OCLR Annual Report Annual Report (10-k) Tabl
Post# of 29735
Annual Report (10-k)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 2013
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-30684
OCLARO, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 20-1303994
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2560 Junction Avenue, San Jose, California, 95134
(Address of principal executive offices, zip code)
(408) 383-1400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share NASDAQ Global Select 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 ¨ No x
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 ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 the registrant’s 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. ¨
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):
Large accelerated filer ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the common stock held by non-affiliates of the registrant was $139,320,000 based on the last reported sale price of the registrant’s common stock on December 28, 2012 as reported by the NASDAQ Global Select Market ($1.54 per share). As of September 9, 2013, there were 92,873,317 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders, which will be filed on or before October 28, 2013. With the exception of the sections of the registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders specifically incorporated herein by reference, the registrant’s Proxy Statement for its 2013 Annual Meeting of Stockholders is not deemed to be filed as part of this Form 10-K.
Table of Contents
OCLARO, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 29, 2013
TABLE OF CONTENTS
Page
PART I
Item 1.
Business
4
Item 1A.
Risk Factors
14
Item 1B.
Unresolved Staff Comments
36
Item 2.
Properties
37
Item 3.
Legal Proceedings
37
Item 4.
Mine Safety Disclosures
39
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
39
Item 6.
Selected Financial Data
41
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
62
Item 8.
Financial Statements and Supplementary Data
63
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
63
Item 9A.
Controls and Procedures
63
Item 9B.
Other Information
64
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
65
Item 11.
Executive Compensation
65
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
65
Item 13.
Certain Relationships and Related Transactions, and Director Independence
65
Item 14.
Principal Accounting Fees and Services
65
PART IV
Item 15.
Exhibits, Financial Statement Schedules
65
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, about our future expectations, plans or prospects and our business. You can identify these statements by the fact that they do not relate strictly to historical or current events, and contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “will,” “plan,” “believe,” “should,” “outlook,” “could,” “target,” “model,” “may” and other words of similar meaning in connection with discussion of future operating or financial performance. We have based our forward looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. There are a number of important factors that could cause our actual results or events to differ materially from those indicated by such forward-looking statements, including (i) the effect of receiving a “going concern” statement in our auditors report on our 2013 consolidated financial statements, (ii) the exercise of the option to purchase our optical amplifier and micro-optics business (the “Amplifier Business”), our ability to close the sale of the Amplifier Business and the sale of other businesses which may or may not arise in connection with executing our restructuring plans, (iii) the future performance of Oclaro and our ability to effectively integrate the operations of acquired companies following the closing of acquisitions and mergers, including our merger with Opnext, (iv) our ability to support the carve out of processes, assets and product lines sold (or to be sold) in connection with the sale of our Oclaro Switzerland GmbH and associated laser diodes and pump business (the” Zurich Business”) and the Amplifier Business, to serve as a supplier to the buyers of such businesses during the transition of manufacturing activities, (v) our ability to effectively restructure our operations and business following the sale of its Zurich Business and the Amplifier Business in accordance with our business plan, (vi) the potential inability to realize the expected and ongoing benefits and synergies of acquisitions and mergers and from the utilization of capital from our asset dispositions, (vii) the impact to our operations, revenues and financial condition attributable to the flooding in Thailand, (viii) the impact of continued uncertainty in world financial markets and any resulting reduction in demand for our products, (ix) our ability to meet or exceed our gross margin expectations, (x) the effects of fluctuating product mix on our results, (xi) our ability to timely develop and commercialize new products, (xii) our ability to reduce costs and operating expenses, (xiii) our ability to respond to evolving technologies and customer requirements and demands, (xiv) our dependence on a limited number of customers for a significant percentage of our revenues, (xv) our ability to maintain strong relationships with certain customers, (xvi) our ability to effectively compete with companies that have greater name recognition, broader customer relationships and substantially greater financial, technical and marketing resources than we do, (xvii) our ability to effectively and efficiently transition to an outsourced back-end assembly and test model, (xviii) our ability to timely capitalize on any increase in market demand, (xix) increased costs related to downsizing and compliance with regulatory and legal requirements in connection with such downsizing, (xx) competition and pricing pressure, (xxi) the potential lack of availability of credit or opportunity for equity based financing, (xxii) the risks associated with our international operations, (xxiii) our ability to service and repay our outstanding indebtedness pursuant to the terms of the applicable agreements, (xxiv) the outcome of tax audits or similar proceedings, (xxv) the outcome of pending or potential litigation against the company, (xxvi) our ability to maintain or increase our cash reserves and obtain financing on terms acceptable to us or at all, and (xxvii) other factors described in other documents we periodically file with the SEC. We cannot guarantee any future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements. Moreover, we assume no obligation to update forward-looking statements or update the reasons actual results could differ materially from those anticipated in forward-looking statements. Several of the important factors that may cause our actual results to differ materially from the expectations we describe in forward-looking statements are identified in the sections captioned “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K and the documents incorporated herein by reference.
As used herein, “Oclaro,” “we,” “our,” and similar terms include Oclaro, Inc. and its subsidiaries, unless the context indicates otherwise.
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PART I
Item 1. Business
Overview of Oclaro
During our fiscal year 2013, we were one of the largest providers of lasers and optical components, modules and subsystems for the optical communications, industrial and consumer laser markets. In all markets, our approach is to offer a differentiated solution that is designed to make it easier for our customers to do business by combining optical technology innovation, photonic integration and a vertically integrated approach to manufacturing and product development.
Our customers include ADVA Optical Networking; Alcatel-Lucent; Ciena Corporation (Ciena); Cisco Systems, Inc. (Cisco); Coriant; Ericsson; Fiberhome Technologies Group; Fujitsu Limited (Fujitsu); Huawei Technologies Co. Ltd (Huawei); and Tellabs, Inc.
Corporate Information
We were incorporated in Delaware in June 2004. On September 10, 2004, we became the publicly traded parent company of the Oclaro Technology Ltd (formerly Bookham Technology plc) group of companies, including Oclaro Technology Ltd, a limited company incorporated under the laws of England and Wales whose stock was previously traded on the London Stock Exchange and the NASDAQ National Market under the Bookham name. Effective January 3, 2011, our common stock is now traded on the NASDAQ Global Select Market under the symbol “OCLR.”
Our principal executive offices are located at 2560 Junction Avenue, San Jose, California 95134, and our telephone number at that location is (408) 383-1400. We maintain a web site with the address www.oclaro.com . Our web site includes links to our Code of Business Conduct and Ethics and our Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee charters. We did not waive any provisions of our Code of Business Conduct and Ethics during the year ended June 29, 2013. We are not including the information contained in our web site or any information that may be accessed through our web site as part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practical after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). Any document we file with the SEC, may be inspected, without charge, at the SEC’s public reference room at 100 F Street NE, Washington, D.C. 20549 or may be obtained by calling the SEC at 1-800-SEC-0330 or at the SEC’s internet address at http://www.sec.gov (the information contained in the SEC’s website is not intended to be a part of this filing).
Recent Developments
On September 12, 2013, we sold our Oclaro Switzerland GmbH subsidiary and associated laser diodes and pump business (the “Zurich Business”) to II-VI Incorporated (“II-VI”). We received proceeds of $92.3 million in cash on September 12, 2013. We will also receive $6.0 million subject to hold-back by II-VI until December 31, 2014 to address any post-closing adjustments or claims, and $2.0 million subject to a potential post-closing working capital adjustment. In addition, we retained approximately $14.7 million in accounts receivable related to the Zurich Business and approximately $9.6 million of supplier and employee related payables related to the Zurich Business which were not included in the Oclaro Switzerland GmbH subsidiary.
The Zurich Business purchased by II-VI includes our GaAs fabrication facility in Zurich, Switzerland, and the corresponding high power laser diodes, VCSEL and 980 nm pump laser product lines, including intellectual property, inventory, equipment and a related research and development facility in Tucson, Arizona, all of which are associated with this business.
We will continue the back-end manufacturing of the 980 nm pump and certain high power laser diode products at our Shenzhen, China manufacturing facility and supply them to II-VI under a manufacturing services agreement. The employees of Shenzhen, China will continue to be employed by us. In addition, various supply and transition service agreements have been established between the companies to ensure a smooth transition.
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In addition, II-VI acquired an exclusive option to purchase our optical amplifier and micro-optics business (the “Amplifier Business”) for $88.0 million in cash. The option to purchase the Amplifier Business, for which II-VI separately paid $5.0 million in cash, will expire if not exercised within 30 days. If this option is exercised and II-VI purchases the Amplifier Business, the option price will be applied to the purchase price. If II-VI does not exercise this option, we expect the $5.0 million payment would be retained by us. We received the $5.0 million in cash proceeds on September 12, 2013.
We have used a portion of the proceeds from the sale of the Zurich Business to repay our term loan of $24.6 million and will use a portion of the remaining proceeds to begin restructuring the Company for the future. We intend to further simplify our operating footprint, reduce our cost structure and focus our research and development investment in the optical communications market where we can leverage our core competencies.
Oclaro, Inc. (the “Parent”) is a party to the Second Amended and Restated Credit Agreement, dated as of November 2, 2012 (as amended, the “Credit Agreement”), among the Parent, Oclaro Technology Limited (the “Borrower”), each lender party thereto (the “Lenders”) and Wells Fargo Capital Finance, Inc., as administrative agent for the Lenders (the “Agent”). On August 21, 2013, the Parent, the Borrower, the Lenders and the Agent entered into Waiver and Amendment Number Three to the Credit Agreement (the “Third Amendment”), which amended the Credit Agreement in pertinent part by: (i) extending the date by which the Borrower shall have consummated one or more asset sales with a minimum threshold of net proceeds; (ii) eliminating the mandatory reduction of the revolving credit facility upon the consummation of the asset sales described in (i) above; and (iii) adding a covenant that the Borrower is required to maintain liquidity of at least $45 million at all times (liquidity being the sum of the Borrower’s excess availability under the revolving credit facility plus the lesser of $25 million and qualified cash balances). The Borrower paid the lenders an amendment fee of $650,000.
Under the Credit Agreement, as amended, we were required to complete certain asset sales on or by September 2, 2013. We completed the sale of the Zurich Business on September 12, 2013 and applied the net proceeds to repay all amounts outstanding under the Credit Agreement. The event of default resulting from not completing the transaction on September 2, 2013 was waived on September 26, 2013. This waiver eliminated the requirement for the Agent and Lenders to make any advances, issue any letters of credit or provide any other extension of credit until the Agent and Lenders agree otherwise and prevents us from exercising any right or action set forth in the applicable loan documents that is conditioned on the absence of any event of default. If the Agent and Lenders do not agree to make amounts under the Credit Agreement available to us within 30 days of the waiver (or such later time as the Agent agrees), then the Agent and Lenders will have the option to immediately terminate the Credit Agreement.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of our Credit Agreement, amendments to our Credit Agreement and the potential impact of an event of default under our Credit Agreement.
Our Business
We are a supplier of core optical network technology to leading telecommunication and data communication equipment companies worldwide. We target telecommunications equipment manufacturers that integrate our optical technology into the systems they offer to the telecom carriers that are building, upgrading and operating high-performance optical networks. Telecom carriers are increasingly demanding greater levels of network capacity from their telecom equipment suppliers, our customers, in order to meet their rapidly growing network bandwidth requirements. We believe that the trend toward an increase in demand for optical solutions, which increase network capacity, is in response to growing bandwidth demand driven by increased transmission of video, voice and data over optical communication networks. Network carriers also seek to decrease the total cost of ownership of their networks and many of our advanced optical solutions, both now and potentially in terms of future optical technologies to enable new network architectures, can provide a level of flexibility and responsiveness consistent with supporting these goals. The rapid development of network infrastructure underway in developing countries is also driving growth in demand for optical solutions. Increasingly, internet service providers with their own wide area networks have similar requirements and are also becoming customers for our optical network products.
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We design, manufacture and market optical components, modules and subsystems that generate, detect, amplify, combine and separate light signals in telecom networks. During fiscal year 2013 we were a leading supplier of optical products at the component level, including tunable lasers, pump lasers, external modulators, integrated lasers and modulators and receivers. We are also a leading supplier of products at the module and subsystem levels, including transceivers, transponders, tunable dispersion compensation, amplifiers, and controlled subsystems, including integrated reconfigurable optical add-drop multiplexer (ROADM) line cards which in some cases contain our own proprietary wavelength selective switch (WSS). Many of our products enable increased flexibility in optical telecom networks, making the networks more dynamic in nature. We supply transmission products at the component level and the module level into 10 gigabits per second (Gb/s), 40 Gb/s and 100 Gb/s telecommunications solutions.
Additionally, in data communications (datacom), enterprises and institutions are managing the rapidly escalating demands for data and bandwidth and are upgrading and deploying their own high-speed local, storage and wide-area networks, also called LANs, SANs and WANs, respectively. These deployments increase the ability to utilize high-bandwidth applications that are growing in importance to their organizations and also increase utilization across telecommunications networks as this traffic leaves the LANs, SANs and WANs and travels over the network service providers’ edge and core networks. We are a leading supplier of client-side and short reach optical transceivers at 10 Gb/s, 40 Gb/s, 100 Gb/s and, in some cases, less than 10Gb/s, into data communications and enterprise solutions.
Within our overall business, we also have specific product lines focused on the design, manufacture, marketing and sale of optics and photonics solutions for select non-telecom markets. These products include (i) high-power lasers targeted at material processing, consumer, medical, industrial and printing markets; (ii) lower power lasers supplied into mini-projectors, defense products, laser projection, medical systems, display applications, laser printers and barcode scanners; and (iii) vertical cavity surface emitting lasers (VCSELs) targeted primarily at consumer markets with some application into datacom solutions. Increasingly, customers outside of the telecom market are recognizing the value of optical technology to their products and end markets. On September 12, 2013, we sold the high power laser and the VCSEL product lines in connection with the sale of our Zurich Business.
Competitive Differentiation
We believe that demonstrating the following competitive strengths will continue to be important to maintain and reinforce our position as a leading provider of core optical network components, modules and subsystems:
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Optical Technology Leadership . We have extensive expertise in optical technologies including optoelectronic semiconductors, electronics design, firmware and software capabilities. Our expertise includes III-V optoelectronic semiconductors utilizing indium phosphide (InP), gallium arsenide (GaAs) and lithium niobate (LiN) substrates. As of June 29, 2013, we have over 1,650 patents issued. Our intellectual property (IP) portfolio represents a significant investment in the optical industry over the past 20 years. We believe our commitment to the optical industry and our IP and know-how represents a differentiated value proposition for our customers. We believe that we are positioned as the number one or number two supplier in many of our metro and long-haul telecom product areas.
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Leading Photonic Integration Capabilities . Photonic integration, which is the combination of multiple functions or devices in one package or on one chip, is an important source of differentiation. Photonic integration can reduce the number of component elements, and thus the cost, of a solution, reduce the landscape of the required functionality, reduce the complexity of the corresponding integration of component elements and reduce overall power consumption of the related functionality. Our wafer fabrication facilities and process technologies position us to be a leader in delivering photonic integration. We believe that photonic integration will enable us to capture additional value in the optical network supply chain as customers demand increasing product integration and complexity to build the next generation network.
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Vertically Integrated Approach . Our wafer fabrication facilities position us to introduce product innovations delivering optical network cost and performance advantages to our customers. We believe that the combination of our in-house control of the product lifecycle process combined with the scalability and flexibility of our contract manufacturers enables us to respond more quickly to changing customer requirements, allowing our customers to reduce the time it takes them to deliver products to market. We operate a back-end assembly and test facility in China, which is in the process of being transitioned to a contract manufacturer. We continue to perform certain back-end assembly and test activities, which have been gradually transferring to contract manufacturers in recent years, in our facility in Japan. We believe that our ability to deliver innovative technologies in a variety of vertical form factors, ranging from chip level to module level to subsystem level, allows us to address the needs of a broad base of potential customers regardless of their desired level of product integration or complexity.
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Customer Ease of Use. We believe that providing innovative solutions to enhance our customers’ ease of doing business is critical to success, and this is at the core of our strategy. This includes exhibiting high standards of flexibility and quality and the ability to provide products ranging from standard components to advanced subsystems designed in partnership with our customers. We are a leading supplier of optical products at the component level, including tunable lasers, pump lasers, external modulators, integrated lasers and modulators and receivers. We are also a leading supplier of products at the module and subsystem levels, including transceivers, transponders, tunable dispersion compensation, amplifiers, and controlled subsystems, including integrated ROADM line cards. Our IP leadership and vertically integrated manufacturing strategy enable us to deliver high performance, competitive solutions.
Business Strategy
In order to maintain our position as a leading provider of core optical network components, modules and subsystems, we are continuing to pursue the following business strategies:
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Increase the Focus of Our Business on Our Core Competencies . We do not believe that our recent operating results have been satisfactory. We believe that, in order to have an opportunity to potentially execute a plan that restores us to profitability, we need to reduce our overhead expenses to be more aligned to our recent revenue levels, refine the focus of our research and development efforts into areas where we have the potential for significant technological differentiation, and continue to simplify our operating footprint. For example, we recently sold our Zurich Business, which simplifies our operating footprint and generated capital for other improvements, and we have recently deemed our WSS and 40G transmission products to be mature and have decreased the corresponding research and development expenditures and/or reallocated the expenditures to product areas with more potential for technology differentiation.
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Maintain Focus on Communications Networks . We are positioned as a key strategic supplier to the major telecom equipment and datacom equipment companies and intend to continue to focus on enabling our customers to build equipment for the implementation of next generation core optical networks. Our optical IP and development expertise provides us with optical network insights that enable us to partner with our customers to continue to develop and deliver innovative optical solutions. We plan to continue to work with our customers to develop key technologies and expand our product offerings across the optical network.
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Expand Position with Tier One Customers Through Technology Innovation and Manufacturing Flexibility . We believe we are a market leader in many of the market segments we address. Our combination of technology innovation and manufacturing flexibility enable us to deliver low-latency, high-performance products to our customers. We believe our customer-centric strategy will enable us to continue to gain share in our markets by innovating in partnership with our customers and delivering cost-effective solutions to them.
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Extend Optical Product Differentiation . We plan to continue to invest in optical innovation in order to power the infrastructure required to serve the rapidly growing demand for bandwidth. Our photonic integration capability enables additional functionality of our products and we plan to continue to leverage this advantage to advance optical technology in the network. We also plan to evaluate acquisitions of and investments in complementary businesses, products or technologies in order to continuously improve our solutions for customers.
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Match Global Engineering and Manufacturing Resources with Customer Demands . We believe our global engineering and manufacturing infrastructure enables us to deliver cost-effective solutions for our customers. Our use of contract manufacturers, primarily in Southeast Asia, provides us with an effective cost base and enables us to dynamically manage our production in the face of varying customer demand. We also operate a back-end assembly and test facility in China, which is in the process of being transitioned to a contract manufacturer. We continually evaluate the capabilities of additional potential contract manufacturing partners to ensure we have a scalable and cost effective manufacturing strategy appropriate for executing to our business objectives over a long-term horizon.
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In the Future We May Consider the Use of Strategic Investments, Acquisitions and Divestitures to Maintain an Optical Leadership Position . In the short term we expect to focus our strategy on improving our existing businesses and do not anticipate making strategic investments or acquiring companies or businesses to extend or reinforce our position. However, we could consider the use of strategic investments, acquisitions and divestitures in the future. Our industry has historically been fragmented and characterized by large numbers of competitors, but in recent years has experienced increasing levels of consolidation. In addition to our internal development capabilities, we have used acquisitions as a means to enhance our scale, obtain critical technologies and enter new markets. We have historically expanded our business through acquisitions where we have seen an opportunity to enhance scale, broaden our product offerings or integrate new technology. Our July 2012 acquisition of Opnext was consistent with this strategy. In addition, we have participated in significant past merger and acquisition activities, including our merger with Avanex in April 2009; our acquisition of Xtellus, Inc. (Xtellus) in December 2009; and our acquisition of Mintera Corporation (Mintera) in July 2010.
Our Product Offerings
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Tunable laser transmitters. Our tunable laser products include discrete lasers and co-packaged laser modulators to optimize performance and reduce the size of the product. Our tunable products at the component level include an InP tunable laser chip, a 10 Gb/s integrated tunable laser assembly (iTLA) and a 10 Gb/s co-packaged laser modulator tunable compact mach-zender. We also supply our tunable components into our customers’ 40 Gb/s products, and believe we are a primary supplier of these and related components into the 40 Gb/s solutions commercially available today. We are in the process of introducing a micro-iTLA with characteristics suitable for 100 Gb/S coherent applications.
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Fixed wavelength laser transmitters. Our fixed laser products include discrete lasers and co-packaged laser modulators to optimize performance and reduce the size of the product. Our fixed wavelength products at the component level are designed for both long-haul and metro applications at 2.5 Gb/s and 10 Gb/s and include InP laser chips, a 10 Gb/s laser and a 10 Gb/s co-packaged laser and compact mach-zender modulator. We believe that our ability to produce co-packaged, integrated transmitters, both tunable and fixed wavelength, many of which are sole-sourced to customers, demonstrates the advantages of InP photonic integration provided by our wafer fabrication facility in Caswell, U.K.
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Lithium niobate modulators. Our lithium niobate external modulators are optical devices that manipulate the phase or the amplitude of an optical signal. Their primary function is to transfer information on an optical carrier by modulating the light. These devices externally modulate the lasers of discrete transmitter products including, but not limited to, our own standalone laser products. We are leaders in the market for 10 Gb/s modulators, and have introduced 40 Gb/s and 100 Gb/s modulators for coherent applications.
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Receivers. Our portfolio of discrete receivers for metro and long-haul applications includes 10 Gb/s XMD PIN and avalanche photodiode (APD) receivers, 40 Gb/s XLMD PIN receivers, 10 Gb/s coplanar receivers in PIN and APD configurations and 20 Gb/s balanced receivers, and 40 Gb/s coherent receivers.
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Transceivers. Our pluggable transceiver portfolio includes fixed wavelength CFP, CFP-2, VSR, SFP+, SFP, XFP, Xenpak and X2 form factors at data rates ranging from 2.5 Gb/s through 10 Gb/s, and 40 Gb/s to 100 Gb/s. We believe we are leaders in tunable products. We believe the photonic integration of our internal componentry represents a differentiator and a competitive advantage in our tunable XFP products. Utilizing our differentiated internal componentry, we believe we have demonstrated the first tunable SFP transceiver performing according to MSA criteria. We are also developing a 100 Gb/s CFP pluggable transceiver for coherent long-haul applications.
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Transponder modules. Our transponder modules provide both transmitter and receiver functions. A transponder includes electrical circuitry to control the laser diode and modulation function of the transmitter as well as the receiver electronics. We supply a small form factor tunable transponder at 10 Gb/s. We supply large form factor 40 Gb/s transponders based on a differential phase shift keying (DPSK) modulation scheme, a DQPSK modulation scheme, and 40 Gb/s and 100 Gb/s polarization multiplexing quadrature phase-shift keying (PM-QPSK) transponders, also known as a coherent-based transponders. We believe the photonic integration of our internal componentry can represent a differentiator and a competitive advantage in certain of these products.
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Amplifiers. Erbium doped fiber amplifiers (EDFAs) are used to boost the brightness of optical signals and offer compact amplification for ultra long-haul, long-haul and metro networks. We offer a semi-custom product portfolio of multi-wavelength amplifiers from gain blocks to full card level or subsystem solutions designed for use in wide bandwidth wave division multiplexing (WDM) optical transmission systems. We also offer lower cost narrow band mini-amplifiers. 980 nanometer (nm) pump laser diodes are a key component of these products and they are mostly sourced internally from the Zurich wafer fabrication facility recently sold to II-VI and for which we have a supply agreement with II-VI. We are also introducing amplifier arrays, and we have also introduced a Ramen amplifier subsystem (EDRA) which is suited for applications in coherent networks.
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Wavelength Management. Our wavelength management products include switching and routing solutions, multiplexing and signal processing solutions and micro-optics and integrated modules. These include products that optically add and drop transmission signals in both fixed and reconfigurable versions. Our products include vertically integrated into ROADM line cards, which are largely based on our amplification platforms, certain micro-optics products, as well as WSS products that can be integrated into our ROADM line cards or sold as discrete modules. Subsequent to June 29, 2013, we have de-emphasized internal research and development efforts on our WSS products, and in the future may seek to procure WSS from third party suppliers for integration in our ROADM line card products.
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Tunable Dispersion Compensation. Our tunable dispersion compensation product family consists of products that optically compensate for chromatic dispersion and dispersion degradation of transmission signals, based on dispersion compensating fiber and cascaded etalons. We believe our tunable dispersion compensation products are deployed in most non-coherent 40 Gb/s networks in service today.
The products described under Amplifiers, Tunable Dispersion Compensation, Wavelength Management (excluding WSS) and certain other micro-optics products comprise the “Amplifier Business” which II-VI paid us $5.0 million for an option to purchase from us for $88.0 million).
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Pump laser chips. Our 980 nm pump laser diodes are designed for use as high-power, reliable pump sources for EDFAs in terrestrial and undersea, or submarine, applications. Uncooled modules are designed for low-cost, reliable amplification for metro, cross-connect or other single/multi-channel amplification applications and submarine applications. Our 980 nm pump laser diode product line was sold to II-VI in the first quarter of fiscal year 2014. We have entered into a supply agreement with II-VI to secure a supply of 980 nm pump lasers for integration in our amplification solutions.
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High Powered Laser Diode Products. We market advanced pump laser technology diodes for material processing, medical, cosmetic, 3-D imaging and printing applications. We are also exploring other new market opportunities for our high power lasers. Our High Powered Laser Diode product line was sold II-VI in the first quarter of fiscal 2014.
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VCSEL Products. We sell low-power polarized products for optical mouse and finger navigation applications. Our market opportunities for VCSEL products are expanding to include optical data interconnectivity applications. Our VCSEL product line was sold to II-VI in the first quarter of fiscal 2014.
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Visible Spectrum Laser Diode and LED Products. These products include 404 nm, 445 nm, 635 nm, 650 nm and 670 nm wavelength-visible lasers for applications such as mini-projectors, laser printing, industrial barcode scanning, bio/medical imaging, industrial imaging and professional contractor tools; 780 nm and 830 nm wavelength infrared lasers for scientific measurement, night vision, and other infrared applications; and 640 nm, 760 nm, 840 nm and 880 nm wavelength infrared LEDs for sensors used in robotics and other industrial applications. This product line was not sold to II-VI and continues to be operating by us at our Komoro, Japan facility.
The following table sets forth our revenues by product group for the periods indicated:
Year Ended
June 29, 2013 June 30, 2012 July 2, 2011
(Thousands)
40 Gb/s and 100 Gb/s transmission modules (1)
$ 135,311 $ 61,579 $ 33,490
10 Gb/s and lower transmission modules (1)
173,708 47,387 59,802
Transmission components (2)
93,608 99,096 137,056
Amplification, filtering and optical switching (3)
108,750 119,766 183,271
Industrial and consumer (4)
74,651 57,630 52,886
$ 586,028 $ 385,458 $ 466,505
(1) Includes transponders and transceivers.
(2) Includes lasers, modulators, laser pumps, receivers and integrated lasers and modulators.
(3) Includes amplifiers, micro-optics, dispersion compensation management, WSS modules, subsystems, ROADM line cards and thin film filters.
(4) Includes high power laser, visible laser and VCSEL.
Customers, Sales and Marketing
We believe it is essential to maintain a comprehensive and capable sales and marketing organization. As of June 29, 2013, our sales and marketing organization, which included direct sales force, customer service, marketing communications and product line specific marketing employees, totaled 158 people for all of our products sold in Canada, China, France, Germany, Italy, Japan, Malaysia, Thailand, Switzerland, the U.K. and the United States. In addition to our direct sales and marketing organization, we also sell and market our products through international sales representatives and resellers that extend our commercial reach to smaller geographic locations and customers that are not currently covered by our direct sales and marketing efforts.
Many of our products typically have a long sales cycle. The period of time from our initial contact with a customer to the receipt of an actual purchase order is frequently a year or more. In addition, many customers perform, and require us to perform, extensive process and product evaluation and testing of components before entering into purchase arrangements.
We offer support services in connection with the sale and purchase of certain products, primarily consisting of customer service and technical support. Customer service representatives assist customers with orders, warranty returns and other administrative functions. Technical support engineers provide customers with answers to technical and product-related questions. Technical support engineers also provide application support to customers who have incorporated our products into custom applications.
For the fiscal year ended June 29, 2013, Cisco accounted for 12 percent and Huawei accounted for 11 percent of our revenues. For the fiscal year ended June 30, 2012, Huawei and Fujitsu each accounted for 10 percent of our revenues. For the fiscal year ended July 2, 2011, Huawei accounted for 15 percent and Alcatel-Lucent accounted for 11 percent of our revenues.
Our customers are primarily telecommunications and data communications systems and components vendors, and also include customers in laser systems, life-sciences, industrial printing and consumer electronics components.
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The following table sets forth our revenues by geographic region for the periods indicated, determined based on the country or region to which the products were shipped:
Year Ended
June 29, 2013 June 30, 2012 July 2, 2011
(Thousands)
United States
$ 77,511 $ 68,271 $ 80,350
China, excluding Hong Kong
36,607 44,370 81,828
Hong Kong
124,966 41,967 47,452
Germany
72,306 47,446 46,652
Italy
26,939 23,159 46,376
Japan
57,863 59,552 45,058
Thailand
30,502 32,290 32,072
Malaysia
42,626 3,567 6,613
Rest of world
116,708 64,836 80,104
$ 586,028 $ 385,458 $ 466,505
Manufacturing
Our wafer fabrication facilities in particular, we believe, position us to introduce product innovations delivering optical network cost and performance advantages to our customers. We also believe that our ability to deliver innovative technologies in a variety of form factors, ranging from chip level to module level to subsystem level, allows us to address the needs of a broad base of potential customers regardless of their desired level of product integration or complexity.
We believe our advanced chip and component design and manufacturing facilities would be very expensive to replicate. On-chip, or monolithic, integration of functionality is more difficult to achieve without control over the production process, and requires advanced process know-how and equipment. Although the market for optical integrated circuits is still in its early stages, it shares many characteristics with the semiconductor market, including the positive relationship between the number of features integrated on a chip, the wafer size and the cost and sophistication of the fabrication equipment. For example, we believe our 3-inch wafer InP semiconductor fabrication facility in Caswell, U.K. provides us a competitive advantage by allowing us to increase the complexity of the optical circuits that we design and manufacture, and the integration of photonics components within smaller packages, without the relatively high cost, power and size issues associated with less integrated solutions.
Our manufacturing capabilities include fabrication processing operations for InP substrates, gallium arsenide substrates, and lithium niobate substrates, including clean room facilities for each of these fabrication processes, along with assembly and test capability and reliability/quality testing. We utilize sophisticated semiconductor processing equipment in these operations, such as epitaxy reactors, metal deposition systems, photolithography, etching, analytical measurement and control equipment. Our assembly and test facilities, whether internal or under service agreements with our contract manufacturers, include specialized automated assembly equipment, temperature and humidity control and reliability and testing facilities.
We have wafer fabrication facilities in Caswell, U.K.; Sagamihara, Japan; Komora, Japan; and San Donato, Italy. As part of our sale of the Zurich Business in the first quarter of fiscal year 2014, we have transferred our facilities in Zurich, Switzerland, to II-VI. We also have facilities in Shenzhen, China where we perform assembly and test operations; a facility in California where we perform a portion of the manufacturing of 40 Gb/s and 100 Gb/s subsystems and 40 Gb/s DPSK modules; and a liquid crystal optical processor fabrication facility with the fabrication of liquid crystal devices and associated assembly and test activities in Daejeon, South Korea. We believe that innovation at the wafer and fab level is a key differentiator in optical components and we are positioned accordingly.
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We also use third-party contract manufacturers in Thailand (Fabrinet) and China, and these activities are coordinated by our operations support team in Shenzhen, China. In the third quarter of fiscal year 2012, we entered into an agreement with Venture Corporation Limited (Venture) to transfer our Shenzhen, China operations to their facilities in Malaysia over a period of three years. We also use other contract manufacturers to a lesser degree, on a specific product basis. We continually evaluate the capabilities of additional potential contract manufacturing partners to ensure we have a scalable and cost effective manufacturing strategy appropriate for executing our business objectives over a long-term horizon. As of June 29, 2013, our manufacturing organization was comprised of 1,862 people, and will continue to gradually decrease as a result of our phased and gradual transfer of our operations from Shenzhen, China to Venture, which includes the completion of manufacturing services and transfer support associated with those product lines sold to II-VI that are manufactured in Shenzhen. II-VI will contract directly with Fabrinet on those products that are manufactured in Fabrinet’s facilities. Supply agreements exist between us and II-VI, primarily related to ensuring our supply of 980 nm pumps.
Research and Development
We draw upon our internal development and manufacturing capability to continue to create innovative solutions for our customers. We believe that continued focus on the development of our technology, and cost reduction of existing products through design enhancements, are critical to our future competitive success. We seek to expand and develop our products to reduce cost, improve performance and address new market opportunities, and to enhance our manufacturing processes to reduce production costs, provide increased device performance and reduce product time to market.
We have significant expertise in optical technologies such as optoelectronic semiconductors utilizing InP, gallium arsenide and lithium niobate substrates and micro-optic assembly and packaging technology. In addition to these technologies, we also have electronics design, firmware and software capabilities to produce transceivers, transponders, optical amplifiers, ROADMs and other value-added subsystems, and a proprietary WSS solution on which we de-emphasized any future research and development on new products. We will also consider supplementing our in-house technical capabilities with strategic alliances or technology development arrangements with third parties when we deem appropriate. We spent $100.8 million, $67.0 million and $65.5 million on research and development during the years ended June 29, 2013, June 30, 2012 and July 2, 2011, respectively. As of June 29, 2013, our research and development organization was comprised of 590 people.
Our research and development facilities are in China, Italy, Israel, Japan, the U.K., and the United States. These facilities include computer-aided design stations, modern laboratories and automated test equipment. Our research and development organization has optical and electronic integration expertise that facilitates meeting customer-specific requirements as they arise. Research and development facilities in Zurich and Tucson, Arizona were included in the sale of product lines to II-VI in the first quarter of fiscal year 2014. We also closed our research and development facility in Israel during the first quarter of fiscal year 2014.
Intellectual Property
Our competitive position significantly depends upon our research, development, engineering, manufacturing and marketing capabilities, and not just on our patent position. However, obtaining and enforcing intellectual property rights, including patents, provides us with a further competitive advantage. In the appropriate circumstances, these rights can help us to obtain entry into new markets by providing consideration for cross-licenses. In other circumstances, they can be used to prevent competitors from copying our products or from using our inventions. Accordingly, our practice is to file patent applications in the United States and certain other countries for inventions that we consider significant. In addition to patents, we also possess other intellectual property, including trademarks, know-how, trade secrets, design rights and copyrights.
We have a substantial number of patents in the United States and other countries, and additional applications are pending. These relate to technology that we have obtained from our acquisitions of businesses and companies in addition to our own internally developed technology. As of June 29, 2013, we held over 1,650 issued patents worldwide, with additional patent applications pending in various jurisdictions. Although our business is not materially dependent upon any one patent, our rights and the products made and sold under our patents, taken as a whole, are a significant element of our business. We maintain an active program designed to identify technology appropriate for patent protection. Following our acquisition of Opnext in July 2012, our patent portfolio increased by over 650 issued patents worldwide.
We require employees and consultants to execute appropriate non-disclosure and proprietary rights agreements. These agreements acknowledge our exclusive ownership of intellectual property developed for us and require that all proprietary information disclosed remain confidential. While such agreements are intended to be binding, we may not be able to enforce these agreements in all jurisdictions.
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Although we continue to take steps to identify and protect our patentable technology and to obtain and protect proprietary rights to our technology, we cannot be certain the steps we have taken will prevent misappropriation of our technology, especially in certain countries where the legal protections of intellectual property are still developing. We may take legal action to enforce our patents and trademarks and other intellectual property rights. However, legal action may not always be successful or appropriate, and may be costly. Further, situations may arise in which we may decide to grant intellectual property licenses to third parties in which case other parties will be able to exploit our technology in the marketplace.
We enter into patent and technology licensing agreements with other companies when management determines that it is in our best interest to do so, for example, see our risk factor “Our products may infringe the intellectual property rights of others, which could result in expensive litigation or require us to obtain a license to use the technology from third parties, or we may be prohibited from selling certain products in the future” appearing in Item 1A of this Annual Report on Form 10-K. These may result in net royalties payable to us by third parties or by us to third parties. However, royalties received from or paid to third parties to date have not been material to our consolidated results of operations.
In the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for us to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to us on commercially reasonable terms, or at all. If we are not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend our position, our business, financial condition and results of operations could be materially and adversely affected.
Competition
The optical communications markets are rapidly evolving. We expect these markets to continue to be highly competitive because of the available capacity and number of competitors. We compete with domestic and international companies, many of which have substantially greater financial and other resources than we do. As of June 29, 2013, we believe that our principal competitors in the optical subsystems, modules and components industry include Finisar Corporation (Finisar), JDS Uniphase Corporation (JDSU) Oplink Communications, Inc. (Oplink), Neophotonics Corporation and vertically-integrated equipment manufacturers such as Fujitsu Limited and Sumitomo Electric Industries, Ltd. The principal competitive factors upon which we compete include breadth of product line, availability, performance, product reliability, innovation and selling price. We seek to differentiate ourselves from our competitors by offering high levels of customer value through collaborative product design, technology innovation, manufacturing capabilities, optical/mechanical performance, intelligent features for configuration, control and monitoring, multi-function integration and overall customization. There can be no assurance that we will continue to compete favorably with respect to these factors. We encounter substantial competition in most of our markets, although no one competitor competes with us across all product lines or markets.
During our fiscal year 2013, our competitors also included laser diode suppliers such as DILAS Diode Lasers, Inc., Jenoptik AG, Coherent, Inc. and JDSU, some of which are captive suppliers to their own vertically integrated laser systems operations as well as suppliers to external customers, and some of which, like us, are merchant suppliers of laser diodes. In addition, our competitors in VCSEL products included Avago Technologies.
Consolidation in the optical systems and components industry has intensified, and future consolidation could further intensify, the competitive pressures that we face. For example, in addition to our mergers with Opnext and Avanex, our fiscal year 2010 acquisition of Xtellus and our fiscal year 2011 acquisition of Mintera; Avago Technologies Ltd. acquired CyOptics, Inc. in 2013, Finisar and Optium Corporation merged in 2008, Finisar acquired Ignis Optics in 2011 and Red-C Optical Networks Ltd. in 2012, Neophotonics acquired Santur in 2011 and Opnext acquired StrataLight Communications, Inc. in 2009. In the past, JDSU and Oplink have also expanded their businesses through acquisitions.