN
Business. Utilizing annualized fourth quarter product cost of good sold, inventory turns would have
been 3.1 days.
47
During fiscal 2010, changes in inventory reflect a $13.7 million reduction related to a
non-cash provision for excess and obsolescence.
The following table sets forth (in thousands) changes to the components of our inventory from
the end of fiscal 2009 through the end of fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2010 |
|
|
(decrease) |
|
Raw materials |
|
$ |
19,694 |
|
|
$ |
30,569 |
|
|
$ |
10,875 |
|
Work-in-process |
|
|
1,480 |
|
|
|
6,993 |
|
|
|
5,513 |
|
Finished goods |
|
|
61,026 |
|
|
|
177,994 |
|
|
|
116,968 |
|
Deferred
cost of goods sold |
|
|
29,888 |
|
|
|
76,830 |
|
|
|
46,942 |
|
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
112,088 |
|
|
|
292,386 |
|
|
|
180,298 |
|
Provision for inventory excess and obsolescence |
|
|
(24,002 |
) |
|
|
(30,767 |
) |
|
|
(6,765 |
) |
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
88,086 |
|
|
$ |
261,619 |
|
|
$ |
173,533 |
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other
Excluding the addition of $54.4 million of prepaid expense and other from the MEN Acquisition,
cash used in operations related to prepaid expense and other during fiscal 2010 was $34.9 million.
This usage was primarily related an increase in value added tax receivable.
Accounts payable, accruals and other obligations
Excluding the addition of $36.5 million of accruals and other obligations upon completion of
the MEN Acquisition, cash generated in operations related to accounts payable, accruals and other
obligations during fiscal 2010 was $180.8 million. Between fiscal 2009 and 2010, the change in
unpaid equipment purchases was $3.8 million. Changes in accrued liabilities in the table below
reflect non-cash provisions of $15.4 million related to warranties.
The following table sets forth (in thousands) changes in our accounts payable, accruals and
other obligations from the end of fiscal 2009 through the end of fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2010 |
|
|
(decrease) |
|
Accounts payable |
|
$ |
53,104 |
|
|
$ |
200,617 |
|
|
$ |
147,513 |
|
Accrued liabilities |
|
|
105,160 |
|
|
|
193,994 |
|
|
|
88,834 |
|
Other long-term obligations |
|
|
16,348 |
|
|
|
16,435 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accruals and other obligations |
|
$ |
174,612 |
|
|
$ |
411,046 |
|
|
$ |
236,434 |
|
|
|
|
|
|
|
|
|
|
|
Interest Paid on Convertible Notes
Interest on our outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May
1 and November 1 of each year. We paid $0.4 million in interest on our 0.25% convertible notes
during fiscal 2010.
Interest on our outstanding 4.0% convertible senior notes, due March 15, 2015, is payable on
March 15 and September 15 of each year. We paid $7.5 million in interest on our 4.0% convertible
notes during fiscal 2010.
Interest on our outstanding 0.875% convertible senior notes, due June 15, 2017, is payable on
June 15 and December 15 of each year. We paid $4.3 million in interest on our 0.875% convertible
notes during fiscal 2010.
Interest on our outstanding 3.75% convertible senior notes, due October 15, 2018, is payable
on April 15 and October 15 of each year. Our initial interest payment on these notes will be due on
April 15, 2011.
For additional information about our convertible notes, see Note 15 to our Consolidated
Financial Statements included in Item 8 of Part II of this report.
48
Deferred revenue
Excluding the addition of $28.1 million of deferred revenue recorded upon completion of the
MEN Acquisition, deferred revenue increased by $1.0 million during fiscal 2010. Product deferred
revenue represents payments received in advance of shipment and payments received in advance of our
ability to recognize revenue. Services deferred revenue is related to payment for service contracts
that will be recognized over the contract term. The following table
reflects (in thousands) the balance of deferred revenue and the change in this balance from the end of fiscal
2009 through the end of fiscal 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2009 |
|
|
2010 |
|
|
(decrease) |
|
Products |
|
$ |
11,998 |
|
|
$ |
31,187 |
|
|
$ |
19,189 |
|
Services |
|
|
63,935 |
|
|
|
73,862 |
|
|
|
9,927 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
75,933 |
|
|
$ |
105,049 |
|
|
$ |
29,116 |
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
Significant changes to contractual obligations during fiscal 2010 relate to purchase
obligations and operating leases, principally for additional facilities, associated with the MEN
Acquisition. Changes to interest and principal due on convertible notes relate to our private
placement of convertible notes during fiscal 2010. For additional information about our convertible
notes, see Note 15 to our Consolidated Financial Statements included in Item 8 of Part II of this
report. The following is a summary of our future minimum payments under contractual obligations as
of October 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Interest due on convertible notes |
|
$ |
204,747 |
|
|
$ |
33,041 |
|
|
$ |
66,081 |
|
|
$ |
57,500 |
|
|
$ |
48,125 |
|
Principal due at maturity on convertible notes |
|
|
1,441,210 |
|
|
|
|
|
|
|
216,210 |
|
|
|
375,000 |
|
|
|
850,000 |
|
Operating leases (1) |
|
|
140,340 |
|
|
|
28,119 |
|
|
|
42,891 |
|
|
|
31,432 |
|
|
|
37,898 |
|
Purchase obligations (2) |
|
|
283,688 |
|
|
|
283,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition service obligations (3) |
|
|
22,633 |
|
|
|
22,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (4) |
|
$ |
2,092,618 |
|
|
$ |
367,481 |
|
|
$ |
325,182 |
|
|
$ |
463,932 |
|
|
$ |
936,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the effect of the exercise of an early termination feature by the landlord for our
Carling lease. See Item 2 of Part I of this report and Note 23 to the Consolidated Financial
Statements in Item 8 of Part II of this report. The amount for operating leases above does not
include insurance, taxes, maintenance and other costs required by the applicable operating lease.
These costs are variable and are not expected to have a material impact. |
|
(2) |
|
Purchase obligations relate to purchase order commitments to our contract manufacturers and
component suppliers for inventory. In certain instances, we are permitted to cancel, reschedule or
adjust these orders. Consequently, only a portion of the amount reported above relates to firm,
non-cancelable and unconditional obligations. |
|
(3) |
|
Transition service obligations represent the non-cancelable portion of fees under the
transition service agreement. See Overview Integration Activities and Costs. |
|
(4) |
|
As of October 31, 2010, we also had approximately $7.9 million of other long-term obligations
in our condensed consolidated balance sheet for unrecognized tax positions that are not included in
this table because the timing or amount of any cash settlement with the respective tax authority
cannot be reasonably estimated. |
Some of our commercial commitments, including some of the future minimum payments set
forth above, are secured by standby letters of credit. The following is a summary of our commercial
commitments secured by standby letters of credit by commitment expiration date as of October 31,
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to |
|
|
Three to |
|
|
|
Total |
|
|
year |
|
|
three years |
|
|
five years |
|
Standby letters of credit |
|
$ |
47,943 |
|
|
$ |
12,048 |
|
|
$ |
35,308 |
|
|
$ |
587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not
have any equity interests in so-called limited purpose entities, which include special purpose
entities (SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related
disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our estimates,
including those related to bad debts, inventories, investments, intangible assets, goodwill, income
taxes, warranty obligations, restructuring, derivatives and hedging, and contingencies and
litigation. We base our estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Among other things, these estimates form the
basis for judgments about the carrying values of assets and liabilities
49
that are
not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. To the extent that there are material differences between our estimates
and actual results, our consolidated financial statements will be affected.
We believe that the following critical accounting policies reflect those areas where
significant judgments and estimates are used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue to be
realized or realizable and earned when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred or services have been rendered; the price to the
buyer is fixed or determinable; and collectibility is reasonably assured. Customer purchase
agreements and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify
delivery. We assess whether the price is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or adjustment. We
assess collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customers payment history. Revenue for maintenance
services is generally deferred and recognized ratably over the period during which the services are
to be performed.
We apply the percentage of completion method to long term arrangements where we are required
to undertake significant production customizations or modification engineering, and reasonable and
reliable estimates of revenue and cost are available. Utilizing the percentage of completion
method, we recognize revenue based on the ratio of actual costs incurred to date to total estimated
costs expected to be incurred. In instances that do not meet the percentage of completion method
criteria, and recognition of revenue is deferred until there are no uncertainties regarding
customer acceptance. If circumstances arise that change the original estimates of revenue, costs,
or extent of progress toward completion, revisions to the estimates are made. These revisions may
result in increases or decreases in estimated revenue or costs, and such revisions are reflected in
income in the period in which the circumstances that gave rise to the revision become known by
management.
Some of our communications networking equipment is integrated with software that is essential
to the functionality of the equipment. Software revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility
is probable. In instances where final acceptance of the product is specified by the customer,
revenue is deferred until there are no uncertainties regarding customer acceptance.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, we allocate the arrangement fee to
those separate units of accounting. Multiple element arrangements that include software are
separated into more than one unit of accounting if the functionality of the delivered element(s) is
not dependent on the undelivered element(s), there is vendor-specific objective evidence of the
fair value of the undelivered element(s), and general revenue recognition criteria related to the
delivered element(s) have been met. The amount of product and services revenue recognized is
affected by our judgments as to whether an arrangement includes multiple elements and, if so,
whether vendor-specific objective evidence of fair value exists. Changes to the elements in an
arrangement and our ability to establish vendor-specific objective evidence for those elements
could affect the timing of revenue recognition. For all other deliverables, we separate the
elements into more than one unit of accounting if the delivered element(s) have value to the
customer on a stand-alone basis, objective and reliable evidence of fair value exists for the
undelivered element(s), and delivery of the undelivered element(s) is probable and substantially
within our control. Revenue is allocated to each unit of accounting based on the relative fair
value of each accounting unit or using the residual method if objective evidence of fair value does
not exist for the delivered element(s). The revenue recognition criteria described above are applied to each
separate unit of accounting. If these criteria are not met, revenue is deferred until the criteria
are met or the last element has been delivered.
Our total deferred revenue for products was $12.0 million and $31.2 million as of October 31,
2009 and October 31, 2010, respectively. Our services revenue is deferred and recognized ratably
over the period during which the services are to be performed. Our total deferred revenue for
services was $63.9 million and $73.9 million as of October 31, 2009 and October 31, 2010,
respectively.
Business Combinations
We record acquisitions using the purchase method of accounting. All of the assets acquired,
liabilities assumed, contractual contingencies and contingent consideration are recognized at their
fair value as of the acquisition date. The excess of the purchase price over the estimated fair
values of the net tangible and net intangible assets acquired is recorded as goodwill. The
application of the purchase method of accounting
50
for business combinations requires management to
make significant estimates and assumptions in the determination of the fair value of assets acquired and
liabilities assumed in order to properly allocate purchase price consideration between assets that
are depreciated and amortized from goodwill. These assumptions and estimates include a market
participants use of the asset and the appropriate discount rates for a market participant. Our
estimates are based on historical experience, information obtained from the management of the
acquired companies and, when appropriate, includes assistance from independent third-party
appraisal firms. Our significant assumptions and estimates can include, but are not limited to, the
cash flows that an asset is expected to generate in the future, the appropriate weighted-average
cost of capital, and the cost savings expected to be derived from acquiring an asset. These
estimates are inherently uncertain and unpredictable. In addition, unanticipated events and
circumstances may occur which may affect the accuracy or validity of such estimates. During fiscal
2010, we completed the MEN Acquisition for a purchase price of $676.8 million. As a result of the
purchase price allocation to the assets acquired and liabilities assumed, as well as contingent
consideration, there was no value assigned to goodwill. See Note 2 to the Consolidated Financial
Statements included in Item 8 of Part II of this report.
Share-Based Compensation
We measure and recognize compensation expense for share-based awards based on estimated fair
values on the date of grant. We estimate the fair value of each option-based award on the date of
grant using the Black-Scholes option-pricing model. This option pricing model requires that we make
several estimates, including the options expected life and the price volatility of the underlying
stock. The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. We calculate the expected term using detailed
historical information about specific exercise behavior of our grantees. We considered the implied
volatility and historical volatility of our stock price in determining our expected volatility,
and, finding both to be equally reliable, determined that a combination of both measures would
result in the best estimate of expected volatility. We recognize the estimated fair value of
option-based awards, net of estimated forfeitures, as share-based compensation expense on a
straight-line basis over the requisite service period.
We estimate the fair value of our restricted stock unit awards based on the fair value of our
common stock on the date of grant. Our outstanding restricted stock unit awards are subject to
service-based vesting conditions and/or performance-based vesting conditions. We recognize the
estimated fair value of service-based awards, net of estimated forfeitures, as share-based expense
ratably over the vesting period on a straight-line basis. Awards with performance-based vesting
conditions require the achievement of certain financial or other performance criteria or targets as
a condition to the vesting, or acceleration of vesting. We recognize the estimated fair value of
performance-based awards, net of estimated forfeitures, as share-based expense over the performance
period, using graded vesting, which considers each performance period or tranche separately, based
upon our determination of whether it is probable that the performance targets will be achieved. At
each reporting period, we reassess the probability of achieving the performance targets and the
performance period required to meet those targets. Determining whether the performance targets will
be achieved involves judgment, and the estimate of expense may be revised periodically based on
changes in the probability of achieving the performance targets. Revisions are reflected in the
period in which the estimate is changed. If any performance goals are not met, no compensation cost
is ultimately recognized against that goal, and, to the extent previously recognized, compensation
cost is reversed.
Because share-based compensation expense is based on awards that are ultimately expected to
vest, the amount of expense takes into account estimated forfeitures. We estimate forfeitures at
the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Changes in these estimates and assumptions can materially affect the measure of
estimated fair value of our share-based compensation. See Note 19 to our Consolidated Financial
Statements in Item 8 of Part II of this report for information regarding our assumptions related to
share-based compensation and the amount of share-based compensation expense we incurred for the
periods covered in this report. As of October 31, 2010, total unrecognized compensation expense was
$60.9 million: (i) $5.4 million, which relates to unvested stock options and is expected to be
recognized over a weighted-average period of 0.9 year; and (ii) $55.5 million, which relates to
unvested restricted stock units and is expected to be recognized over a weighted-average period of
1.6 years.
We recognize windfall tax benefits associated with the exercise of stock options or release of
restricted stock units directly to stockholders equity only when realized. A windfall tax benefit
occurs when the actual tax benefit realized by us upon an employees disposition of a share-based
award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When
assessing whether a tax benefit relating to share-based compensation has been realized, we follow
the tax law with-and-without method. Under the with-and-without method, the windfall is
considered realized and recognized for financial statement purposes only when an incremental
benefit is provided after considering all other tax benefits including our net operating losses.
The with-and-without method results in the windfall from share-based compensation awards always
being effectively the last tax benefit to be considered. Consequently, the windfall attributable to
share-based compensation will not be considered realized in instances where our net operating loss
carryover (that is unrelated to windfalls) is sufficient to offset the current years taxable
income before considering the effects of current-year windfalls.
51
Reserve for Inventory Obsolescence
We make estimates about future customer demand for our products when establishing the
appropriate reserve for excess and obsolete inventory. We write down inventory that has become
obsolete or unmarketable by an amount equal to the difference between the cost of inventory and the
estimated market value based on assumptions about future demand and market conditions. Inventory
write downs are a component of our product cost of goods sold. Upon recognition of the write down,
a new lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. We
recorded charges for excess and obsolete inventory of $15.7 million and $13.7 million in fiscal
2009 and 2010, respectively. During fiscal 2009, these charges were primarily related to excess
inventory due to a change in forecasted product sales. For fiscal 2010, these charges were
primarily related to excess and obsolete inventory charges relating to product rationalization
decisions in connection with the MEN Acquisition. In an effort to limit our exposure to delivery
delays and to satisfy customer needs we purchase inventory based on forecasted sales across our
product lines. In addition, part of our research and development strategy is to promote the
convergence of similar features and functionalities across our product lines. Each of these
practices exposes us to the risk that our customers will not order products for which we have
forecasted sales, or will purchase less than we have forecasted. Historically, we have experienced
write downs due to changes in strategic direction, discontinuance of a product and declines in
market conditions. If actual market conditions worsen or differ from those we have assumed, if
there is a sudden and significant decrease in demand for our products, or if there is a higher
incidence of inventory obsolescence due to a rapid change in technology, we may be required to take
additional inventory write-downs, and our gross margin could be adversely affected. Our inventory
net of allowance for excess and obsolescence was $88.1 million and $261.6 million as of October 31,
2009 and October 31, 2010, respectively.
Restructuring
As part of our restructuring costs, we provide for the estimated cost of the net lease expense
for facilities that are no longer being used. The provision is equal to the fair value of the
minimum future lease payments under our contracted lease obligations, offset by the fair value of
the estimated sublease payments that we may receive. As of October 31, 2010, our accrued
restructuring liability related to net lease expense and other related charges was $6.4 million.
The total minimum remaining lease payments for these restructured facilities are $9.0 million.
These lease payments will be made over the remaining lives of our leases, which range from five
months to eight years. If actual market conditions are different than those we have projected, we
will be required to recognize additional restructuring costs or benefits associated with these
facilities.
Allowance for Doubtful Accounts Receivable
Our allowance for doubtful accounts receivable is based on managements assessment, on a
specific identification basis, of the collectibility of customer accounts. We perform ongoing
credit evaluations of our customers and generally have not required collateral or other forms of
security from customers. In determining the appropriate balance for our allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectibility. In doing so, we consider creditworthiness, payment history, account
activity and communication with such customer. If a customers financial condition changes, or if
actual defaults are higher than our historical experience, we may be required to take a charge for
an allowance for doubtful accounts receivable which could have an adverse impact on our results of
operations. Our accounts receivable net of allowance for doubtful accounts was $118.3 million and
$343.6 million as of October 31, 2009 and October 31, 2010, respectively. Our allowance for
doubtful accounts as of October 31, 2009 and October 31, 2010 was $0.1 million.
Goodwill
Goodwill is the excess of the purchase price over the fair values assigned to the net assets
acquired in a business combination. Goodwill is assigned to the reporting units that are expected
to benefit from the synergies of the combination. We test goodwill for impairment on an annual
basis, which we have determined to be the last business day of fiscal September
each year. We also test goodwill for impairment between annual tests if an event occurs or
circumstances change that would, more likely than not, reduce the fair value of the reporting unit
below its carrying value. Prior to the reorganization of our operations described in Overview
above, we tested goodwill for impairment as a single reporting unit. See Interim Impairment
Assessment-Fiscal 2009 below.
The first step in the process of assessing goodwill impairment is to compare the fair value
of the reporting unit with the units carrying amount, including goodwill. If this test indicates
that the fair value is less than the carrying value, then step two is required to compare the
implied fair value of the reporting units goodwill with the carrying amount of the reporting
units goodwill. A non-cash goodwill impairment charge would have the effect of decreasing our
earnings or increasing our losses in such period. If we are required to take a substantial
impairment charge, our operating results would be materially adversely affected in such period. As
of the end of fiscal 2009 and 2010, our goodwill balance was $0.
52
Interim Impairment Assessment Fiscal 2009
Based on a combination of factors, including the then current macroeconomic conditions, a
sustained decline in our common stock price and market capitalization below our net book value, we
conducted an interim impairment assessment of goodwill during the second quarter of fiscal 2009.
We determined the fair value of our then single reporting unit to be equal to our market
capitalization plus a control premium. Market capitalization was determined by multiplying the
shares outstanding on the assessment date by the average market price of our common stock over a
10-day period before and a 10-day period after each assessment date. We used this 20-day duration
to consider inherent market fluctuations that may have affected any individual closing price. We
believed that our market capitalization alone did not fully capture the fair value of our business
as a whole, or the substantial value that an acquirer would obtain from its ability to obtain
control of our business. As such, in determining fair value, we added a control premium which
seeks to give effect to the increased consideration a potential acquirer would be required to pay
in order to gain sufficient ownership to set policies, direct operations and make decisions
related to our company to our market capitalization.
When we performed the step one fair value comparison during the second quarter of fiscal 2009,
our market capitalization was $721.8 million and our carrying value, including goodwill, was $949.0
million. We applied a 25% control premium to market capitalization to determine a fair value of
$902.2 million. Because step one indicated that the fair value was less than our carrying value, we
performed the step two analysis. Under the step two analysis, the implied fair value of goodwill
requires valuation of a reporting units tangible and intangible assets and liabilities in a manner
similar to the allocation of purchase price in a business combination. If the carrying value of a
reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired and is
written down to the extent of the difference. The implied fair value of the reporting units
goodwill was determined to be $0, and, as a result, we recorded a goodwill impairment of $455.7
million in fiscal 2009, representing the full carrying value of the goodwill.
Long-lived Assets
Our long-lived assets include: equipment, furniture and fixtures; finite-lived intangible
assets; indefinite-lived intangible assets; and maintenance spares. As of October 31, 2009 and 2010
these assets totaled $154.7 million and $600.4 million, net, respectively. We test long-lived
assets for impairment whenever events or changes in circumstances indicate that the assets
carrying amount is not recoverable from its undiscounted cash flows. Our long-lived assets are
assigned to asset groups which represents the lowest level for which we identify cash flows.
Deferred Tax Valuation Allowance
As of October 31, 2010, we have recorded a valuation allowance offsetting essentially all our
net deferred tax assets of $1.4 billion. When measuring the need for a valuation allowance, we
assess both positive and negative evidence regarding the realizability of these deferred tax
assets. We record a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized. In determining net deferred tax assets and valuation
allowances, management is required to make judgments and estimates related to projections of
profitability, the timing and extent of the utilization of net operating loss carryforwards,
applicable tax rates, transfer pricing methodologies and tax planning strategies. The valuation
allowance is reviewed quarterly and is maintained until sufficient positive evidence exists to
support a reversal. Because evidence such as our operating results during the most recent
three-year period is afforded more weight than forecasted results for future periods, our
cumulative loss during this three-year period represents sufficient negative evidence regarding the
need for nearly a full valuation allowance. We will release this valuation allowance when
management determines that it is more likely than not that our deferred tax assets will be
realized. Any future release of valuation allowance may be recorded as a tax benefit increasing net
income or as an adjustment to paid-in capital, based on tax ordering requirements.
Uncertain Tax Positions
We account for uncertainty in income tax positions using a two-step approach. The first step
is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it
is more likely than not that the position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon settlement. Significant
judgment is required in evaluating our uncertain tax positions and determining our provision for
income taxes. Although we believe our reserves are reasonable, no assurance can be given that the
final tax outcome of these matters will not be different from that which is reflected in our
historical income tax provisions and accruals. We adjust these reserves in light of changing facts
and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the
extent that the final tax outcome of these matters is different than the amounts recorded, such
differences will affect the provision for income taxes in the period in which such determination is
made. As of October 31, 2010, we had $0.9 million and $7.9 million recorded as current and
long-term obligations, respectively, related to uncertain tax positions. The provision for income
taxes includes the effect of reserve provisions and changes to reserves that are considered
appropriate, as well as the related net interest.
53
The total amount of unrecognized tax benefits increased by $1.4 million during
fiscal 2010 to $8.8 million, which includes $1.4 million of interest and some minor penalties. On
March 19, 2010, as a result of the acquisition of the MEN Business, Ciena recorded a liability and
an indemnification asset of $2.6 million related to the uncertain income tax positions of the MEN
Business. During the second quarter of fiscal 2010, subsequent to the acquisition, this acquired
liability and associated indemnification asset were reduced by $2.0 million due to a lapse in
applicable statute of limitations.
Warranty
Our liability for product warranties, included in other accrued liabilities, was $40.2 million
and $54.4 million as of October 31, 2009 and 2010, respectively. Our products are generally covered
by a hardware warranty for periods ranging from one to five years and a software warranty of 90
days or one year, depending upon the product. We accrue for warranty costs as part of our cost of
goods sold based on associated material costs, technical support labor costs, and associated
overhead. Material cost is estimated based primarily upon historical trends in the volume of
product returns within the warranty period and the cost to repair or replace the equipment.
Technical support labor cost is estimated based primarily upon historical trends and the cost to
support the customer cases within the warranty period. The provision for product warranties was
$19.3 million and $15.4 million for fiscal 2009 and 2010, respectively. The provision for warranty
claims may fluctuate on a quarterly basis depending upon the mix of products and customers in that
period. If actual product failure rates, material replacement costs, service or labor costs differ
from our estimates, revisions to the estimated warranty provision would be required. An increase in
warranty claims or the related costs associated with satisfying these warranty obligations could
increase our cost of sales and negatively affect our gross margin.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. We consider the
likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss, in determining loss contingencies. A loss is accrued when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether any accruals should be adjusted
and whether new accruals are required.
Effects of Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Item 8 of Part II of this report for
information relating to our discussion of the effects of recent accounting pronouncements.
Unaudited Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results in our
consolidated statements of operations for each of the eight quarters in the period ended October
31, 2010 and reflect the impact of our March 19, 2010 acquisition of the MEN Business. This
information is unaudited, but in our opinion reflects all adjustments (consisting only of normal
recurring adjustments) that we consider necessary for a fair statement of such information in
accordance with generally accepted accounting principles. There were no material, retroactive
measurement period adjustments related to the MEN Acquisition. The results for any quarter are not
necessarily indicative of results for any future period.
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
Jan. 31, |
|
|
Apr. 30, |
|
|
Jul. 31, |
|
|
Oct. 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
|
2010 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
139,717 |
|
|
$ |
118,849 |
|
|
$ |
139,903 |
|
|
$ |
149,053 |
|
|
$ |
149,054 |
|
|
$ |
206,420 |
|
|
$ |
312,378 |
|
|
$ |
341,387 |
|
Services |
|
|
27,683 |
|
|
|
25,352 |
|
|
|
24,855 |
|
|
|
27,217 |
|
|
|
26,822 |
|
|
|
47,051 |
|
|
|
77,297 |
|
|
|
76,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
167,400 |
|
|
|
144,201 |
|
|
|
164,758 |
|
|
|
176,270 |
|
|
|
175,876 |
|
|
|
253,471 |
|
|
|
389,675 |
|
|
|
417,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
76,367 |
|
|
|
65,419 |
|
|
|
72,842 |
|
|
|
81,542 |
|
|
|
76,669 |
|
|
|
118,221 |
|
|
|
201,559 |
|
|
|
200,255 |
|
Services |
|
|
19,190 |
|
|
|
18,062 |
|
|
|
17,251 |
|
|
|
17,126 |
|
|
|
19,047 |
|
|
|
30,308 |
|
|
|
44,107 |
|
|
|
48,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of goods sold |
|
|
95,557 |
|
|
|
83,481 |
|
|
|
90,093 |
|
|
|
98,668 |
|
|
|
95,716 |
|
|
|
148,529 |
|
|
|
245,666 |
|
|
|
249,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
71,843 |
|
|
|
60,720 |
|
|
|
74,665 |
|
|
|
77,602 |
|
|
|
80,160 |
|
|
|
104,942 |
|
|
|
144,009 |
|
|
|
168,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
46,700 |
|
|
|
49,482 |
|
|
|
44,442 |
|
|
|
49,695 |
|
|
|
50,033 |
|
|
|
71,142 |
|
|
|
100,869 |
|
|
|
105,582 |
|
Selling and marketing |
|
|
33,819 |
|
|
|
33,295 |
|
|
|
31,468 |
|
|
|
35,945 |
|
|
|
34,237 |
|
|
|
45,328 |
|
|
|
52,127 |
|
|
|
61,823 |
|
General and administrative |
|
|
11,585 |
|
|
|
12,615 |
|
|
|
11,524 |
|
|
|
11,785 |
|
|
|
12,763 |
|
|
|
21,503 |
|
|
|
32,649 |
|
|
|
35,777 |
|
Acquisition and integration costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,031 |
|
|
|
39,221 |
|
|
|
17,033 |
|
|
|
18,094 |
|
Amortization of intangible assets |
|
|
6,404 |
|
|
|
6,224 |
|
|
|
6,224 |
|
|
|
5,974 |
|
|
|
5,981 |
|
|
|
17,121 |
|
|
|
38,727 |
|
|
|
37,572 |
|
Restructuring costs |
|
|
76 |
|
|
|
6,399 |
|
|
|
3,941 |
|
|
|
791 |
|
|
|
(21 |
) |
|
|
1,849 |
|
|
|
2,157 |
|
|
|
4,529 |
|
Goodwill impairment |
|
|
|
|
|
|
455,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
98,584 |
|
|
|
563,688 |
|
|
|
97,599 |
|
|
|
104,190 |
|
|
|
130,024 |
|
|
|
196,164 |
|
|
|
243,562 |
|
|
|
249,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(26,741 |
) |
|
|
(502,968 |
) |
|
|
(22,934 |
) |
|
|
(26,588 |
) |
|
|
(49,864 |
) |
|
|
(91,222 |
) |
|
|
(99,553 |
) |
|
|
(81,180 |
) |
Interest and other income (loss), net |
|
|
4,660 |
|
|
|
3,508 |
|
|
|
999 |
|
|
|
320 |
|
|
|
(773 |
) |
|
|
3,748 |
|
|
|
(2,668 |
) |
|
|
3,610 |
|
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,948 |
|
Interest expense |
|
|
(1,844 |
) |
|
|
(1,852 |
) |
|
|
(1,856 |
) |
|
|
(1,854 |
) |
|
|
(1,828 |
) |
|
|
(4,113 |
) |
|
|
(5,990 |
) |
|
|
(6,688 |
) |
Loss on cost method investments |
|
|
(565 |
) |
|
|
(2,570 |
) |
|
|
(2,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(24,490 |
) |
|
|
(503,882 |
) |
|
|
(25,984 |
) |
|
|
(28,122 |
) |
|
|
(52,465 |
) |
|
|
(91,587 |
) |
|
|
(108,211 |
) |
|
|
(79,310 |
) |
Provision (benefit) for income tax |
|
|
341 |
|
|
|
(672 |
) |
|
|
470 |
|
|
|
(1,463 |
) |
|
|
868 |
|
|
|
(1,578 |
) |
|
|
1,644 |
|
|
|
1,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(24,831 |
) |
|
$ |
(503,210 |
) |
|
$ |
(26,454 |
) |
|
$ |
(26,659 |
) |
|
$ |
(53,333 |
) |
|
$ |
(90,009 |
) |
|
$ |
(109,855 |
) |
|
$ |
(80,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per common share |
|
$ |
(0.27 |
) |
|
$ |
(5.53 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.97 |
) |
|
$ |
(1.18 |
) |
|
$ |
(0.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per potential common share |
|
$ |
(0.27 |
) |
|
$ |
(5.53 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.58 |
) |
|
$ |
(0.97 |
) |
|
$ |
(1.18 |
) |
|
$ |
(0.86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
90,620 |
|
|
|
90,932 |
|
|
|
91,364 |
|
|
|
91,758 |
|
|
|
92,321 |
|
|
|
92,614 |
|
|
|
92,906 |
|
|
|
93,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
90,620 |
|
|
|
90,932 |
|
|
|
91,364 |
|
|
|
91,758 |
|
|
|
92,321 |
|
|
|
92,614 |
|
|
|
92,906 |
|
|
|
93,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates and foreign currency
exchange rates.
Interest Rate Sensitivity. As of October 31, 2010 we no longer hold any marketable debt
securities. Accordingly, if market interest rates were to increase immediately and uniformly by 10
percentage points from current levels, the fair value of the portfolio would not be affected.
55
Foreign Currency Exchange Risk. As a global concern, our business and results of operations
are exposed to adverse movements in foreign currency exchange rates. Historically, our sales have
primarily been denominated in U.S. dollars and the impact of foreign currency fluctuations on
revenue has not been material. As a result of our increased global presence, in large part
resulting from the MEN Acquisition, a larger percentage of our revenue is non-U.S. dollar
denominated, in particular, with sales denominated in Canadian Dollars and Euros. As a result, if
the U.S. dollar strengthens against these currencies, our revenues could be adversely affected. For
our U.S. dollar denominated sales, an increase in the value of the U.S. dollar would increase the
real cost to our customers of our products in markets outside the United States.
With regard to operating expense, our primary exposure to foreign currency exchange risk
relates to operating expense incurred in Canadian Dollars, British Pounds, Euros and Indian Rupees.
During fiscal 2010, approximately 32% of our operating expense was non-U.S. dollar denominated. If
these currencies strengthen, costs reported in U.S. dollars will increase, which would adversely
affect our operating expense.
To reduce variability in non-U.S. dollar denominated operating expense, we have previously
entered into foreign currency forward contracts and may do so in the future. In the past, these
derivatives have been designated as cash flow hedges. We do not enter into foreign exchange forward
or option contracts for trading purposes. As of October 31, 2010, we did not have any foreign
currency forward contracts outstanding.
For fiscal 2010, research and development expense was negatively affected by approximately
$13.9 million due to unfavorable foreign exchange rates related to the weakening of the U.S. dollar
in relation to the Canadian Dollar, partially offset by the favorable impact of a stronger U.S.
dollar in relation to the Euro. Sales and marketing expense benefited by $1.6 million due to the
strengthening of the U.S. dollar in relation to the Euro.
As of October 31, 2010, the assets and liabilities of our entities that are denominated in
currencies other than the entitys functional currency were primarily related to intercompany
payables and receivables. We may experience gains or losses from the revaluation of these foreign
currency denominated assets and liabilities. The net gain (loss) on foreign currency revaluation
during fiscal 2010 was immaterial.
Convertible Debt Outstanding. The fair market value of each of our outstanding issues of
convertible notes is subject to interest rate and market price risk due to the convertible feature
of the notes and other factors. Generally the fair market value of fixed interest rate debt will
increase as interest rates fall and decrease as interest rates rise. The fair market value of the
notes may also increase as the market price of our stock rises and decrease as the market price of
the stock falls. Interest rate and market value changes affect the fair market value of the notes,
and may affect the prices at which we would be able repurchase such notes were we to do so. These
changes do not impact our financial position, cash flows or results of operations. During fiscal
2010, we repurchased $81.8 million in aggregate principal amount of our outstanding 0.25%
convertible senior notes due 2013 in privately negotiated transactions for cash payments of $76.1
million. During fiscal 2009, we repurchased $2.0 million in aggregate principal amount of our
outstanding 0.25% convertible senior notes due May 1, 2013 in open market transactions for $1.0
million. For additional information on the fair value of our outstanding notes, see Note 15 to our
Consolidated Financial Statements included in Item 8 of Part II of this report.
56
Item 8. Financial Statements and Supplementary Data
The following is an index to the consolidated financial statements:
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
62 |
|
|
|
|
63 |
|
57
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ciena Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Ciena Corporation and its subsidiaries
(the Company) at October 31, 2010 and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2010 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of October 31, 2010, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the Report of Management on Internal Control Over
Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial
statements and on the Companys internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for business combinations in fiscal 2010.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
As described in the Report of Management on Internal Control Over Financial Reporting under
Item 9A, management has excluded the MEN Business from its assessment of internal control over
financial reporting as of October 31, 2010 because it was acquired by the Company in a purchase
business combination during fiscal 2010. We have also excluded the MEN Business from our audit of
internal control over financial reporting. The MEN Business is included in the consolidated
results on which we are reporting and its total assets and total
revenues represent 20% and 43%,
respectively, of the related consolidated financial statement amounts as of and for the year ended
October 31, 2010.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
December 22, 2010
58
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
485,705 |
|
|
$ |
688,687 |
|
Short-term investments |
|
|
563,183 |
|
|
|
|
|
Accounts receivable, net |
|
|
118,251 |
|
|
|
343,582 |
|
Inventories |
|
|
88,086 |
|
|
|
261,619 |
|
Prepaid expenses and other |
|
|
50,537 |
|
|
|
147,680 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,305,762 |
|
|
|
1,441,568 |
|
Long-term investments |
|
|
8,031 |
|
|
|
|
|
Equipment, furniture and fixtures, net |
|
|
61,868 |
|
|
|
120,294 |
|
Other intangible assets, net |
|
|
60,820 |
|
|
|
426,412 |
|
Other long-term assets |
|
|
67,902 |
|
|
|
129,819 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,504,383 |
|
|
$ |
2,118,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
53,104 |
|
|
$ |
200,617 |
|
Accrued liabilities |
|
|
105,160 |
|
|
|
193,994 |
|
Deferred revenue |
|
|
40,565 |
|
|
|
75,334 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
198,829 |
|
|
|
469,945 |
|
Long-term deferred revenue |
|
|
35,368 |
|
|
|
29,715 |
|
Other long-term obligations |
|
|
16,348 |
|
|
|
16,435 |
|
Convertible notes payable |
|
|
798,000 |
|
|
|
1,442,705 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,048,545 |
|
|
|
1,958,800 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock par value $0.01;
20,000,000 shares authorized; zero shares
issued and outstanding |
|
|
|
|
|
|
|
|
Common stock par value $0.01;
290,000,000 shares authorized; 92,038,360
and 94,060,300 shares issued and
outstanding |
|
|
920 |
|
|
|
941 |
|
Additional paid-in capital |
|
|
5,665,028 |
|
|
|
5,702,137 |
|
Accumulated other comprehensive income |
|
|
1,223 |
|
|
|
1,062 |
|
Accumulated deficit |
|
|
(5,211,333 |
) |
|
|
(5,544,847 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
455,838 |
|
|
|
159,293 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,504,383 |
|
|
$ |
2,118,093 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
791,415 |
|
|
$ |
547,522 |
|
|
$ |
1,009,239 |
|
Services |
|
|
111,033 |
|
|
|
105,107 |
|
|
|
227,397 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
902,448 |
|
|
|
652,629 |
|
|
|
1,236,636 |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
371,238 |
|
|
|
296,170 |
|
|
|
596,704 |
|
Services |
|
|
80,283 |
|
|
|
71,629 |
|
|
|
142,431 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
451,521 |
|
|
|
367,799 |
|
|
|
739,135 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
450,927 |
|
|
|
284,830 |
|
|
|
497,501 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
175,023 |
|
|
|
190,319 |
|
|
|
327,626 |
|
Selling and marketing |
|
|
152,018 |
|
|
|
134,527 |
|
|
|
193,515 |
|
General and administrative |
|
|
68,639 |
|
|
|
47,509 |
|
|
|
102,692 |
|
Acquisition and integration costs |
|
|
|
|
|
|
|
|
|
|
101,379 |
|
Amortization of intangible assets |
|
|
32,264 |
|
|
|
24,826 |
|
|
|
99,401 |
|
Restructuring costs |
|
|
1,110 |
|
|
|
11,207 |
|
|
|
8,514 |
|
Goodwill impairment |
|
|
|
|
|
|
455,673 |
|
|
|
|
|
Change in fair value of contingent consideration |
|
|
|
|
|
|
|
|
|
|
(13,807 |
) |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
429,054 |
|
|
|
864,061 |
|
|
|
819,320 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
21,873 |
|
|
|
(579,231 |
) |
|
|
(321,819 |
) |
Interest and other income, net |
|
|
36,762 |
|
|
|
9,487 |
|
|
|
3,917 |
|
Interest expense |
|
|
(12,927 |
) |
|
|
(7,406 |
) |
|
|
(18,619 |
) |
Realized loss due to impairment of marketable debt investments |
|
|
(5,101 |
) |
|
|
|
|
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
(5,328 |
) |
|
|
|
|
Gain on extinguishment of debt |
|
|
932 |
|
|
|
|
|
|
|
4,948 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
41,539 |
|
|
|
(582,478 |
) |
|
|
(331,573 |
) |
Provision (benefit) for income taxes |
|
|
2,645 |
|
|
|
(1,324 |
) |
|
|
1,941 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
$ |
(333,514 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per potential common share |
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
89,146 |
|
|
|
91,167 |
|
|
|
93,103 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
110,605 |
|
|
|
91,167 |
|
|
|
93,103 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
60
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Paid-in-Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance at October 31, 2007 |
|
|
86,752,069 |
|
|
$ |
868 |
|
|
$ |
5,519,741 |
|
|
$ |
(1,243 |
) |
|
$ |
(4,669,212 |
) |
|
$ |
850,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative effect of adopting FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,894 |
|
|
|
38,894 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,479 |
) |
|
|
|
|
|
|
(1,479 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,862 |
|
Exercise of stock options, net |
|
|
1,253,350 |
|
|
|
12 |
|
|
|
5,764 |
|
|
|
|
|
|
|
|
|
|
|
5,776 |
|
Tax benefit from employee stock option plans |
|
|
|
|
|
|
|
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
318 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
31,428 |
|
|
|
|
|
|
|
|
|
|
|
31,428 |
|
Issuance of common stock for acquisitions, net of issuance costs |
|
|
2,465,384 |
|
|
|
25 |
|
|
|
72,247 |
|
|
|
|
|
|
|
|
|
|
|
72,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
|
90,470,803 |
|
|
|
905 |
|
|
|
5,629,498 |
|
|
|
(1,275 |
) |
|
|
(4,630,179 |
) |
|
|
998,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(581,154 |
) |
|
|
(581,154 |
) |
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,404 |
|
|
|
|
|
|
|
1,404 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(578,656 |
) |
Exercise of stock options, net |
|
|
1,567,557 |
|
|
|
15 |
|
|
|
1,092 |
|
|
|
|
|
|
|
|
|
|
|
1,107 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
34,438 |
|
|
|
|
|
|
|
|
|
|
|
34,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2009 |
|
|
92,038,360 |
|
|
|
920 |
|
|
|
5,665,028 |
|
|
|
1,223 |
|
|
|
(5,211,333 |
) |
|
|
455,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333,514 |
) |
|
|
(333,514 |
) |
Changes in unrealized loss on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(458 |
) |
|
|
|
|
|
|
(458 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(333,675 |
) |
Exercise of stock options, net |
|
|
2,021,940 |
|
|
|
21 |
|
|
|
1,549 |
|
|
|
|
|
|
|
|
|
|
|
1,570 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
35,560 |
|
|
|
|
|
|
|
|
|
|
|
35,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2010 |
|
|
94,060,300 |
|
|
$ |
941 |
|
|
$ |
5,702,137 |
|
|
$ |
1,062 |
|
|
$ |
(5,544,847 |
) |
|
$ |
159,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
61
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
$ |
(333,514 |
) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt |
|
|
(932 |
) |
|
|
|
|
|
|
(4,948 |
) |
Amortization of premium (discount) on marketable debt securities |
|
|
(2,878 |
) |
|
|
(907 |
) |
|
|
574 |
|
Realized loss due to impairment of marketable debt investments |
|
|
5,101 |
|
|
|
|
|
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
5,328 |
|
|
|
|
|
Change in fair value of embedded redemption feature |
|
|
|
|
|
|
|
|
|
|
(2,510 |
) |
Change in fair value of contingent consideration |
|
|
|
|
|
|
|
|
|
|
(13,807 |
) |
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements |
|
|
18,599 |
|
|
|
21,933 |
|
|
|
42,789 |
|
Impairment of goodwill |
|
|
|
|
|
|
455,673 |
|
|
|
|
|
Share-based compensation costs |
|
|
31,428 |
|
|
|
34,438 |
|
|
|
35,560 |
|
Amortization of intangible assets |
|
|
37,956 |
|
|
|
31,429 |
|
|
|
127,018 |
|
Deferred tax provision |
|
|
1,640 |
|
|
|
(883 |
) |
|
|
700 |
|
Provision for inventory excess and obsolescence |
|
|
18,325 |
|
|
|
15,719 |
|
|
|
13,696 |
|
Provision for warranty |
|
|
15,336 |
|
|
|
19,286 |
|
|
|
15,353 |
|
Other |
|
|
5,243 |
|
|
|
2,044 |
|
|
|
2,296 |
|
Changes in assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(32,471 |
) |
|
|
20,097 |
|
|
|
(218,196 |
) |
Inventories |
|
|
3,713 |
|
|
|
(10,353 |
) |
|
|
(40,957 |
) |
Prepaid expenses and other |
|
|
1,649 |
|
|
|
(9,678 |
) |
|
|
(34,908 |
) |
Accounts payable, accruals and other obligations |
|
|
(31,600 |
) |
|
|
2,943 |
|
|
|
180,814 |
|
Deferred revenue |
|
|
7,616 |
|
|
|
1,506 |
|
|
|
1,030 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
117,619 |
|
|
|
7,421 |
|
|
|
(229,010 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for equipment, furniture, fixtures and intellectual property |
|
|
(29,998 |
) |
|
|
(24,114 |
) |
|
|
(51,207 |
) |
Restricted cash |
|
|
1,340 |
|
|
|
(4,116 |
) |
|
|
(24,521 |
) |
Purchase of available for sale securities |
|
|
(571,511 |
) |
|
|
(1,214,218 |
) |
|
|
(63,591 |
) |
Proceeds from maturities of available for sale securities |
|
|
901,433 |
|
|
|
645,119 |
|
|
|
454,141 |
|
Proceeds from sales of available for sale securities |
|
|
|
|
|
|
523,137 |
|
|
|
179,531 |
|
Acquisition of business, net of cash acquired |
|
|
(210,016 |
) |
|
|
|
|
|
|
(693,247 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
91,248 |
|
|
|
(74,192 |
) |
|
|
(198,894 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior convertible notes payable |
|
|
|
|
|
|
|
|
|
|
725,000 |
|
Repayment of senior convertible notes payable |
|
|
(543,296 |
) |
|
|
|
|
|
|
(76,065 |
) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
(20,301 |
) |
Repayment of indebtedness of acquired business |
|
|
(12,363 |
) |
|
|
|
|
|
|
|
|
Excess tax benefit from employee stock option plans |
|
|
318 |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and warrants |
|
|
5,776 |
|
|
|
1,107 |
|
|
|
1,570 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(549,565 |
) |
|
|
1,107 |
|
|
|
630,204 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(694 |
) |
|
|
700 |
|
|
|
682 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
(341,392 |
) |
|
|
(64,964 |
) |
|
|
202,982 |
|
Cash and cash equivalents at beginning of period |
|
|
892,061 |
|
|
|
550,669 |
|
|
|
485,705 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
550,669 |
|
|
$ |
485,705 |
|
|
$ |
688,687 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest |
|
$ |
15,339 |
|
|
$ |
4,748 |
|
|
$ |
12,248 |
|
Cash paid during the period for income taxes, net |
|
$ |
3,120 |
|
|
$ |
584 |
|
|
$ |
1,705 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment in accounts payable |
|
$ |
2,316 |
|
|
$ |
1,481 |
|
|
$ |
5,259 |
|
Value of common stock issued in acquisition |
|
$ |
62,360 |
|
|
$ |
|
|
|
$ |
|
|
Fair value of vested options assumed in acquisition |
|
$ |
9,912 |
|
|
$ |
|
|
|
$ |
|
|
Debt issuance costs in accrued liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
206 |
|
The accompanying notes are an integral part of these consolidated financial statements.
62
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CIENA CORPORATION AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Ciena Corporation (Ciena or the Company) is a provider of communications networking
equipment, software and services that support the transport, switching, aggregation and management
of voice, video and data traffic. Cienas Packet-Optical Transport, Packet-Optical Switching and
Carrier Ethernet Service Delivery products are used, individually or as part of an integrated
solution, in networks operated by communications service providers, cable operators, governments
and enterprises around the globe. Ciena is a network specialist targeting the transition of
disparate, legacy communications networks to converged, next-generation architectures, better able
to handle increased traffic and deliver more efficiently a broader mix of high-bandwidth
communications services. Cienas products, along with its embedded, network element software and
unified service and transport management, enable service providers to efficiently and
cost-effectively deliver critical enterprise and consumer-oriented communication services. Cienas
principal executive offices are located at 1201Winterson Road, Linthicum, Maryland 21090.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Ciena and its
wholly owned subsidiaries. All material inter-company accounts and transactions have been
eliminated in consolidation.
Acquisition of MEN Business (MEN Acquisition)
On March 19, 2010, Ciena completed its acquisition of substantially all of the optical and
carrier Ethernet assets of Nortels Metro Ethernet Networks Business (the MEN Business).
Additional details regarding this transaction are set forth in Note 2 below.
Business Combinations
During fiscal 2010, Ciena adopted the new FASB guidance on business combinations which
requires the total purchase price to be allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The fair values assigned to the assets acquired and
liabilities assumed are based on valuations using managements best estimates and assumptions. The
allocation of the purchase price as reflected in the consolidated financial statements is based on
the best information available to management at the time the consolidated financial statements are
issued. During the measurement period, not to exceed one year, Ciena is required to retrospectively
adjust the initial measurement allocation if new information is obtained about facts and
circumstances that existed as of the acquisition date that, if known, would have resulted in the
recognition of those assets or liabilities as of that date. Cienas measurement period ended
October 31, 2010 as related to the MEN Acquisition.
Fiscal Year
Ciena has a 52 or 53 week fiscal year, which ends on the Saturday nearest to the last day of
October in each year (November 1, 2008, October 31, 2009 and October 30, 2010 for the periods
reported). For purposes of financial statement presentation, each fiscal year is described as
having ended on October 31.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and judgments that affect the amounts reported in the consolidated financial statements and
accompanying notes. Estimates are used for purchase accounting, bad debts, valuation of inventories
and investments, recoverability of intangible assets, other long-lived assets and goodwill, income
taxes, warranty obligations, restructuring liabilities, derivatives, contingencies and litigation.
Ciena bases its estimates on historical experience and assumptions that it believes are reasonable.
Actual results may differ materially from managements estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. Restricted cash collateralizing letters of credit are
included in other current assets and other long-term assets depending upon the duration of the
restriction.
63
Investments
Cienas investments are classified as available-for-sale and are reported at fair value, with
unrealized gains and losses recorded in accumulated other comprehensive income. Ciena recognizes
losses when it determines that declines in the fair value of its investments, below their cost
basis, are other-than-temporary. In determining whether a decline in fair value is
other-than-temporary, Ciena considers various factors including market price (when available),
investment ratings, the financial condition and near-term prospects of the investee, the length of
time and the extent to which the fair value has been less than Cienas cost basis, and its intent
and ability to hold the investment until maturity or for a period of time sufficient to allow for
any anticipated recovery in market value. Ciena considers all marketable debt securities that it
expects to convert to cash within one year or less to be short-term investments. All others are
considered long-term investments.
Ciena has certain minority equity investments in privately held technology companies that are
classified as other assets. These investments are carried at cost because Ciena owns less than 20%
of the voting equity and does not have the ability to exercise significant influence over these
companies. These investments involve a high degree of risk as the markets for the technologies or
products manufactured by these companies are usually early stage at the time of Cienas investment
and such markets may never be significant. Ciena could lose its entire investment in some or all of
these companies. Ciena monitors these investments for impairment and makes appropriate reductions
in carrying values when necessary.
Inventories
Inventories are stated at the lower of cost or market, with cost computed using standard cost,
which approximates actual cost, on a first-in, first-out basis. Ciena records a provision for
excess and obsolete inventory when an impairment has been identified.
Goodwill
Goodwill is the excess of the purchase price over the fair values assigned to the net assets
acquired in a business combination. Goodwill is assigned to the reporting units that are expected
to benefit from the synergies of the combination. Ciena has determined that its operating segments
and reporting units for goodwill assignment are the same. This determination is based on the fact
that components below Cienas operating segment level, such as individual product or service
offerings, do not constitute a reporting unit because they do not constitute a business for which
discrete financial information is available.
Ciena tests each reporting units goodwill for impairment on an annual basis, which Ciena has
determined to be the last business day of its fiscal September each year. Testing is required
between annual tests if events occur or circumstances change that would, more likely than not,
reduce the fair value of the reporting unit below its carrying value. Prior to the reorganization
of Cienas operations described above, Ciena tested its goodwill
for impairment as a single reporting unit.
Long-lived Assets
Cienas long-lived assets include: equipment, furniture and fixtures; intangible assets; and
maintenance spares. Ciena tests long-lived assets for impairment whenever triggering events or
changes in circumstances indicate that the assets carrying amount is not recoverable from its
undiscounted cash flows. An impairment loss is measured as the amount by which the carrying amount
of the asset or asset group exceeds its fair value. Cienas long-lived assets are assigned to
asset groups which represent the lowest level for which cash flows can be identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are
computed using the straight-line method over useful lives of two years to five years for equipment,
furniture and fixtures and the shorter of useful life or lease term for leasehold improvements.
Qualifying internal use software and website development costs incurred during the application
development stage that consist primarily of outside services and purchased software license costs,
are capitalized and amortized straight-line over the estimated useful lives of two years to five
years.
Intangible Assets
Ciena has recorded finite-lived intangible assets as a result of several acquisitions.
Finite-lived intangible assets are carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the expected economic lives of the respective assets,
from nine months to seven years, which approximates the use of intangible assets.
64
Maintenance Spares
Maintenance spares are recorded at cost. Spares usage cost is expensed ratably over four
years.
Concentrations
Substantially all of Cienas cash and cash equivalents and short-term and long-term
investments in marketable debt securities are maintained at two major U.S. financial institutions.
The majority of Cienas cash equivalents consist of money market funds. Deposits held with banks
may exceed the amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand and, therefore, management believes that they bear minimal risk.
Historically, a large percentage of Cienas revenue has been the result of sales to a small
number of communications service providers. Consolidation among Cienas customers has increased
this concentration. Consequently, Cienas accounts receivable are concentrated among these
customers. See Notes 8 and 20 below.
Additionally, Cienas access to certain materials or components is dependent upon sole or
limited source suppliers. The inability of any supplier to fulfill Cienas supply requirements
could affect future results. Ciena relies on a small number of contract manufacturers to perform
the majority of the manufacturing for its products. If Ciena cannot effectively manage these
manufacturers and forecast future demand, or if they fail to deliver products or components on
time, Cienas business and results of operations may suffer.
Revenue Recognition
Ciena recognizes revenue when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is
fixed or determinable; and collectibility is reasonably assured. Customer purchase agreements and
customer purchase orders are generally used to determine the existence of an arrangement. Shipping
documents and evidence of customer acceptance, when applicable, are used to verify delivery. Ciena
assesses whether the price is fixed or determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or adjustment. Ciena assesses
collectibility based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customers payment history. Revenue for maintenance services is
generally deferred and recognized ratably over the period during which the services are to be
performed.
Ciena applies the percentage of completion method to long-term arrangements where it is
required to undertake significant production, customizations or modification engineering, and
reasonable and reliable estimates of revenue and cost are available. Utilizing the percentage of
completion method, Ciena recognizes revenue based on the ratio of actual costs incurred to date to
total estimated costs expected to be incurred. In instances that do not meet the percentage of
completion method criteria, recognition of revenue is deferred until there are no uncertainties
regarding customer acceptance.
Some of Cienas communications networking equipment is integrated with software that is
essential to the functionality of the equipment. Software revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. In instances where final acceptance of the product is specified by the
customer, revenue is deferred until there are no uncertainties regarding customer acceptance.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, Ciena allocates the arrangement fee
to be allocated to those separate units of accounting. Multiple element arrangements that include
software are separated into more than one unit of accounting if the functionality of the delivered
element(s) is not dependent on the undelivered element(s), there is vendor-specific objective
evidence of the fair value of the undelivered element(s), and general revenue recognition criteria
related to the delivered element(s) have been met. The amount of product and services revenue
recognized is affected by Cienas judgments as to whether an arrangement includes multiple elements
and, if so, whether vendor-specific objective evidence of fair value exists. Changes to the
elements in an arrangement and Cienas ability to establish vendor-specific objective evidence for
those elements could affect the timing of revenue recognition. For all other deliverables, Ciena
separates the elements into more than one unit of accounting if the delivered element(s) have value
to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for
the undelivered element(s), and delivery of the undelivered element(s) is probable and
substantially in Cienas control. Revenue is allocated to each unit of accounting based on the
relative fair value of each accounting unit or using the residual method if objective evidence of
fair value does not exist for the delivered element(s). The revenue recognition criteria described
above are applied to each separate unit of accounting. If these criteria are not met, revenue is
deferred until the criteria are met or the last element has been delivered.
65
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon the
recognition of the related revenue. Estimated warranty costs include estimates for material costs,
technical support labor costs and associated overhead. The warranty liability is included in cost
of goods sold and determined based upon actual warranty cost experience, estimates of component
failure rates and managements industry experience. Cienas sales contracts do not permit the right
of return of product by the customer after the product has been accepted.
During the first quarter of fiscal 2010, Ciena recorded an adjustment to reduce its warranty
liability and cost of goods sold by $3.3 million, to correct an overstatement of warranty expenses
related to prior periods. The adjustment related to an error in the methodology of computing the
annual failure rate used to calculate the warranty accrual. There was no tax impact as a result of
this adjustment. Ciena believes this adjustment is not material to its financial statements for
prior annual or interim periods, or the annual results for fiscal 2010.
Accounts Receivable, Net
Cienas allowance for doubtful accounts is based on its assessment, on a specific
identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit
evaluations of its customers and generally has not required collateral or other forms of security
from its customers. In determining the appropriate balance for Cienas allowance for doubtful
accounts, management considers each individual customer account receivable in order to determine
collectibility. In doing so, management considers creditworthiness, payment history, account
activity and communication with such customer. If a customers financial condition changes, Ciena
may be required to record an allowance for doubtful accounts, which would negatively affect its
results of operations.
Research and Development
Ciena charges all research and development costs to expense as incurred. Types of expense
incurred in research and development include employee compensation, prototype, consulting,
depreciation, facility costs and information technologies.
Advertising Costs
Ciena expenses all advertising costs as incurred.
Legal Costs
Ciena expenses legal costs associated with litigation defense as incurred.
Share-Based Compensation Expense
Ciena measures and recognizes compensation expense for share-based awards based on estimated
fair values on the date of grant. Ciena estimates the fair value of each option-based award on the
date of grant using the Black-Scholes option-pricing model. This model is affected by Cienas stock
price as well as estimates regarding a number of variables including expected stock price
volatility over the expected term of the award and projected employee stock option exercise
behaviors. Ciena estimates the fair value of each share-based award based on the fair value of the
underlying common stock on the date of grant. In each case, Ciena only recognizes expense to its
consolidated statement of operations for those options or shares that are expected ultimately to
vest. Ciena uses two attribution methods to record expense, the straight-line method for grants
with service-based vesting and the graded-vesting method, which considers each performance period
or tranche separately, for all other awards. See Note 19 below.
Income Taxes
Ciena accounts for income taxes using an asset and liability approach that recognizes deferred
tax assets and liabilities for the expected future tax consequences attributable to differences
between the carrying amounts of assets and liabilities for financial reporting purposes and their
respective tax bases, and for operating loss and tax credit carryforwards. In estimating future tax
consequences, Ciena considers all expected future events other than the enactment of changes in tax
laws or rates. Valuation allowances are provided, if, based upon the weight of the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized.
Ciena adopted the accounting guidance on uncertainty related to income tax positions at the
beginning of fiscal 2008. Ciena classifies interest and penalties related to uncertain tax
positions as a component of income tax expense. All of the uncertain tax positions, if recognized,
would decrease the effective income tax rate.
66
In the ordinary course of business, transactions occur for which the ultimate outcome may be
uncertain. In addition, tax authorities periodically audit Cienas income tax returns. These audits
examine significant tax filing positions, including the timing and amounts of deductions and the
allocation of income tax expenses among tax jurisdictions. Ciena is
currently under audit in India
for 2007. Management does not expect the outcome of this audit to have a material adverse effect on
the Companys consolidated financial position, result of operations or cash flows. Cienas major
tax jurisdictions and the earliest
open tax years are as follows: United States (2007), United Kingdom (2004), Canada (2005) and
India (2007). However, limited adjustments can be made to Federal tax returns in earlier years in
order to reduce net operating loss carryforwards.
Ciena has not provided U.S. deferred income taxes on the cumulative unremitted earnings of its
non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings
outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes.
These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions
and are required to fund foreign operations, capital expenditures, and any expansion requirements.
Ciena recognizes windfall tax benefits associated with the exercise of stock options or
release of restricted stock units directly to stockholders equity only when realized. A windfall
tax benefit occurs when the actual tax benefit realized by Ciena upon an employees disposition of
a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena
had recorded. When assessing whether a tax benefit relating to share-based compensation has been
realized, Ciena follows the tax law with-and-without method. Under the with-and-without method,
the windfall is considered realized and recognized for financial statement purposes only when an
incremental benefit is provided after considering all other tax benefits including Cienas net
operating losses. The with-and-without method results in the windfall from share-based compensation
awards always being effectively the last tax benefit to be considered. Consequently, the windfall
attributable to share-based compensation will not be considered realized in instances where Cienas
net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current
years taxable income before considering the effects of current-year windfalls.
Loss Contingencies
Ciena is subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. Ciena considers the
likelihood of loss or the incurrence of a liability, as well as Cienas ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is
accrued when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Ciena regularly evaluates current information available to it to determine
whether any accruals should be adjusted and whether new accruals are required.
Fair Value of Financial Instruments
The carrying value of Cienas cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities, approximates fair market value due to the relatively short period
of time to maturity. The fair value of investments in marketable debt securities is determined
using quoted market prices for those securities or similar financial instruments. For information
related to the fair value of Cienas convertible notes, see Note 7 below.
Fair value for the measurement of financial assets and liabilities is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. Ciena utilizes a valuation hierarchy for disclosure of the inputs
for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as
follows:
|
|
|
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or
liabilities; |
|
|
|
|
Level 2 inputs are quoted prices for identical or similar assets or liabilities in less
active markets or model-derived valuations in which significant inputs are observable for
the asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument; |
|
|
|
|
Level 3 inputs are unobservable inputs based on Cienas assumptions used to measure
assets and liabilities at fair value. |
By distinguishing between inputs that are observable in the marketplace, and therefore more
objective, and those that are unobservable and therefore more subjective, the hierarchy is designed
to indicate the relative reliability of the fair value measurements. A financial asset or
liabilitys classification within the hierarchy is determined based on the lowest level input that
is significant to the fair value measurement.
67
Restructuring
From time to time, Ciena takes actions to align its workforce, facilities and operating costs
with perceived market opportunities and business conditions. Ciena implements these restructuring
plans and incurs the associated liability concurrently. Generally accepted accounting principles
require that a liability for the cost associated with an exit or
disposal activity be recognized in
the period in which the liability is incurred, except for one-time employee termination benefits
related to a service period of more than 60 days, which are accrued over the service period. See
Note 3 below.
Foreign Currency
Some of Cienas foreign branch offices and subsidiaries use the U.S. dollar as their
functional currency, because Ciena, as the U.S. parent entity, exclusively funds the operations of
these branch offices and subsidiaries. For those subsidiaries using the local currency as their
functional currency, assets and liabilities are translated at exchange rates in effect at the
balance sheet date, and the statement of operations is translated at a monthly average rate.
Resulting translation adjustments are recorded directly to a separate component of stockholders
equity. Where the monetary assets and liabilities are transacted in a currency other than the
entitys functional currency, re-measurement adjustments are recorded in other income. The net gain
(loss) on foreign currency re-measurement and exchange rate changes is immaterial for separate
financial statement presentation.
Derivatives
Cienas 4.0% convertible senior notes include a redemption feature that is accounted for as a
separate embedded derivative. The embedded redemption feature is recorded at fair value on a
recurring basis and these changes are included in interest and other income, net on the
Consolidated Statement of Operations.
Occasionally, Ciena uses foreign currency forward contracts to hedge certain forecasted
foreign currency transactions relating to operating expenses. Historically these derivatives,
designated as cash flow hedges, had maturities of less than one year and permitted net settlement.
At the inception of the cash flow hedge and on an ongoing basis, Ciena assesses the hedging
relationship to determine its effectiveness in offsetting changes in cash flows attributable to the
hedged risk during the hedge period. The effective portion of the hedging instruments net gain or
loss is initially reported as a component of accumulated other comprehensive income (loss), and
upon occurrence of the forecasted transaction, is subsequently reclassified into the operating
expense line item to which the hedged transaction relates. Any net gain or loss associated with the
ineffectiveness of the hedging instrument is reported in interest and other income, net. See Note
14 below.
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income (Loss) per Dilutive
Potential Common Share
Ciena calculates basic earnings per share (EPS) by dividing earnings attributable to common
stock by the weighted-average number of common shares outstanding for the period. Diluted EPS
includes other potential dilutive common stock that would occur if securities or other contracts to
issue common stock were exercised or converted into common stock. Ciena uses a dual presentation of
basic and diluted EPS on the face of its income statement. A reconciliation of the numerator and
denominator used for the basic and diluted EPS computations is set forth in Note 16.
Software Development Costs
Ciena develops software for sale to its customers. Generally accepted accounting principles
require the capitalization of certain software development costs that are incurred subsequent to
the date technological feasibility is established and prior to the date the product is generally
available for sale. The capitalized cost is then amortized straight-line over the estimated life of
the product. Ciena defines technological feasibility as being attained at the time a working model
is completed. To date, the period between Ciena achieving technological feasibility and the general
availability of such software has been short, and software development costs qualifying for
capitalization have been insignificant. Accordingly, Ciena has not capitalized any software
development costs.
Segment Reporting
Effective upon the March 19, 2010 completion of the acquisition of the MEN Business, Ciena
reorganized its internal organizational structure and the management of its business. Cienas chief
operating decision maker, its chief executive officer, evaluates performance and allocates
resources based on multiple factors, including segment profit (loss) information for the following
product categories: (i) Packet-Optical Transport; (ii) Packet-Optical Switching; (iii) Carrier
Ethernet Service Delivery; and (iv) Software and Services. Operating segments are defined as
components of an enterprise: that engage in business activities which may earn revenue and incur
expense; for which discrete financial information is available; and for which such information is
evaluated regularly by the chief operating decision maker for purposes of allocating resources and
assessing performance. Ciena considers the four product categories above to be its operating
segments for reporting purposes. See Note 20.
68
Newly Issued Accounting Standards
In October 2009, the Financial Accounting Standards Board, (FASB) amended the accounting
standards for revenue recognition with multiple deliverables. The amended guidance allows the use
of managements best estimate of selling price for individual elements of an arrangement when
vendor-specific objective evidence or third-party evidence is unavailable. Additionally, it
eliminates the residual method of revenue recognition in accounting for multiple deliverable
arrangements. The guidance is effective for fiscal years beginning on or after June 15, 2010 and
early adoption is permitted. Ciena will adopt this standard prospectively during its first quarter
of fiscal 2011. As a result, Ciena will disclose comparative revenue, for fiscal 2010, as if
adoption had occurred on the first day of fiscal 2010. Ciena is currently
evaluating the impact this new guidance could have on its financial condition, results of
operations and cash flows.
In October 2009, the FASB amended the accounting standards for revenue arrangements with
software elements. The amended guidance modifies the scope of the software revenue recognition
guidance to exclude tangible products that contain both software and non-software components that
function together to deliver the products essential functionality. The pronouncement is effective
for fiscal years beginning on or after June 15, 2010 and early adoption is permitted. This guidance
must be adopted in the same period an entity adopts the amended revenue arrangements with multiple
deliverables guidance described above. Ciena will adopt this standard prospectively during its
first quarter of fiscal 2011. As a result, Ciena will disclose comparative revenue, for fiscal
2010, as if adoption had occurred on the first day of fiscal 2010. Ciena is
currently evaluating the impact this new guidance could have on its financial condition, results of
operations and cash flows.
(2) BUSINESS COMBINATIONS
Acquisition of MEN Business
On March 19, 2010, Ciena completed its acquisition of the MEN Business. On March 19, 2010,
Ciena completed its acquisition of the MEN Business. Ciena acquired the MEN Business in an effort
to strengthen its position as a technology leader in next-generation, converged optical Ethernet
networking, accelerate the execution of its corporate and research and development strategies and
enable Ciena to better compete with larger equipment vendors. The acquisition expands Cienas
geographic reach, customer relationships, and portfolio of network solutions.
In accordance with the agreements for the acquisition, the $773.8 million aggregate purchase
price was subsequently adjusted downward by $80.6 million based upon the amount of net working
capital transferred to Ciena at closing. See Note 15 below for information related to Cienas
election to pay the entire aggregate purchase price in cash. As a result, Ciena paid $693.2
million in cash for the purchase of the MEN Business.
In connection with the acquisition, Ciena entered into an agreement with Nortel to lease the
Lab 10 building on Nortels Carling Campus in Ottawa, Canada (the Carling lease) for a term of
ten years. The lease agreement contained a provision that allowed Nortel to reduce the term of the
lease, and in exchange, Ciena could receive a payment of up to $33.5 million. This amount was
placed into escrow by Nortel in accordance with the acquisition agreements. The fair value of this
contingent refund right of $16.4 million was recorded as a reduction to the consideration paid,
resulting in a purchase price of $676.8 million.
On October 19, 2010, Nortel issued a public announcement that it had entered into a sale
agreement of its Carling campus with Publics Works and Government Services Canada (PWGSC).
According to the announcement, the sale, targeted to close at the end of the calendar year 2010, is
subject to customary closing conditions as well as approval of certain governmental authorities and
of the Ontario Superior Court of Justice. With respect to the Carling lease, Nortel has been
directed by PWGSC to exercise, on closing, its early termination rights under the Carling lease,
shortening the lease term from ten years to five years. Pursuant to the lease, this will result in
the refund to Ciena of $33.5 million from the escrowed cash consideration paid. As a result of this
change in circumstances and expected outcome probability, during the fourth quarter of fiscal 2010
Ciena recorded an unrealized gain of $13.8.million resulting in a fair value of $30.2 million for
the contingent consideration right.
See Note 23 to the Consolidated Financial Statements in Item 8 of
Part II of this annual report.
Given the structure of the transaction as an asset carve-out from Nortel, this transaction has
resulted in a costly and complex integration. As of October 31, 2010, Ciena has incurred $101.4
million in transaction, consulting and third party service fees, $8.5 million in severance expense,
and an additional $12.4 million, primarily related to purchases of capitalized information
technology equipment. In addition to the estimated costs above, Ciena has also incurred significant
transition services expense as it relies upon an affiliate of Nortel to perform certain critical
operational and business support functions during an interim integration period. Ciena can utilize
certain of these support services for a period of up to 24 months following the acquisition of the
MEN Business, 12 months in Europe, Middle East and Africa, (EMEA). The cost of these transition
services is estimated to be up to approximately $94 million annually. The actual expense will
depend upon the scope of the services that Ciena utilizes and the time within which Ciena is able
to complete the planned transfer of these services to internal resources or other third party
providers.
69
The following table summarizes the final allocation related to the MEN Business based on the
estimated fair value of the acquired assets and assumed liabilities (in thousands):
|
|
|
|
|
|
|
Final |
|
|
|
Allocation |
|
Unbilled receivables |
|
$ |
7,136 |
|
Inventories |
|
|
146,272 |
|
Prepaid expenses and other |
|
|
32,517 |
|
Other long-term assets |
|
|
21,924 |
|
Equipment, furniture and fixtures |
|
|
41,213 |
|
Developed technology |
|
|
218,774 |
|
In-process research and development |
|
|
11,000 |
|
Customer relationships, outstanding purchase orders and contracts |
|
|
260,592 |
|
Trade name |
|
|
2,000 |
|
Deferred revenue |
|
|
(28,086 |
) |
Accrued liabilities |
|
|
(33,845 |
) |
Other long-term obligations |
|
|
(2,644 |
) |
|
|
|
|
Total purchase price allocation |
|
$ |
676,853 |
|
|
|
|
|
Adjustments to the preliminary purchase price allocation have been made to reflect revised
estimates of the fair values of the assets acquired and liabilities assumed at March 19, 2010.
These adjustments resulted in a net decrease to goodwill of $40.0 million through October 31, 2010,
the end of the measurement period. The most significant adjustments were associated with increases
in valuations of inventories of $32.1 million and deferred revenue of $9.3 million. The valuations
of inventories and deferred revenue primarily related to in-transit shipments of orders that
existed at the acquisition date. Providing for these adjustments in previous periods would have had
an immaterial impact on the reported operating results for the quarterly periods ended April 30,
2010 and July 31, 2010.
Unbilled receivables represent unbilled claims for which Ciena will invoice customers upon its
completion of the acquired projects.
Under the acquisition method of accounting, Ciena revalued the acquired finished goods
inventory to fair value, which was determined to be most appropriately recognized as the estimated
selling price less the sum of (a) costs of disposal, and (b) a reasonable profit allowance for
Cienas selling effort.
Prepaid expenses and other include product demonstration units used to support research and
development projects and indemnification assets related to uncertain tax contingencies acquired and
recorded as part of other long-term obligations. Other long-term assets represent spares used to
support customer maintenance commitments.
Developed technology represents purchased technology that had reached technological
feasibility and for which development had been completed as of the date of the acquisition.
Developed technology will be amortized on a straight line basis over its estimated useful lives of
two to seven years.
In-process research and development represents development projects that had not reached
technological feasibility at the time of the acquisition. In-process research and development
assets will be impaired, if abandoned, or amortized in future periods, depending upon the ability
of Ciena to use the research and development in future periods. Future expenditures to complete the
in-process research and development projects will be expensed as incurred.
Customer relationships, outstanding purchase orders and contracts represent agreements with
existing customers of the MEN Business. These intangible assets are expected to have estimated
useful lives of nine months to seven years, with the exception of $14.2 million related to a
contract asset for acquired in-process projects,
to be billed by
Ciena and
recognized as a reduction in revenue. As of October 31, 2010, Ciena
has billed $10.2 million of these contract assets. The remaining
$4.0 million will be billed during the first half of fiscal 2011.
Trade name represents acquired product trade names that are expected
to have a useful life of nine months.
Deferred revenue represents obligations assumed by Ciena to provide maintenance support
services for which payment for such services was already made to Nortel.
70
Accrued liabilities represent assumed warranty obligations, other customer contract
obligations, and certain employee benefit plans. Other long-term obligations represent uncertain
tax contingencies.
The following unaudited pro forma financial information summarizes the results of operations
for the periods indicated as if Cienas acquisition of the MEN Business had been completed as of
the beginning of each of the periods presented. Revenue specific to the MEN Business since the
March 19, 2010 acquisition date was $530.9 million. As Ciena has begun to integrate the
combined operations, eliminating overlapping processes and expenses and integrating its products
and sales efforts with those of the acquired MEN Business, it is impractical to determine the
earnings specific to the MEN Business since the acquisition date.
These pro forma amounts (in thousands) do not purport to be indicative of the results that
would have actually been obtained if the acquisition occurred as of the beginning of the periods
presented or that may be obtained in the future.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2009 |
|
|
2010 |
|
Pro forma revenue |
|
$ |
1,704,037 |
|
|
$ |
1,592,911 |
|
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(1,008,894 |
) |
|
$ |
(536,253 |
) |
|
|
|
|
|
|
|
Acquisition of World Wide Packets
On March 3, 2008, Ciena acquired World Wide Packets, Inc. (World Wide Packets or WWP)
pursuant to the terms of an Agreement and Plan of Merger dated January 22, 2008 (the Merger
Agreement) by and among Ciena, World Wide Packets, Wolverine Acquisition Subsidiary, Inc., a
wholly owned subsidiary of Ciena (Merger Sub), and Daniel Reiner, as stockholders
representative. Pursuant to the Merger Agreement, on March 3, 2008, Merger Sub was merged with and
into World Wide Packets, with World Wide Packets continuing as the surviving corporation and a
wholly owned subsidiary of Ciena. World Wide Packets is a supplier of communications networking
equipment that enables the cost-effective delivery of a wide variety of carrier Ethernet-based
services. Prior to the acquisition, World Wide Packets was a privately held company. Cienas
results of operations for fiscal 2008 in these financial statements include the operations of World
Wide Packets beginning on March 3, 2008, the effective date of the acquisition.
Upon the closing of the acquisition, all of the outstanding shares of World Wide Packets
common stock and preferred stock were exchanged for approximately 2.5 million shares of Ciena
common stock and approximately $196.7 million in cash. Of this amount, $20.0 million in cash and
340,000 shares of Ciena common stock were placed into escrow for a period of one year as security
for the indemnification obligations of World Wide Packets stockholders under the Merger Agreement.
Upon the closing, Ciena also assumed all then outstanding World Wide Packets options and exchanged
them for options to acquire approximately 0.9 million shares of Ciena common stock. Under the
Merger Agreement, Ciena also agreed to indemnify certain officers and directors of World Wide
Packets against third-party claims arising out of their employment relationship. Ciena has
determined the fair value of this indemnification obligation to be insignificant.
The following table summarizes the purchase price for the acquisition (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
196,668 |
|
Acquisition-related costs |
|
|
14,183 |
|
Value of common stock issued |
|
|
62,360 |
|
Fair value of vested options assumed |
|
|
9,912 |
|
|
|
|
|
Total purchase price |
|
$ |
283,123 |
|
|
|
|
|
The value of Cienas common stock issued in the acquisition was based on the average closing
price of Cienas common stock for the two trading days prior to, the date of, and the two trading
days after the announcement of the acquisition. The fair value of the vested options assumed was
determined using the Black-Scholes option-pricing model.
71
The acquisition was accounted for under the purchase method of accounting, which requires the
total purchase price to be allocated to the acquired assets and assumed liabilities based on their
estimated fair values. The amount of the purchase price in excess of the amounts assigned to
acquired tangible or intangible assets and assumed liabilities is recognized as goodwill. Amounts
allocated to goodwill are not tax deductible. As set forth below, Ciena recorded acquired,
finite-lived intangible assets related to developed technology, covenants not to compete, and
customer relationships, outstanding purchase orders and contracts. The following table summarizes
the allocation of the acquisition purchase price based on the estimated fair value of the acquired
assets and assumed liabilities (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
835 |
|
Accounts receivable |
|
|
2,049 |
|
Inventory |
|
|
12,872 |
|
Equipment, furniture and fixtures |
|
|
2,691 |
|
Other tangible assets |
|
|
2,003 |
|
Developed technology |
|
|
42,400 |
|
Covenants not to compete |
|
|
3,200 |
|
Customer relationships, outstanding purchase orders and contracts |
|
|
19,100 |
|
Goodwill |
|
|
223,658 |
|
Accounts payable, accrued liabilities and deferred revenue |
|
|
(13,322 |
) |
Promissory notes and loans payable |
|
|
(12,363 |
) |
|
|
|
|
Total purchase price allocation |
|
$ |
283,123 |
|
|
|
|
|
Under purchase accounting rules, Ciena valued the acquired finished goods inventory to fair
value, which is defined as the estimated selling price less the sum of (a) costs of disposal, and
(b) a reasonable profit allowance for Cienas selling effort. This valuation resulted in an
increase in inventory carrying value of approximately $5.3 million for marketable inventory,
slightly offset by a decrease of $0.7 million for unmarketable inventory.
Developed technology represents purchased technology that had reached technological
feasibility and for which World Wide Packets had substantially completed development as of the date
of acquisition. Fair value was determined using future discounted cash flows related to the
projected income stream of the developed technology for a discrete projection period. Cash flows
were discounted to their present value as of the closing date. Developed technology is amortized on
a straight line basis over its estimated useful lives of 4 years to 6 years.
Covenants not to compete represent agreements entered into with key employees of World Wide
Packets. Covenants not to compete are amortized on a straight line basis over estimated useful
lives of 3.5 years.
Customer relationships, outstanding purchase orders and contracts represent agreements with
existing World Wide Packets customers and have estimated useful lives of 4 months to 6 years.
The following unaudited pro forma financial information summarizes the results of operations
for the periods indicated as if Cienas acquisition of World Wide Packets had been completed as of
the beginning of each of the periods presented. These pro forma amounts (in thousands, except per
share data) do not purport to be indicative of the results that would have actually been obtained
if the acquisition occurred as of the beginning of the periods presented or that may be obtained in
the future.
|
|
|
|
|
|
|
Year Ended |
|
|
|
October 31, |
|
|
|
2008 |
|
Pro forma revenue |
|
$ |
909,098 |
|
|
|
|
|
Pro forma net income |
|
$ |
22,179 |
|
|
|
|
|
(3) RESTRUCTURING COSTS
In April 2010, Ciena committed to certain restructuring actions and subsequently effected a
headcount reduction principally affecting Cienas global product group and global field
organization outside of the EMEA region. In May 2010, following the end of its fiscal second
quarter, Ciena informed employees of its proposal to reorganize and restructure portions of Cienas
business and operations in the EMEA region, including a headcount reduction principally affecting
employees in Cienas global field and supply chain organizations.
72
The following table displays the activity and balances of the historical restructuring
liability accounts for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
Workforce |
|
|
of excess |
|
|
|
|
|
|
reduction |
|
|
facilities |
|
|
Total |
|
Balance at October 31, 2007 |
|
$ |
|
|
|
$ |
4,688 |
|
|
$ |
4,688 |
|
Additional liability recorded |
|
|
1,057 |
(a) |
|
|
53 |
(a) |
|
|
1,110 |
|
Cash payments |
|
|
(75 |
) |
|
|
(1,498 |
) |
|
|
(1,573 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
|
982 |
|
|
|
3,243 |
|
|
|
4,225 |
|
Additional liability recorded |
|
|
4,117 |
(b) |
|
|
3,419 |
(b) |
|
|
7,536 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
3,670 |
(b) |
|
|
3,670 |
|
Cash payments |
|
|
(4,929 |
) |
|
|
(897 |
) |
|
|
(5,826 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2009 |
|
|
170 |
|
|
|
9,435 |
|
|
|
9,605 |
|
Additional liability recorded |
|
|
9,256 |
(c) |
|
|
|
(c) |
|
|
9,256 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
(742 |
) (c) |
|
|
(742 |
) |
Cash payments |
|
|
(7,850 |
) |
|
|
(2,301 |
) |
|
|
(10,151 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2010 |
|
$ |
1,576 |
|
|
$ |
6,392 |
|
|
$ |
7,968 |
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities |
|
$ |
1,576 |
|
|
$ |
1,208 |
|
|
$ |
2,784 |
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring liabilities |
|
$ |
|
|
|
$ |
5,184 |
|
|
$ |
5,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During fiscal 2008, Ciena recorded a charge of $1.0 million related to a workforce
reduction of 56 employees and a charge of approximately $0.1 million related to the closure
of a facility located in San Antonio, Texas. |
|
(b) |
|
During fiscal 2009, Ciena recorded a charge of $4.1 million of severance and other
employee-related costs associated with a workforce reduction of 200 employees, $3.4 million
related to the Acton, MA facility closure and $3.7 million related to previously
restructured facilities. |
|
(c) |
|
During fiscal 2010, Ciena recorded a charge of $2.1 million
related to a workforce reduction of approximately 70 employees, principally affecting
Cienas global product group and global field organization outside of the EMEA region and
$7.1 million related to a workforce reduction of 82 employees associated with the
restructuring activities in the EMEA region described above and an adjustment of $0.7
million associated with previously restructured facilities. |
(4) GOODWILL
As of October 31, 2009 and 2010, Ciena did not have any goodwill on its Consolidated Balance
Sheets.
Impairment loss fiscal 2009
Prior to the acquisition of the MEN Business, Ciena assessed its goodwill based upon a single
reporting unit and tested its single reporting units goodwill for impairment annually on the last
business day of fiscal September each year. Testing is required between annual tests if events
occur or circumstances change that would, more likely than not, reduce the fair value of the
reporting unit below its carrying value. Based on a combination of factors, including macroeconomic
conditions and a sustained decline in Cienas common stock price and market capitalization below
net book value, Ciena conducted an interim impairment assessment of goodwill during the second
quarter of fiscal 2009. Ciena performed the step one fair value comparison, and its market
capitalization was $721.8 million and its carrying value, including goodwill, was $949.0 million.
Ciena applied a 25% control premium to its market capitalization to determine a fair value of
$902.2 million. Because step one indicated that Cienas fair value was less than its carrying
value, Ciena performed the step two analysis. Under the step two analysis, the implied fair value
of goodwill requires valuation of a reporting units tangible and intangible assets and liabilities
in a manner similar to the allocation of purchase price in a business combination. If the carrying
value of a reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired
and is written down to the extent of the difference. The implied fair value of the reporting
units goodwill was determined to be $0, and, as a result, Ciena recorded a goodwill impairment of
$455.7 million, representing the full carrying value of the goodwill.
Ciena performed assessments of the fair value of its single reporting unit as of September 27,
2008. Ciena compared its fair value on each assessment date to its carrying value, including
goodwill, and determined that the carrying value, including goodwill, did not exceed fair value.
Because the carrying amount was less than its fair value, no impairment loss was recorded.
(5) LONG-LIVED ASSET IMPAIRMENTS
Due to the reorganization described in Note 1 above, Ciena performed an impairment analysis of
its long-lived assets during the second quarter of fiscal 2010. Based on Cienas estimate of
future, undiscounted cash flows by asset group, no impairment was required.
Due to effects of difficult macroeconomic conditions on Cienas business, including
lengthening sales cycles and slowing deployments resulting in lower demand, Ciena performed an
impairment analysis of its long-lived assets during the fourth quarter of fiscal 2008 and the
second quarter of fiscal 2009. Based on Cienas estimate of future, undiscounted cash flows by
asset group as of October 31, 2008 and April 30, 2009, respectively, no impairment was required.
73
(6) MARKETABLE DEBT SECURITIES
As of October 31, 2010, Ciena had no investments in marketable debt securities. As of October
31, 2009, short-term and long-term investments in marketable debt securities are comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
US government obligations |
|
$ |
570,505 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
570,963 |
|
Publicly traded equity securities |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
570,756 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
562,781 |
|
|
|
404 |
|
|
|
2 |
|
|
|
563,183 |
|
Included in long-term investments |
|
|
7,975 |
|
|
|
56 |
|
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
570,756 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses related to marketable debt investments, included in short-term
investments at October 31, 2009, were immaterial. During fiscal 2008, Ciena recognized losses of
$5.1 million related to two structured investment vehicles (SIVs) that entered into receivership
during the fourth quarter of fiscal 2007 and failed to make payment at maturity.
(7) FAIR VALUE MEASUREMENTS
As of the dates indicated, the following table summarizes the fair value of assets that are
recorded at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded redemption feature |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,220 |
|
|
$ |
4,220 |
|
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
30,195 |
|
|
|
30,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
34,415 |
|
|
$ |
34,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government obligations |
|
$ |
|
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
570,963 |
|
Publicly traded equity securities |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
251 |
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of the dates indicated, the assets and liabilities above were presented on Cienas
Consolidated Balance Sheet as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other |
|
$ |
|
|
|
$ |
|
|
|
$ |
30,195 |
|
|
$ |
30,195 |
|
Other long-term assets |
|
|
|
|
|
|
|
|
|
|
4,220 |
|
|
|
4,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
34,415 |
|
|
$ |
34,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
251 |
|
|
$ |
562,932 |
|
|
$ |
|
|
|
$ |
563,183 |
|
Long-term investments |
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
251 |
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cienas Level 1 assets include corporate equity securities publicly traded on major exchanges
that are valued using quoted prices in active markets.
Cienas Level 2 investments include U.S. government obligations. These investments are valued
using observable inputs such as quoted market prices, benchmark yields, reported trades,
broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency.
Investments are held by a custodian who obtains investment prices from a third party pricing
provider that uses standard inputs to models which vary by asset class.
74
Cienas Level 3 assets included in prepaid expenses and other reflect its contingent right to
receive a refund of up to $33.5 million in aggregate purchase price paid in the MEN Acquisition.
The fair value was based on the weighted average probabilities of expected cash flows discounted to
its present value. Cienas Level 3 assets included in other long-term assets reflect the embedded
redemption feature contained within Cienas 4.0% convertible senior notes. See Note 15 below. The
embedded redemption feature is bifurcated from Cienas 4.0% convertible senior notes using the
with-and-without approach. As such, the total value of the embedded redemption feature is
calculated as the difference between the value of the 4.0% convertible senior notes (the Hybrid
Instrument) and the value of an identical instrument without the embedded redemption feature (the
Host Instrument). Both the Host Instrument and the Hybrid Instrument are valued using a modified
binomial model. The modified binomial model utilizes a risk free interest rate, an implied
volatility of Cienas stock, the recovery rates of bonds and the implied default intensity of the
4.0% convertible senior notes.
As of the dates indicated, the following table sets forth, in thousands, the reconciliation of
changes in Level 3 assets recorded at fair value:
|
|
|
|
|
|
|
Level 3 |
|
Balance at October 31, 2009 |
|
$ |
|
|
Initial recognition |
|
|
18,104 |
|
Changes in unrealized gain |
|
|
16,311 |
|
Transfers into Level 3 |
|
|
|
|
Transfers out of Level 3 |
|
|
|
|
|
|
|
|
Balance at October 31, 2010 |
|
$ |
34,415 |
|
|
|
|
|
During fiscal 2009, due to certain triggering events, Ciena recorded a non-cash loss on cost
method investments of $5.3 million. Ciena utilized both Level 2 and Level 3 inputs in its fair
value measurements for these investments.
(8) ACCOUNTS RECEIVABLE
As of October 31, 2010, no customers accounted for 10.0% of net trade accounts receivable. As
of October 31, 2009, one customer accounted for 10.7% of net trade accounts receivable. Cienas
allowance for doubtful accounts as of October 31, 2008, 2009 and 2010 was $0.1 million and Ciena
has not historically experienced a significant amount of bad debt expense.
The following table summarizes the activity in Cienas allowance for doubtful accounts for
the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
Provisions |
|
|
|
|
|
Balance at end of |
October 31, |
|
of period |
|
(Recovery) |
|
Deductions |
|
period |
2008
|
|
$ |
132 |
|
|
$ |
157 |
|
|
$ |
165 |
|
|
$ |
124 |
|
2009
|
|
$ |
124 |
|
|
$ |
93 |
|
|
$ |
101 |
|
|
$ |
116 |
|
2010
|
|
$ |
116 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
117 |
|
(9) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Raw materials |
|
$ |
19,694 |
|
|
$ |
30,569 |
|
Work-in-process |
|
|
1,480 |
|
|
|
6,993 |
|
Finished goods |
|
|
61,026 |
|
|
|
177,994 |
|
Deferred
cost of goods sold |
|
|
29,888 |
|
|
|
76,830 |
|
|
|
|
|
|
|
|
|
|
|
112,088 |
|
|
|
292,386 |
|
Provision for excess and obsolescence |
|
|
(24,002 |
) |
|
|
(30,767 |
) |
|
|
|
|
|
|
|
|
|
$ |
88,086 |
|
|
$ |
261,619 |
|
|
|
|
|
|
|
|
75
Ciena writes down its inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market value based on
assumptions about future demand and market conditions. During fiscal 2008, fiscal 2009 and fiscal
2010, Ciena recorded provisions for inventory reserves of $18.3 million, $15.7 million and $13.7
million, respectively, primarily related to changes in forecasted sales for certain products.
Deductions from the reserve for excess and obsolete inventory relate to disposal activities.
The following table summarizes the activity in Cienas reserve for excess and obsolete
inventory for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Year ended |
|
beginning of |
|
|
|
|
|
|
|
|
|
Balance at |
October 31, |
|
period |
|
Provisions |
|
Disposals |
|
end of period |
2008
|
|
$ |
26,170 |
|
|
$ |
18,325 |
|
|
$ |
21,238 |
|
|
$ |
23,257 |
|
2009
|
|
$ |
23,257 |
|
|
$ |
15,719 |
|
|
$ |
14,974 |
|
|
$ |
24,002 |
|
2010
|
|
$ |
24,002 |
|
|
$ |
13,696 |
|
|
$ |
6,931 |
|
|
$ |
30,767 |
|
(10) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Prepaid VAT and other taxes |
|
$ |
14,527 |
|
|
$ |
46,352 |
|
Deferred deployment expense |
|
|
4,242 |
|
|
|
6,918 |
|
Product demonstration equipment, net |
|
|
|
|
|
|
29,449 |
|
Prepaid expenses |
|
|
8,869 |
|
|
|
15,087 |
|
Capitalized acquisition costs |
|
|
12,473 |
|
|
|
|
|
Restricted cash |
|
|
7,477 |
|
|
|
12,994 |
|
Contingent consideration |
|
|
|
|
|
|
30,195 |
|
Other non-trade receivables |
|
|
2,949 |
|
|
|
6,685 |
|
|
|
|
|
|
|
|
|
|
$ |
50,537 |
|
|
$ |
147,680 |
|
|
|
|
|
|
|
|
Prepaid expenses and other as of October 31, 2010 includes $29.4 million related to product
demonstration equipment, net. Depreciation of product demonstration equipment was $4.2 million for
fiscal 2010. Capitalized acquisition costs at October 31, 2009 include direct costs related to
Cienas then pending acquisition of the MEN Business. In the first quarter of fiscal 2010, Ciena
adopted newly issued accounting guidance related to business combinations, which required the full
amount of these capitalized acquisition costs to be expensed in the Consolidated Statement of
Operations.
(11) EQUIPMENT, FURNITURE AND FIXTURES
As of the dates indicated, equipment, furniture and fixtures are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Equipment, furniture and fixtures |
|
$ |
293,093 |
|
|
$ |
360,908 |
|
Leasehold improvements |
|
|
45,761 |
|
|
|
49,595 |
|
|
|
|
|
|
|
|
|
|
|
338,854 |
|
|
|
410,503 |
|
Accumulated depreciation and amortization |
|
|
(276,986 |
) |
|
|
(290,209 |
) |
|
|
|
|
|
|
|
|
|
$ |
61,868 |
|
|
$ |
120,294 |
|
|
|
|
|
|
|
|
During fiscal 2008, fiscal 2009 and fiscal 2010, Ciena recorded depreciation of equipment,
furniture and fixtures, and amortization of leasehold improvements of $18.6 million, $21.9 million
and $38.5 million, respectively.
76
(12) OTHER INTANGIBLE ASSETS
As of the dates indicated, other intangible assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
Developed technology |
|
$ |
185,833 |
|
|
$ |
(147,504 |
) |
|
$ |
38,329 |
|
|
$ |
417,833 |
|
|
$ |
(186,129 |
) |
|
$ |
231,704 |
|
Patents and licenses |
|
|
47,370 |
|
|
|
(42,811 |
) |
|
|
4,559 |
|
|
|
45,388 |
|
|
|
(45,167 |
) |
|
|
221 |
|
Customer relationships,
covenants not to compete,
outstanding purchase orders
and contracts |
|
|
60,981 |
|
|
|
(43,049 |
) |
|
|
17,932 |
|
|
|
323,573 |
|
|
|
(129,086 |
) |
|
|
194,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets |
|
$ |
294,184 |
|
|
$ |
(233,364 |
) |
|
$ |
60,820 |
|
|
$ |
786,794 |
|
|
$ |
(360,382 |
) |
|
$ |
426,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense of other intangible assets was $38.0 million, $31.4 million
and $127.0 million for fiscal 2008, fiscal 2009 and fiscal 2010, respectively. Expected future
amortization of other intangible assets for the fiscal years indicated is as follows (in
thousands):
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2011 |
|
$ |
96,669 |
|
2012 |
|
|
73,564 |
|
2013 |
|
|
71,145 |
|
2014 |
|
|
56,987 |
|
2015 |
|
|
52,714 |
|
Thereafter |
|
|
75,333 |
|
|
|
|
|
|
|
$ |
426,412 |
|
|
|
|
|
(13) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Maintenance spares inventory, net |
|
$ |
31,994 |
|
|
$ |
53,654 |
|
Deferred debt issuance costs, net |
|
|
12,832 |
|
|
|
28,853 |
|
Embedded redemption feature |
|
|
|
|
|
|
4,220 |
|
Restricted cash |
|
|
18,792 |
|
|
|
37,796 |
|
Other |
|
|
4,284 |
|
|
|
5,296 |
|
|
|
|
|
|
|
|
|
|
$ |
67,902 |
|
|
$ |
129,819 |
|
|
|
|
|
|
|
|
Deferred debt issuance costs are amortized using the straight line method which approximates
the effect of the effective interest rate method through the maturity of the related debt.
Amortization of deferred debt issuance costs, which is included in interest expense, was $2.9
million, $2.3 million and $3.8 million for fiscal 2008, fiscal 2009 and fiscal 2010, respectively.
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Warranty |
|
$ |
40,196 |
|
|
$ |
54,372 |
|
Compensation, payroll related tax and benefits |
|
|
20,025 |
|
|
|
39,391 |
|
Vacation |
|
|
11,508 |
|
|
|
20,412 |
|
Current restructuring liabilities |
|
|
1,811 |
|
|
|
2,784 |
|
Interest payable |
|
|
2,045 |
|
|
|
4,345 |
|
Other |
|
|
29,575 |
|
|
|
72,690 |
|
|
|
|
|
|
|
|
|
|
$ |
105,160 |
|
|
$ |
193,994 |
|
|
|
|
|
|
|
|
The following table summarizes the activity in Cienas accrued warranty for the fiscal years
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Beginning |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end |
October 31, |
|
Balance |
|
Acquired |
|
Provisions |
|
Settlements |
|
of period |
2008
|
|
$ |
33,580 |
|
|
$ |
|
|
|
$ |
15,336 |
|
|
$ |
11,658 |
|
|
$ |
37,258 |
|
2009
|
|
$ |
37,258 |
|
|
$ |
|
|
|
$ |
19,286 |
|
|
$ |
16,348 |
|
|
$ |
40,196 |
|
2010
|
|
$ |
40,196 |
|
|
$ |
24,041 |
|
|
$ |
15,353 |
|
|
$ |
25,218 |
|
|
$ |
54,372 |
|
77
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Products |
|
$ |
11,998 |
|
|
$ |
31,187 |
|
Services |
|
|
63,935 |
|
|
|
73,862 |
|
|
|
|
|
|
|
|
|
|
|
75,933 |
|
|
|
105,049 |
|
Less current portion |
|
|
(40,565 |
) |
|
|
(75,334 |
) |
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
35,368 |
|
|
$ |
29,715 |
|
|
|
|
|
|
|
|
(14) FOREIGN CURRENCY FORWARD CONTRACTS
Ciena has previously used, and may in the future use, foreign currency forward contracts to
reduce variability in non-U.S. dollar denominated expected cash flows. As of October 31, 2009 and
2010, there were no foreign currency forward contracts outstanding and Ciena did not enter into any
foreign currency forward contracts during fiscal 2010. During fiscal 2009, Ciena entered into such
foreign currency forward contracts and these derivatives were designated as cash flow hedges. No
portion of the hedging instruments was considered ineffective. Gains and losses from these foreign
currency forward contracts were immaterial during fiscal 2009.
(15) CONVERTIBLE NOTES PAYABLE
Payment at Maturity of Convertible Notes Payable
3.75% Convertible Notes, due February 1, 2008
During fiscal 2008, Ciena paid at maturity the remaining $542.3 million in aggregate principal
amount on its 3.75% convertible notes. All of the notes were retired without conversion into common
stock.
Outstanding Convertible Notes Payable
Ciena has four issuances of convertible notes payable outstanding. The notes are senior
unsecured obligations of Ciena and rank equally with all of Cienas other existing and future
senior unsecured debt. The indentures governing Cienas notes provide for customary events of
default which include (subject in certain cases to customary grace and cure periods), among others,
the following: nonpayment of principal or interest; breach of covenants or other agreements in the
indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy
or insolvency. Generally, if an event of default occurs and is continuing, the trustee or the
holders of at least 25% in aggregate principal amount of the notes may declare the principal of,
accrued interest on, and premium, if any, on all the notes immediately due and payable. Under the
indentures, if Ciena undergoes a fundamental change (as that term is defined in the indenture
governing the notes to include certain change in control transactions), holders of notes will have
the right, subject to certain exemptions, to require Ciena to purchase for cash any or all of their
notes at a price equal to the principal amount, plus accrued and unpaid interest. If the holder
elects to convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
0.25% Convertible Senior Notes due May 1, 2013
On April 10, 2006, Ciena completed a public offering of 0.25% convertible senior notes due May
1, 2013, in aggregate principal amount of $300.0 million. Interest is payable on May 1 and November
1 of each year.
During the fourth quarter of fiscal 2008, Ciena repurchased $2.0 million in principal amount
of its outstanding 0.25% convertible senior notes in an open market transaction. Ciena used $1.0
million of cash to effect these repurchases during the quarter, which resulted in a gain of
approximately $0.9 million. During the fourth quarter of fiscal 2010, Ciena repurchased $81.8
million in aggregate principal amount of its outstanding 0.25% convertible senior notes in
privately negotiated transactions, which resulted in a gain of approximately $4.9 million. As of
October 31, 2010, the outstanding principal on these notes was $216.2 million.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of $39.5255 per share. The notes may be redeemed by
Ciena if the closing sale price of Cienas common stock for at least 20 trading days in any 30
consecutive trading day period ending on the date one day prior to the date of the notice of
redemption exceeds 130% of the conversion price. Ciena may redeem the notes in whole or in part, at
a redemption price in cash equal to the principal amount to be redeemed, plus accrued and unpaid
interest.
78
Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from the
conversion of the notes. See Note 17 below for a description of this call spread option.
4.0% Convertible Senior Notes, due March 15, 2015
On March 15, 2010, Ciena completed a private placement of 4.0% convertible senior notes due
March 15, 2015, in aggregate principal amount of $375.0 million. Interest is payable on the notes
on March 15 and September 15 of each year, beginning on September 15, 2010.
At the election of the holder, the notes may be converted prior to maturity into shares of
Ciena common stock at the initial conversion rate of 49.0557 shares per $1,000 in principal amount,
which is equivalent to an initial conversion price of approximately $20.38 per share. The notes may
be redeemed by Ciena on or after March 15, 2013 if the closing sale price of Cienas common stock
for at least 20 trading days in any 30 consecutive trading day period ending on the date one day
prior to the date of the notice of redemption exceeds 150% of the conversion price. Ciena may
redeem the notes in whole or in part, at a redemption price in cash equal to the principal amount
to be redeemed, plus accrued and unpaid interest, including any additional interest to, but
excluding, the redemption date, plus a make-whole premium payment. The make whole premium payment
will be made in cash and equal the present value of the remaining interest payments, to maturity,
computed using a discount rate equal to 2.75%. The make-whole premium is paid to holders whether or
not they convert the notes following Cienas issuance of a redemption notice. For accounting
purposes, this redemption feature is an embedded derivative that is not clearly and closely related
to the notes. Consequently, it was initially bifurcated from the indenture and separately recorded
at its fair value as an asset with subsequent changes in fair value recorded through earnings. As
of October 31, 2010, the fair value of the embedded redemption feature was $4.2 million and is
included in other long-term assets on the Consolidated Balance Sheet. Since inception on March 15,
2010, the changes in fair value of the embedded redemption feature in the amount of $2.5 million
were reflected as interest and other income (loss), net on the Consolidated Statement of
Operations.
The net proceeds from the offering of the notes were $364.3 million after deducting the
placement agents fees and other fees and expenses. Ciena used $243.8 million of this amount to
fund its payment election to replace its contractual obligation to issue convertible notes to
Nortel as part of the aggregate purchase price for the acquisition of the MEN Business. The
remaining proceeds were used to reduce the cash on hand required to fund the aggregate purchase
price of the MEN Business. See Note 2 above.
0.875% Convertible Senior Notes due June 15, 2017
On June 11, 2007, Ciena completed a public offering of 0.875% convertible senior notes due
June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and
December 15 of each year, beginning on December 15, 2007.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not
redeemable by Ciena prior to maturity.
Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from
conversion of the notes. See Note 17 below for a description of this call spread option.
3.75% Convertible Senior Notes, due October 15, 2018
On October 18, 2010, Ciena completed a private placement of 3.75% convertible senior notes due
October 15, 2018, in aggregate principal amount of $350.0 million. Interest is payable on the notes
on April 15 and October 15 of each year, beginning on April 15, 2011.
At the election of the holder, the notes may be converted prior to maturity into shares of
Ciena common stock at the initial conversion rate of 49.5872 shares per $1,000 in principal
amount, which is equivalent to an initial conversion price of approximately $20.17 per share.
The net proceeds from the offering were approximately $340.4 million after deducting the
placement agents fees and other fees and expenses. Ciena used $76.1 million of the net proceeds to
effect the repurchase of its 0.25% convertible senior notes due 2013 described above.
79
The
following table sets forth, in thousands, the carrying value and the
estimated current fair
value of Cienas outstanding convertible notes:
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
Description |
|
Carrying Value |
|
|
Fair Value |
|
0.25% Convertible Senior Notes due May 1, 2013 |
|
$ |
216,210 |
|
|
$ |
197,300 |
|
4.0% Convertible Senior Notes, due March 15, 2015 (1) |
|
|
376,495 |
|
|
|
371,260 |
|
0.875% Convertible Senior Notes due June 15, 2017 |
|
|
500,000 |
|
|
|
366,700 |
|
3.75% Convertible Senior Notes, due October 15, 2018 |
|
|
350,000 |
|
|
|
339,500 |
|
|
|
|
|
|
|
|
|
|
$ |
1,442,705 |
|
|
$ |
1,274,760 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes unamortized bond premium related to embedded redemption feature |
Except for the 4.0% convertible senior notes, the fair value reported above is based on the
quoted market price for the notes on the date above. Due to the lack of trading activity, the fair
value of the 4.0% convertible senior notes is based on a modified binomial model as described
above.
(16) EARNINGS PER SHARE CALCULATION
The following table (in thousands except per share amounts) is a reconciliation of the
numerator and denominator of the basic net income (loss) per common share (Basic EPS) and the
diluted net income (loss) per potential common share (Diluted EPS). Basic EPS is computed using
the weighted average number of common shares outstanding. Diluted EPS is computed using the
weighted average number of (i) common shares outstanding, (ii) shares issuable upon vesting of
restricted stock units, (iii) shares issuable upon exercise of outstanding stock options, employee
stock purchase plan options and warrants using the treasury stock method; and (iv) shares
underlying Cienas outstanding convertible notes.
Diluted EPS for fiscal 2010 reflects only a portion of the shares underlying the 4.0% and
3.75% senior convertible notes because they were issued on March 15, 2010 and October 15, 2010,
respectively.
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Net income (loss) |
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
$ |
(333,514 |
) |
Add: Interest expense for 0.25% Convertible Senior Notes due 2013 |
|
|
1,874 |
|
|
|
|
|
|
|
|
|
Add: Interest expense for 0.875% Convertible Senior Notes due 2017 |
|
|
5,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used to calculate Diluted EPS |
|
$ |
46,278 |
|
|
$ |
(581,154 |
) |
|
$ |
(333,514 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2008 |
|
2009 |
|
2010 |
Basic weighted average shares outstanding |
|
|
89,146 |
|
|
|
91,167 |
|
|
|
93,103 |
|
Add: Shares underlying outstanding stock options, employees
stock purchase plan options, warrants and restricted stock
units |
|
|
761 |
|
|
|
|
|
|
|
|
|
Add: Shares underlying 0.25% Convertible Senior Notes due 2013 |
|
|
7,590 |
|
|
|
|
|
|
|
|
|
Add: Shares underlying 0.875% Convertible Senior Notes due 2017 |
|
|
13,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares outstanding |
|
|
110,605 |
|
|
|
91,167 |
|
|
|
93,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Basic EPS |
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
$ |
(3.58 |
) |
|
|
|
|
|
|
|
|
|
|
Explanation of Shares Excluded due to Anti-Dilutive Effect
The weighted average number of certain shares underlying outstanding stock options, employee
stock purchase plan options, restricted stock units and warrants in the table below are considered
anti-dilutive because the exercise price of these awards is greater than the average closing price
per share on the NASDAQ Stock Market during this period. In addition, the weighted average number
of shares underlying Cienas outstanding convertible senior notes, are considered anti-dilutive
because the related interest expense on a per common share if converted basis exceeds Basic EPS
for the period.
80
The following table summarizes the weighted average shares excluded from the calculation
of the denominator for Basic and Diluted EPS due to their anti-dilutive effect for the fiscal years
indicated (in thousands):
Weighted average shares excluded from EPS Denominator due to anti-dilutive effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2008 |
|
2009 |
|
2010 |
Shares underlying stock options, restricted stock units and warrants |
|
|
5,311 |
|
|
|
8,302 |
|
|
|
7,397 |
|
3.75% Convertible Senior Notes due 2008 |
|
|
182 |
|
|
|
|
|
|
|
|
|
0.25% Convertible Senior Notes due 2013 |
|
|
|
|
|
|
7,539 |
|
|
|
7,454 |
|
0.875% Convertible Senior Notes due 2017 |
|
|
|
|
|
|
13,108 |
|
|
|
13,108 |
|
4.0% Convertible Senior Notes due 2015 |
|
|
|
|
|
|
|
|
|
|
11,605 |
|
3.75% Convertible Senior Notes due 2018 |
|
|
|
|
|
|
|
|
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluded due to anti-dilutive effect |
|
|
5,493 |
|
|
|
28,949 |
|
|
|
40,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17) STOCKHOLDERS EQUITY
Call Spread Option
Ciena holds two call spread options on its common stock relating to the shares issuable upon
conversion of two issues of convertible notes. These call spread options are designed to mitigate
exposure to potential dilution from the conversion of these notes. Ciena purchased a call spread
option relating to the 0.25% convertible senior notes due May 1, 2013 for $28.5 million during the
second quarter of fiscal 2006. Ciena purchased a call spread option relating to the 0.875%
convertible senior notes due June 15, 2017 for $42.5 million during the third quarter of fiscal
2007. In each case, the call spread options were purchased at the time of the notes offering from
an affiliate of the underwriter. The cost of each call spread option was recorded as a reduction in
paid-in capital.
Each call spread option is exercisable, upon maturity of the relevant issue of convertible
notes, for such number of shares of Ciena common stock issuable upon conversion of that series of
notes in full. Each call spread option has a lower strike price equal to the conversion price for
the notes and a higher strike price that serves to cap the amount of dilution protection
provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net
share basis. The value of the consideration of a net share settlement will be equal to the value
upon a net cash settlement and can range from $0, if the market price per share of Ciena common
stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million (in
the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the
June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or
above the higher strike price. If the market price on the date of exercise is between the lower
strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive
the full number of shares underlying the call spread option by paying the aggregate option exercise
price, which is equal to the original principal outstanding on that series of notes. Should there
be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena
will depend upon the existing overall market conditions, and on Cienas stock price, the volatility
of Cienas stock and the remaining term of the call spread option. The number of shares subject to
the call spread options, and the lower and higher strike prices, are subject to customary
adjustments.
81
(18) INCOME TAXES
For the periods indicated, the provision (benefit) for income taxes consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(712 |
) |
|
$ |
(3,488 |
) |
|
$ |
(918 |
) |
State |
|
|
209 |
|
|
|
122 |
|
|
|
223 |
|
Foreign |
|
|
1,508 |
|
|
|
2,925 |
|
|
|
1,936 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
1,005 |
|
|
|
(441 |
) |
|
|
1,241 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
1,640 |
|
|
|
(860 |
) |
|
|
700 |
|
State |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
1,640 |
|
|
|
(883 |
) |
|
|
700 |
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
$ |
2,645 |
|
|
$ |
(1,324 |
) |
|
$ |
1,941 |
|
|
|
|
|
|
|
|
|
|
|
For the periods indicated, income (loss) before provision (benefit) for income taxes consists
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
United States |
|
$ |
32,868 |
|
|
$ |
(591,637 |
) |
|
$ |
(317,899 |
) |
Foreign |
|
|
8,671 |
|
|
|
9,159 |
|
|
|
(13,674 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
41,539 |
|
|
$ |
(582,478 |
) |
|
$ |
(331,573 |
) |
|
|
|
|
|
|
|
|
|
|
For the periods indicated, the tax provision (benefit) reconciles to the amount computed by
multiplying income or loss before income taxes by the U.S. federal statutory rate of 35% as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2008 |
|
2009 |
|
2010 |
Provision at statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
State taxes |
|
|
0.50 |
% |
|
|
(0.02 |
%) |
|
|
(0.07 |
%) |
Foreign taxes |
|
|
(3.67 |
%) |
|
|
0.05 |
% |
|
|
(4.56 |
%) |
Research and development credit |
|
|
(2.60 |
%) |
|
|
0.60 |
% |
|
|
2.54 |
% |
Goodwill impairment |
|
|
0.00 |
% |
|
|
(27.38 |
%) |
|
|
0.00 |
% |
Non-deductible compensation and other |
|
|
11.20 |
% |
|
|
(1.42 |
%) |
|
|
(1.43 |
%) |
Valuation allowance |
|
|
(34.06 |
%) |
|
|
(6.60 |
%) |
|
|
(32.07 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
6.37 |
% |
|
|
0.23 |
% |
|
|
(0.59 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accrued liabilities |
|
$ |
31,088 |
|
|
$ |
30,889 |
|
Depreciation and amortization |
|
|
159,858 |
|
|
|
186,716 |
|
NOL and credit carry forward |
|
|
965,529 |
|
|
|
1,107,059 |
|
Other |
|
|
42,292 |
|
|
|
38,829 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
1,198,767 |
|
|
|
1,363,493 |
|
Valuation allowance |
|
|
(1,198,067 |
) |
|
|
(1,363,493 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
700 |
|
|
$ |
|
|
|
|
|
|
|
|
|
82
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding
interest and penalties, is as follows (in thousands):
|
|
|
|
|
Unrecognized tax benefits at October 31, 2008 |
|
$ |
4,436 |
|
Increase related to positions taken in prior period |
|
|
106 |
|
Increase related to positions taken in current period |
|
|
1,947 |
|
Reductions related to expiration of statute of limitations |
|
|
(300 |
) |
|
|
|
|
Unrecognized tax benefits at October 31, 2009 |
|
|
6,189 |
|
Increase related to positions taken in prior period |
|
|
26 |
|
Increase related to positions taken in current period |
|
|
3,383 |
|
Reductions related to expiration of statute of limitations |
|
|
(2,156 |
) |
|
|
|
|
Unrecognized tax benefits at October 31, 2010 |
|
$ |
7,442 |
|
|
|
|
|
As of October 31, 2009 and 2010, Ciena had accrued $1.2 million and $1.4 million of interest,
respectively, and some minor penalties related to unrecognized tax benefits within other long-term
liabilities in the Consolidated Balance Sheets, of which $0.1 million and $0.2 million of interest
was recorded to the provision for income taxes during fiscal 2009 and 2010, respectively. If
recognized, the entire balance of unrecognized tax benefits would impact the effective tax rate.
Over the next 12 months, Ciena does not estimate any material changes in the unrecognized income
tax benefits.
During fiscal 2002, Ciena established a valuation allowance against its deferred tax assets.
Ciena intends to maintain a valuation allowance until sufficient positive evidence exists to
support a reversal. Any future release of valuation allowance may be recorded as a tax benefit
increasing net income or as an adjustment to paid-in capital, based on tax ordering requirements.
The following table summarizes the activity in Cienas valuation allowance against its gross
deferred tax assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
|
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
October 31, |
|
|
|
of period |
|
Additions |
|
Deductions |
|
of period |
|
2008 |
|
|
|
|
$ |
1,180,123 |
|
|
$ |
|
|
|
$ |
15,739 |
|
|
$ |
1,164,384 |
|
|
2009 |
|
|
|
|
$ |
1,164,384 |
|
|
$ |
33,683 |
|
|
$ |
|
|
|
$ |
1,198,067 |
|
|
2010 |
|
|
|
|
$ |
1,198,067 |
|
|
$ |
165,426 |
|
|
$ |
|
|
|
$ |
1,363,493 |
|
As of October 31, 2010, Ciena had a $2.7 billion net operating loss carry forward and a $0.1
billion income tax credit carry forward which begin to expire in fiscal year 2018 and 2013,
respectively. Cienas ability to use net operating losses and credit carry forwards is subject to
limitations pursuant to the ownership change rules of the Internal Revenue Code Section 382.
The income tax provision does not reflect the tax savings resulting from deductions associated
with Cienas equity compensation and the call spread option associated with Cienas convertible
debt. The cumulative tax benefit through October 31, 2010 of approximately $76 million will be
credited to additional paid-in capital when realized. For deductions associated with Cienas equity
compensation, credits to paid-in capital will be recorded when those tax benefits are used to
reduce taxes payable.
(19) SHARE-BASED COMPENSATION EXPENSE
Ciena grants equity awards under its 2008 Omnibus Incentive Plan (2008 Plan) and 2003
Employee Stock Purchase Plan (ESPP). In connection with its acquisition of the MEN Business,
Ciena also adopted the 2010 Inducement Equity Award Plan, pursuant to which it has made awards to
eligible persons as described below.
2008 Plan
The 2008 Omnibus Incentive Plan (the 2008 Plan) was approved by Cienas Board of Directors
on December 12, 2007 and became effective upon the approval of Cienas stockholders on March 26,
2008. The 2008 Plan has a ten year term. The 2008 Plan reserves eight million shares of common
stock for issuance, subject to increase from time to time by the number of shares: (i) subject to
outstanding awards granted under Cienas prior equity compensation plans that terminate without
delivery of any stock (to the extent such shares would have been available for issuance under such
prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition
of another company.
83
The 2008 Plan authorizes the issuance of awards including stock options, restricted stock
units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other
equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena.
Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad
discretion to establish the terms and conditions for awards under the 2008 Plan, including the
number of shares, vesting conditions and the required service or performance criteria. Options and SARs
have a maximum term of ten years, and their exercise price may not be less than 100% of fair market
value on the date of grant. Repricing of stock options and SARs is prohibited without stockholder
approval. Certain change in control transactions may cause awards granted under the 2008 Plan to
vest, unless the awards are continued or substituted for in connection with the transaction.
Pursuant to Board and stockholder approval, effective April 14, 2010, Ciena amended its 2008
Plan to (i) increase the number of shares available for issuance by five million shares; and (ii)
reduce from 1.6 to 1.31 the fungible share ratio used for counting full value awards, such as
restricted stock units, against the shares remaining available under the 2008 Plan. As of October
31, 2010, there were approximately 5.8 million shares authorized and remaining available for
issuance under the 2008 Plan.
2010 Inducement Equity Award Plan
On December 8, 2009, the Compensation Committee of the Board of Directors approved the 2010
Inducement Equity Award Plan (the 2010 Plan). The 2010 Plan is intended to enhance Cienas
ability to attract and retain certain key employees transferred to Ciena in connection with its
acquisition of the MEN Business. The 2010 Plan authorizes the issuance of restricted stock or
restricted stock units representing up to 2.25 million shares of Ciena common stock. Upon the March
19, 2011 termination of the 2010 Plan, any shares then remaining available shall cease to be
available for issuance under the 2010 Plan or any other existing Ciena equity incentive plan. As of
October 31, 2010, there were approximately 0.7 million shares authorized and available for issuance
under the 2010 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting
restrictions and vest incrementally over a four-year period. The following table is a summary of
Cienas stock option activity for the periods indicated (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
Weighted |
|
|
Options |
|
Average |
|
|
Outstanding |
|
Exercise Price |
Balance as of October 31, 2007 |
|
|
5,871 |
|
|
$ |
53.67 |
|
Granted |
|
|
760 |
|
|
|
28.92 |
|
Granted in exchange for WWP options |
|
|
934 |
|
|
|
7.50 |
|
Exercised |
|
|
(658 |
) |
|
|
7.12 |
|
Canceled |
|
|
(508 |
) |
|
|
52.79 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
6,399 |
|
|
|
48.84 |
|
Granted |
|
|
234 |
|
|
|
8.63 |
|
Exercised |
|
|
(107 |
) |
|
|
2.33 |
|
Canceled |
|
|
(988 |
) |
|
|
61.40 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009 |
|
|
5,538 |
|
|
|
45.80 |
|
Granted |
|
|
86 |
|
|
|
12.42 |
|
Exercised |
|
|
(103 |
) |
|
|
5.21 |
|
Canceled |
|
|
(519 |
) |
|
|
95.00 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2010 |
|
|
5,002 |
|
|
$ |
40.96 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal 2008, fiscal 2009 and fiscal 2010
was $14.7 million, $0.7 million and $0.9 million, respectively. The weighted average fair value of
each stock option granted by Ciena during fiscal 2008, fiscal 2009 and fiscal 2010 was $14.52,
$4.94 and $6.94, respectively.
84
The following table summarizes information with respect to stock options outstanding at
October 31, 2010, based on Cienas closing stock price of $13.81 per share on the last trading day
of Cienas fiscal 2010 (shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2010 |
|
|
Vested Options at October 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
Range of |
|
|
|
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
Exercise |
|
|
|
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
Price |
|
|
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
$ |
0.01 |
|
|
|
- |
|
|
$ |
16.52 |
|
|
|
|
|
846 |
|
|
|
6.16 |
|
|
$ |
11.19 |
|
|
$ |
3,112 |
|
|
|
635 |
|
|
|
5.36 |
|
|
$ |
11.52 |
|
|
$ |
2,346 |
|
$ |
16.53 |
|
|
|
- |
|
|
$ |
17.43 |
|
|
|
|
|
506 |
|
|
|
4.95 |
|
|
|
17.21 |
|
|
|
|
|
|
|
480 |
|
|
|
4.80 |
|
|
|
17.20 |
|
|
|
|
|
$ |
17.44 |
|
|
|
- |
|
|
$ |
22.96 |
|
|
|
|
|
430 |
|
|
|
4.41 |
|
|
|
21.75 |
|
|
|
|
|
|
|
401 |
|
|
|
4.19 |
|
|
|
21.83 |
|
|
|
|
|
$ |
22.97 |
|
|
|
- |
|
|
$ |
31.71 |
|
|
|
|
|
1,414 |
|
|
|
4.18 |
|
|
|
29.44 |
|
|
|
|
|
|
|
1,329 |
|
|
|
3.99 |
|
|
|
29.51 |
|
|
|
|
|
$ |
31.72 |
|
|
|
- |
|
|
$ |
46.90 |
|
|
|
|
|
865 |
|
|
|
5.52 |
|
|
|
39.38 |
|
|
|
|
|
|
|
718 |
|
|
|
5.19 |
|
|
|
39.74 |
|
|
|
|
|
$ |
46.91 |
|
|
|
- |
|
|
$ |
73.78 |
|
|
|
|
|
436 |
|
|
|
2.08 |
|
|
|
59.70 |
|
|
|
|
|
|
|
436 |
|
|
|
2.08 |
|
|
|
59.70 |
|
|
|
|
|
$ |
73.79 |
|
|
|
- |
|
|
$ |
1,046.50 |
|
|
|
|
|
505 |
|
|
|
0.91 |
|
|
|
149.84 |
|
|
|
|
|
|
|
505 |
|
|
|
0.91 |
|
|
|
149.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01 |
|
|
|
- |
|
|
|