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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 April 30, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to          

000-27999
(Commission File No.)
Finisar Corporation
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
 
94-3038428
(I.R.S. Employer Identification No.)
1389 Moffett Park Drive, Sunnyvale, California
(Address of principal executive offices)
 
94089
(Zip Code)
Registrant’s telephone number, including area code: 408-548-1000
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, $.001 par value
 
NASDAQ Stock Market
 
 
(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  x      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  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  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 (§ 229.405 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  x      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 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.   x
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  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   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  x
As of October 30, 2016 , the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $2.3 billion based on the closing sales price of the registrant’s common stock as reported on the NASDAQ Stock Market on October 28, 2016 of $27.57 per share. Shares of common stock held by officers, directors and holders of more than ten percent of the outstanding common stock have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of June 9, 2017 , there were 111,526,276 shares of the registrant’s common stock, $.001 par value, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2017 annual meeting of stockholders are incorporated by reference in Part III hereof.
 



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INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 2017

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We use words like “anticipates,” “believes,” “plans,” “expects,” “future,” “intends” and similar expressions to identify these forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events; however, our business and operations are subject to a variety of risks and uncertainties, and, consequently, actual results may materially differ from those projected by any forward-looking statements. As a result, you should not place undue reliance on these forward-looking statements since they may not occur.
Certain factors that could cause actual results to differ from those projected are discussed in “Item 1A. Risk Factors.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or future events.


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PART I

Item 1.
Business

Overview

We are a leading provider of optical subsystems and components that are used in data communication and telecommunication applications. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in these networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 200 Gbps, over distances of less than 10 meters to more than 2,000 kilometers, using a wide range of network protocols and physical configurations.

We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as a reconfigurable optical add/drop multiplexers, or ROADM.

Our line of optical components consists primarily of packaged lasers and photodetectors for data communication and telecommunication applications. We are also developing laser and photodetector products for use in emerging consumer applications.

Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, tablet computers, and other mobile devices.

Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products, including lasers, photodetectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.

We sell our products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Brocade, Ciena, Cisco Systems, Dell EMC, Ericsson, FiberHome, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Juniper, Nokia, QLogic, and ZTE, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.

We were incorporated in California in April 1987 and reincorporated in Delaware in November 1999. Our principal executive offices are located at 1389 Moffett Park Drive, Sunnyvale, California 94089, and our telephone number at that location is +1-408-548-1000.

All references to “Finisar,” “the Company,” “we,” “us” or “our” are references to Finisar Corporation and its consolidated subsidiaries, collectively, except as otherwise indicated or where the context otherwise requires.


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Business Strategy

In order to maintain our position as a leading supplier of fiber optic subsystems and components, we are continuing to pursue the following business strategies:

•
Continue to Invest in or Acquire Critical Technologies to Further Our Vertical Integration Strategy.   Our years of engineering experience and our multi-disciplinary technical expertise, combined with our participation in the development of industry standards have enabled us to become a leader in the design and development of optical subsystems and components. We have developed and acquired critical skills that we believe are essential to maintaining a technological lead in our markets including high speed semiconductor laser design and wafer fabrication, complex logic and mixed signal integrated circuit design, optical subassembly design, software coding, system design, and manufacturing test design. In the process of investing in and/or acquiring critical technologies, we have obtained a number of U.S. and foreign patents with other patents pending. We intend to maintain our technological leadership through continual enhancement of our existing products and the development or acquisition of new products and technologies. Of special interest are technologies that enable smaller, more efficient, and lower cost transceivers capable of transmitting data at higher speeds, over longer distances, or at greater capacity per fiber.

•
Expand Our Broad Product Line of Optical Subsystems.   We offer one of the broadest portfolios of optical subsystems that support a wide range of speeds, fiber types, wavelengths, distances and functionality, which are available in a variety of industry standard packaging configurations, or form factors. Our optical subsystems are designed to comply with key networking protocols such as Fibre Channel, Ethernet, Optical Transport Network, or OTN, and Synchronous Optical Networking/Synchronous Digital Hierarchy, or SONET/SDH, and plug directly into standard port configurations used in our customers’ products. The breadth of our optical subsystems product line is important to many of our customers who are seeking to consolidate their supply sources for a wide range of networking products for diverse applications. We are focused on the ongoing expansion of our product line to add key products to meet our customers’ needs. Where time-to-market considerations are especially important in order to secure or enhance our supplier relationships with key customers, we may elect to acquire additional product lines.

•
Leverage Core Competencies Across Multiple, High-Growth Markets.   We believe that fiber optic technology will remain the transmission technology of choice for Fibre Channel and Ethernet data communication applications, including 1 Gigabit Ethernet and 10 Gbps, 40 Gbps,100 Gbps, and 400 Gbps Ethernet-based networks, and OTN- and SONET/SDH-based telecommunication applications. We also believe that wavelength management and switching technologies, such as those found in WSS, optical channel monitors, and linecards, will be increasingly important in optical transmission networks. These markets are characterized by differentiated applications with unique design criteria such as product function, performance, reliability, cost, in-system monitoring, size, power dissipation and software. We intend to target opportunities where our core competencies in high-speed data transmission protocols can be leveraged into leadership positions as these technologies are extended across multiple data communication and telecommunication applications and into other markets and industries such as high performance computing, military, medical, and consumer electronics.

•
Strengthen and Expand Customer Relationships.   Over more than 25 years, we have established valuable relationships and a loyal base of customers by providing high-quality products and superior service. Our service-oriented approach has allowed us to work closely with leading data communication and telecommunication system manufacturers to understand and address their current needs and anticipate their future requirements.

•
Continue to Strengthen Our Lower-Cost Manufacturing Capabilities.   We believe that new markets can be created by the introduction of new, lower-cost, high value-added products. We achieve lower product costs through the introduction of new technologies, product design and market presence. Our in-house, lower-cost manufacturing resources are also a key factor in our ability to offer a lower-cost product solution. We have established our own manufacturing facilities in Ipoh, Malaysia and Wuxi, China in order to take advantage of lower-cost labor while protecting access to our intellectual property and know-how. In addition, access to critical underlying component technologies, such as our laser, detector, and IC design and development capabilities, enables us to accelerate our product development efforts to be able to introduce new, low cost products more quickly. We continue to seek ways to lower our production costs through improved product design, improved manufacturing and testing processes and increased vertical integration.


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Products

Our optical subsystems and components are integrated into our customers’ systems and used for fiber optics-based data communication and telecommunication networks.

Our family of optical subsystem products consists of transmitters, receivers, transceivers, transponders, and active optical cables principally based on the Ethernet, Fibre Channel, OTN and SONET/SDH protocols. A transmitter uses a laser plus direct or indirect modulation to convert electrical signals into optical signals for transmission over optical fiber. Receivers incorporating photo detectors convert incoming optical signals into electrical signals. A transceiver combines both transmitter and receiver functions in a single device. A transponder includes an IC to provide the data serializer-deserializer function that would otherwise reside in the customer’s equipment if a transceiver is used. An active optical cable combines two transceivers and a fiber optic cable that are built into an integrated, connectorized cable assembly that is sold in various cable lengths. Our optical subsystem products perform these functions with high reliability and data integrity and support a wide range of protocols, transmission speeds, fiber types, wavelengths, transmission distances, physical configurations, and software enhancements.

Our high-speed optical subsystems are engineered to deliver value-added functionality and intelligence. Our optical subsystem products typically include a microprocessor with proprietary embedded software that provides customers real-time monitoring of transmitted and received optical power, temperature, drive current, and other link parameters for each port in their systems.

For data communication applications that rely on the Fibre Channel standard, we currently provide a wide range of optical subsystems for transmission applications at 1 to 16 Gbps. For data communication applications that rely on the Ethernet standard, we provide a broad range of optical subsystems for transmitting signals at 1 to 100 Gbps using the SFP, SFP+, XFP, X2, QSFP, QSFP28, CXP, CFP, CFP2, CFP4, and proprietary form factors. For OTN and SONET/SDH-based telecommunication applications, we supply optical subsystems that are capable of transmitting at 0.155, 0.622, 2.5, 10, 40,100, and 200 Gbps.

We also offer a full line of optical subsystems for telecommunication applications using wavelength division multiplexing, or WDM technologies. Our products include coarse wavelength division multiplexing, or CWDM, transceivers in the SFP form factor and dense wavelength division multiplexing, or DWDM, transceivers in the SFP, SFP+, XFP, and CFP form factors. These products include both fixed wavelength transceivers and tunable transceivers that are capable of dynamically tuning across a range of wavelengths in the C- and L-Bands.

As a result of several acquisitions, we have gained access to leading-edge technology for the manufacture of a number of active and passive optical components including vertical cavity surface emitting lasers, or VCSELs; Fabry-Perot, or FP, lasers; distributed feedback, or DFB, lasers; tunable lasers; positive intrinsic negative, or PIN, detectors; high-speed integrated waveguide detectors; Mach Zehnder Modulators; fused fiber couplers; isolators; filters; polarization beam combiners; interleavers; and amplifiers. Most of these optical components are used internally in the manufacture of our optical subsystems. We currently sell some of these components in the so-called “merchant market” to other subsystems manufacturers. We are also developing laser and photodetector products for use in emerging consumer applications.

We also offer products used in building fiber-to-the-home/curb networks and for parallel optics applications such as backplanes for switches and routers.

We offer WSS and ROADM linecard products for wavelength management in DWDM telecommunication networks. These capabilities are made possible in part through the use of our unique liquid crystal on silicon, or LCoS, technology, similar to that used in miniature projectors. This technology provides a highly flexible WSS capable of operating on both 50 and 100 GHz International Telecommunications Union, or ITU, grids, based on our patented Flexgrid TM technology. In addition, this LCoS-based architecture offers the capability for in-service upgrades of functionality and integration of additional system functionality, including route and select, drop and continue, channel monitoring, and channel contouring features. Our WSS and ROADM linecard product offering ranges from 1x2, 1x4 and 1x9 products up to higher output fiber port counts in our latest 1x23 and 2x1x20 products.

Customers

Our revenues are principally derived from sales of optical subsystems and components to a broad base of OEMs, distributors, end customers, and system integrators. Sales of products for data communication applications represented 72% ,

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74% , and 75% of our total revenues in fiscal 2017 , 2016 , and 2015 , respectively. Sales of products for telecommunication applications represented 28% , 26% , and 25% of our total revenues in fiscal 2017 , 2016 , and 2015 , respectively.

Sales to our ten largest customers represented 56% , 56% , and 55% of our total revenues during fiscal 2017 , 2016 , and 2015 , respectively. Two customers, Cisco Systems and Huawei, represented more than 10% of our total revenues during fiscal 2017 and 2016. One customer, Cisco Systems, represented more than 10% of our total revenues during fiscal 2015. No other customer accounted for more than 10% of our total revenues in any of these years.

Technology

The development of high quality optical subsystems and components for high-speed communications requires multidisciplinary expertise in the following technology areas:

High Frequency Integrated Circuit Design.   Our optical subsystems development efforts are supported by an engineering team that specializes in analog/digital IC design. This group utilizes semiconductor technologies such as silicon complementary-metal-oxide-semiconductor, or Si CMOS, and silicon germanium bipolar CMOS, or SiGe BiCMOS, to design high-speed, high performance proprietary ICs such as laser drivers, receiver pre-and post-amplifiers, and microprocessors. These proprietary ICs are incorporated across our transceiver and transponder product portfolio at data rates from 1 to 100 Gbps. We also design the advanced LCoS controller ICs for our WSS and ROADM linecard products. Our internally developed ICs provide significant cost and performance advantages throughout our current product portfolio. Our in-house IC design capabilities are critical to our ongoing development of future products with even faster data rates, higher performance, and lower cost.

Optical Subassembly and Mechanical Design.   We established ourselves as a low-cost design leader beginning with our initial optical subsystems in 1992. From that base we have developed single-mode laser alignment approaches and low-cost, all-metal packaging techniques for improved electromagnetic interference, or EMI, performance and environmental tolerance. We develop our own component and packaging designs and integrate these designs with proprietary manufacturing processes that allow our products to be manufactured in high volume.

System Design.   The design of all of our products requires a combination of sophisticated technical competencies, including optical engineering, high-speed electrical design, digital and analog application specific IC, or ASIC, design, and firmware and software engineering. We have built a substantial organization of engineers and scientists with skills in all of these areas. It is the integration and combination of these technical competencies that enables us to design and manufacture optical subsystem and component products that meet the needs of our customers.

Manufacturing System Design.   Hardware, firmware, and software design skills are utilized to provide specialized manufacturing test systems for our internal use. These test systems are optimized for test capacity and broad test coverage. We use automated, software-controlled testing to enhance the field reliability of all Finisar products and to reduce the level of capital expenditures that would otherwise be required to purchase these test systems.

Optoelectronic Device Design and Wafer Fabrication.   The ability to manufacture our own optical components provides significant cost savings as well as the ability to create unique, high performance components that are not commercially available. This enhances our competitive position in terms of performance, time-to-market, and intellectual property. Most significantly, we design and manufacture a number of active components that are used in our optical subsystems. Certain of our past acquisitions provided us with wafer fabrication capability for designing and manufacturing VCSEL components, used in our shorter distance transceivers for data communication applications, PIN detectors and 1310 nm FP and DFB lasers used in our longer distance transceivers, although we continue to rely on third-party suppliers for a portion of our DFB laser requirements, and tunable lasers for use in our tunable XFP and SFP+ transceivers for telecommunication applications.

Competition

The market for optical subsystems and components for use in data communication and telecommunication applications remains highly competitive. We believe the principal competitive factors in these markets are:

•
product performance, features, functionality, and reliability;
•
price/performance characteristics;
•
timeliness of new product introductions;
•
breadth of product line;
•
adoption of emerging industry standards;

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•
service and support;
•
size and scope of distribution network;
•
brand name;
•
access to customers; and
•
size of installed customer base.

Competition in the market for optical subsystems and components varies by market segment. Our principal competitors for optical transceivers sold for data communication applications include Applied Optoelectronics, Foxconn, Innolight, Lumentum Holdings (former communications and optical products business of JDS Uniphase), Oclaro, and Sumitomo. Our principal competitors for optical transceivers sold for telecommunication applications include Acacia Communications, Fujitsu Optical Components, Lumentum, Oclaro, and Sumitomo. Our principal competitors for WSS ROADM products include CoAdna, Lumentum, Oplink, and Nistica. We believe we compete favorably with our competitors with respect to most of the foregoing factors based, in part, upon our broad product line, our sizeable installed base, our significant vertical integration, and our lower-cost manufacturing facilities in Ipoh, Malaysia and Wuxi, China.

Sales, Marketing and Technical Support

For sales of our optical subsystems and components, we utilize a direct sales force augmented by four world-wide distributors, 12 international distributors, seven domestic distributors, 17 domestic manufacturers’ representatives, and six international manufacturers’ representatives. Our direct sales force maintains close contact with our customers and provides technical support to our manufacturers’ representatives. In our international markets, our direct sales force works with local resellers who assist us in providing support and maintenance in the territories they cover.

Our marketing efforts are focused on increasing awareness of our product offerings for optical subsystems and our brand name. Key components of our marketing efforts include:

•
continuing our active participation in industry associations and standards committees to promote and further enhance Ethernet, Fibre Channel and SONET/SDH/OTN technologies, promote standardization in the data communication and telecommunication markets, and increase our visibility as industry experts; and

•
leveraging major trade show events and conferences to promote our broad product lines.

In addition, our marketing group focuses on product management and product strategy and also provides marketing support services for our direct sales force and our manufacturers’ representatives and resellers. Through our marketing activities, we provide technical and strategic sales support to our direct sales personnel and resellers, including in-depth product presentations, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration, and other support functions.

A high level of continuing service and support is critical to our objective of developing long-term customer relationships. We emphasize customer service and technical support in order to provide our customers and their end users with the knowledge and resources necessary to successfully utilize our product line. Our customer service organization utilizes a technical team of field and factory applications engineers, technical marketing personnel and, when required, product design engineers. We provide extensive customer support throughout the qualification and sale process. In addition, we provide many resources through our World Wide Web site, including product documentation and technical information. We intend to continue to provide our customers with comprehensive product support and believe it is critical to remaining competitive.

Backlog

A substantial portion of our revenues is derived from sales to customers through hub arrangements where revenue is generated as inventory that resides at these customers or their contract manufacturers is drawn down. Visibility as to future customer demand is limited in these situations. Most of our other revenues are derived from sales pursuant to individual purchase orders that remain subject to negotiation with respect to delivery schedules and are generally cancelable without significant penalties. Manufacturing capacity and availability of key components can also impact the timing and amount of revenue ultimately recognized under such sale arrangements. Accordingly, we do not believe that the backlog of undelivered product under these purchase orders at a particular time is a meaningful indicator of our future financial performance.



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Manufacturing

We manufacture our optical subsystems at our production facility in Ipoh, Malaysia. This facility consists of 640,000 square feet, of which 240,000 square feet is suitable for clean room operations. We also conduct a portion of our new product introduction operations at our Ipoh facility. In 2012, we entered into a 50-year lease for 550,000 square feet of land in Wuxi, China, where we built a 800,000 square foot facility. At this facility, we manufacture tunable and parallel transceivers, WSS components, ROADM line cards, passive optical components, coherent receivers, and high-end optical subassemblies used in VCSELs and detectors. In 2017, we entered into a 50-year lease for an additional 280,000 square feet of land adjacent to the above location in Wuxi, China, where we have begun the process of constructing an additional 300,000 square foot manufacturing facility. We manufacture WSS products at our 100,000 square foot facility in Sydney, Australia and certain telecommunication products at our 64,000 square foot facility in Horsham, Pennsylvania. We continue to conduct a substantial portion of our new product introduction activities at our Sunnyvale, California, Horsham, Pennsylvania, Sydney, Australia, and Shanghai, China facilities. In Sunnyvale, we also conduct supply chain management for certain components as well as quality assurance and documentation control operations. We maintain an international purchasing office in Shenzhen, China. We conduct wafer fabrication operations for the manufacture of VCSELs used in short wavelength transceiver products at our facility in Allen, Texas. We conduct wafer fabrication operations for the manufacture of long wavelength FP and DFB lasers at our facility in Fremont, California. We conduct wafer fabrication operations for the manufacturing of tunable lasers and photonic integrated circuits, or PICs, at our facility in Jarfalla, Sweden. We manufacture high speed optical receivers and photodetectors at our facility in Berlin, Germany. We expect to continue to use contract manufacturers for a portion of our manufacturing needs, primarily printed circuit board assemblies.

We design and develop a number of the key components of our products, including photodetectors, lasers, ASICs, printed circuit boards, and software. In addition, our manufacturing team works closely with our engineers to manage the supply chain. To assure the quality and reliability of our products, we conduct product testing and burn-in at our facilities in conjunction with inspection and the use of testing and statistical process controls. In addition, most of our optical subsystems have an intelligent interface that allows us to monitor product quality during the manufacturing process. Our facilities in Sunnyvale and Fremont, California; Allen, Texas; Horsham, Pennsylvania; Shanghai, China; Ipoh, Malaysia; Sydney, Australia; Jarfalla, Sweden; and Berlin, Germany are qualified under ISO 9001-9002.

Although we use standard parts and components for our products wherever possible, we currently purchase several key components from single or limited sources. Our principal single source components purchased from external suppliers include ASICs and certain DFB lasers that we do not manufacture internally. Generally, purchase commitments with our single or limited source suppliers are on a purchase order basis. We generally try to maintain a buffer inventory of key components. However, any interruption or delay in the supply of any of these components, or the inability to procure these components from alternate sources at acceptable prices and within a reasonable time, would substantially harm our business. In addition, qualifying additional suppliers can be time-consuming and expensive and may increase the likelihood of errors.

We use a rolling 12-month forecast of anticipated product orders to determine our material requirements. Lead times for materials and components we order vary significantly and depend on factors such as the demand for such components in relation to each supplier’s manufacturing capacity, internal manufacturing capacity, contract terms, and demand for a component at a given time.

Research and Development

In fiscal 2017 , 2016 and 2015 , our research and development expenses were $217.9 million , $203.4 million , and $202.1 million , respectively. We believe that our future success depends on our ability to continue to enhance the performance and reduce the cost of our existing products and to develop new products that maintain technological and business competitiveness. We focus our product development activities on addressing the evolving needs of our customers within the data communication and telecommunication markets. We also seek opportunities to leverage the technical and product competencies created for our core markets to develop products for other applications, especially products using active optical components that we design and manufacture. We work closely with our customers to monitor changes in the marketplace. We design our products around current industry standards and will continue to support emerging standards that are consistent with our product strategy. Our research and development groups are aligned with our various product lines, and we also have specific groups devoted to ASIC design and test, subsystem design, and software design. Our product development operations include the active involvement of our manufacturing engineers who examine each product for its manufacturability, predicted reliability, expected lifetime, and manufacturing costs.

We believe that our research and development efforts are key to our ability to maintain technical and business competitiveness and to deliver innovative products that address the needs of the market. However, there can be no assurance

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that our product development efforts will result in commercially successful products, or that our products will not be rendered obsolete by changing technology or new product announcements by other companies.

Intellectual Property

Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We currently own approximately 2,002 issued U.S. and foreign patents and have approximately 405 pending U.S. and foreign patent applications. We cannot assure that any patents will be issued as a result of pending patent applications or that our issued patents will be upheld. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, potentially resulting in loss of a competitive advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark, and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or to deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult. We have been involved in extensive litigation to enforce certain of our patents and are currently engaged in such litigation. Additional litigation may be necessary in the future to enforce our intellectual property rights. This litigation could result in substantial costs and diversion of resources and could significantly harm our business.

The optical networking and communications industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We have been involved in extensive litigation to protect our products against accusations of infringement. See "Item 3. Legal Proceedings." From time to time, other parties may assert patent, copyright, trademark, and other intellectual property rights to technologies in various jurisdictions that are important to our business, and such claims could result in additional litigation. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. Royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.

Employees

As of April 30, 2017 , we employed approximately 14,000 full-time employees and contractors, of whom approximately 1,000 were located in the United States and approximately 12,000 were located at our production facilities in Ipoh, Malaysia, and Wuxi, China. We also, from time to time, employ part-time employees. Our employees are not represented by any union, and we have never experienced a work stoppage. Certain of our employees in our Sydney, Australia facility are subject to a collective agreement not involving a union. In addition, we have a works council in our Berlin, Germany facility. We believe that there is a positive employee relations environment within our company.

Segment and Geography Information

The material set forth in Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.

Available Information

Our website is located at www.finisar.com . Electronic copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available, free of charge, on our website as soon as practicable after we electronically file such material with the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Annual Report on Form 10-K.


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Item 1A.
Risk Factors

OUR FUTURE PERFORMANCE IS SUBJECT TO A VARIETY OF RISKS, INCLUDING THOSE DESCRIBED BELOW. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS COULD BE HARMED AND THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES.

Our quarterly revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the price of our stock.

Our quarterly operating results have varied significantly due to a number of factors, including:

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fluctuation in demand for our products;
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the timing of new product introductions or enhancements by us and our competitors;
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the level of market acceptance of new and enhanced versions of our products;
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the timing of acquisitions that we have undertaken;
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the timing or cancellation of large customer orders;
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changes in levels of our customer's forecasted demand;
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the length and variability of the sales cycle for our products;
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pricing policy changes by us and our competitors and suppliers;
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the availability of development funding;
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changes in the mix of products sold;
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increased competition in product lines, and competitive pricing pressures; and
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the evolving and unpredictable nature of the markets for products incorporating our optical components and subsystems.

We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:

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fluctuations in manufacturing yields;
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the emergence of new industry standards;
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failure to anticipate changing customer product requirements;
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the loss or gain of important customers;
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product obsolescence; and
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the amount of research and development expenses associated with new product introductions.

Our operating results could also be harmed by:

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adverse changes in economic conditions in various geographic areas where we or our customers do business;
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acts of terrorism and international conflicts or domestic crises;
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other conditions affecting the timing of customer orders or our ability to fill orders of customers subject to export control or U.S. economic sanctions; or
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a downturn in the markets for our customers' products, particularly the data storage and networking and telecommunication components markets.

We may experience a delay in generating or recognizing revenues for a number of reasons. Open orders at the beginning of each quarter are typically lower than expected revenues for that quarter and are generally cancelable with minimal notice. Accordingly, we depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our operating results. Furthermore, our customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified timeframes without significant penalty. Because we base our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted revenues or changes in levels of our customer's forecasted demand could significantly harm our business. It is likely that in some future quarters our operating results will again decrease from the previous quarter or fall below the expectations of securities analysts and investors.

As a result of these factors, our operating results may vary significantly from quarter to quarter. Accordingly, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance.

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Any shortfall in revenues or net income from the previous quarter or from levels expected by the investment community could cause a decline in the trading price of our stock.

We may lose sales if our suppliers or independent contract manufacturers fail to meet our needs or go out of business.

We currently purchase a number of key components used in the manufacture of our products from single or limited sources, and we rely on several independent contract manufacturers to supply us with certain key components and subassemblies, including lasers, modulators, and printed circuit boards. We depend on these sources to meet our production needs. Moreover, we depend on the quality of the components and subassemblies that they supply to us, over which we have limited control. Several of our suppliers are or may become financially unstable as the result of current global market conditions. In addition, from time to time we have encountered shortages and delays in obtaining components, and we may encounter additional shortages and delays in the future. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business will be significantly harmed. We generally have no long-term contracts with any of our component suppliers or contract manufacturers. As a result, a supplier or contract manufacturer can discontinue supplying components or subassemblies to us without penalty. If a supplier were to discontinue supplying a key component or cease operations, the resulting product manufacturing and delivery delays could be lengthy, and our business could be substantially harmed. We are also subject to potential delays in the development by our suppliers of key components which may affect our ability to introduce new products. Similarly, disruptions in the operations of our key suppliers or in the services provided by our contract manufacturers, including disruptions due to natural disasters, or the transition to other suppliers of these key components or services could lead to supply chain problems or delays in the delivery of our products. These problems or delays could damage our relationships with our customers and adversely affect our business.

We use rolling forecasts based on anticipated product orders to determine our component and subassembly requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences could significantly harm our business.

If we are unable to realize anticipated cost savings from the transfer of certain manufacturing operations to our overseas locations and increased use of internally-manufactured components our results of operations could be harmed.

As part of our ongoing initiatives to reduce the cost of revenues, we expect to realize significant cost savings through (i) the transfer of certain product manufacturing operations to lower cost off-shore locations and (ii) product engineering changes to enable the broader use of internally-manufactured components. The transfer of production to overseas locations may be more difficult and costly than we currently anticipate which could result in increased transfer costs and time delays. Further, following transfer, we may experience lower manufacturing yields than those historically achieved in our U.S. manufacturing locations. In addition, the engineering changes required for the use of internally-manufactured components may be more technically-challenging than we anticipate and customer acceptance of such changes could be delayed. Adverse changes in currency exchange rates between the U.S. dollar and the applicable local currency and/or unanticipated increases in labor costs at our lower cost manufacturing locations could limit the anticipated benefits of the transfer of certain product manufacturing operations to such lower cost locations. If we fail to achieve the planned product manufacturing transfer and increase in internally-manufactured component use within our currently anticipated timeframe, or if our manufacturing yields decrease as a result, we may be unsuccessful in achieving cost savings or such savings will be less than anticipated, and our results of operations could be harmed.

Continued competition in our markets may lead to an accelerated reduction in our prices, revenues and market share.

The end markets for optical products have experienced significant industry consolidation during the past few years while the industry that supplies these customers has experienced less consolidation. As a result, the markets for optical subsystems and components are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Increased consolidation in our industry, should it occur, will reduce the number of our competitors, but would be likely to further strengthen surviving industry participants. We may not be able to compete successfully against either current or future competitors. Companies competing with us may introduce products that are competitively priced, have increased performance or functionality, or incorporate technological advances and may be able to react quicker to changing customer requirements and expectations. There is also the risk that network systems vendors may re-enter the subsystem market and begin to manufacture the optical subsystems incorporated in their network systems. Increased competition could result in

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significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business. Our principal competitors for data communication applications include Applied Optoelectronics, Foxconn, Innolight, Lumentum, Oclaro, and Sumitomo. Our principal competitors for telecommunication applications include Acacia Communications, Fujitsu Optical Components, Lumentum, Oclaro, and Sumitomo. Our competitors continue to introduce improved products and we will have to do the same to remain competitive.

Decreases in average selling prices of our products may reduce our gross margins.

The market for optical subsystems is characterized by declining average selling prices resulting from factors such as increased competition, overcapacity, the introduction of new products and increased unit volumes as manufacturers continue to deploy network and storage systems. We have in the past experienced, and in the future may experience, substantial period-to-period fluctuations in operating results due to declining average selling prices. We anticipate that average selling prices will decrease in the future in response to product introductions by competitors or us, or by other factors, including pricing pressures from significant customers. In particular, we typically conduct pricing negotiations for our existing products with some of our largest telecommunication OEM customers in the last several months of the calendar year. Decreases in our average selling prices resulting from these negotiations typically become effective at the beginning of the next calendar year and generally have an adverse impact on our gross margins in future quarters. This impact is typically most pronounced in our fourth fiscal quarter ending in April, when the impact of the new pricing is first felt over a full quarter. In order to sustain profitable operations, we must continue to develop and introduce on a timely basis new products that incorporate features that can be sold at higher average selling prices. Failure to do so could cause our revenues and gross margins to decline, which would result in additional operating losses and significantly harm our business.

We may be unable to reduce the cost of our products sufficiently to enable us to compete with others. Our cost reduction efforts may not allow us to keep pace with competitive pricing pressures and could adversely affect our margins. In order to remain competitive, we must continually reduce the cost of manufacturing our products through design and engineering changes. We may not be successful in redesigning our products or delivering our products to market in a timely manner. We cannot assure you that any redesign will result in sufficient cost reductions to allow us to reduce the price of our products to remain competitive or improve our gross margins.

Shifts in our product mix may result in declines in gross margins.

Gross margins on individual products fluctuate over the product's life cycle. Our overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and our ability to reduce product costs. These fluctuations are expected to continue in the future.

Failure to accurately forecast our revenues could result in additional charges for obsolete or excess inventories or non-cancelable purchase commitments.

We base many of our operating decisions, and enter into purchase commitments, on the basis of anticipated revenue trends which are highly unpredictable. Some of our purchase commitments are not cancelable, and in some cases we are required to recognize a charge representing the amount of material or capital equipment purchased or ordered which exceeds our actual requirements. In the past, we have periodically experienced significant growth followed by a significant decrease in customer demand such as occurred in fiscal 2001, when revenues increased by 181% followed by a decrease of 22% in fiscal 2002. Based on projected revenue trends during these periods, we acquired inventories and entered into purchase commitments in order to meet anticipated increases in demand for our products, which did not materialize. As a result, we recorded significant charges for obsolete and excess inventories and non-cancelable purchase commitments which contributed to substantial operating losses in fiscal 2002. Should revenues in future periods again fall substantially below our expectations, or should we fail again to accurately forecast changes in demand mix, we could again be required to record substantial charges for obsolete or excess inventories or non-cancelable purchase commitments.

If we encounter sustained yield problems or other delays in the production or delivery of our internally-manufactured components or in the final assembly and test of our products, we may lose sales and damage our customer relationships.

Our manufacturing operations are highly vertically integrated. In order to reduce our manufacturing costs, we have acquired a number of companies, and business units of other companies that manufacture optical components incorporated in our optical subsystem products and have developed our own facilities for the final assembly and testing of our products. For example, we design and manufacture many critical components incorporated in transceivers used for data communication and telecommunication applications, including all of the short wavelength VCSEL lasers, at our wafer fabrication facility in Allen, Texas and manufacture a portion of our internal requirements for longer wavelength lasers at our wafer fabrication facility in

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Fremont, California. We assemble and test most of our transceiver products at our facilities in Ipoh, Malaysia and Wuxi, China. As a result of this vertical integration, we have become increasingly dependent on our internal production capabilities. The manufacture of critical components, including the fabrication of wafers, and the assembly and testing of our products, involve highly complex processes. For example, minute levels of contaminants in the manufacturing environment, difficulties in the fabrication process or other factors can cause a substantial portion of the components on a wafer to be nonfunctional. These problems may be difficult to detect at an early stage of the manufacturing process and often are time-consuming and expensive to correct. From time to time, we have experienced problems achieving acceptable yields at our wafer fabrication facilities, resulting in delays in the availability of components. Moreover, an increase in the rejection rate of products during the quality control process before, during or after manufacture, results in lower yields and margins. In addition, changes in manufacturing processes required as a result of changes in product specifications, changing customer needs and the introduction of new product lines have historically significantly reduced our manufacturing yields, resulting in low or negative margins on those products. Poor manufacturing yields over a prolonged period of time could adversely affect our ability to deliver our subsystem products to our customers and could also affect our sale of components to customers in the merchant market. Our inability to supply components to meet our internal needs could harm our relationships with customers and have an adverse effect on our business.

The markets for our products are subject to rapid technological change, and to compete effectively we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and evolving industry standards with respect to the protocols used in data communication and telecommunication networks. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these changes as well as current and potential customer requirements. For example, the market for optical subsystems is currently characterized by a trend toward the adoption of “pluggable” modules and subsystems that do not require customized interconnections and by the development of more complex and integrated optical subsystems. We expect that new technologies will emerge as competition and the need for higher and more cost-effective bandwidth increases. The introduction of new and enhanced products may cause our customers to defer or cancel orders for existing products. In addition, a slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products and/or a charge for the impairment of long-lived assets related to such products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such slowdown in demand and delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in the expectation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our operating results would be adversely affected. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including:

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changing product specifications and customer requirements;
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unanticipated engineering complexities;
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expense reduction measures we have implemented, and others we may implement, to conserve our cash and attempt to achieve and sustain profitability;
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difficulties in hiring and retaining necessary technical personnel;
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difficulties in reallocating engineering resources and overcoming resource limitations; and
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changing market or competitive product requirements.

The development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate prediction of technological and market trends. The introduction of new products also requires significant investment to ramp up production capacity, for which benefit will not be realized if customer demand does not develop as expected. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of the new product introduction. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Many of these factors are beyond our control. Any failure to respond to technological change would significantly harm our business.

In addition, in order to achieve widespread market acceptance, we must differentiate ourselves from our competition through product offerings and brand name recognition. We cannot assure you that we will be successful in making this differentiation or achieving widespread acceptance of our products. Failure of our existing or future products to maintain and achieve widespread levels of market acceptance will significantly impair our revenue growth.

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Our future success ultimately depends on the continued growth of the communications industry and, in particular, the continued expansion of global information networks, particularly those directly or indirectly dependent upon a fiber optics infrastructure.

We are relying on increasing demand for voice, video and other data delivered over high-bandwidth network systems as well as commitments by network systems vendors to invest in the expansion of the global information network. As network usage and bandwidth demand increase, so does the need for advanced optical networks to provide the required bandwidth. Without network and bandwidth growth, the need for optical subsystems and components, and hence our future growth as a manufacturer of these products, will be jeopardized, and our business would be significantly harmed.

We depend on large purchases from a few significant customers, and any loss, cancellation, reduction or delay in purchases by these customers could harm our business.

A small number of customers have consistently accounted for a significant portion of our revenues. Our success will depend on our continued ability to develop and manage relationships with our major customers. Although we are attempting to expand our customer base, we expect that significant customer concentration will continue for the foreseeable future. We may not be able to offset any decline in revenues from our existing major customers with revenues from new customers, and our quarterly results may be volatile because we are dependent on large orders from these customers that may be reduced, delayed, or cancelled.

The markets in which we have historically sold our optical subsystems and components products are dominated by a relatively small number of systems manufacturers, thereby limiting the number of our potential customers. Recent consolidation of portions of our customer base, including telecommunication systems manufacturers, and potential future consolidation, may have a material adverse impact on our business. Our dependence on large orders from a relatively small number of customers makes our relationship with each customer critically important to our business. We cannot assure you that we will be able to retain our major customers, attract additional customers, or that our customers will be successful in selling their products that incorporate our products. We have in the past experienced delays and reductions in orders from some of our major customers. In addition, our customers have in the past sought price concessions from us, and we expect that they will continue to do so in the future. Expense reduction measures that we have implemented over the past several years, and additional action we are taking to reduce costs, may adversely affect our ability to introduce new and improved products which may, in turn, adversely affect our relationships with some of our key customers. Further, some of our customers may in the future shift their purchases of products from us to our competitors or to joint ventures between these customers and our competitors, or may in certain circumstances produce competitive products themselves. The loss of one or more of our major customers, any reduction or delay in sales to these customers, our inability to successfully develop relationships with additional customers, or future price concessions that we may make could significantly harm our business.

Because we do not have long-term contracts with our customers, our customers may cease purchasing our products at any time if we fail to meet our customers' needs.

Typically, we do not have long-term contracts with our customers. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly:

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our customers can stop purchasing our products at any time without penalty;
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our customers are free to purchase products from our competitors; and
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our customers are not required to make minimum purchases.

Sales are typically made pursuant to inventory hub arrangements under which customers may draw down inventory to satisfy their demand as needed or pursuant to individual purchase orders, often with extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is likely that we will lose sales and customers. If our major customers stop purchasing our products for any reason, our business, financial condition, and results of operations would be harmed.

Our customers often evaluate our products for long and variable periods, which causes the timing of our revenues and results of operations to be unpredictable.

The period of time between our initial contact with a customer and the receipt of an actual purchase order typically spans over a year. During this time, customers may perform, or require us to perform, extensive and lengthy evaluation and testing of our products before purchasing and using the products in their equipment. These products often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. Our

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customers do not typically share information on the duration or magnitude of these qualification procedures. The length of these qualification processes also may vary substantially by product and customer, and, thus, cause our results of operations to be unpredictable. While our potential customers are qualifying our products and before they place an order with us, we may incur substantial research and development and sales and marketing expenses and expend significant management effort. Even after incurring such costs, we ultimately may not be able to sell any products to such potential customers. In addition, these qualification processes often make it difficult to obtain new customers, as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources. Once our products have been qualified, the agreements that we enter into with our customers typically contain no minimum purchase commitments. Failure of our customers to incorporate our products into their systems would significantly harm our business.

Our products may contain defects that may cause us to incur significant costs, divert our attention from product development efforts and result in a loss of customers.

Our products are complex and defects may be found from time to time. Networking products frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with our customers' products, which incorporate a variety of components produced by third parties. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relation problems or loss of customers, all of which would harm our business.

We may not be able to obtain additional capital in the future, and failure to do so may harm our business.

We believe that our existing balances of cash and cash equivalents, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire our outstanding 2033 Notes, in the aggregate principal amount of $258.8 million, which are subject to redemption by the holders in December 2018, 2023 and 2028, or our 2036 Notes, in the aggregate principal amount of $575.0 million, which are subject to redemption by the holders in December 2021, 2026 and 2031. Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be able to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, we could be required to significantly reduce or restructure our business operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders.

Our international business and operations expose us to additional risks.

Products shipped to customers located outside the United States account for a majority of our revenues. In addition, we have significant tangible assets located outside the United States. Our principal manufacturing facilities are located in Malaysia and China. We currently operate smaller facilities in Australia, Israel, Korea, Sweden and Germany, and we are further expanding one of our manufacturing facilities in China. We also rely on several contract manufacturers located in Asia for our supply of key subassemblies. Conducting business outside the United States subjects us to a number of additional risks and challenges, including:

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periodic changes in a specific country's or region's economic conditions, such as recession;
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compliance with a wide variety of domestic and foreign laws and regulations (including those of municipalities or provinces where we have operations) and unexpected changes in those laws and regulatory requirements, including uncertainties regarding taxes, social insurance contributions and other payroll taxes and fees to governmental entities, tariffs, quotas, export controls, export licenses and other trade barriers;
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unanticipated restrictions on our ability to sell to foreign customers where sales of products and the provision of services may require export licenses;
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certification requirements;
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environmental regulations;
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fluctuations in foreign currency exchange rates;
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inadequate protection of intellectual property rights in some countries;
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potential political, legal and economic instability, foreign conflicts, and the impact of regional and global infectious illnesses in the countries in which we and our customers, suppliers and contract manufacturers are located;
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preferences of certain customers for locally produced products;

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difficulties and costs of staffing and managing international operations across different geographic areas and cultures, including assuring compliance with the U.S. Foreign Corrupt Practices Act and other U. S. and foreign anticorruption laws;
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seasonal reductions in business activities in certain countries or regions; and
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fluctuations in freight rates and transportation disruptions.

These factors, individually or in combination, could impair our ability to effectively operate one or more of our foreign facilities or deliver our products, result in unexpected and material expenses, or cause an unexpected decline in the demand for our products in certain countries or regions. Our failure to manage the risks and challenges associated with our international business and operations could have a material adverse effect on our business.

Our future operating results may be subject to volatility, as a result of exposure to foreign exchange risks.

We are exposed to foreign exchange risks. Foreign currency fluctuations may affect both our revenues and our costs and expenses, which would significantly affect our operating results. More than 95% of our sales worldwide are denominated in U.S. dollars. If there is a significant devaluation of the currency in a specific country relative to the dollar, the prices of our products will increase relative to that country's currency, our products may be less competitive in that country and our revenues may be adversely affected.

Although we price our products in U.S. dollars, portions of both our cost of revenues and operating expenses are incurred in foreign currencies, principally the Malaysian ringgit, the Chinese yuan, the Australian dollar, the Israeli shekel, the Swedish krona, and the Euro. As a result, we bear the risk that the rate of inflation in one or more countries will exceed the rate of the devaluation of that country's currency in relation to the U.S. dollar, which would increase our costs as expressed in U.S. dollars. To date, we have not engaged in currency hedging transactions to decrease the risk of financial exposure from fluctuations in foreign exchange rates.

Our failure to protect our intellectual property may significantly harm our business.

Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. We license certain of our proprietary technology, including our digital diagnostics technology, to customers who include current and potential competitors, and we rely largely on provisions of our licensing agreements to protect our intellectual property rights in this technology. We have obtained a number of issued patents, acquired certain other patents as a result of our acquisitions, and we have filed applications for additional patents; however, we cannot assure you that any pending patent applications will result in issued patents, any issued patents will include claims that are sufficiently broad to cover our products and technologies or to provide sufficient protection from our competitors, or that our issued patents will be upheld. Additionally, significant technology used in our product lines is not the subject of any patent protection, and we may be unable to obtain patent protection on such technology in the future. Any infringement of our proprietary rights could result in significant litigation costs, and any failure to adequately protect our proprietary rights could result in our competitors offering similar products, which could result in loss of competitive advantages and decreased revenues to us.

Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Furthermore, policing the unauthorized use of our products is difficult and expensive. We are currently engaged in pending litigation to enforce certain of our patents, and additional litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. In connection with the pending litigation, substantial management time has been, and will continue to be, expended. In addition, we have incurred, and we expect to continue to incur, substantial legal expenses in connection with these pending lawsuits. These costs and this diversion of resources could significantly harm our business.

Claims that we or any user of our products infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.

Our industry is characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. We are currently involved as a defendant in patent infringement litigation and have been involved in the past as a defendant in such lawsuits. From time to time, we have also been accused of patent infringement that is not subject to current lawsuit, some of which accusations are unresolved. In the future, we may be subject to additional litigation alleging

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infringement of patent, copyright, trademark and other intellectual property rights to technologies and in various jurisdictions that are important to our business. Any claims asserting that our products infringe or may infringe proprietary rights of third parties, if determined adversely to us, could significantly harm our business. Further, claims against a customer and/or end user of our products that the re-sale or use of our products, either alone or in combination with other products, infringes proprietary rights of third parties could cause customers or users to choose to not or be required to not utilize our products alone or in such combination, which could harm our sales of such products. Any claims, against us or any customer or user of our products, with or without merit, could be time-consuming, result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays or require us to enter into royalty or licensing agreements, any of which could significantly harm our business. In addition, our agreements with our customers typically require us to indemnify our customers from any expense or liability resulting from claimed infringement of third party intellectual property rights. In the event a claim against us was successful and we could not obtain a license to the relevant technology on acceptable terms or license a substitute technology or redesign our products to avoid infringement, our business would be significantly harmed.

Numerous patents in our industry are held by others, including academic institutions, competitors and non-practicing entities. Optical subsystem suppliers may seek to gain a competitive advantage or other third parties may seek an economic return on their intellectual property portfolios by making infringement claims against us. In the future, we may need to obtain license rights to patents or other intellectual property held by others to the extent necessary for our business. Unless we are able to obtain those licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products. Licenses granting us the right to use third party technology may not be available on commercially reasonable terms, if at all. Generally, a license, if granted, would include payments of up-front fees, ongoing royalties or both. These payments or other terms could have a significant adverse impact on our operating results.

If we are unable to retain our key management and technical personnel and attract and retain additional key personnel as required, our business could be significantly harmed.

Our future success is substantially dependent upon the continued contributions of the members of our senior management team, many of whom have years of management, engineering, sales, marketing and manufacturing experience that would be difficult to replace. We also believe our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial, technical, sales and marketing, finance and manufacturing personnel. In particular, we will need to increase the number of our technical staff members with experience in high-speed networking applications as we further develop our product lines. Competition for these highly skilled employees in our industry is intense. In making employment decisions, particularly in the high-technology industries, job candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our common stock may adversely affect our ability to attract or retain key management and technical personnel. The loss of service of any our key management or technical employees, our inability to attract or retain qualified personnel in the future or delays in hiring key personnel, as required, could significantly harm our business. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We have been subject to claims of this type and may be subject to such claims in the future as we seek to hire qualified personnel. Some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits.

Our business and future operating results are subject to a wide range of uncertainties arising out of the continuing threat of terrorist attacks and ongoing military actions in the Middle East.

Like other U.S. companies, our business and operating results are subject to uncertainties arising out of the continuing threat of terrorist attacks on United States' interests, including U.S. companies, in locations worldwide and ongoing military actions in the Middle East, including the economic consequences of the war in Afghanistan or additional terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:

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increased risks related to the operations of our manufacturing facilities in Malaysia;
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greater risks of disruption in the operations of our China, Singapore and Israeli facilities and our Asian contract manufacturers, including contract manufacturers located in Thailand, and more frequent instances of shipping delays; and
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the risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities.


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Future acquisitions could be difficult to integrate, disrupt our business, dilute stockholder value and harm our operating results.

In addition to our combination with Optium in August 2008 and our acquisitions of Ignis in May 2011, Red-C in July 2012 and u 2 t Photonics AG ("u 2 t") in January 2014, we have completed the acquisition of 11 privately-held companies and certain businesses and assets from seven other companies since October 2000. We continue to review opportunities to acquire other businesses, product lines or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities, and we from time to time make proposals and offers, and take other steps, to acquire businesses, products and technologies.

The Optium merger and several of our other past acquisitions have been material, and acquisitions that we may complete in the future may be material. In 13 of our 22 acquisitions, we issued common stock or notes convertible into common stock as all or a portion of the consideration. The issuance of common stock or other equity securities by us in connection with any future acquisition would dilute our stockholders' percentage ownership.

Other risks associated with acquiring the operations of other companies include:

•
problems assimilating the purchased operations, technologies or products;
•
unanticipated costs associated with the acquisition;
•
diversion of management's attention from our core business;
•
adverse effects on existing business relationships with suppliers and customers;
•
risks associated with entering markets in which we have no or limited prior experience; and
•
potential loss of key employees of purchased organizations.

Not all of our past acquisitions have been successful. In the past, we have subsequently sold some of the assets acquired in prior acquisitions, discontinued product lines and closed acquired facilities. As a result of these activities, we incurred significant restructuring charges and charges for the write-down of assets associated with those acquisitions. Through fiscal 2017, we have written off all of the goodwill associated with our past acquisitions with the exception of the more recently completed acquisitions of Ignis, Red-C and u 2 t. We cannot assure you that we will be successful in overcoming problems encountered in connection with our past acquisitions or potential future acquisitions, and our inability to do so could significantly harm our business. In addition, to the extent that the economic benefits associated with our past acquisitions or any of our future acquisitions diminish in the future, we may be required to record additional write downs of goodwill, intangible assets or other assets associated with such acquisitions, which would adversely affect our operating results.

We have made and may continue to make strategic investments which may not be successful, may result in the loss of all or part of our invested capital and may adversely affect our operating results.

Since inception, we have made minority equity investments in a number of early-stage technology companies, totaling approximately $61.9 million. Our investments in these early stage companies were primarily motivated by our desire to gain early access to new technology. We intend to review additional opportunities to make strategic equity investments in pre-public companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make these strategic, minority equity investments. Each of these investments in pre-public companies involves a high degree of risk. We may not be successful in achieving the financial, technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives or to raise capital needed on acceptable economic terms could result in a loss of all or part of our invested capital. Between fiscal 2003 and 2017, we wrote off an aggregate of $26.2 million in seven investments which became impaired and reclassified $4.2 million of another investment to goodwill as the investment was deemed to have no value. We may be required to write off all or a portion of the $3.2 million of such equity investments remaining on our balance sheet as of April 30, 2017 in future periods.

Our ability to utilize certain net operating loss carryforwards and tax credit carryforwards may be limited under Sections 382 and 383 of the Internal Revenue Code.

As of April 30, 2017 , the Company had federal, state and foreign net operating loss carryforwards of approximately $276.8 million , $13.2 million and $34.3 million , respectively, and federal and state tax credit carryforwards of approximately $34.3 million and $26.8 million , respectively. With the exception of California R&D credit, which can be carried forward indefinitely, the net operating loss and tax credit carryforwards will expire at various dates beginning in fiscal 2020 through 2037 , if not utilized. $2.3 million of such net operating loss carryforwards and $1.5 million of such tax credit carryforwards will expire in

17

the next five years. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.

Changes in the application of tax policies may harm our results of operations.

A number of factors may negatively impact the manner in which our existing NOLs are applied as well as our future effective tax rates including, but not limited to:

•
the jurisdictions in which profits are determined to be earned and taxed;
•
changes in valuation of our deferred tax assets and liabilities;
•
increases in expenses not deductible for tax purposes;
•
changes in available tax credits;
•
changes in stock-based compensation; and
•
changes in tax laws or the interpretation of such tax laws, including by authorities in municipalities where we are subject to social insurance and other payroll taxes and fees, and changes in generally accepted accounting principles in the United States or other countries in which we operate.

An adverse change that impacts our tax position could negatively impact our operating results. In addition, we are the recipient of tax incentives that provide that certain income earned by our subsidiary in Malaysia is subject to a tax holiday for a limited period of time under the laws of that country. This Malaysian tax holiday is subject to expiration in August 2021. Our ability to realize benefits from tax initiatives could be materially affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction. In addition, although we have successfully received tax holiday extensions in the past, there can be no assurance that future extensions will be granted. If we are not able to extend a tax holiday, our total tax paid on a consolidated basis would be materially increased.

We will lose sales if we are unable to obtain government authorization to export certain of our products, and we would be subject to legal and regulatory consequences if we do not comply with applicable export control laws and regulations.

Exports of certain of our products are subject to export controls imposed by the U.S. Government and administered by the United States Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations, or EAR, administered by the Department of Commerce's Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations, or ITAR, administered by the Department of State's Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are subject to EAR and certain of our RF-over-fiber products, as well as certain products developed with government funding, are currently subject to ITAR. Products developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation.

Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments could significantly reduce our revenue and materially adversely affect our business, financial condition and results of operations. Compliance with U.S. Government regulations also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

We have previously been the subject of inquiries from the Department of State and the Department of Justice regarding compliance with ITAR. Although these inquiries were closed with no action being taken, we expended significant time and resources to resolve them, and future inquiries of this type could also be costly to resolve.

We are subject to pending securities class action and shareholder derivative legal proceedings.

Several securities class action lawsuits were filed against us and our Chairman of the Board, Chief Executive Officer and Chief Financial Officer following our March 8, 2011 announcement of unaudited financial results for the third quarter of fiscal 2011 and our financial outlook for the fourth quarter of fiscal 2011. We also have been named as a nominal defendant in several shareholder derivative lawsuits filed in 2011 concerning our March 8, 2011 earnings announcement. No specific amounts of damages have been alleged in the class action lawsuits and, by the nature of the lawsuits, no damages will be alleged against Finisar in the derivative lawsuits.

18


We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuits vigorously, however there can be no assurance that we will be successful in any defense. If any of the lawsuits related to our earnings announcement are adversely decided, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows. Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

Our business and future operating results may be adversely affected by events outside our control.

Our business and operating results are vulnerable to events outside of our control, such as earthquakes, floods, fire, power loss, telecommunication failures and uncertainties arising out of terrorist attacks in the United States and overseas. Our corporate headquarters and a portion of our manufacturing operations are located in California, and our principal manufacturing operations and those of most of our key suppliers and contract manufacturers are located in Asia. These areas have been vulnerable to natural disasters, such as earthquakes, floods and fires, and other risks which at times have disrupted the local economy and posed physical risks to our property. We are also dependent on communications links with our overseas manufacturing locations and would be significantly harmed if these links were interrupted for any significant length of time. We presently do not have adequate redundant, multiple site capacity if any of these events were to occur, nor can we be certain that the insurance we maintain against these events would be adequate.

The conversion of our outstanding convertible notes would result in substantial dilution to our current stockholders.

As of April 30, 2017 , we had outstanding an aggregate principal amount of $258.8 million of our 2033 Notes and an aggregate principal amount of $575.0 million of our 2036 Notes. The 2033 Notes are convertible at the option of the holder, under certain circumstances, into shares of our common stock at an initial conversion price of $30.18 per share, subject to adjustments, and the 2036 Notes are convertible at the option of the holder, under certain circumstances, into shares of our common stock at an initial conversion price of $44.17 per share, subject to adjustments. An aggregate of approximately 8,572,413 and 13,017,885 shares of common stock would be issued upon the conversion of all outstanding 2033 Notes and all outstanding 2036 Notes, respectively, at these conversion prices, which would dilute the voting power and ownership percentage of our existing stockholders. We have previously entered into privately negotiated transactions with certain holders of our convertible notes for the repurchase of notes in exchange for a greater number of shares of our common stock than would have been issued had the principal amount of the notes been converted at the original conversion rate specified in the notes, thus resulting in more dilution. We may enter into similar transactions in the future and, if we do so, there will be additional dilution to the voting power and percentage ownership of our existing stockholders.

Delaware law, our charter documents and our stockholder rights plan contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders.

Some provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These include provisions:

•
authorizing the board of directors to issue additional preferred stock;
•
prohibiting cumulative voting in the election of directors;
•
limiting the persons who may call special meetings of stockholders;
•
prohibiting stockholder actions by written consent;
•
creating a classified board of directors pursuant to which our directors are elected for staggered three-year terms;
•
permitting the board of directors to increase the size of the board and to fill vacancies;
•
requiring a super-majority vote of our stockholders to amend our bylaws and certain provisions of our certificate of incorporation; and
•
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

We are subject to the provisions of Section 203 of the Delaware General Corporation Law which limit the right of a corporation to engage in a business combination with a holder of 15% or more of the corporation's outstanding voting securities, or certain affiliated persons.


19

Although we believe that these charter and bylaw provisions and provisions of Delaware law provide an opportunity for the board to assure that our stockholders realize full value for their investment, they could have the effect of delaying or preventing a change of control, even under circumstances that some stockholders may consider beneficial.

We do not currently intend to pay dividends on Finisar common stock and, consequently, a stockholder's ability to achieve a return on such stockholder's investment will depend on appreciation in the price of the common stock.

We have never declared or paid any cash dividends on Finisar common stock and we do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, a stockholder is not likely to receive any dividends on such stockholder's common stock for the foreseeable future.

Our stock price has been and is likely to continue to be volatile.

The trading price of our common stock has been and is likely to continue to be subject to large fluctuations. Our stock price may increase or decrease in response to a number of events and factors, including:

•
trends in our industry and the markets in which we operate;
•
changes in the market price of the products we sell;
•
changes in financial estimates and recommendations by securities analysts;
•
acquisitions and financings;
•
quarterly variations in our operating results;
•
the operating and stock price performance of other companies that investors in our common stock may deem comparable; and
•
purchases or sales of blocks of our common stock.

Part of this volatility is attributable to the current state of the stock market, in which wide price swings are common. This volatility may adversely affect the prices of our common stock, regardless of our operating performance. If any of the foregoing occurs, our stock price could fall and we may be exposed to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure.

We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to our changing needs. In some cases, we may rely upon third-party hosting and support services to meet these needs. Any failure to manage, expand and update our information technology infrastructure, including our Enterprise Resource Planning ("ERP") system and other applications, any failure in the extension or operation of this infrastructure, or any failure by our hosting and support partners in the performance of their services could materially and adversely harm our business. Despite our implementation of security measures, our systems are vulnerable to damage from computer viruses, natural disasters, unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruption or security breach results in a loss or damage to our data or in inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, and ultimately harm our business. In addition, we may be required to incur significant costs to protect against or mitigate damage caused by these disruptions or security breaches in the future.

Item 1B.
Unresolved Staff Comments

None.


20
Table of Contents

Item 2.    Properties

Our principal facilities are located in California, Pennsylvania, Texas, Malaysia and China.

Information regarding our properties as of April 30, 2017 is as follows:
Location
Use
Size
 
 
(Square Feet)
Owned
 
 
Wuxi, China
Manufacturing operations
800,000
Ipoh, Malaysia
Manufacturing operations
640,000
Shenzhen, China
Administrative operations
50,000
Daejeon, Korea
Research and development
12,800
Leased
 
 
Shanghai, China
Research and development, general and administrative, and limited manufacturing operations
180,000
Allen, Texas
Wafer fabrication operations. A portion of this facility is currently subleased.
160,000
Sydney, Australia
Manufacturing, research and development and administrative operations
100,000
Fremont, California
Research and development and manufacturing operations
121,000
Sunnyvale, California
Corporate headquarters, research and development, sales and marketing, general and administrative and limited manufacturing operations
92,000
Horsham, Pennsylvania
Manufacturing, research and development, sales and administration
64,000
Jarfalla, Sweden
Wafer fabrication operations and research and development
63,000
Holon, Israel
Research and development and manufacturing operations
34,000
Berlin, Germany
Research and development and manufacturing operations
22,000
Hyderabad, India
Information technology support center
22,000
Singapore
Research and development
16,000
Eugene, Oregon
Research and development and manufacturing operations
9,000
Champaign, Illinois
Research and development
3,000

The owned property in Wuxi, China, consists of 550,000 square feet of land leased for 50 years where we built a 800,000 square foot manufacturing operations facility and an additional 280,000 square feet of land leased for 50 years where we have begun the process of constructing an additional 300,000 square foot manufacturing operations facility expected to be completed in thesecond half of calendar year 2018. The owned property in Daejeon, Korea, includes 4,200 square feet of land owned by our subsidiary, Finisar Daejeon Co. Ltd. We believe our properties are in good condition and are suitable for their present uses. We also believe that our existing facilities, combined with the additional facility being constructed in Wuxi, China, will be adequate to accommodate our needs for the foreseeable future.

Item 3.
Legal Proceedings

The material set forth in Note 17 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K is incorporated herein by reference.

Item 4.
Mine Safety Disclosures

Not applicable.


21
Table of Contents

PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Since our initial public offering on November 11, 1999, our common stock has traded on the NASDAQ Stock Market under the symbol “FNSR.” The following table sets forth the range of high and low sales prices of our common stock for the periods indicated:
 
High
 
Low
Fiscal 2017 Quarter Ended:
 
 
 
April 30, 2017
$
36.41

 
$
21.53

January 29, 2017
$
36.85

 
$
27.13

October 30, 2016
$
31.42

 
$
18.00

July 31, 2016
$
19.53

 
$
15.21

Fiscal 2016 Quarter Ended:
 
 
 
May 1, 2016
$
19.00

 
$
12.19

January 31, 2016
$
14.97

 
$
11.11

November 1, 2015
$
17.79

 
$
10.66

August 2, 2015
$
23.14

 
$
16.86


According to records of our transfer agent, we had 193 stockholders of record as of June 9, 2017 and we believe there is a substantially greater number of beneficial holders. We have never declared or paid dividends on our common stock and currently do not intend to pay dividends in the foreseeable future so that we may reinvest our earnings in the development of our business. The payment of dividends in the future will be at the discretion of the Board of Directors.

Item 6.
Selected Financial Data
You should read the following selected financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and the notes thereto included elsewhere in this report. The statement of operations data set forth below for the fiscal years ended April 30, 2017, May 1, 2016 and May 3, 2015 and the balance sheet data as of April 30, 2017 and May 1, 2016 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this report. The statement of operations data set forth below for the fiscal years ended April 27, 2014 and April 28, 2013 and the balance sheet data as of May 3, 2015, April 27, 2014, and April 28, 2013 are derived from our audited consolidated financial statements not included in this report.
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
 
April 27, 2014
 
April 28, 2013
 
(In thousands, except per share data)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues
$
1,449,303

 
$
1,263,166

 
$
1,250,944

 
$
1,156,833

 
$
934,335

Consolidated net income (loss)
$
249,346

 
$
35,193

 
$
11,887

 
$
111,537

 
$
(8,095
)
Net income (loss) per share attributable to Finisar Corporation common stockholders:
 
 
 
 
 
 
 
 
 
Basic
$
2.26

 
$
0.33

 
$
0.12

 
$
1.16

 
$
(0.06
)
Diluted
$
2.19

 
$
0.32

 
$
0.11

 
$
1.09

 
$
(0.06
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Total assets
$
2,539,882

 
$
1,645,371

 
$
1,551,882

 
$
1,497,546

 
$
1,007,847

Long-term portion of convertible notes
$
707,782

 
$
229,393

 
$
221,406

 
$
252,268

 
$
40,015



22
Table of Contents

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation

Management’s discussion and analysis of financial condition and results of operation, or MD&A, is provided as a supplement to the accompanying consolidated financial statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of operations. The MD&A is organized as follows:

•
Forward-looking statements.   This section discusses how forward-looking statements made by us in the MD&A and elsewhere in this report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.

•
Business Overview.   This section provides an introductory overview and context for the discussion and analysis that follows in MD&A.

•
Critical Accounting Policies and Estimates.   This section discusses those accounting policies that are both considered important to our financial condition and operating results and require significant judgment and estimates on the part of management in their application.

•
Results of Operations.   This section provides analysis of the Company’s results of operations for the three fiscal years period ended April 30, 2017 . A brief description is provided of transactions and events that impact comparability of the results being analyzed.

•
Financial Condition and Liquidity.   This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.

Forward Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under “Item 1A. Risk Factors.” The following discussion should be read together with our consolidated financial statements and related notes thereto included elsewhere in this report.

Business Overview

We are a leading provider of optical subsystems and components that are used in data communication and telecommunication applications. Our optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables, which provide the fundamental optical-electrical, or optoelectronic interface for interconnecting the electronic equipment used in these networks, including the switches, routers, and servers used in wireline networks as well as the antennas and base stations used in wireless networks. These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits and novel optoelectronic packaging to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second, or Gbps, to more than 200 Gbps, over distances of less than 10 meters to more than 2,000 kilometers, using a wide range of network protocols and physical configurations.

We also provide products known as wavelength selective switches, or WSS. In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal. The wavelength selective feature means that WSS enable any wavelength or combination of wavelengths to be switched from the input fiber to the output fibers. WSS products are sometimes combined with other components and sold as linecards that plug into a system chassis referred to as a reconfigurable optical add/drop multiplexers, or ROADM.

Our line of optical components consists primarily of packaged lasers and photodetectors for data communication and telecommunication applications. We are also developing laser and photodetector products for use in emerging consumer applications.

Demand for our products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization that must be handled by both wireline and wireless networks. Mobile traffic is increasing as the result of proliferation of smartphones, tablet computers, and other mobile devices.

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Table of Contents


Our manufacturing operations are vertically integrated and we produce many of the key components used in making our products, including lasers, photodetectors and integrated circuits, or ICs, designed by our internal IC engineering teams. We also have internal assembly and test capabilities that make use of internally designed equipment for the automated testing of our optical subsystems and components.

We sell our products primarily to manufacturers of storage systems, networking equipment and telecommunication equipment such as Brocade, Ciena, Cisco Systems, Dell EMC, Ericsson, FiberHome, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Juniper, Nokia, QLogic, and ZTE, and to their contract manufacturers. These customers, in turn, sell their systems to businesses and to wireline and wireless telecommunication service providers and cable TV operators, collectively referred to as carriers. We also sell products to end-users.

Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, inventory adjustments for obsolete and excess inventory and the amortization of acquired developed technology associated with acquisitions that we have made. As a result of building a vertically integrated business model, our manufacturing cost structure has become more fixed. While this can be beneficial during periods when demand is strong, it can be more difficult to reduce costs during periods when demand for our products is weak, product mix is unfavorable or selling prices are generally lower. While we have undertaken measures to reduce our operating costs, there can be no assurance that we will be able to reduce our cost of revenues sufficiently to achieve or sustain profitability.

Since October 2000, we have completed the acquisition of two publicly-held companies. We have also completed the acquisition of 13 privately-held companies and certain businesses and assets from seven other companies in order to broaden our product offerings and provide new sources of revenue, production capabilities and access to advanced technologies that we believe will enable us to reduce our product costs and develop innovative and more highly integrated product platforms while accelerating the timeframe required to develop such products.

Critical Accounting Policies
The preparation of our financial statements and related disclosures require that we make estimates, assumptions and judgments that can have a significant impact on our revenue and operating results, as well as on the value of certain assets and contingent liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. See below for more information about these critical accounting policies. We believe there have been no material changes to our critical accounting policies during the fiscal year ended April 30, 2017 compared to prior years.

Revenue Recognition, Warranty and Sales Returns
We recognize revenue when persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, generally upon shipment, the price is fixed or determinable and collectability is reasonably assured. At the time revenue is recognized, we establish an accrual for estimated warranty expenses associated with our sales, recorded as a component of cost of revenues. Our standard warranty period usually extends 12 months from the date of sale, although it can extend for longer periods of three to five years for certain products sold to certain customers. Our warranty accrual represents our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. While we believe that our warranty accrual is adequate and that the judgment applied is appropriate, such amounts estimated to be incurred could differ materially from what actually transpire in the future. If our actual warranty costs are greater than the accrual, costs of revenue will increase in the future. We also provide an allowance for estimated customer returns, which is netted against revenue. This provision is based on our historical returns, analysis of credit memo data and our return policies. If the historical data used by us to calculate the estimated sales returns does not properly reflect future returns, revenue could be reduced in the future.

Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination of factors. In circumstances where, subsequent to delivery, we become aware of a customer’s potential inability to meet its obligations, we record a specific allowance for the doubtful account to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize an allowance for doubtful accounts based on the length of time the receivables are past due and historical actual bad debt history. A material adverse change in a major customer’s ability to meet its financial obligations to us could result in a material reduction in the estimated amount of accounts receivable that can ultimately be collected and an increase in our general and administrative expenses for the shortfall.


24
Table of Contents

Slow Moving and Obsolete Inventories
To mitigate the component supply constraints that have existed in the past and to fill orders with non-standard configurations, we build inventory levels for certain items with long lead times and enter into certain longer-term commitments for certain items. We permanently write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. We define obsolete inventory as inventory that will no longer be used in the manufacturing process. We periodically discard obsolete inventory. Excess inventory is generally defined as inventory in excess of projected usage, and is determined using our best estimate of future demand at the time, based upon information then available to us. In making these assessments, we are required to make judgments as to the future unit demand for current or committed inventory levels. In addition to the future unit demand, we also consider:
•
parts and subassemblies that can be used in alternative finished products;
•
parts and subassemblies that are unlikely to be engineered out of our products; and
•
known design changes which would reduce our ability to use the inventory as planned.
Significant differences between our estimates and judgments regarding future timing of product transitions, volume and mix of customer demand for our products and actual timing, volume and demand mix may result in additional write-offs in the future, or additional usage of previously written-off inventory in future periods for which we would benefit from a reduced cost of revenues in those future periods.

Business Combinations
We apply the provisions of the Financial Accounting Standards Board's Accounting Standards Codification Topic 805, Business Combinations (“ASC 805”), in the accounting for our acquisitions. Under ASC 805, the purchase price is equivalent to the fair value of consideration transferred on the date of the business combination, tangible and identifiable intangible assets acquired and liabilities assumed as of the acquisition date are recorded at the acquisition date fair value, and goodwill is recognized for any excess of purchase price over the net fair value of assets acquired and liabilities assumed.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date including our estimates for intangible assets, contractual obligations assumed, restructuring liabilities, pre-acquisition contingencies and contingent consideration, where applicable. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.
Because of this uncertainty, our estimates are subject to refinement. As a result, during the measurement period, which may be up to one year following the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations.

Goodwill, Intangibles and Other Long-Lived Assets
Goodwill, purchased technology, and other intangible assets resulting from acquisitions are accounted for under the acquisition method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been provided on a straight-line basis over periods ranging from three to 15 years.
Goodwill is assessed for impairment annually or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value. Goodwill is tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value of the reporting unit exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the unit may be impaired. The amount, if any, of the impairment is then measured in the second step in which we determine the implied value of goodwill based on the allocation of the estimated fair value determined in the initial step to all assets and liabilities of the reporting unit.
We are required to make judgments about the recoverability of our long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying value of these assets may be impaired or not recoverable. In order to make such judgments, we are required to make assumptions about the value of these assets in the future including future prospects for earnings and cash flows. If impairment is indicated, we write those assets down to their fair value which is generally determined based on discounted cash flows. Judgments and assumptions about the future are complex, subjective and can be affected by a variety of factors including industry and economic trends, our market position and the competitive environment of the businesses in which we operate.


25
Table of Contents

Share-Based Compensation Expense
Compensation cost for all share-based payment awards made to employees and directors including restricted stock units and employee stock purchases under our Employee Stock Purchase Plan is measured at the grant date based on the fair value of the award. We measure the fair value of restricted stock units using the market value of our common stock on the grant date. We estimate the fair value of employee stock purchases under our Employee Stock Purchase Plan on the date of grant using the Black-Scholes option pricing model.
The determination of the fair value of stock-based awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, the risk-free interest rate, and expected dividends.
We estimate the expected term of employee stock purchase rights by calculating the average of the remaining purchase periods under each offering period. We calculate the volatility factor based on our historical stock prices. We base the risk-free interest rate on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term on the purchase rights. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model.
Compensation cost of expected-to-vest awards is valued under the single-option approach and recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. We account for forfeitures as they occur rather than estimating the number of awards that are expected to ultimately vest.
If we use different assumptions for estimating stock-based compensation expense in future periods, the change in our stock-based compensation expense could materially affect our operating income, net income and net income per share.

Accounting for Income Taxes
We apply the liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities and their reported amounts, along with net operating loss carryforwards and credit carryforwards. We reduce the deferred tax assets by recording a valuation allowance that is calculated in accordance with the provisions of ASC 740, “Income Taxes,” which requires an assessment of both positive and negative evidence regarding the realizability of these deferred tax assets, when measuring the need for a valuation allowance. 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 carry-forwards, applicable tax rates and tax planning strategies. We review the valuation allowance quarterly and maintain it until sufficient positive evidence exists to support a release of all or a portion of valuation allowance.
We provide for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Also, our current effective tax rate assumes that United States income taxes are not provided for the undistributed earnings of non-United States subsidiaries. We intend to indefinitely reinvest the earnings of all foreign corporate subsidiaries accumulated in fiscal 2008 and subsequent years.
Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

Recent Accounting Pronouncements
For a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on our consolidated financial statements, see "Part II, Item 8, Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies."


26
Table of Contents

Results of Operations
Comparison of Fiscal Years Ended April 30, 2017 and May 1, 2016
Revenues
The following table sets forth the changes in revenues by market application:
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentages)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Datacom revenue
$
1,041,854

 
$
929,247

 
$
112,607

 
12
%
Telecom revenue
407,449

 
333,919

 
73,530

 
22
%
Total revenues
$
1,449,303

 
$
1,263,166

 
$
186,137

 
15
%

Datacom revenue for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to an increase in market demand for our 100 Gbps transceivers. Telecom revenue for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to an increase in market demand for our 100G products.

Amortization of Acquired Developed Technology
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Amortization of acquired developed technology
$
4,492

 
$
6,129

 
$
(1,637
)
 
(27
)%

Amortization of acquired developed technology for the year ended April 30, 2017 decreased compared to the year ended May 1, 2016 primarily due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.

Impairment of Long-lived Assets
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Impairment of long-lived assets
$
—

 
$
1,901

 
$
(1,901
)
 
(100
)%

During the first quarter of fiscal 2016, we recorded a $1.9 million charge for the impairment of certain long-lived assets due to the projected cash flows associated with these assets not supporting the carrying values of these assets.

Gross Profit
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentages)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Gross profit
$
503,647

 
$
354,650

 
$
148,997

 
42
%
As a percentage of revenues
35
%
 
28
%
 
 
 
 

Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross margin for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to a more favorable product mix, primarily 100 Gbps transceivers.

Research and Development Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Research and development expenses
$
217,914

 
$
203,389

 
$
14,525

 
7
%

Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer

27

hardware, costs related to prototyping, and allocated facilities and IT support costs. Research and development expenses for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to an increase in employee compensation related expenses.

Sales and Marketing Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Sales and marketing expenses
$
50,644

 
$
46,619

 
$
4,025

 
9
%

Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs. Sales and marketing expenses for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to an increase in employee compensation related expenses.

General and Administrative Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
General and administrative expenses
$
55,442

 
$
60,117

 
$
(4,675
)
 
(8
)%

General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended April 30, 2017 decreased compared to the year ended May 1, 2016 primarily due to higher legal service fees related to on-going litigations in fiscal 2016.

Interest Income
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Interest income
$
6,763

 
$
2,345

 
$
4,418

 
188
%

Interest income for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to an increase in cash and short-term investments balances during fiscal 2017 primarily as a result of issuance of $575.0 million in aggregate principal amount of our 0.50% Convertible Senior Notes due 2036 in December 2016.

Interest Expense
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Interest expense
$
(20,363
)
 
$
(11,750
)
 
$
(8,613
)
 
73
%

Interest expense for the year ended April 30, 2017 increased compared to the year ended May 1, 2016 primarily due to the amortization of the debt discount on our 0.50% Convertible Senior Notes due 2036 issued in December 2016.

Other Income (Expense), Net
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Other income (expense), net
$
(91
)
 
$
3,213

 
$
(3,304
)
 
(103
)%

Other income (expense), net for the year ended April 30, 2017 decreased compared to the year ended May 1, 2016 primarily due to fluctuations of foreign currency exchange rates.


28

Provision for (Benefit from) Income Taxes
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
April 30, 2017
 
May 1, 2016
 
Change
 
% Change
Provision for (benefit from) income taxes
$
(86,152
)
 
$
(362
)
 
$
(85,790
)
 
23,699
%

The increase in benefit was primarily due to a release of valuation allowance related to a majority of our U.S. deferred tax assets during the fourth quarter of fiscal 2017, based on sufficient positive objective evidence that we would generate sufficient taxable income in the U.S. to realize the deferred tax assets. The positive evidence as of April 30, 2017 included fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Realization of our deferred tax assets is primarily dependent upon future taxable income in related tax jurisdictions. If our assumptions and consequently our estimates change in the future, the valuation allowances may be increased or decreased, resulting in a respective increase or decrease in income tax expense.

Comparison of Fiscal Years Ended May 1, 2016 and May 3, 2015
Revenues
The following table sets forth the changes in revenues by market application:
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentages)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Datacom revenue
$
929,247

 
$
933,455

 
$
(4,208
)
 
—
 %
Telecom revenue
333,919

 
317,489

 
16,430

 
5
 %
Total revenues
$
1,263,166

 
$
1,250,944

 
$
12,222

 
1
 %

Datacom revenue for the year ended May 1, 2016 decreased compared to the year ended May 3, 2015 primarily due to a decline in average selling prices of datacom products. Telecom revenue for the year ended May 1, 2016 increased compared to the year ended May 3, 2015 primarily due to an increase in market demand for our 10 Gbps tunable transceivers and WSS products.

Amortization of Acquired Developed Technology
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Amortization of acquired developed technology
$
6,129

 
$
5,739

 
$
390

 
7
%

Amortization of acquired developed technology for the year ended May 1, 2016 increased compared to the year ended May 3, 2015 primarily due to the start of amortization for certain in-process R&D intangible assets related to our acquisition of u 2 t as a result of completing related development projects during fiscal 2016.

Impairment of Long-lived Assets
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Impairment of long-lived assets
$
1,901

 
$
5,767

 
$
(3,866
)
 
(67
)%

During the first quarter of fiscal 2016 and the third quarter of fiscal 2015, we recorded $1.9 million and $5.8 million, respectively, of charges for the impairment of long-lived assets (primarily machinery and equipment) due to the projected cash flows associated with these assets not supporting the carrying values of these assets.

Gross Profit
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentages)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Gross profit
$
354,650

 
$
350,910

 
$
3,740

 
1
%
As a percentage of revenues
28
%
 
28
%
 
 
 
 

29


Gross profit is calculated as revenues less cost of revenues, amortization of acquired developed technology, and, if applicable, impairment of long-lived assets. Gross margin is gross profit reflected as a percentage of revenues. Our cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead, warranty expense, and inventory adjustments for excess and obsolete inventory. Gross profit for the year ended May 1, 2016 increased compared to the year ended May 1, 2016 primarily due to long-lived assets impairment charges described above.

Research and Development Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Research and development expenses
$
203,389

 
$
202,089

 
$
1,300

 
1
%

Research and development expenses consist primarily of salaries and related costs of employees engaged in research and design activities, including stock-based compensation charges related to those employees, costs of design tools and computer hardware, costs related to prototyping, and allocated facilities and IT support costs. Research and development expenses for the year ended May 1, 2016 increased compared to the year ended May 3, 2015 primarily due to an increase in employee compensation related expenses.

Sales and Marketing Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Sales and marketing expenses
$
46,619

 
$
46,178

 
$
441

 
1
%

Sales and marketing expenses consist primarily of salaries and related costs of employees engaged in sales and marketing functions, including stock-based compensation charges related to those employees, commissions for our external sales representatives, costs related to marketing and promotional activities, and allocated facilities and IT support costs. Sales and marketing expenses for the year ended May 1, 2016 increased compared to the year ended May 3, 2015 primarily due to an increase in marketing product samples in connection with the expansion of our product offering and customer base.

General and Administrative Expenses
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
General and administrative expenses
$
60,117

 
$
72,856

 
$
(12,739
)
 
(17
)%

General and administrative expenses consist primarily of salaries and related costs of employees engaged in general and administrative functions, including stock-based compensation charges related to those employees, legal, audit and other professional fees, insurance costs, human resources and other corporate costs, and allocated facilities and IT support costs. General and administrative expenses for the year ended April 30, 2017 decreased compared to the year ended May 1, 2016 primarily due to an $11.0 million charge related to the settlement of patent litigation during the second quarter of fiscal 2015.

Amortization of Purchased Intangibles
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Amortization of purchased intangibles
$
2,672

 
$
2,948

 
$
(276
)
 
(9
)%

Amortization of purchased intangibles for the year ended May 1, 2016 decreased compared to the year ended May 3, 2015 due to the roll-off of amortization of certain intangible assets related to our prior acquisitions.

Interest Income
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Interest income
$
2,345

 
$
1,811

 
$
534

 
29
%

30


Interest income for the year ended May 1, 2016 increased compared to the year ended May 3, 2015 primarily due to higher cash and short-term investments balances during fiscal 2016 compared to fiscal 2015.

Interest Expense
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Interest expense
$
(11,750
)
 
$
(12,022
)
 
$
272

 
(2
)%

Interest expense for the year ended May , 2016 decreased compared to the year ended May 3, 2015 primarily due to the conversion of all of the remaining 5.0% Convertible Senior Notes due 2029 into common stock during October 2014.

Other Income (Expense), Net
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Other income (expense), net
$
3,213

 
$
4,099

 
$
(886
)
 
(22
)%

Other income (expense), net for the year ended May 1, 2016 decreased compared to the year ended May 3, 2015 primarily due to higher foreign currency exchange losses in fiscal 2016.

Provision for (Benefit from) Income Taxes
 
 
 
 
 
 
 
 
Fiscal Years Ended
 
 
 
 
(in thousands, except percentage)
May 1, 2016
 
May 3, 2015
 
Change
 
% Change
Provision for (benefit from) income taxes
$
(362
)
 
$
8,795

 
$
(9,157
)
 
(104
)%

The decrease was primarily due to a change in the mix of pre-tax income into jurisdictions with lower effective tax rate. The income tax provisions for fiscal 2016 and 2015 primarily represent current state and foreign income taxes arising in certain jurisdictions in which we conduct business.

Liquidity and Capital Resources
 
Fiscal Years Ended
(in thousands)
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Net cash provided by operating activities
$
227,832

 
$
183,600

 
$
113,597

Net cash used in investing activities
$
(852,783
)
 
$
(88,618
)
 
$
(230,633
)
Net cash provided by financing activities
$
585,958

 
$
6,796

 
$
11,378


Cash Flows from Operating Activities
Net cash provided by operating activities in fiscal 2017 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $62.2 million , offset by a $83.7 million increase in working capital primarily related to increases in inventory. Inventory increased by $73.6 million due to increased purchases to support the increase in sales level.
Net cash provided by operating activities in fiscal 2016 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $147.2 million.
Net cash provided by operating activities in fiscal 2015 primarily consisted of our net income, as adjusted to exclude depreciation, amortization and other non-cash items totaling $150.9 million, offset by a $49.2 million increase in working capital primarily related to increases in inventory. Inventory increased by $37.5 million due to increased purchases to support the increase in sales level.

31

Cash Flows from Investing Activities
Net cash used in investing activities in fiscal 2017 primarily consisted of expenditures of $140.1 million for long-lived assets (property, equipment and improvements) and $1,032.5 million related to purchases of short-term marketable securities, offset by $321.2 million of proceeds from maturities of short-term marketable securities.
Net cash used in investing activities in fiscal 2016 primarily consisted of expenditures of $118.8 million for long-lived assets (property, equipment and improvements) and $261.2 million related to purchases of short-term marketable securities, offset by $290.5 million of proceeds from maturities of short-term marketable securities.
Net cash used in investing activities in fiscal 2015 primarily consisted of expenditures of $149.2 million for long-lived assets (property, equipment and improvements) and $462.9 million related to purchases of short-term marketable securities, offset by $380.3 million of proceeds from maturities of short-term marketable securities.
Cash Flows from Financing Activities
Net cash provided by financing activities in fiscal 2017 primarily consisted of $569.3 million of proceeds, net of issuance costs, from the issuance of the 2036 Convertible Senior Notes and $16.9 million of proceeds from the issuance of shares under our employee stock option and stock purchase plans.
Net cash provided by financing activities in fiscal 2016 primarily consisted of proceeds from the issuance of shares under our employee stock option and stock purchase plans.
Net cash provided by financing activities in fiscal 2015 primarily consisted of proceeds from the issuance of shares under our employee stock option and stock purchase plans.
Contractual Obligations and Commercial Commitments
Our contractual obligations at April 30, 2017 were as follows (in thousands):
 
 
 
Payments Due by Period
 
 
 
Less than
 
 
 
 
 
After
Contractual Obligations
Total
 
1 year
 
1-3 Years
 
4-5 Years
 
5 Years
0.5% Convertible Senior Notes due 2033
$
258,750

 
$
—

 
$
258,750

 
$
—

 
$
—

0.5% Convertible Senior Notes due 2036
575,000

 
—

 
—

 
575,000

 
—

Interest on 2033 Notes (a)
2,103

 
1,294

 
809

 
—

 
—

Interest on 2036 Notes (b)
13,297

 
2,875

 
5,750

 
4,672

 
—

Operating leases (c)
42,167

 
10,324

 
17,172

 
6,747

 
7,924

Purchase obligations (d)
196,935

 
196,935

 
—

 
—

 
—

Total contractual obligations
$
1,088,252

 
$
211,428

 
$
282,481

 
$
586,419

 
$
7,924

_________________
(a)
Includes interest on our 0.50% Convertible Senior Notes due 2033 through December 2018 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2018.
(b)
Includes interest on our 0.50% Convertible Senior Notes due 2036 through December 2021 as we have the right to redeem the notes in whole or in part at any time on or after December 22, 2021.
(c)
Includes operating lease obligations that have been accrued as restructuring charges.
(d)
Includes open purchase orders with terms that generally allow us the option to cancel or reschedule the order, subject to various restrictions and limitations.

The 2033 Notes are convertible into shares of our common stock at specified conversion prices by the holders at their option prior to the close of business on the business day immediately preceding June 15, 2033 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 26, 2014 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2033 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the

32

foregoing circumstances have occurred. The 2033 Notes are also subject to redemption by the holders in December 2018, 2023 and 2028. These notes are redeemable by us, in whole or in part, at any time on or after December 22, 2018.
The 2036 Notes are convertible into shares of our common stock at specified conversion prices by the holders at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing circumstances have occurred. The 2036 Notes are also subject to redemption by the holders in December 2021, 2026 and 2031. These notes are redeemable by us, in whole or in part, at any time on or after December 22, 2021.
Operating lease obligations consist primarily of base rents for facilities we occupy at various locations.
Purchase obligations represent all open purchase orders and contractual obligations in the ordinary course of business for which we have not received the goods or services. Although open purchase orders are considered enforceable and legally binding, their terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
Sources of Liquidity and Capital Resource Requirements
At April 30, 2017 , our principal sources of liquidity consisted of approximately $1.2 billion of cash and cash equivalents and short-term investments, of which approximately $81 million was held by our foreign subsidiaries.
We believe that our existing balances of cash, cash equivalents and short-term investments, together with the cash expected to be generated from future operations, will be sufficient to meet our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional financing to fund our operations in the future, to finance future acquisitions that we may propose to undertake or to repay or otherwise retire all of our outstanding 2033 Notes, in the aggregate principal amount of $258.8 million, which are subject to redemption by the holders in December 2018, 2023 and 2028, or our 2036 Notes, in the aggregate principal amount of $575.0 million, which are subject to redemption by the holders in December 2021, 2026 and 2031. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations will be adversely affected.

Off-Balance-Sheet Arrangements
At April 30, 2017 and May 1, 2016 , we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are typically established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
As of April 30, 2017 , we had $833.8 million of aggregate principal amount of convertible notes with a fixed interest rate of 0.5% outstanding. The fair value of this debt as of April 30, 2017 was approximately $808.0 million, based on the market price of the notes in the open market as of or close to April 30, 2017 . The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the convertible notes. We are subject to significant fluctuations in fair market value of the debt due to the volatility of the stock market. We had no variable interest rate debt outstanding which would expose us to interest rate risk.
We invest in equity instruments of privately-held companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when our ownership interest is less than 20% and we do not have the ability to exercise significant influence. At April 30, 2017 , we had an investment in three privately-held companies in the amount of $603,000 accounted for under the cost method and one privately-held company in the amount of $2.6 million accounted for under the equity method. For such non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and

33
Table of Contents

record impairment losses when events and circumstances indicate that such assets are impaired. During the third quarter of fiscal 2017, we recorded a $643,000 impairment loss related to one of our cost method minority investments as a result of an equity transaction by the investee at a price per share lower than the value at which the investment was carried by us. No such impairment was recorded in fiscal 2016 and 2015. If our investment in a privately-held company becomes readily marketable upon the company’s completion of an initial public offering or its acquisition by another company, our investment would be subject to significant fluctuations in fair market value due to the volatility of the stock market.
We have subsidiaries located in China, Malaysia, Israel, Australia, Korea, Sweden, Germany, India and Singapore. Due to the relative volume of transactions through these subsidiaries, we do not believe that we have significant exposure to foreign currency exchange risks. We currently do not use derivative financial instruments to mitigate this exposure. We continue to review this issue and may consider hedging certain foreign exchange risks through the use of currency forwards or options in future years.

34
Table of Contents

Item 8.
Financial Statements and Supplementary Data

FINISAR CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX


35
Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
Sunnyvale, California
We have audited the accompanying consolidated balance sheets of Finisar Corporation as of April 30, 2017 and May 1, 2016 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the years then ended. In connection with our audits of the financial statements, we have audited the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Finisar Corporation at April 30, 2017 and May 1, 2016 and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Finisar Corporation's internal control over financial reporting as of April 30, 2017 , based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 16, 2017 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

San Jose, California
June 16, 2017


36

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
Sunnyvale, California
We have audited Finisar Corporation's internal control over financial reporting as of April 30, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Finisar Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Item 9A, Management's Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's 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 company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's 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.
In our opinion, Finisar Corporation maintained, in all material respects, effective internal control over financial reporting as of April 30, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Finisar Corporation as of April 30, 2017 and May 1, 2016 and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows for the fiscal years then ended and our report dated June 16, 2017 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

San Jose, California
June 16, 2017


37

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Finisar Corporation
We have audited the accompanying consolidated statements of operations, comprehensive income (loss), stockholders' equity and cash flows of Finisar Corporation for the year ended May 3, 2015. Our audit also included the financial statement schedule for the year ended May 3, 2015 listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Finisar Corporation for the year ended May 3, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the year ended May 3, 2015, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

San Jose, California
June 19, 2015



38

FINISAR CORPORATION
CONSOLIDATED BALANCE SHEETS
 
April 30, 2017
 
May 1, 2016
 
(In thousands, except share and per share data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
260,228

 
$
299,221

Short-term investments
976,595

 
263,255

Accounts receivable, net of allowance for doubtful accounts of $756 at April 30, 2017 and $727 at May 1, 2016
272,377

 
249,257

Accounts receivable, other
48,807

 
44,576

Inventories
331,388

 
273,291

Prepaid expenses and other current assets
19,462

 
18,483

Total current assets
1,908,857

 
1,148,083

Property, equipment and improvements, net
383,919

 
348,613

Purchased intangible assets, net
13,019

 
18,388

Goodwill
106,736

 
106,736

Minority investments
3,162

 
4,051

Other assets
16,964

 
14,655

Deferred tax assets
107,225

 
4,845

Total assets
$
2,539,882

 
$
1,645,371

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
140,568

 
$
141,591

Accrued compensation
54,520

 
36,084

Other current liabilities
43,698

 
42,206

Deferred revenue
13,015

 
13,529

Total current liabilities
251,801

 
233,410

Long-term liabilities:
 
 
 
Convertible debt
707,782

 
229,393

Other non-current liabilities
17,594

 
14,882

Total liabilities
977,177

 
477,685

Commitments and contingencies


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at April 30, 2017 and May 1, 2016
—

 
—

Common stock, $0.001 par value, 750,000,000 shares authorized, 111,519,186 shares issued and outstanding at April 30, 2017 and 107,696,314 shares issued and outstanding at May 1, 2016
112

 
108

Additional paid-in capital
2,784,204

 
2,605,859

Accumulated other comprehensive (loss) income
(57,864
)
 
(25,188
)
Accumulated deficit
(1,163,747
)
 
(1,413,093
)
Total stockholders' equity
1,562,705

 
1,167,686

Total liabilities and stockholders’ equity
$
2,539,882

 
$
1,645,371


See accompanying notes.

39
Table of Contents

FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
 
(In thousands, except per share data)
Revenues
$
1,449,303

 
$
1,263,166

 
$
1,250,944

Cost of revenues
941,164

 
901,316

 
888,573

Amortization of acquired developed technology
4,492

 
6,129

 
5,739

Impairment of long-lived assets
—

 
1,071

 
5,722

Gross profit
503,647

 
354,650

 
350,910

Operating expenses:
 
 
 
 


Research and development
217,914

 
203,389

 
202,089

Sales and marketing
50,644

 
46,619

 
46,178

General and administrative
55,442

 
60,117

 
72,856

Amortization of purchased intangibles
2,762

 
2,672

 
2,948

Impairment of long-lived assets
—

 
830

 
45

Total operating expenses
326,762

 
313,627

 
324,116

Income from operations
176,885

 
41,023

 
26,794

Interest income
6,763

 
2,345

 
1,811

Interest expense
(20,363
)
 
(11,750
)
 
(12,022
)
Other income (expense), net
(91
)
 
3,213

 
4,099

Income before income taxes
163,194

 
34,831

 
20,682

Provision for (benefit from) income taxes
(86,152
)
 
(362
)
 
8,795

Net income
$
249,346

 
$
35,193

 
$
11,887

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
2.26

 
$
0.33

 
$
0.12

Diluted
$
2.19

 
$
0.32

 
$
0.11

Shares used in computing net income per share:
 
 
 
 
 
Basic
110,405

 
106,678

 
101,408

Diluted
114,097

 
108,870

 
104,970


See accompanying notes.

40
Table of Contents

FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
 
Fiscal Years Ended
 
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Net income
 
$
249,346

 
$
35,193

 
$
11,887

Other comprehensive loss, net of tax:
 
 
 
 
 
 
Change in cumulative foreign currency translation adjustment
 
(32,676
)
 
(26,049
)
 
(19,164
)
Total other comprehensive loss, net of tax
 
(32,676
)
 
(26,049
)
 
(19,164
)
Total comprehensive income (loss)
 
$
216,670

 
$
9,144

 
$
(7,277
)

See accompanying notes.


41
Table of Contents

FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated
Deficit
 
Total
Finisar
Stockholders’
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
 
(In thousands, except share data)
 
 
Balance at April 27, 2014
97,281,665

 
$
97

 
$
2,456,110

 
$
20,025

 
$
(1,460,173
)
 
$
1,016,059

Net income
—

 
—

 
—

 
—

 
11,887

 
11,887

Other comprehensive loss, net
—

 
—

 
—

 
(19,164
)
 
—

 
(19,164
)
Issuance of shares pursuant to equity plans, net of tax withholdings
2,453,668

 
3

 
(754
)
 
—

 
—

 
(751
)
Issuance of shares pursuant to employee stock purchase plan
525,032

 
—

 
8,584

 
—

 
—

 
8,584

Share-based compensation expense
—

 
—

 
44,600

 
—

 
—

 
44,600

Employer contribution to defined contribution retirement plan
122,979

 
—

 
2,563

 
—

 
—

 
2,563

Issuance of shares upon conversion of convertible debt
3,748,473

 
4

 
40,011

 
—

 
—

 
40,015

Balance at May 3, 2015
104,131,817

 
104

 
2,551,114

 
861

 
(1,448,286
)
 
1,103,793

Net income
—

 
—

 
—

 
—

 
35,193

 
35,193

Other comprehensive loss, net
—

 
—

 
—

 
(26,049
)
 
—

 
(26,049
)
Issuance of shares pursuant to equity plans, net of tax withholdings
2,761,884

 
3

 
(1,923
)
 
—

 
—

 
(1,920
)
Issuance of shares pursuant to employee stock purchase plan
639,149

 
1

 
8,980

 
—

 
—

 
8,981

Share-based compensation expense
—

 
—

 
45,243

 
—

 
—

 
45,243

Employer contribution to defined contribution retirement plan
163,464

 
—

 
2,445

 
—

 
—

 
2,445

Balance at May 1, 2016
107,696,314

 
108

 
2,605,859

 
(25,188
)
 
(1,413,093
)
 
1,167,686

Net income
—

 
—

 
—

 
—

 
249,346

 
249,346

Other comprehensive loss, net
—

 
—

 
—

 
(32,676
)
 
—

 
(32,676
)
Issuance of shares pursuant to equity plans, net of tax withholdings
2,997,093

 
3

 
7,553

 
—

 
—

 
7,556

Issuance of shares pursuant to employee stock purchase plan
740,739

 
1

 
9,333

 
—

 
—

 
9,334

Share-based compensation expense
—

 
—

 
49,879

 
—

 
—

 
49,879

Employer contribution to defined contribution retirement plan
85,040

 
—

 
2,782

 
—

 
—

 
2,782

Equity component of senior convertible notes, net of allocated issuance costs
—

 
—

 
108,798

 
—

 
—

 
108,798

Balance at April 30, 2017
111,519,186

 
$
112

 
$
2,784,204

 
$
(57,864
)
 
$
(1,163,747
)
 
$
1,562,705

See accompanying notes.

42
Table of Contents

FINISAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
 
(In thousands)
Operating activities
 
 
 
 
 
Net income
$
249,346

 
$
35,193

 
$
11,887

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
87,016

 
85,264

 
82,699

Amortization
8,203

 
9,416

 
9,374

Stock-based compensation expense
52,598

 
47,508

 
46,613

Amortization of discount on held-to-maturity investments
(2,045
)
 
—

 
—

Equity in losses (earnings) of equity method investment
250

 
(1,200
)
 
(730
)
(Gain) loss on sale or retirement of assets and asset disposal groups
149

 
(405
)
 
(1,955
)
Impairment of long-lived assets
—

 
1,901

 
5,767

Impairment of minority investment
643

 
—

 
—

Amortization of discount on convertible debt
16,935

 
9,604

 
9,153

Deferred tax (benefit) expense
(101,534
)
 
(4,928
)
 
—

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(23,120
)
 
(36,023
)
 
12,238

Inventories
(73,582
)
 
(4,221
)
 
(37,542
)
Other assets
(8,365
)
 
19,728

 
(17,098
)
Accounts payable
(1,023
)
 
10,081

 
12,024

Accrued compensation
18,436

 
11,166

 
(17,505
)
Deferred revenue
(514
)
 
3,679

 
(5,816
)
Other liabilities
4,439

 
(3,163
)
 
4,488

Net cash provided by operating activities
227,832

 
183,600

 
113,597

Investing activities
 
 
 
 
 
Additions to property, equipment and improvements
(140,106
)
 
(118,825
)
 
(149,193
)
Proceeds from sale of property and equipment and asset disposal groups
504

 
844

 
2,477

Purchases of short-term investments
(1,032,474
)
 
(261,179
)
 
(462,935
)
Maturities of short-term investments
321,178

 
290,542

 
380,276

Purchase of intangible assets
(1,885
)
 
—

 
—

Acquisitions, net of cash acquired
—

 
—

 
(2,728
)
Proceeds from sale of minority investments
—

 
—

 
1,470

Net cash used in investing activities
(852,783
)
 
(88,618
)
 
(230,633
)
Financing activities
 
 
 
 
 
Repayments of term loans
(234
)
 
(265
)
 
(337
)
Proceeds from issuance of 0.50% Convertible Senior Notes due 2036, net of issuance costs
569,302

 
—

 
—

Proceeds from issuance of shares under equity plans and employee stock purchase plan
16,890

 
7,061

 
11,715

Net cash provided by financing activities
585,958

 
6,796

 
11,378

Net increase (decrease) in cash and cash equivalents
(38,993
)
 
101,778

 
(105,658
)
Cash and cash equivalents at beginning of year
299,221

 
197,443

 
303,101

Cash and cash equivalents at end of year
$
260,228

 
$
299,221

 
$
197,443

 
 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
 
 
Cash paid for interest
$
1,298

 
$
1,314

 
$
2,340

Cash paid for taxes
$
11,108

 
$
9,590

 
$
4,984

 
 
 
 
 
 
Supplemental disclosure of non-cash transactions
 
 
 
 
 
Issuance of common stock upon conversion of 5.0% Convertible Senior Notes due 2029
$
—

 
$
—

 
$
40,015

See accompanying notes

43
Table of Contents

FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Basis of Presentation
The Company has a 52- or 53-week fiscal year ending on the Sunday closest to the last day of April in each year. Fiscal 2017, 2016 and 2015 had 52, 52, and 53 weeks, respectively, and fiscal 2018 will have 52 weeks. Fourth quarter of fiscal 2015 was a 14-week quarter. The consolidated financial statements include the accounts of Finisar Corporation and its controlled subsidiaries (collectively “Finisar” or the “Company”). Intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior year balance sheet and statement of cash flows related to presentation of deferred tax assets resulting from the release of deferred tax valuation allowance in fiscal 2017. These changes had no effect on previously reported results of operations and stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

2.
Summary of Significant Accounting Policies
Revenue Recognition
The Company’s revenue transactions consist predominately of sales of products to customers. Product revenues are generally recognized in the period in which persuasive evidence of an arrangement exists, title and risk of loss have passed to the customer, generally upon shipment, the price is fixed or determinable, and collectability is reasonably assured.
At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses associated with sales, recorded as a component of cost of revenues. The Company’s customers generally do not have return rights. However, the Company has established an allowance for estimated customer returns, based on historical experience, which is netted against revenue.
Sales to certain distributors are made under agreements providing distributor price adjustments and rights of return under certain circumstances. Revenue and costs relating to sales to distributors with price protection and rights of return are deferred until products are sold by the distributors to end customers. Revenue recognition depends on notification from the distributor that product has been sold to the end customer. Also reported by the distributor are product resale price, quantity and end customer shipment information, as well as inventory on hand. Deferred revenue on shipments to distributors reflects the effects of distributor price adjustments and the amount of gross margin expected to be realized when distributors sell-through products purchased from us. Accounts receivable from distributors are recognized and inventory is relieved when title to inventories transfers, typically upon shipment from us at which point we have a legally enforceable right to collection under normal payment terms.
Segment Reporting
The Financial Accounting Standards Board's (FASB) authoritative guidance regarding segment reporting establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has determined that it operates in one reportable segment comprising optical subsystems and components. Optical subsystems consist primarily of transceivers sold to manufacturers of storage and networking equipment for data communication and telecommunication applications. Optical subsystems also include multiplexers, de-multiplexers and optical add/drop modules for use in telecommunication applications. Optical components consist primarily of packaged lasers and photo-detectors which are incorporated in transceivers for data communication and telecommunication applications.

44
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Concentrations of Risk
Financial instruments which potentially subject the Company to concentrations of credit risk include cash and cash equivalents, short-term investment and accounts receivable. The Company invests only in high-quality credit instruments and maintains its cash, cash equivalents and short-term investments with several high-quality credit financial institutions. Deposits held with banks, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits.
Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have not been material. The Company’s ten largest customers represented 56% and 55% of total accounts receivable at April 30, 2017 and May 1, 2016 , respectively. Two customers, Jabil and Flextronics, represented 12% and 11% , respectively, of total accounts receivable as of April 30, 2017 . One customer, Huawei, represented 18% of total accounts receivable as of May 1, 2016 .
Sales to the Company’s ten largest customers represented 56% , 56% and 55% of total revenues during fiscal 2017 , 2016 and 2015 , respectively. Two customers, Cisco Systems and Huawei, represented 12% and 11% , respectively, of total revenues during fiscal 2017. Two customers, Huawei and Cisco Systems, represented 12% and 11% , respectively, of total revenues during fiscal 2016. One customer, Cisco Systems, represented 14% of total revenues during fiscal 2015.
The Company relies on single and limited suppliers for a number of key components. The Company relies primarily on a limited number of significant independent contract manufacturers for the production of certain key components and subassemblies, including lasers, modulators, and printed circuit boards.
Included in the Company’s consolidated balance sheet at April 30, 2017 are the net assets of the Company’s operations located at its overseas facilities totaling approximately $510.9 million .
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. Any translation adjustments resulting from this process are shown separately as a component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses are included in the determination of net income (loss). Included in the determination of net income for fiscal 2017 , 2016 and 2015 were $539,000 , $(1.2) million and $(479,000) , respectively, of gains (losses) on foreign currency transactions.
Research and Development
Research and development expenditures are charged to operations as incurred.
Shipping and Handling Costs
The Company records costs related to shipping and handling in cost of sales for all periods presented.
Cash and Cash Equivalents
Finisar’s cash equivalents consist of money market funds. Finisar considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents.
Minority Investments
The Company uses the cost method of accounting for investments in companies that do not have a readily determinable fair value in which it holds an interest of less than 20% and over which it does not have the ability to exercise significant influence. For entities in which the Company holds an interest of greater than 20% or in which the Company does have the ability to exercise significant influence, the Company uses the equity method. Under the equity method of accounting, investments are stated at initial cost and are adjusted for subsequent additional investments and the Company's proportionate share of earnings or losses and distributions. Such proportionate share of earnings or losses is included in other income (expense), net in the consolidated statement of operations. In determining if and when a decline in the market value of these investments below their carrying value is other-than-temporary, the Company evaluates the market conditions, offering prices, trends of earnings and cash flows, price multiples, prospects for liquidity and other key measures of performance. The Company’s policy is to recognize an impairment in the value of its minority equity investments when clear evidence of an

45
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


impairment exists. Factors considered in this assessment include (a) the completion of a new equity financing that may indicate a new value for the investment, (b) the failure to complete a new equity financing arrangement after seeking to raise additional funds or (c) the commencement of proceedings under which the assets of the business may be placed in receivership or liquidated to satisfy the claims of debt and equity stakeholders. The Company’s minority investments in private companies are generally made in exchange for preferred stock with a liquidation preference that is intended to help protect the underlying value of its investment.
Fair Value Accounting
The FASB authoritative guidance regarding fair valuation defines fair value and establishes a framework for measuring fair value and expands the related disclosure requirements. The guidance requires or permits fair value measurements with certain exclusions. It provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under this guidance must maximize the use of observable inputs and minimize the use of unobservable inputs. It describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and
Level 3 inputs are unobservable inputs based on the Company's own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable and accrued liabilities have carrying amounts which approximate fair value due to the short-term maturity of these instruments. See Note 12 for additional details regarding the fair value of the Company’s financial instruments.
Allowance for Doubtful Accounts
The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where, subsequent to delivery, the Company becomes aware of a customer’s potential inability to meet its obligations, it records a specific allowance for the doubtful account to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For all other customers, the Company recognizes an estimated allowance for doubtful accounts based on the length of time the receivables are past due and historical actual bad debt history. A material adverse change in a major customer’s ability to meet its financial obligations to the Company could result in a material reduction in the estimated amount of accounts receivable that can ultimately be collected and an increase in the Company’s general and administrative expenses for the shortfall. Accounts receivable are charged against the allowance for doubtful accounts when identified as fully uncollectable.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
The Company permanently writes down to its estimated net realizable value the cost of inventory that the Company specifically identifies and considers obsolete or excessive to fulfill future sales estimates. The Company defines obsolete inventory as inventory that will no longer be used in the manufacturing process. Excess inventory is generally defined as inventory in excess of projected usage and is determined using management’s best estimate of future demand, based upon information then available to the Company. The Company also considers: (1) parts and subassemblies that can be used in alternative finished products, (2) parts and subassemblies that are unlikely to be engineered out of the Company’s products, and (3) known design changes which would reduce the Company’s ability to use the inventory as planned. Inventory on hand that is in excess of future demand is written down to its estimated net realizable value. Obligations to purchase inventory acquired by subcontractors based on forecasts provided by the Company are recognized at the time such obligations arise.

46
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Property, Equipment and Improvements
Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally three years to seven years, except for buildings which are depreciated over 25 to 30 years . Land is carried at acquisition cost and not depreciated. Leased land is depreciated over the life of the lease.
Goodwill and Other Intangible Assets
Goodwill, purchased technology and other intangible assets resulting from acquisitions are accounted for under the acquisition method. Intangible assets with finite lives are amortized over their estimated useful lives. Amortization of purchased technology and other intangibles has been recorded on a straight-line basis over periods ranging from three to 15 years. Goodwill is assessed for impairment annually or more frequently when an event occurs or circumstances change between annual impairment tests that would more likely than not reduce the fair value of the reporting unit holding the goodwill below its carrying value.
Accounting for the Impairment of Long-Lived Assets
The Company periodically evaluates whether changes have occurred to long-lived assets that would require revision of the remaining estimated useful life of the property, improvements and finite-lived intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows.
During the first quarter of fiscal 2016 and the third quarter of fiscal 2015, the Company recorded a $1.9 million and $5.8 million , respectively, charges for the impairment of long-lived assets (primarily machinery and equipment) due to the projected cash flows associated with these assets not supporting the carrying values of these assets. In accordance with the guidance for the impairment of long-lived assets, these assets were written down to their estimated fair value of zero, which was determined based on an income approach using the discounted cash flow method.
Restructuring Costs
The Company recognizes liability for exit and disposal activities when the liability is incurred. Facilities consolidation charges are calculated using estimates and are based upon the remaining future lease commitments for vacated facilities from the date of facility consolidation, net of estimated future sublease income. The estimated costs of vacating these leased facilities are based on market information and trend analysis, including information obtained from third party real estate sources.
Stock-Based Compensation Expense
The Company measures and recognizes compensation expense for all stock-based payment awards made to employees and directors including restricted stock units and employee stock purchases under the Company’s Employee Stock Purchase Plan based on estimated fair values. The Company uses the grant-date fair value of its common stock to determine the fair value of restricted stock units. The Company uses the Black-Scholes option pricing model to determine the fair value of employee stock purchase rights. The fair value of the awards is recognized as expense in the consolidated statements of operations under the single-option approach on a straight-line basis over the requisite service periods.
Income Taxes
The Company uses the liability method to account for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. Deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities and their reported amounts, along with net operating loss carryforwards and credit carryforwards. This method also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized.
The Company provides for income taxes based upon the geographic composition of worldwide earnings and tax regulations governing each region. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Also, the Company’s current effective tax rate assumes that United States income taxes are not provided for the undistributed earnings of non-United States subsidiaries. The Company intends to indefinitely reinvest the earnings of all foreign corporate subsidiaries for past and subsequent accumulated earnings.

47
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Recent and Pending Adoption of New Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update simplifying the presentation of debt issuance costs as a direct deduction from the carrying value of the debt liability rather than showing the debt issuance costs as an asset. The Company adopted this update in the first quarter of fiscal 2017 on a retrospective basis. Accordingly, $1.6 million of unamortized debt issuance costs were reclassified from Other Assets to Convertible Debt in the consolidated balance sheet as of May 1, 2016.
In March 2016, the FASB issued an accounting standards update simplifying several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted all provisions of this update in the first quarter of fiscal 2017. Adoption of this update did not have a significant effect on the Company's consolidated financial position, results of operations and cash flows. As part of this adoption, the Company made an accounting policy election to account for forfeitures as they occur, rather than continue to estimate the number of stock-based awards that are expected to vest.
In May 2014, the FASB, jointly with the International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue recognition. Provisions of this new standard are effective for annual reporting periods (including interim reporting periods within those annual periods) beginning after December 15, 2016. In April 2015, the FASB proposed a deferral of this standard's effective date by one year. The proposed deferral allows early adoption at the original effective date. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The Company plans to adopt this standard using a modified retrospective approach. The Company's assessment has identified a change in revenue recognition timing on sales made to distributors. The Company expects to recognize revenue upon delivery of products to the distributor (in accordance with established shipping and delivery terms) rather than deferring recognition until the distributor sells the product to the end customer. On the date of the initial application, the Company will remove the deferred revenue on sales to distributors through a cumulative adjustment to retained earnings. The Company is continuing its evaluation of any additional potential effects on its consolidated financial position, results of operations and cash flows, as well as changes to its accounting policies and disclosures, from adoption of this standard.
In February 2016, the FASB issued an accounting standards update which replaces the current lease accounting standard. The update will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the timing of adoption and potential effect on its consolidated financial position, results of operations and cash flows from adoption of this update.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position, results of operations and cash flows upon adoption.

3.    Earnings Per Share
Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options and restricted stock units (under the treasury stock method), 5.0% Convertible Senior Notes due 2029 (on an as-if-converted basis), 0.50% Convertible Senior Notes due 2033 (under the treasury stock method), and 0.50% Convertible Senior Notes due 2036 (under the treasury stock method) outstanding during the period.

48
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following table presents the calculation of basic and diluted net income per share:
 
Fiscal Years Ended
 (in thousands, except per share amounts)
April 30, 2017

May 1, 2016

May 3, 2015
Numerator:
 
 
 
 
 
Net income
$
249,346

 
$
35,193

 
$
11,887

Numerator for basic income per share
$
249,346

 
$
35,193

 
$
11,887

Effect of dilutive securities:
 
 
 
 
 
Interest expense on 5.0% Convertible Senior Notes due 2029
n/a

 
n/a

 
—

Numerator for diluted income per share
$
249,346

 
$
35,193

 
$
11,887

Denominator:
 
 
 
 
 
Denominator for basic income per share - weighted average shares
110,405

 
106,678

 
101,408

Effect of dilutive securities:
 
 
 
 
 
Stock options and restricted stock units
3,692

 
2,192

 
3,562

5.0% Convertible Senior Notes due 2029
n/a

 
n/a

 
—

Dilutive potential common shares
3,692

 
2,192

 
3,562

Denominator for diluted income per share 
114,097


108,870

 
104,970

Net income per share:
 
 
 
 
 
Basic
$
2.26


$
0.33

 
$
0.12

Diluted
$
2.19


$
0.32

 
$
0.11


The following table presents common shares related to potentially dilutive securities excluded from the calculation of diluted net income per share as their effect would have been anti-dilutive:
 
Fiscal Years Ended
(in thousands) 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Stock options and restricted stock units
207

 
3,069

 
880

Conversion of 5.0% Convertible Senior Notes due 2029
n/a

 
n/a

 
—

 
207

 
3,069

 
880


0.50% Convertible Senior Notes due 2033 and 0.50% Convertible Senior Notes due 2036 were excluded from the calculation of diluted earnings per share under the treasury stock method for the periods when the conversion price exceeded the average market price for the Company's common stock.

4.    Intangible Assets
The following tables reflect intangible assets as of April 30, 2017 and May 1, 2016 :
 
April 30, 2017
(in thousands)
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Purchased technology
$
107,759

 
$
(101,367
)
 
$
6,392

Purchased trade name
1,172

 
(1,172
)
 
—

Purchased customer relationships
21,344

 
(17,752
)
 
3,592

Purchased internal use software and backlog
2,816

 
(2,643
)
 
173

Purchased patents
4,505

 
(1,643
)
 
2,862

Total
$
137,596

 
$
(124,577
)
 
$
13,019


49
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
May 1, 2016
(in thousands)
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying Amount
Purchased technology
$
107,759

 
$
(96,875
)
 
$
10,884

Purchased trade name
1,172

 
(1,172
)
 
—

Purchased customer relationships
21,344

 
(15,700
)
 
5,644

Purchased internal use software and backlog
2,816

 
(2,317
)
 
499

Purchased patents
2,620

 
(1,259
)
 
1,361

Total
$
135,711

 
$
(117,323
)
 
$
18,388


The amortization expense on intangible assets was $7.3 million , $8.8 million and $8.7 million for fiscal 2017 , 2016 and 2015 , respectively.
Estimated amortization expense for each of the next five fiscal years and thereafter as of April 30, 2017 is as follows:
Year
Amount (in thousands)
2018
$
5,141

2019
3,696

2020
2,224

2021
704

2022
306

Beyond 2022
948

Total
$
13,019


5.    Investments

Fixed Income Securities
The Company's portfolio of fixed income securities consists of commercial paper notes and term bank certificates of deposit. All of the Company's investments in fixed income securities have original maturity (maturity at the purchase date) of less than 12 months and are reported as short-term investments in the consolidated balance sheets as of April 30, 2017 and May 1, 2016 . All of the Company's investments in fixed income securities are classified as held-to-maturity since the Company has the positive intent and ability to hold these investments until maturity. These investments are carried at amortized cost.

The Company's investments in fixed income securities as of April 30, 2017 and May 1, 2016 were as follows:
 
April 30, 2017
 
May 1, 2016
 
 
Gross Unrealized
 
 
 
Gross Unrealized
 
(in thousands)
Amortized Cost
Gains
Losses
Fair Value
 
Amortized Cost
Gains
Losses
Fair Value
Commercial paper
$
571,592

$
—

$
—

$
571,592

 
$
—

$
—

$
—

$
—

Certificates of deposit
405,003

—

—

405,003

 
263,255

—

—

263,255

Total
$
976,595

$
—

$
—

$
976,595

 
$
263,255

$
—

$
—

$
263,255


The Company monitors its investment portfolio for impairment on a periodic basis. In order to determine whether a decline in fair value is other-than-temporary, the Company evaluates, among other factors: the duration and extent to which the fair value has been less than the carrying value; the Company's financial condition and business outlook, including key operational and cash flow metrics, current market conditions and future trends in its industry; the Company's relative competitive position within the industry; and the Company's intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. A decline in the fair value of the security below amortized cost that is deemed other-than-temporary is charged to earnings, resulting in the establishment of a new cost basis for the affected securities. During fiscal 2017, 2016 and 2015 there were no realized gains or losses, and the Company did not recognize any other-than-temporary impairments.


50
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Minority Investments
The Company's portfolio of minority investments consists of investments in privately held early stage companies. These investments were primarily motivated by the Company's desire to gain early access to new technology. The Company’s investments are passive in nature in that the Company generally does not obtain representation on the board of directors of the companies in which it invests.
The Company's minority investments as of April 30, 2017 and May 1, 2016 were as follows:
 
April 30, 2017
 
May 1, 2016
(dollars in thousands)
Number of Investments
Carrying Value
 
Number of Investments
Carrying Value
Cost method
three
$
603

 
three
$
1,242

Equity method
one (1)
2,559

 
one
2,809

Total
 
$
3,162

 
 
$
4,051

(1) As of April 30, 2017 , the Company had a 19.9% ownership interest in this company.
During the third quarter of fiscal 2017, the Company recorded a $643,000 impairment loss (included in other income (expense) in the consolidated statement of operations) related to one of its cost method minority investments as a result of an equity transaction by the investee at a price per share lower than the value at which the investment was carried by the Company.

6.    Inventories
Inventories consist of the following (in thousands):
As of
 
April 30, 2017
 
May 1, 2016
Raw materials
$
66,560

 
$
52,948

Work-in-process
173,302

 
142,757

Finished goods
91,526

 
77,586

Total inventories
$
331,388

 
$
273,291

Including: inventory consigned to others
$
40,363

 
$
44,600


7.    Property, Equipment and Improvements, Net
Property, equipment and improvements consist of the following (in thousands):
As of
 
April 30, 2017
 
May 1, 2016
Land and buildings
$
100,850

 
$
98,586

Computer equipment
68,309

 
64,155

Office equipment, furniture and fixtures
5,764

 
5,901

Machinery and equipment
587,442

 
518,649

Leasehold property and improvements
44,724

 
41,826

Total
807,089

 
729,117

Accumulated depreciation and amortization
(423,170
)
 
(380,504
)
Property, equipment and improvements, net
$
383,919

 
$
348,613


8.    Other Current Liabilities
Other current liabilities consist of the following (in thousands):
As of
 
April 30, 2017
 
May 1, 2016
Warranty accrual (Note 9)
$
4,417

 
$
12,001

Other liabilities
39,281

 
30,205

Total
$
43,698

 
$
42,206



51
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


9.     Warranty
The Company generally offers a one-year limited warranty for its products. The specific terms and conditions of these warranties vary depending upon the product sold. The Company estimates the costs that may be incurred under its basic limited warranty and records a liability for the amount of such costs at the time revenue is recognized. Factors that affect the Company’s warranty liability include the historical and anticipated rates of warranty claims and cost to repair. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Changes in the Company’s warranty liability during the following periods were as follows:
 
As of
(in thousands)
April 30, 2017
 
May 1, 2016
Beginning balance
$
12,001

 
$
6,451

Additions during the period based on product sold
3,579

 
9,548

Change in estimates
(2,081
)
 
(734
)
Settlements and expirations
(9,082
)
 
(3,264
)
Ending balance
$
4,417

 
$
12,001


10.     Debt
0.50% Convertible Senior Notes Due 2036
In December 2016, the Company issued and sold $575.0 million in aggregate principal amount of 0.50% Convertible Senior Notes due 2036 (the "2036 Notes") at par. The terms of the 2036 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2036 Notes will mature on December 15, 2036, unless earlier repurchased, redeemed or converted. The 2036 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2036 Notes bear interest at a rate of 0.5% per year, payable semi-annually in arrears on June 15 and December 15 each year.
Holders of the 2036 Notes may convert their 2036 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2036 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 29, 2017 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of the 2036 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2036 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2036 Notes at any time, regardless of whether any of the foregoing circumstances have occurred. The conversion rate will initially equal 22.6388 shares of common stock per $1,000 principal amount of the 2036 Notes (which is equivalent to an initial conversion price of approximately $44.17 per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2036 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2021, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2036 Notes ("make-whole feature").
In the event of a fundamental change, holders will have the option to require the Company to redeem for cash any 2036 Notes held by them at a purchase price equal to 100% of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2036 Notes held by them on December 15, 2021, December 15, 2026 and December 15, 2031 at a redemption price equal to 100% of the principal amount of the 2036 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2036 Notes in whole or in part at any time on or after December 22, 2021 at 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2036 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.

52
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Because of its option to settle conversion of the 2036 Notes in cash, the Company separated the liability and equity components of the 2036 Notes. The carrying amount of the liability component at issuance date of $465.1 million was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2036 Notes of $109.9 million was allocated to the equity component. The resulting debt discount is amortized as interest expense. As of April 30, 2017 , the remaining debt discount amortization period was 56 months .
The 2036 Notes consisted of the following:
 
As of
(in thousands)
April 30, 2017
 
May 1, 2016
Liability component:
 
 
 
Principal
$
575,000

 
n/a
Unamortized debt discount
(103,022
)
 
n/a
Unamortized debt issuance costs
(4,281
)
 
n/a
Net carrying amount of the liability component
$
467,697

 
n/a
Carrying amount of the equity component
$
109,881

 
n/a

The Company incurred approximately $5.7 million in transaction costs in connection with the issuance of the 2036 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs of $4.6 million , allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of $1.1 million , allocated to the equity component, were recognized as a reduction of additional paid-in capital.

The following table sets forth interest expense information related to the 2036 Notes:
 
Fiscal Years Ended
(in thousands, except percentages)
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Contractual interest expense
$
1,001

 
n/a
 
n/a
Amortization of the debt discount
6,859

 
n/a
 
n/a
Amortization of issuance costs
334

 
n/a
 
n/a
Total interest cost
$
8,194

 
n/a
 
n/a
Effective interest rate on the liability component
4.85
%
 
n/a
 
n/a
The Company applies the treasury stock method to determine the potential dilutive effect of the 2036 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2036 Notes in cash.
0.50% Convertible Senior Notes Due 2033
In December 2013, the Company issued and sold $258.8 million in aggregate principal amount of 0.50% Convertible Senior Notes due 2033 (the "2033 Notes") at par. The terms of the 2033 Notes are governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2033 Notes will mature on December 15, 2033, unless earlier repurchased, redeemed or converted. The 2033 Notes are senior unsecured and unsubordinated obligations of the Company, and are effectively subordinated to the Company's secured indebtedness and the indebtedness and other liabilities of the Company's subsidiaries. The 2033 Notes bear interest at a rate of 0.5% per year, payable semi-annually in arrears on June 15 and December 15 each year.
Holders of the 2033 Notes may convert their 2033 Notes at their option prior to the close of business on the business day immediately preceding June 15, 2033 only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on January 26, 2014 (and only during such fiscal quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period ("measurement period"), in which the trading price per $1,000 principal amount of the 2033 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company's common stock and the applicable conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after June 15, 2033 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2033 Notes at any time, regardless of whether any of the foregoing circumstances have

53
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


occurred. The conversion rate will initially equal 33.1301 shares of common stock per $1,000 principal amount of the 2033 Notes (which is equivalent to an initial conversion price of approximately $30.18 per share of common stock), subject to adjustment. Upon conversion of a note, the Company will pay or deliver, as the case may be, either cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election, as provided in the indenture. If holders elect to convert their 2033 Notes in connection with a "fundamental change" (as defined in the indenture) that occurs on or before December 22, 2018, the Company will, to the extent provided in the indenture, increase the conversion rate applicable to such 2033 Notes ("make-whole feature").
In the event of a fundamental change, holders will have the option to require the Company to redeem for cash any 2033 Notes held by them at a purchase price equal to 100% of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. Holders also have the option to require the Company to redeem for cash any 2033 Notes held by them on December 15, 2018, December 15, 2023 and December 15, 2028 at a redemption price equal to 100% of the principal amount of the 2033 Notes plus accrued and unpaid interest to, but excluding, the redemption date. The Company may redeem the 2033 Notes in whole or in part at any time on or after December 22, 2018 at 100% of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date.
The Company considered the features embedded in the 2033 Notes, that is, the conversion feature, the holders' put feature, the Company's call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Because of its option to settle conversion of the 2033 Notes in cash, the Company separated the liability and equity components of the 2033 Notes. The carrying amount of the liability component at issuance date of $209.1 million was calculated by estimating the fair value of similar liabilities without a conversion feature. The residual principal amount of the 2033 Notes of $49.6 million was allocated to the equity component. The resulting debt discount is amortized as interest expense. As of April 30, 2017 , the remaining debt discount amortization period was 19 months .
The 2033 Notes consisted of the following:
 
As of
(in thousands)
April 30, 2017
 
May 1, 2016
Liability component:
 
 
 
Principal
$
258,750

 
$
258,750

Unamortized debt discount
(17,663
)
 
(27,739
)
Unamortized debt issuance costs
(1,002
)
 
(1,618
)
Net carrying amount of the liability component
$
240,085

 
$
229,393

Carrying amount of the equity component
$
49,648

 
$
49,648


The Company incurred approximately $3.8 million in transaction costs in connection with the issuance of the 2033 Notes. These costs were allocated to the liability and equity components in proportion to the allocation of proceeds. Transaction costs of $3.1 million , allocated to the liability component, were recognized as a non-current asset and are being amortized. Transaction costs of $725,000 , allocated to the equity component, were recognized as a reduction of additional paid-in capital.

The following table sets forth interest expense information related to the 2033 Notes:
 
Fiscal Years Ended
(in thousands, except percentages)
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Contractual interest expense
$
1,294

 
$
1,294

 
$
1,294

Amortization of the debt discount
10,076

 
9,604

 
9,153

Amortization of issuance costs
616

 
616

 
616

Total interest cost
$
11,986

 
$
11,514

 
$
11,063

Effective interest rate on the liability component
4.87
%
 
4.87
%
 
4.87
%
The Company applies the treasury stock method to determine the potential dilutive effect of the 2033 Notes on net income per share as a result of the Company's intent and stated policy to settle the principal amount of the 2033 Notes in cash.

54
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


5.0% Convertible Senior Notes Due 2029
In October 2009, the Company issued and sold $100 million in aggregate principal amount of 5.0%  Convertible Senior Notes due 2029 (the "2029 Notes"). The terms of the 2029 Notes were governed by an indenture by and between the Company and Wells Fargo Bank, National Association, as Trustee. The 2029 Notes were scheduled to mature on October 15, 2029, unless earlier repurchased, redeemed or converted. Interest on the 2029 Notes is payable semi-annually in arrears at a rate of 5.0% per annum on each April 15 and October 15, beginning on April 15, 2010. The 2029 Notes were senior unsecured and unsubordinated obligations of the Company, and ranked equally in right of payment with the Company’s other unsecured and unsubordinated indebtedness, but were effectively subordinated to the Company’s secured indebtedness and liabilities to the extent of the value of the collateral securing those obligations, and structurally subordinated to the indebtedness and other liabilities of the Company’s subsidiaries. Holders had the right to convert the 2029 Notes into shares of the Company’s common stock, at their option, at any time prior to the close of business on the trading day before the stated maturity date. The initial conversion rate was 93.6768  shares of Common Stock per $1,000 principal amount of the 2029 Notes (equivalent to an initial conversion price of approximately $10.68 per share of common stock), subject to adjustment upon the occurrence of certain events. Upon conversion of the 2029 Notes, holders were to receive shares of common stock unless the Company obtained consent from a majority of the holders to deliver cash or a combination of cash and shares of common stock in satisfaction of its conversion obligation.
Holders had the right to require the Company to redeem, for cash, all or part of their 2029 Notes upon a “fundamental change” at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date. Holders also had the right to require the Company to redeem, for cash, any of their 2029 Notes on October 15, 2014, October 15, 2016, October 15, 2019 and October 15, 2024 at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.
The Company had the right to redeem the 2029 Notes in whole or in part at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, at any time on or after October 22, 2014 if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for at least 20 trading days within a period of 30 consecutive trading days ending within five trading days of the date on which the Company provides the notice of redemption.
The Company considered the embedded derivative in the 2029 Notes, that is, the conversion feature, and concluded that it was indexed to the Company’s common stock and would be classified as equity, were it to be accounted for separately and thus was not required to be bifurcated and accounted for separately from the debt.
The Company also considered the Company’s call feature and the holders’ put feature in the event of a change in control under the provisions of FASB authoritative guidance, and concluded that they need not be accounted for separately from the debt.
In fiscal 2011, the Company entered into privately-negotiated agreements with existing holders of the 2029 Notes to exchange an aggregate of approximately $60.0 million principal amount of the 2029 Notes. Following these exchanges, $40.0 million principal amount of the 2029 Notes remained outstanding.
As explained above, the terms of the 2029 Notes included a provision that allowed the holders to require the Company to redeem any of their notes on October 15, 2014. Accordingly, all $40.0 million of the principal amount of the 2029 Notes outstanding as of April 27, 2014 was classified as a current liability as of that date.
During October 2014, all holders of the 2029 Notes exercised their rights to exchange their 2029 Notes for 3,748,473 shares of the Company's common stock. All conversions were in accordance with the original terms of the 2029 Notes and no gain or loss was recognized as a result of conversion.

11.     Commitments
The Company’s future commitments at April 30, 2017 included minimum payments under non-cancelable operating lease agreements, including operating lease obligations that have been accrued as restructuring charges, as follows (in thousands):
 
 
 
Payments Due by Period
 
Total
 
Less Than 1 Year
 
1-3 Years
 
4-5 Years
 
After 5 Years
Operating leases
$
42,167

 
$
10,324

 
$
17,172

 
$
6,747

 
$
7,924

Rent expense under the non-cancelable operating leases was approximately $9.0 million , $9.4 million and $10.7 million for the years ended April 30, 2017 , May 1, 2016 and May 3, 2015 , respectively. The Company subleases a portion of its

55
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


facilities that it considers to be in excess of its requirements. Sublease income was $373,000 , $168,000 and $218,000 for the years ended April 30, 2017 , May 1, 2016 and May 3, 2015 , respectively. Certain leases have scheduled rent increases which have been included in the above table. Other leases contain provisions to adjust rental rates for inflation during their terms, most of which are based on to-be-published indices. Rents subject to these adjustments are included in the above table based on current rates.

12.     Fair Value of Financial Instruments
The Company's financial instruments not measured at fair value on a recurring basis as of April 30, 2017 and May 1, 2016 were as follows:
 
April 30, 2017
 
May 1, 2016
 
Carrying
 
Fair Value
 
Carrying
 
Fair Value
(in thousands)
Amount
 
Level 1
Level 2
Level 3
Total
 
Amount
 
Level 1
Level 2
Level 3
Total
Commercial paper
$
571,592

 
$
—

$
571,592

$
—

$
571,592

 
$
—

 
$
—

$
—

$
—

$
—

Certificates of deposit
$
405,003

 
$
—

$
405,003

$
—

$
405,003

 
$
263,255

 
$
—

$
263,255

$
—

$
263,255

2033 Notes
$
240,085

 
$
273,628

$
—

$
—

$
273,628

 
$
229,393

 
$
247,430

$
—

$
—

$
247,430

2036 Notes
$
467,697

 
$
534,391

$
—

$
—

$
534,391


n/a


n/a

n/a

n/a

n/a


The fair values of the Company's investments in commercial papers and certificates of deposit are based on quoted market prices for similar instruments or non-binding market prices that are corroborated by observable market data. The fair values of the 2033 Notes and the 2036 Notes are based on the price in the open market as of or close to the respective balance sheet dates. The difference between the carrying value and the fair value is primarily due to the spread between the conversion price and the market value of the shares underlying the conversion as of each respective balance sheet date.

13.     Stockholders’ Equity

Accumulated Other Comprehensive Income
Cumulative foreign currency translation adjustment was the only component of the accumulated other comprehensive income as of April 30, 2017 and May 1, 2016 .
Common Stock and Preferred Stock
As of April 30, 2017 , Finisar is authorized to issue 750,000,000  shares of $0.001  par value common stock and 5,000,000  shares of $0.001  par value preferred stock. The holder of each share of common stock has the right to one vote and is entitled to receive dividends when and as declared by the Company’s Board of Directors. The Company has never declared or paid dividends on its common stock. The Company has authority to issue up to 5,000,000  shares of preferred stock, $0.001  par value. The preferred stock may be issued in one or more series having such rights, preferences and privileges as may be designated by the Company’s board of directors.
Common stock subject to future issuance as of April 30, 2017 is as follows:
Exercise of outstanding stock options
581,172

Vesting of restricted stock awards
6,618,360

Available for grant under employee stock incentive plan
8,844,712

Available for grant under employee stock purchase plan
2,870,077

Total
18,914,321

Employee Stock Purchase Plan
In September 2009, the Company’s board of directors adopted the 2009 Employee Stock Purchase Plan (the "ESPP"), which was approved by the stockholders in November 2009. An amended and restated version of ESPP was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated ESPP, 7,000,000 shares of the Company’s common stock have been reserved for issuance, and the term of the ESPP is scheduled to expire on September 1, 2024. The ESPP permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee’s total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower.

56
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Employee Stock Plans
In September 1999, Finisar’s 1999 Stock Option Plan was adopted by the board of directors and approved by the stockholders. An amendment and restatement of the 1999 Stock Option Plan, including renaming it the 2005 Stock Incentive Plan (the “2005 Plan”), was approved by the board of directors in September 2005 and by the stockholders in October 2005. An amended and restated version of the 2005 Plan was approved by the Company's board of directors in June 2014 and by the stockholders in September 2014. Under the restated 2005 Plan, a total of 22,500,000 shares of common stock have been reserved for issuance, and the term of the 2005 Plan is scheduled to expire on September 1, 2024. The types of stock-based awards available under the 2005 Plan includes stock options, stock appreciation rights, restricted stock units (“RSUs”) and other stock-based awards which vest upon the attainment of designated performance goals or the satisfaction of specified service requirements or, in the case of certain RSUs or other stock-based awards, become payable upon the expiration of a designated time period following such vesting events. Options generally vest over five years and have a maximum term of 10  years. RSUs generally vest over four years. As of April 30, 2017 and May 1, 2016 , no shares were subject to repurchase.
Stock Options
 
Number of Shares
 
Weighted-Average Exercise Price
Stock options outstanding as of May 1, 2016
1,609,211

 
$
15.68

Stock options exercised
(763,424
)
 
$
14.98

Stock options canceled
(264,615
)
 
$
30.46

Stock options outstanding as of April 30, 2017
581,172

 
$
9.85


The total intrinsic value of stock options exercised during fiscal 2017 , 2016 and 2015 was $9.9 million , $3.3 million and $3.4 million , respectively. All stock options outstanding as of April 30, 2017 are fully vested and exercisable. The aggregate intrinsic value of stock options outstanding as of April 30, 2017 was $7.8 million . The weighted-average remaining contractual life of stock options outstanding as of April 30, 2017 was 1.7 years .
Restricted Stock Units
 
Number of Shares
 
Weighted-Average Grant-Date Fair Value
RSUs unvested as of May 1, 2016
6,214,199

 
$
18.19

RSUs granted
3,162,717

 
$
19.77

RSUs vested
(2,441,964
)
 
$
17.19

RSUs forfeited
(316,592
)
 
$
18.79

RSUs unvested as of April 30, 2017
6,618,360

 
$
19.28


The weighted-average grant-date fair value of RSUs granted during fiscal 2016 and 2015 was $19.02 and $19.55 , respectively. The aggregate intrinsic value of RSUs outstanding as of April 30, 2017 was $151.2 million . The total grant-date fair value of RSUs vested during fiscal 2017 , 2016 and 2015 was $42.0 million , $41.7 million and $36.3 million , respectively.
As of April 30, 2017 , the Company had $89.2 million of unrecognized compensation expense related to RSUs grants. These expenses are expected to be recognized over a weighted-average period of 2.3 years .
Share-Based Compensation Cost
The following table sets forth the detailed allocation of the share-based compensation expense for the fiscal years ended April 30, 2017 , May 1, 2016 and May 3, 2015 which was reflected in the Company’s operating results:

57
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


 
Fiscal Years Ended
(in thousands)
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Share-based compensation expense by caption:
 
 
 
 
 
Cost of revenues
$
11,409

 
$
10,357

 
$
9,908

Research and development
20,425

 
18,245

 
17,764

Sales and marketing
7,170

 
6,667

 
6,251

General and administrative
10,875

 
9,974

 
10,677

Total
$
49,879

 
$
45,243

 
$
44,600

 
 
 
 
 
 
Share-based compensation expense by type of award:
 
 
 
 
 
RSUs
$
46,577

 
$
42,162

 
$
41,729

Employee stock purchase rights under ESPP
3,302

 
3,081

 
2,871

Total
$
49,879

 
$
45,243

 
$
44,600


Total share-based compensation cost capitalized as part of inventory was $2.5 million and $2.5 million as of April 30, 2017 and May 1, 2016 , respectively.
The fair value of employee stock purchase rights granted under the ESPP in fiscal 2017 , 2016 and 2015 was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions:
 
 
Fiscal Years Ended
 
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Expected term (in years)
 
0.75

 
0.75

 
0.75

Volatility
 
40% - 43%

 
32% - 54%

 
34% - 53%

Risk-free interest rate
 
0.36 - 0.89%

 
0.11 - 0.70%

 
0.07 - 0.21%

Dividend yield
 
—
%
 
—
%
 
—
%

The expected term of employee stock purchase rights is the average of the remaining purchase periods under each offering period. The Company calculated the volatility factor based on the Company’s historical stock prices. The Company bases the risk-free interest rate used in the Black-Scholes option-pricing model on constant maturity bonds from the Federal Reserve in which the maturity approximates the expected term. The Black-Scholes option-pricing model calls for a single expected dividend yield as an input. The Company has not issued and does not expect to issue any dividends.
The weighted-average estimated per share fair value of purchase rights granted under the ESPP in fiscal 2017 , 2016 and 2015 was $5.34 , $2.79 and $3.06 , respectively.
The Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the expected life of the stock-based award and the stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, recorded share-based compensation expense could have been materially different from that depicted above.

14.     Employee Benefit Plan
The Company maintains a defined contribution retirement plan under the provisions of Section 401(k) of the Internal Revenue Code which covers all eligible employees. Employees are eligible to participate in the plan on the first day of the calendar year quarter immediately following completion of eligibility requirements as required by the plan.
Under the plan, each participant may contribute up to 20% of his or her pre-tax gross compensation up to a statutory limit, which is $18,000 for each calendar year 2017 , 2016 and 2015 . All amounts contributed by participants and earnings on participant contributions are fully vested at all times. The Company may contribute an amount equal to one-half of the first 6% of each participant’s contribution. The Company may make the matching contribution in shares of Finisar common stock in lieu of cash. Contributions made in shares will be allocated to each participant’s account using the share price on the date the Company matching contribution is made to the plan.
The Company made a discretionary matching contribution of 85,040 shares for a total contribution of $2.7 million during the year ended April 30, 2017 . The Company’s expenses related to this plan were $2.8 million , $2.4 million and $2.6 million for the fiscal years ended April 30, 2017 , May 1, 2016 and May 3, 2015 , respectively.

58
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



15.     Income Taxes
The components of income tax expense (benefit) consist of the following (in thousands):
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Current:
 
 
 
 
 
Federal
$
—

 
$
—

 
$
—

State
532

 
(9
)
 
209

Foreign
14,850

 
4,575

 
8,814

 
15,382

 
4,566

 
9,023

Deferred:
 
 
 
 
 
Federal
(102,305
)
 
—

 
(607
)
State
(1,008
)
 
—

 
(14
)
Foreign
1,779

 
(4,928
)
 
393

 
(101,534
)
 
(4,928
)
 
(228
)
Provision for (benefit from) income taxes
$
(86,152
)
 
$
(362
)
 
$
8,795


Income (loss) before income taxes consists of the following (in thousands):
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
U.S.
$
96,648

 
$
(2,579
)
 
$
(29,300
)
Foreign
66,546

 
37,410

 
49,982

 
$
163,194

 
$
34,831

 
$
20,682


A reconciliation of the income tax provision at the federal statutory rate and the effective rate is as follows:
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
Expected income tax provision (benefit) at U.S. federal statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
Foreign rate differential
(5.0
)
 
(40.5
)
 
(46.9
)
Share-based compensation expense
0.7

 
14.1

 
29.6

Non-deductible transaction costs
—

 
0.1

 
0.5

Valuation allowance
(83.0
)
 
(2.5
)
 
49.1

Other permanent adjustments
0.7

 
4.4

 
—

Research and development credits
(2.3
)
 
(12.6
)
 
(15.0
)
Other
1.0

 
1.0

 
(9.8
)
 
(52.9
)%
 
(1.0
)%
 
42.5
 %


59
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The components of deferred taxes consist of the following (in thousands):

As of
 
April 30, 2017
 
May 1, 2016
Deferred tax assets:
 
 
 
Inventory adjustments
$
9,161

 
$
10,740

Accruals and reserves
12,731

 
14,890

Tax credits
38,092

 
34,094

Net operating loss carryforwards
106,297

 
100,193

Gain/loss on investments under equity or cost method
814

 
8,522

Depreciation and amortization
8,462

 
3,498

Purchase accounting for intangible assets
2,707

 
7,137

Capital loss carryforward
7,183

 
189

Acquired intangibles
4,343

 
6,298

Stock compensation
9,345

 
9,162

Total deferred tax assets
199,135

 
194,723

Valuation allowance
(30,804
)
 
(162,892
)
Net deferred tax assets
168,331

 
31,831

Deferred tax liabilities:
 
 
 
Acquired intangibles
(2,360
)
 
(3,613
)
Debt discount
(43,796
)
 
(10,774
)
Depreciation and amortization
(16,233
)
 
(13,037
)
Total deferred tax liabilities
(62,389
)
 
(27,424
)
Total net deferred tax assets (liabilities)
$
105,942

 
$
4,407

 
 
 
 
Reported as:
 
 
 
Deferred tax assets
$
107,225

 
$
4,845

Deferred tax liabilities
(1,283
)
 
(438
)
Total net deferred tax assets (liabilities)
$
105,942

 
$
4,407


Realization of deferred tax assets is dependent upon future taxable earnings in related tax jurisdictions. In the past, due to U.S. operating losses in previous years and continuing U.S. earnings volatility which did not allow sustainable profitability, management had established and maintained a full valuation allowance for the U.S. deferred tax assets. During the fourth quarter of fiscal 2017, the Company assessed that it is more likely than not that it will realize the majority of the U.S. deferred tax assets, except for deferred tax assets related to California research and development credits and capital losses. The positive evidence as of April 30, 2017 that outweighed the negative evidence to release the valuation allowance included the fiscal 2017 and three year cumulative profitability driven by strong demand of certain new generation products, availability of resources to expand manufacturing capacity, and forecasted U.S. operating profits in the future periods. Accordingly, during the fourth quarter of fiscal 2017, the Company released $103.3 million of valuation allowance on these deferred tax assets. The remaining valuation allowance relates to deferred tax assets, for which management believes it is not more likely than not to be realized in future periods. The Company's valuation allowance increased/(decreased) from the prior year by approximately $(132.1) million , $(1.5) million and $7.7 million in fiscal 2017 , 2016 and 2015 , respectively.

As of April 30, 2017 , the Company had federal, state and foreign net operating loss carryforwards of approximately $276.8 million , $13.2 million and $34.3 million , respectively, and federal and state tax credit carryforwards of approximately $34.3 million and $26.8 million , respectively. With the exception of California R&D credit, which can be carried forward indefinitely, the net operating loss and tax credit carryforwards will expire at various dates beginning in fiscal 2020 through 2037 , if not utilized. Utilization of the Company's U.S. net operating loss and tax credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section 382 and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and tax credit carryforwards before utilization.


60
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company's manufacturing operations in Malaysia operate under a tax holiday which will expire at the beginning of the second quarter of fiscal 2022 . In fiscal 2017 , the aggregate dollar and per share effect of the tax holiday was $6.1 million and $0.05 per share, respectively. As of April 30, 2017 , there was no provision for U.S. income taxes for undistributed earnings of the Company's foreign subsidiaries as it is currently the Company's intention to reinvest these earnings indefinitely in operations outside the United States. The cumulative amount of foreign earnings to be permanently re-invested as of April 30, 2017 was approximately $349.8 million . The Company believes it is not practicable to determine the Company's tax liability that may arise in the event of a future repatriation. If repatriated, these earnings could result in a tax expense at the current U.S. federal statutory tax rate of 35% , subject to available net operating losses and other factors. Tax on undistributed earnings may also be reduced by foreign tax credits that may be generated in connection with the repatriation of earnings.

A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows (in thousands):
 
Fiscal Years Ended
 
April 30, 2017
 
May 1, 2016
 
May 3, 2015
 
 
 
 
 
 
Beginning balance
$
16,411

 
$
14,653

 
$
13,432

Additions for tax positions related to current year
1,675

 
1,331

 
975

Additions for tax positions related to prior years
3,372

 
902

 
246

Reductions for tax positions related to prior years (lapse of statute of limitations)
—

 
(475
)
 
—

Ending balance
$
21,458

 
$
16,411

 
$
14,653


Excluding the effects of recorded valuation allowances for deferred tax assets, $16.7 million of the unrecognized tax benefits would favorably impact the effective tax rate in future periods if recognized.

It is the Company's belief that no significant changes in the unrecognized tax benefit positions will occur within 12 months from April 30, 2017 .

The Company records interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of April 30, 2017 and May 1, 2016 , the Company had accrued $822,000 and zero , respectively, for interest and penalties related to uncertain tax positions.

The Company and its subsidiaries are subject to taxation in various state jurisdictions as well as the U.S. The Company's U.S. federal and state income tax returns are generally not subject to examination by the tax authorities for tax years before fiscal 2009 . For all federal and state net operating loss and credit carryovers, the statute of limitations does not begin until the carryover items are utilized. The taxing authorities can examine the validity of the carryover items and if necessary, adjustments may be made to the carryover items. The Company's Malaysia , Singapore , China , Australia , Israel , and Sweden income tax returns are generally not subject to examination by the tax authorities for tax years before 2011 , 2012 , 2011 , 2011 , 2005 and 2010 , respectively. The Company's Australia subsidiary is under audit for tax year 2011 and after. The Company's Israel subsidiary received a tax assessment from Israel Tax Authority (ITA) for tax years 2005 to 2007. The Company has filed an appeal and anticipates no material tax liability.

16.     Segments and Geography Information
The Company has one reportable segment consisting of optical subsystems and components. Optical subsystems consist primarily of transmitters, receivers, transceivers, transponders and active optical cables that provide the fundamental optical-electrical, or optoelectronic, interface for interconnecting the electronic equipment used in building communication networks, including the switches, routers and servers used in wireline networks as well as the antennas and base stations for wireless networks. Optical components consists primarily of packaged lasers, receivers and photodetectors for data communication and telecommunication applications and passive optical components used in telecommunication applications.

61
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The following is a summary of revenues from sales to unaffiliated customers within geographic areas based on the location of the entity purchasing the Company’s products:
 
Fiscal Years Ended
(in thousands)
April 30, 2017
 
May 1, 2016
 
May 3, 2015
United States
$
476,763

 
$
408,700

 
$
425,066

China
358,561

 
307,327

 
242,916

Malaysia
122,699

 
123,057

 
148,258

Rest of the world
491,280

 
424,082

 
434,704

Totals
$
1,449,303

 
$
1,263,166

 
$
1,250,944

Revenues generated in the United States are all from sales to customers located in the United States.
The following is a summary of long-lived assets within geographic areas based on the location of the assets:
 
As of
(in thousands)
April 30, 2017
 
May 1, 2016
United States
$
133,426

 
$
118,000

Malaysia
49,779

 
53,762

China
205,423

 
182,119

Rest of the world
36,105

 
33,444

 
$
424,733

 
$
387,325


The increase in long-lived assets was primarily due to the additions of property and improvements to the Company's manufacturing facilities in China.

17.     Legal Matters

The Company accrues a liability for legal contingencies when it believes that it is both probable that a liability has been incurred and that it can reasonably estimate the amount of the loss. The Company reviews these accruals and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel and other relevant information. To the extent new information is obtained and the Company's views on the probable outcomes of claims, suits, assessments, investigations or legal proceedings change, changes in the Company's accrued liabilities would be recorded in the period in which such determination is made. For the matters referenced below, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. In addition, in accordance with the relevant authoritative guidance, for matters which the likelihood of material loss is at least reasonably possible, the Company provides disclosure of the possible loss or range of loss; however, if a reasonable estimate cannot be made, the Company will provide disclosure to that effect.

Due to the nature of the Company's business, it is subject to claims alleging infringement by various Company products and services. The Company believes that it has meritorious defenses to the allegations made in its pending cases and intends to vigorously defend these lawsuits; however, it is unable currently to determine the ultimate outcome of these or similar matters. In addition, the Company is a defendant in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcomes of these cases, the Company believes that it is not reasonably possible that the ultimate outcomes will materially and adversely affect its business, financial position, results of operations or cash flows.

Class Action and Shareholder Derivative Litigation
Several securities class action lawsuits related to the Company's March 8, 2011 earnings announcement alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 have been filed in the United States District Court for the Northern District of California on behalf of a purported class of persons who purchased stock between December 2, 2010 through March 8, 2011. The named defendants are the Company and Jerry Rawls, its Chief Executive Officer and Chairman of the Board, and Eitan Gertel, its former Chief Executive Officer. To date, no specific amount of damages has been alleged. The cases were consolidated, lead plaintiff was appointed and a consolidated complaint was filed. The Company filed a motion to dismiss the case. On January 16, 2013, the District Court granted the Company's motion to dismiss and granted the lead

62
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


plaintiffs leave to amend the consolidated complaint. An amended consolidated complaint was filed on February 6, 2013. Thereafter, the Company filed a renewed motion to dismiss the case. On September 30, 2013, the District Court granted the Company's motion and dismissed the case with prejudice, and plaintiff appealed. On January 8, 2016, the Ninth Circuit Court of Appeals reversed the judgment in part for further proceedings in the District Court. On July 15, 2016, lead plaintiff filed a Second Amended Complaint in the District Court. On August 19, 2016, the Company moved to dismiss. On May 1, 2017, the District Court denied the motion and a case scheduling order has been issued.

In addition, two purported shareholder derivative lawsuits related to the Company's March 8, 2011 earnings announcement have been filed in the California Superior Court for the County of Santa Clara, and a third derivative lawsuit has been filed in the United States District Court for the Northern District of California. The complaints assert claims for alleged breach of fiduciary duty, unjust enrichment, and waste on behalf of the Company. Named as defendants are the members of the Company's board of directors and certain officers, including Jerry Rawls, the Company's Chief Executive Officer and Chairman of the Board, Eitan Gertel, the Company’s former Chief Executive Officer, and Kurt Adzema, the Company’s Chief Financial Officer. No specific amount of damages has been alleged and, by the derivative nature of the lawsuits, no damages will be alleged, against the Company. The state court cases have been consolidated and a lead plaintiff has been appointed to file a consolidated complaint. The derivative cases were stayed pending a ruling in the federal class action case. The plaintiff in the federal case will file an amended complaint by August 7, 2017.

Mears Technologies Litigation
On May 6, 2013, Mears Technologies, Inc. filed a complaint for patent infringement in the United States District Court for the Eastern District of Texas against the Company. The complaint alleged that Finisar's WSS products, ROADM line cards containing a Finisar WSS, and Waveshaper products infringe U.S. Patent No. 6,141,361. On June 17, 2014, the district court issued a claim construction order favorable to the Company. On October 6, 2014, the court denied a motion of the plaintiff to amend its infringement contentions in light of the court’s claim construction ruling. As a result, the plaintiff conceded that it was unable to pursue its infringement claims against the Company. On December 30, 2014, the court granted the Company’s motion for summary judgment of non-infringement. The plaintiff appealed the court’s claim construction ruling and the court’s denial of the plaintiff’s motion to amend its infringement contentions in light of the court’s claim construction ruling. The Company opposed this appeal. On January 11, 2017, the verdict of non-infringement was affirmed by the U.S. Court of Appeals for the Federal Circuit and the case has terminated.

Other
In the ordinary course of business, the Company is a party to litigation, claims and assessments in addition to those described above. Based on information currently available, management does not believe the impact of these other matters will have a material adverse effect on its business, financial condition, results of operations or cash flows of the Company.

18.    Guarantees and Indemnifications
Upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligations it assumes under that guarantee. As permitted under Delaware law and in accordance with the Company’s Bylaws, the Company indemnifies its officers and directors for certain events or occurrences, subject to certain limits, while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The Company may terminate the indemnification agreements with its officers and directors upon 90  days written notice, but termination will not affect claims for indemnification relating to events occurring prior to the effective date of termination. The maximum amount of potential future indemnification is unlimited; however, the Company has a director and officer liability insurance policy that may enable it to recover a portion of any future amounts paid.
The Company enters into indemnification obligations under its agreements with other companies in its ordinary course of business, including agreements with customers, business partners, and insurers. Under these provisions the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or the use of the Company’s products. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.
The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of April 30, 2017 . To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.


63
FINISAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


19.    Financial Information by Quarter (Unaudited)
 
Three Months Ended
 
April 30, 2017 (1)
 
January 29, 2017
 
October 30, 2016
 
July 31, 2016
 
May 1, 2016
 
January 31, 2016
 
November 1, 2015
 
August 2, 2015 (2)
 
(In thousands, except per share data)
Revenues
$
357,527

 
$
380,588

 
$
369,863

 
$
341,325

 
$
318,794

 
$
309,206

 
$
321,136

 
$
314,030

Gross profit
$
125,164

 
$
136,637

 
$
133,681

 
$
108,165

 
$
90,442

 
$
87,740

 
$
89,091

 
$
87,377

Income from operations
$
40,841

 
$
54,906

 
$
52,828

 
$
28,311

 
$
14,136

 
$
10,458

 
$
9,368

 
$
7,061

Net income
$
130,245

 
$
46,386

 
$
48,766

 
$
23,949

 
$
13,072

 
$
12,084

 
$
6,644

 
$
3,393

Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.17

 
$
0.42

 
$
0.44

 
$
0.22

 
$
0.12

 
$
0.11

 
$
0.06

 
$
0.03

Diluted
$
1.13

 
$
0.40

 
$
0.43

 
$
0.22

 
$
0.12

 
$
0.11

 
$
0.06

 
$
0.03

Shares used in computing net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
111,438

 
110,956

 
110,407

 
108,820

 
107,612

 
107,180

 
106,635

 
105,286

Diluted
115,248

 
114,873

 
113,192

 
110,821

 
109,386

 
108,128

 
107,493

 
108,107


(1) Net income in the fourth quarter of fiscal 2017 includes a $103.3 million release of valuation allowance on U.S. deferred tax assets.

(2) Net income in the first quarter of fiscal 2016 includes a $1.9 million impairment charge for long-lived assets.



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Table of Contents

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.

Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Attached as exhibits to this report are certifications of our Chairman of the Board and our Chief Executive Officer, our co-principal executive officers, and our Chief Financial Officer, which are required in accordance with Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of April 30, 2017 , our management, with the participation of our Chairman of the Board, Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report for the purpose of ensuring that the information required to be disclosed by us in this report is made known to them by others on a timely basis, and that the information is accumulated and communicated to our management in order to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized, and reported by us within the time periods specified in the SEC’s rules.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
•
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
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s 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.
Under the supervision and with the participation of our management, including our Chairman of the Board, Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting as of April 30, 2017 . Management based its assessment on the criteria set forth in Internal Control - Integrated Framework ("2013 framework") issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that we maintained effective internal control over financial reporting as of April 30, 2017 .
The effectiveness of internal control over financial reporting as of April 30, 2017 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control
There were no changes in our internal control over financial reporting during the fiscal quarter ended April 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.
Other Information
None.


65
Table of Contents

PART III
The SEC allows us to include information required in this report by referring to other documents or reports we have already filed or will soon be filing. This is called “incorporation by reference.” We intend to file our definitive proxy statement for our 2017 annual meeting of stockholders (the “Proxy Statement”) pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report, and certain information to be contained therein is incorporated in this report by reference.

Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference from the sections captioned “Proposal No. 1 – Election of Directors”, “Corporate Governance”, “Executive Officers of the Registrant” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in the Proxy Statement.

Item 11.
Executive Compensation
The information required by this item is incorporated by reference from the sections captioned “Director Compensation” and “Executive Compensation and Related Matters” to be contained in the Proxy Statement.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from the sections captioned “Principal Stockholders and Share Ownership by Management” and “Equity Compensation Plan Information” to be contained in the Proxy Statement.

Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from the sections captioned “Corporate Governance” and “Certain Relationships and Related Transactions” to be contained in the Proxy Statement.

Item 14.
Principal Accountant Fees and Services
The information required by this item is incorporated by reference from the section captioned “Proposal No. 2 – Ratification of Appointment of Independent Registered Public Accounting Firm” to be contained in the Proxy Statement.


66
Table of Contents

PART IV

Item 15.
Exhibits and Financial Statement Schedules
(a) (1)  Financial Statements : See “Finisar Corporation Consolidated Financial Statements Index” in Part II, Item 8 of this report.
(2)  Financial Statement Schedules:
Schedule II — Consolidated Valuation and Qualifying Accounts
 
Balance at
Beginning
of Period
 
Additions
Charged to (Recoveries Offset)
Costs and
Expenses, Net
 
Write-Offs
 
Balance at
End of
Period
 
(in thousands)
Allowance for doubtful accounts
 
 
 
 
 
 
 
Balance at April 30, 2017
$
727

 
$
33

 
$
(4
)
 
$
756

Balance at May 1, 2016
$
1,136

 
$
(403
)
 
$
(6
)
 
$
727

Balance at May 3, 2015
$
929

 
$
207

 
$
—

 
$
1,136


(3) Exhibits :
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
Certain of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
•
may have been qualified by disclosures that were made to the other parties in connection with the negotiation of the agreements, which disclosures are not necessarily reflected in the agreements;
•
may apply standards of materiality that differ from those of a reasonable investor; and
•
were made only as of specified dates contained in the agreements and are subject to subsequent developments and changed circumstances.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date that these representations and warranties were made or at any other time. Investors should not rely on them as statements of fact.


67
Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
FINISAR CORPORATION
 
By
/s/ Jerry S. Rawls
 
 
Jerry S. Rawls
 
 
Chairman of the Board of Directors and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
June 16, 2017
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Jerry S. Rawls and Kurt Adzema, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this report on Form 10-K, and to file same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated:
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Jerry S. Rawls
 
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
 
June 16, 2017
Jerry S. Rawls
 
 
 
 
 
 
 
/s/ Kurt Adzema
 
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
June 16, 2017
Kurt Adzema
 
 
 
 
 
 
 
/s/ Michael C. Child
 
Director
 
June 16, 2017
Michael C. Child
 
 
 
 
 
 
 
/s/ Michael L. Dreyer
 
Director
 
June 16, 2017
Michael L. Dreyer
 
 
 
 
 
 
 
/s/ Roger C. Ferguson
 
Director
 
June 16, 2017
Roger C. Ferguson
 
 
 
 
 
 
 
/s/ Thomas E. Pardun
 
Director
 
June 16, 2017
Thomas E. Pardun
 
 
 
 
 
 
 
/s/ Helene Simonet
 
Director
 
June 16, 2017
Helene Simonet
 
 
 
 
 
 
 
/s/ Robert N. Stephens
 
Director
 
June 16, 2017
Robert N. Stephens
 
 


68
Table of Contents

EXHIBIT INDEX

Number
 
Title
2.1
 
Transaction Agreement, dated March 22, 2011, between Registrant and Ignis ASA(1)
3.1
 
Amended and Restated Bylaws of Registrant(2)
3.2
 
Restated Certificate of Incorporation of Registrant(3)
3.3
 
Certificate of Amendment to Restated Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on June 19, 2001(4)
3.4
 
Certificate of Elimination regarding Registrant’s Series A Preferred Stock(5)
3.5
 
Certificate of Designation regarding Registrant's Series RP Preferred Stock(6)
3.6
 
Certificate of Amendment to Restated Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on May 11, 2005(7)
3.7
 
Certificate of Amendment of the Restated Certificate of Incorporation of Registrant(8)
3.8
 
Amended and Restated Certificate of Incorporation of Registrant (9)
4.1
 
Specimen certificate representing Registrant's common stock(10)
4.2
 
Indenture, dated December 16, 2013, between Registrant and Wells Fargo Bank, National Association (11)
4.3
 
Indenture, dated December 21, 2016, between Registrant and Wells Fargo Bank, National Association (12)
10.1
 
Form of Indemnity Agreement between Registrant and Registrant’s directors and officers(13)
10.2
 
Lease Agreement by and between Finistar (CA-TX) Limited Partnership and Registrant, dated February 4, 2005(14)
10.3*
 
Amended and Restated Finisar Corporation 2005 Stock Incentive Plan(15)
10.4*
 
Form of Stock Option Agreement for options granted under the 2005 Stock Incentive Plan(16)
10.5*
 
Optium Corporation 2000 Stock Incentive Plan(17)
10.6*
 
Optium Corporation 2006 Stock Option and Incentive Plan and Israeli Addendum to 2006 Stock Option and Incentive Plan(18)
10.7
 
First Amendment to lease for 200 Precision Road, Horsham, PA by and between Horsham Property Assoc., L.P. and Optium Corporation dated January 4, 2008(19)
10.8*
 
Form of Stock Option Grant Notice under the Optium Corporation 2006 Stock Option and Incentive Plan(20)
10.9*
 
Form of Stock Option Grant Notice for Australian Employees under the Optium Corporation 2006 Stock Option and Incentive Plan(21)
10.10*
 
Form of Employee Incentive Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(22)
10.11*
 
Form of Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(23)
10.12*
 
Form of Non-Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(24)
10.13*
 
Form of Australian Employee Non-Qualified Stock Option Agreement under the Optium Corporation 2006 Stock Option and Incentive Plan(25)
10.14*
 
Form of Deferred Stock Award under Optium Corporation 2006 Stock Option and Incentive Plan(26)
10.15
 
Lease Agreement, dated December 7, 2007, by and between Charvic Pty Ltd and Optium Australia Pty Limited for premises located at 244 Young Street, Waterloo, NSW, Australia(27)
10.16
 
Lease Agreement between Optium Corporation and 200 Precision Drive Investors, LLC for the premises located at 200 Precision Drive, Horsham, Pennsylvania, dated September 26, 2006(28)
10.17*
 
Stock Option and Grant Notice, dated March 3, 2007, for Eitan Gertel(29)
10.18*
 
Stock Option and Grant Notice, dated March 3, 2007, for Mark Colyar(30)
10.19*
 
Stock Option and Grant Notice, dated March 3, 2007, for Christopher Brown(31)
10.20*
 
Stock Option and Grant Notices, dated March 14, 2006, February 14, 2006, June 23, 2005 and May 1, 2003, for Eitan Gertel(32)
10.21*
 
Stock Option and Grant Notices, dated August 28, 2006, for Christopher Brown(33)
10.22*
 
Finisar Executive Retention and Severance Plan, as Amended and Restated Effective March 7, 2011(34)

69
Table of Contents

EXHIBIT INDEX

Number
 
Title
10.23*
 
Amended and Restated Executive Employment Agreement between Registrant and Christopher Brown, dated December 31, 2008(35)
10.24*
 
Amended and Restated Executive Employment Agreement between Registrant and Mark Colyar, dated December 31, 2008(36)
10.25*
 
Amended and Restated Executive Employment Agreement between Registrant and Eitan Gertel, dated December 31, 2008(37)
10.26*
 
Form of Restricted Stock Unit Issuance Agreement(38)
10.27*
 
Form of Restricted Stock Unit Issuance Agreement — Officers(39)
10.28*
 
Form of Restricted Stock Unit Issuance Agreement — International(40)
10.29*
 
Form of Restricted Stock Unit Issuance Agreement — Israel(41)
10.30*
 
Form of Restricted Stock Unit Issuance Agreement — UK(42)
10.31*
 
Amended and Restated Finisar Corporation 2009 Employee Stock Purchase Plan(43)
10.32
 
Summary of the principal terms of the lease agreement - Wuxi, China(44)
10.33
 
Summary of the principal terms of the contract for state-owned construction land use right assignment - Wuxi, China(45)
10.34
 
Summary of the principal terms of the lease agreement - Jarfalla, Sweden(46)
10.35
 
Summary of the principal terms of the lease agreement - Shanghai, China(47)
10.36
 
Tenth Amendment to the Lease agreement by and between Registrant (as successor in interest to GenOA Corporation) and PSB Northern California Industrial Portfolio, Inc. (as successor in interest to RREEF America REIT II Corp. DDD, successor in interest to Speiker Properties, L.P.) dated January 10, 2000(48)
10.37
 
Lease agreement, dated October 21, 2013, by and between NMBE Pty Ltd and Finisar Australia Pty Ltd for premises located at 19-21 Rosebery Avenue, Rosebery, NSW, Australia(49)
10.38
 
Purchase Agreement dated December 10, 2013, by and between Finisar Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated(50)
10.39*
 
Separation and General Release Agreement(51)
10.40
 
Summary of the principal terms of the contract for state-owned construction land use right assignment - Wuxi, China
10.41*
 
Finisar Corporation Director Compensation Policy
21
 
Subsidiaries of the Registrant
23.1
 
Consent of Independent Registered Public Accounting Firm
23.2
 
Consent of Independent Registered Public Accounting Firm
24
 
Power of Attorney (incorporated by reference to the signature page of this Annual Report)
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS^
 
XBRL Instance Document
101.SCH^
 
XBRL Taxonomy Extension Schema
101.CAL^
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF^
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB^
 
XBRL Taxonomy Extension Label Linkbase
101.PRE^
 
XBRL Taxonomy Extension Presentation Linkbase
______________________________________
^
XBRL information is furnished and not filed for the purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.
* 
Compensatory plan or management contract

70
Table of Contents


(1)
Incorporated by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K filed March 28, 2011.
(2)
Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed December 5, 2014.
(3)
Incorporated by reference to Exhibit 3.5 to Registrant’s Registration Statement on Form S-1/A filed October 19, 1999 (File No. 333-87017).
(4)
Incorporated by reference to Exhibit 3.6 to Registrant’s Annual Report on Form 10-K filed July 18, 2001.
(5)
Incorporated by reference to Exhibit 3.8 to Registrant’s Registration Statement on Form S-3 filed December 18, 2001 (File No. 333-75380).
(6)
Incorporated by reference to Exhibit 99.2 to Registrant’s Registration Statement on Form 8-A12G filed on September 27, 2002.
(7)
Incorporated by reference to Exhibit 3.3 to Registrant’s Registration Statement on Form S-3 filed May 18, 2005 (File No. 333-125034).
(8)
Incorporated by reference to Exhibit 3.8 to Registrant’s Current Report on Form 8-K filed September 28, 2009.
(9)
Incorporated by reference to Exhibit 3.8 to Registrant’s Annual Report on Form 10-K filed July 1, 2010.
(10)
Incorporated by reference to the same numbered exhibit to Registrant’s Quarterly Report on Form 10-Q filed December 10, 2009.
(11)
Incorporated by reference to Exhibit 4.1 to Registrant's Current Report on Form 8-K filed December 16, 2013.
(12)
Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed December 21, 2016.
(13)
Incorporated by reference to Exhibit 10.1 to Registrant’s Registration Statement on Form S-1/A filed October 19, 1999 (File No. 333-87017).
(14)
Incorporated by reference to Exhibit 10.25 to Registrant’s Current Report on Form 8-K filed February 9, 2005.
(15)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed September 8, 2014.
(16)
Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed June 14, 2005.
(17)
Incorporated by reference to Exhibit 99.1 to Registrant’s Registration Statement on Form S-8 filed on September 19, 2008.
(18)
Incorporated by reference to Exhibit 99.2 to Registrant’s Registration Statement on Form S-8 filed on September 19, 2008.
(19)
Incorporated by reference to Exhibit 10.6 to Optium Corporation’s Quarterly Report on Form 10-Q filed on March 13, 2008.
(20)
Incorporated by reference to Exhibit 10.2 to Optium Corporation’s Quarterly Report on Form 10-Q filed on December 12, 2006.
(21)
Incorporated by reference to Exhibit 10.2 to Optium Corporation’s Quarterly Report on Form 10-Q filed on March 7, 2007.
(22)
Incorporated by reference to Exhibit 10.3 to Optium Corporation’s Quarterly Report on Form 10-Q filed on December 12, 2006.
(23)
Incorporated by reference to Exhibit 10.4 to Optium Corporation’s Quarterly Report on Form 10-Q filed on December 12, 2006.
(24)
Incorporated by reference to Exhibit 10.5 to Optium Corporation’s Quarterly Report on Form 10-Q filed on December 12, 2006.
(25)
Incorporated by reference to Exhibit 10.3 to Optium Corporation’s Quarterly Report on Form 10-Q filed on March 7, 2007.
(26)
Incorporated by reference to Exhibit 10.1 to Optium Corporation’s Current Report on Form 8-K filed on September 28, 2007.
(27)
Incorporated by reference to Exhibit 10.3 to Optium Corporation’s Quarterly Report on Form 10-Q filed on December 13, 2007.
(28)
Incorporated by reference to Exhibit 10.23 to Optium Corporation’s Registration Statement on Form S-1/A(333-135472) filed on October 11, 2006.
(29)
Incorporated by reference to Exhibit 10.4 to Optium Corporation’s, Quarterly Report on Form 10-Q filed on March 7, 2007.
(30)
Incorporated by reference to Exhibit 10.5 to Optium Corporation’s Quarterly Report on Form 10-Q filed on March 7, 2007.
(31)
Incorporated by reference to Exhibit 10.6 to Optium Corporation’s Quarterly Report on Form 10-Q filed on March 7, 2007.
(32)
Incorporated by reference to Exhibit 10.36 to Optium Corporation’s Annual Report on Form 10-K filed on October 24, 2007.
(33)
Incorporated by reference to Exhibit 10.38 to Optium Corporation’s Annual Report on Form 10-K filed on October 24, 2007.
(34)
Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed March 10, 2011.
(35)
Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K filed on January 7, 2009.

71
Table of Contents

(36)
Incorporated by reference to Exhibit 99.3 to Registrant’s Current Report on Form 8-K filed on January 7, 2009.
(37)
Incorporated by reference to Exhibit 99.4 to Registrant’s Current Report on Form 8-K filed on January 7, 2009.
(38)
Incorporated by reference to Exhibit 10.61 to Registrant’s Quarterly Report on Form 10-Q filed March 12, 2009.
(39)
Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed September 8, 2016.
(40)
Incorporated by reference to Exhibit 10.63 to Registrant’s Quarterly Report on Form 10-Q filed March 12, 2009.
(41)
Incorporated by reference to Exhibit 10.64 to Registrant’s Quarterly Report on Form 10-Q filed March 12, 2009.
(42)
Incorporated by reference to Exhibit 10.32 to Registrant’s Annual Report on Form 10-K filed June 26, 2014.
(43)
Incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed September 8, 2014.
(44)
Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed March 8, 2013.
(45)
Incorporated by reference to Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed March 8, 2013.
(46)
Incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed March 8, 2013.
(47)
Incorporated by reference to Exhibit 10.36 to Registrant’s Annual Report on Form 10-K filed June 24, 2013.
(48)
Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed March 10, 2016.
(49)
Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed December 5, 2013.
(50)
Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed March 6, 2014.
(51)
Incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed December 10, 2015.


72


Exhibit 10.40

Summary of the principal terms of the contract for state-owned construction land use
right assignment between Wuxi Bureau of Land and Resource and Finisar Optical
Communications Technology (Wuxi) Co., Ltd.
(Original document in Chinese)


Beginning on March 4, 2017, Finisar Optical Communications Technology (Wuxi) Co., Ltd., as Assignee, entered into a contract for state-owned construction land use right assignment with the Wuxi Bureau of Land and Resource, as Assignor, regarding property located at South of Wudu Road and East of Hong Ming Company, Wuxi, Jiangsu, People's Republic of China. The initial term of the agreement is for 50 years, starting on March 4, 2017. The agreement allows Assignee to make application to the Assignor to renew or extend the agreement not less than one year prior to the expiration of the initial term. The total assigned space is 26,353.5 square meters. Assignee paid a one time assignment fee of CNY 13,840,000.

The ownership of the assigned land belongs to the People's Republic of China. Assignee has rights of occupancy, use, earnings and disposal in accordance with laws and shall be entitled to construct buildings, structures and their auxiliary facilities by making use of the land.

The Agreement also contains provisions covering transfer, ease and mortgage of the State-Owned Construction Land Use Right, expiration of use duration, force majeure, liabilities for breach of the contract, governing laws, and dispute resolution.





Exhibit 10.41
FINISAR CORPORATION
DIRECTOR COMPENSATION POLICY
Effective September 6, 2016
Directors of Finisar Corporation, a Delaware corporation (the “Company”), who are not employed by the Company or one of its subsidiaries (“non-employee directors”) are entitled to the compensation set forth below for their service as a member of the Board of Directors (the “Board”) of the Company. This policy is effective as of September 6, 2016 (the “Effective Date”) and supersedes all prior policies concerning compensation of the Company’s non-employee directors as to their service from and after that date. This policy does not, however, modify the terms of any equity or incentive award granted by the Company prior to the Effective Date. The Board (or any committee of the Board within the authority delegated to it) has the right to amend this policy from time to time.
Cash Compensation
 
Annual Retainer
$50,000
Lead Independent Director Retainer
$20,000
Additional Committee Chair Retainers
 
Audit Committee
$28,000
Compensation Committee
$16,000
Nominating and Governance Committee
$11,000
Additional Committee Member Retainers
 
Audit Committee
$12,500
Compensation Committee
$7,500
Nominating and Governance Committee
$5,000
 
 
Equity Compensation
 
Annual Equity Award
$200,000
Initial Equity Award
$275,000

Cash Compensation
Each non-employee director will be entitled to an annual cash retainer while serving on the Board in the amount set forth above. A non-employee director who serves as the Chair of the Board or Lead Independent Director, if applicable, will be entitled to an additional cash retainer while serving in that position in the amount set forth above. A non-employee director who serves as the Chair of the Audit Committee, the Compensation Committee or the Nominating and Governance Committee, or who serves as a member (other than the Chair) of any of these committees, will generally be entitled to an additional cash retainer while serving in that position in the applicable amount set forth above. Non-employee directors are not entitled to meeting fees.
In December 2015, the Board, upon recommendation of the Nominating and Governance Committee, adopted a policy whereby each non-employee director would serve as a member of each of the Audit, Compensation and Nominating and Governance Committees. However, a non-employee director who became a member of one of these committees as a result of this new policy would not be entitled to any additional retainer fees for serving on that committee.
The cash retainers set forth above are expressed as annualized amounts. These retainers are paid on a quarterly basis and will be pro-rated if a non-employee director serves (or serves in the corresponding position, as the case may be) for only a portion of the quarter (with the proration based on the number of calendar days in the quarter that the director served as a non-employee director or held the particular position, as the case may be).




Equity Awards
Annual Equity Awards for Continuing Non-Employee Directors
On or promptly following the date of each annual meeting of the Company’s stockholders at which one or more members of the Board are to be elected (each, an “Annual Meeting”), commencing with the 2016 Annual Meeting, each non-employee director continuing in office after that date will be granted an award of Company restricted stock units (“RSUs”). The number of RSUs covered by any such award will be determined by dividing the Annual Equity Award grant value set forth above by the Closing Price as of the effective date of grant and rounding down to the nearest whole share. For purposes of this policy, “Closing Price” as of a particular date means the closing market price (in regular trading on the principal exchange or market on which the Company’s common stock is then listed or admitted to trade) for a share of the Company’s common stock for the date in question (or for the immediately preceding trading day if that day is not a trading day). The RSUs subject to any such award granted in connection with an Annual Meeting will generally vest on or around the first anniversary of the grant date on a day chosen by the Board.
If more than one Annual Meeting occurs during a particular calendar year, the grants described above for that year will be made only in connection with the first such meeting to occur in that year.
Initial Non-Employee Director Equity Awards
For each new non-employee director appointed or elected to the Board after the Effective Date, on or promptly after the date that the new non-employee director first becomes a member of the Board, the new non-employee director will be granted an award of RSUs. The number of RSUs covered by such award will be determined by dividing the Initial Equity Award grant value set forth above by the Closing Price as of the effective date of grant and rounding down to the nearest whole share. The RSUs subject to any such initial equity award will generally vest in equal installments on each of the first three anniversaries of the director’s appointment or election to the Board.
In addition, if the new non-employee director is so appointed or elected to the Board other than at an Annual Meeting in connection with which the non-employee director receives an annual equity award as described above, the non-employee director will receive an additional RSU award on or promptly after the date of such election or appointment. The number of RSUs covered by any such award will be determined by dividing a pro-rata portion of the Annual Equity Award grant value set forth above by the Closing Price as of the effective date of grant and rounding down to the nearest whole share. For these purposes, the pro-rata portion of the Annual Equity Award grant value will equal the Annual Equity Award value multiplied by a fraction (not greater than one and not less than zero), the numerator of which is 365 minus the number of calendar days that as of the date the director’s appointment or election to the Board had elapsed since the Company’s last Annual Meeting prior to that date and the denominator of which is 365. The RSUs subject to any such pro-rated equity award will generally vest on the same date as the equity awards granted to non-employee directors in connection with the Company’s last Annual Meeting are scheduled to vest.
Provisions Applicable to All Non-Employee Director Equity Awards
Each RSU award will be made under and subject to the terms and conditions of the Company’s 2005 Stock Incentive Plan or any successor equity compensation plan approved by the Company’s stockholders and in effect at the time of grant (the “Equity Plan”). Each RSU award will be evidenced by and subject to the terms and conditions of the Company’s standard form of RSU award agreement for non-employee director RSU awards as in effect on the date of grant of the award.
Each RSU is payable on a one-for-one basis in a share of Company common stock, subject to vesting.




The Board (or any committee of the Board within the authority delegated to it) has the right to award one or more non-employee directors one or more other awards from time to time, and may amend any award, in each case subject to any applicable limits of the Equity Plan.
Expense Reimbursement
All non-employee directors are entitled to reimbursement from the Company for reasonable travel (including airfare and ground transportation), lodging and meal expenses incident to meetings of the Board or committees thereof or in connection with other Board related business. The Company will make reimbursement to a non-employee director within a reasonable amount of time following submission to the Company by the non-employee director of reasonable written substantiation for the expenses, and in all events as to any taxable reimbursement not later than the end of the calendar year following the calendar year in which the related expense was incurred.





EXHIBIT 21

Subsidiaries of the Registrant*
 
 
 
Name
Country/State of Incorporation/Organization
Finisar Australia Pty. Ltd.
Australia
Finisar Brasil Suporte De Vendas LTDA
Brasil
Finisar Daejeon Co. Ltd.
Korea
Finisar Israel Ltd.
Israel
Finisar Japan Ltd.
Japan
Finisar Malaysia Sdn. Bhd.
Malaysia
Finisar Sales Inc.
United States - Delaware
Finisar Sales Hong Kong Ltd.
Hong Kong
Finisar Shanghai Inc.
People's Republic of China
Finisar Shenzhen, Inc.
People's Republic of China
Finisar Singapore Pte. Ltd.
Singapore
Finisar Sweden AB (fka Syntune AB)
Sweden
Finisar Sweden Holdings AB
Sweden
Finisar Technology India Pte. Ltd.
India
Finisar Wuxi Inc.
People's Republic of China
LightSmyth Technologies, Inc.
United States - Delaware
Optium Corporation
United States - Delaware
Finisar Germany GmbH (fka u2t Photonics AG)
Germany
 
 
* All other subsidiaries would not in the aggregate constitute a "significant subsidiary" as defined in Regulation S-X.





Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Finisar Corporation
Sunnyvale, California

We hereby consent to the incorporation by reference in the following Registration Statements:
1)
Registration Statement (Form S-3, No. 333-214076) of Finisar Corporation, for the registration of common stock, preferred stock, debt securities, warrants and units, and
2)
Registration Statements (Forms S-8, Nos. 333-200729, 333-191005, 333-183744, 333-178381, 333-169294, 333-163710, 333-153602 and 333-136933) pertaining to the Finisar Corporation 401(k) Profit Sharing Plan, the Finisar Corporation 2005 Stock Incentive Plan, the Finisar Corporation 2009 Employee Stock Purchase Plan, the Optium Corporation 2000 Stock Incentive Plan, and the Optium Corporation 2006 Stock Option and Incentive Plan;
of our reports dated June 16, 2017 , relating to the consolidated financial statements and the effectiveness of Finisar Corporation's internal control over financial reporting, which appear in this Form 10-K.

/s/ BDO USA, LLP

San Jose, California
June 16, 2017





Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:
1)
Registration Statement (Form S-3, No. 333-214076) of Finisar Corporation, for the registration of common stock, preferred stock, debt securities, warrants and units, and
2)
Registration Statements (Forms S-8, Nos. 333-200729, 333-191005, 333-183744, 333-178381, 333-169294, 333-163710, 333-153602 and 333-136933) pertaining to the Finisar Corporation 401(k) Profit Sharing Plan, the Finisar Corporation 2005 Stock Incentive Plan, the Finisar Corporation 2009 Employee Stock Purchase Plan, the Optium Corporation 2000 Stock Incentive Plan, and the Optium Corporation 2006 Stock Option and Incentive Plan;
of our report dated June 19, 2015, with respect to the consolidated financial statements and schedule of Finisar Corporation for the fiscal year ended May 3, 2015, included in this Annual Report (Form 10-K) of Finisar Corporation for the fiscal year ended April 30, 2017 .

/s/ Ernst & Young LLP

San Jose, California
June 16, 2017





Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jerry S. Rawls, certify that:
1.
I have reviewed this annual report on Form 10-K of Finisar Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 16, 2017
/s/ Jerry S. Rawls
 
Jerry S. Rawls
Chairman of the Board of Directors and Chief Executive Officer




Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt Adzema, certify that:
1.
I have reviewed this annual report on Form 10-K of Finisar Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 16, 2017
/s/ Kurt Adzema
 
Kurt Adzema
Executive Vice President, Finance and Chief Financial Officer





Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Jerry S. Rawls, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Finisar Corporation (the “Company”) on Form 10-K for the year ended April 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: June 16, 2017
 
/s/ Jerry S. Rawls  
Jerry S. Rawls 
Chairman of the Board of Directors and Chief Executive Officer




Exhibit 32.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt Adzema, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Finisar Corporation (the “Company”) on Form 10-K for the year ended April 30, 2017 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: June 16, 2017
 
/s/ Kurt Adzema
Kurt Adzema
Executive Vice President, Finance and Chief Financial Officer