Viavi Solutions Inc 10-Q for FY2022 Q2
Viavi Solutions Inc. (VIAV)
10-Q
2022-02-07
For: 2022-01-01
View Original
Added on
April 11, 2026
About this 10-Q
Viavi Solutions Inc filed this 10-Q on February 7, 2022, covering the quarter ended January 1, 2022 (FY2022 Q2).
Headline figures
Quarter ended January 1, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $314.8M
- up 5.0% from $299.9M a year earlier
- Net income
- $34.6M
- up 26.7% from net income of $27.3M a year earlier
- Diluted EPS
- $0.14
- up 16.7% from $0.12 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended January 01, 2022
OR
| For the transition period from | to | |||||||||||||||||||
Commission File Number 000-22874
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||||||
(Address of principal executive offices including Zip code)
(408 ) 404-3600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of the exchange on which registered | ||||||||||||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| ☒ | Accelerated filer | ☐ | Non-accelerated filer (Do not check if a smaller reporting company) | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 29, 2022, the Registrant had 230,012,284 shares of common stock outstanding.
| TABLE OF CONTENTS | Page | ||||||||||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | |||||||||||||||||||
| Service revenue | |||||||||||||||||||||||
| Total net revenue | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Product cost of revenue | |||||||||||||||||||||||
| Service cost of revenue | |||||||||||||||||||||||
| Amortization of acquired technologies | |||||||||||||||||||||||
| Total cost of revenues | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Amortization of other intangibles | |||||||||||||||||||||||
| Restructuring and related (benefits) charges | ( | ( | ( | ||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Loss on convertible note settlement (Note 11) | ( | ( | |||||||||||||||||||||
| Interest income and other income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted | $ | $ | $ | ( | $ | ||||||||||||||||||
| Shares used in per-share calculations: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
2
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Net change in cumulative translation adjustment, net of tax | ( | ( | |||||||||||||||||||||
| Unrealized holding gain arising during period | |||||||||||||||||||||||
| Amortization of actuarial income | |||||||||||||||||||||||
| Net change in accumulated other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
3
VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
(unaudited)
| January 1, 2022 | July 3, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Restricted cash | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepayments and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill, net | |||||||||||
| Intangibles, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other non-current assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued payroll and related expenses | |||||||||||
| Deferred revenue | |||||||||||
| Accrued expenses | |||||||||||
Short-term debt (Note11) | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other non-current liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
4
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Six Months Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation expense | |||||||||||
| Amortization of acquired technologies and other intangibles | |||||||||||
| Stock-based compensation | |||||||||||
| Loss on convertible note settlement | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquisitions: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other current and non-currents assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Income taxes payable | ( | ||||||||||
| Deferred revenue, current and non-current | ( | ||||||||||
| Deferred taxes, net | ( | ( | |||||||||
| Accrued payroll and related expenses | |||||||||||
| Accrued expenses and other current and non-current liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures | $ | ( | $ | ( | |||||||
| Proceeds from the sale of assets | |||||||||||
| Acquisitions, net of cash hold back | ( | ( | |||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| FINANCING ACTIVITIES: | |||||||||||
Proceeds from issuance of | $ | $ | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Repurchase and retirement of common stock | ( | ( | |||||||||
| Withholding tax payment on vesting of restricted stock awards | ( | ( | |||||||||
| Cash paid to note holders in convertible note settlement | ( | ||||||||||
| Cash paid to third parties in convertible note settlement | ( | ||||||||||
| Payment of financing obligations | ( | ||||||||||
| Proceeds from employee stock purchase plan | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Repayment of revolving credit facility | ( | ||||||||||
| Payment of acquisition related contingent consideration | ( | ||||||||||
| Payment of debt | ( | ||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | $ | ( | $ | ||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
Cash, cash equivalents and restricted cash at the beginning of the period (1) | |||||||||||
Cash, cash equivalents and restricted cash at the end of the period (2) | $ | $ | |||||||||
(1) These amounts include both current and non-current balances of restricted cash totaling $10.6 million and $8.4 million as of July 3, 2021 and June 27, 2020, respectively.
(2) These amounts include both current and non-current balances of restricted cash totaling $11.6 million and $8.5 million as of January 1, 2022 and January 2, 2021, respectively.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
5
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
| Three Months Ended January 1, 2022 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at October 2, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Convertible note settlement (Note 11) | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Three Months Ended January 2, 2021 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at October 3, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Six Months Ended January 1, 2022 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at July 3, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Convertible note settlement (Note 11) | — | — | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
6
| Six Months Ended January 2, 2021 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at June 27, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Balance at January 2, 2021 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
7
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | ||
Note 1. Basis of Presentation
The financial information for Viavi Solutions Inc. (VIAVI also referred to as the Company) for the three and six months ended January 1, 2022 and January 2, 2021 is unaudited, and includes all normal and recurring adjustments the Company’s management considers necessary for a fair statement of the financial information set forth herein. The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual consolidated financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended July 3, 2021.
Other than the adoption of Accounting Standards Update (ASU) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity and ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (refer to “Note 2. Recently Issued Accounting Pronouncements” for more detail), there have been no material changes to the Company’s accounting policies during the three and six months ended January 1, 2022 as compared to the significant accounting policies presented in “Note 1. Basis of Presentation” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report for the year ended July 3, 2021 on Form 10-K, filed with the SEC on August 23, 2021.
The Consolidated Balance Sheet as of July 3, 2021 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three and six months ended January 1, 2022 and January 2, 2021 may not be indicative of results for the fiscal year ending July 2, 2022 or any future periods.
Fiscal Years
The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th. The Company’s fiscal 2022 is a 52-week year ending on July 2, 2022. The Company’s fiscal 2021 was a 53-week year ending on July 3, 2021. The Company’s first quarter of fiscal year 2021 was a 14 week quarter compared to the standard 13 week quarters.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. The Company bases estimates on historical experience and assumptions about future periods that are believed to be reasonable based on available information. The Company’s reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect readily available current information.
8
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 2. Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In August 2018, the FASB issued ASU 2018-14 Defined Benefit Plans (Topic 715-20) - Changes to the Disclosure Requirements for Defined Benefit Plans, to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU 2019-12 Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes, by removing specific exceptions to the general principles in Topic 740, Income Taxes and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The Company adopted this guidance in the first quarter of fiscal 2022. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments with characteristics of liability and equity. This new guidance removes separation models for certain convertible debt instruments which will now be accounted for as a single liability measured at amortized cost. In addition, the interest expense recognized for these instruments will typically be closer to the coupon interest rate due to the removal of the separation model’s non-cash discount amortization. ASU 2020-06 is effective for the Company in the first quarter of fiscal 2023, with early adoption permitted for the first quarter of fiscal 2022. Adoption of the new guidance can either be on a modified retrospective or full retrospective method.
The Company adopted ASU 2020-06 effective the first quarter of fiscal 2022, on the full retrospective basis. The elimination of the separation model for the convertible debt instruments reclassified the equity components of the Company’s convertible notes previously in Additional paid-in capital to Long-term debt. Consequently, the temporary equity balance for the Senior Convertible Notes as of July 3, 2021 was eliminated. In addition, interest expense was reduced and net income was increased by $21.4
9
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The following table presents the impact of the standard adoption to select line items of the Company’s Consolidated Balance Sheet as of July 3, 2021 (in millions):
| July 3, 2021 | |||||||||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Short-term debt | $ | $ | $ | ||||||||||||||
| Long-term debt | |||||||||||||||||
| Mezzanine equity - convertible notes | ( | ||||||||||||||||
| Additional paid-in capital | ( | ||||||||||||||||
| Accumulated deficit | $ | ( | $ | $ | ( | ||||||||||||
The following table presents the impact of the standard adoption to select line items of the Company’s Consolidated Statement of Operations for the three and six months ended January 2, 2021 (in millions, except per-share data):
| Three Months Ended January 2, 2021 | |||||||||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||||||||
| Interest Expense | $ | ( | $ | $ | ( | ||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Net income per share: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
| Shares used in per-share calculation: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
| Six Months Ended January 2, 2021 | |||||||||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||||||||
| Interest Expense | $ | ( | $ | $ | ( | ||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
| Net income per share: | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | $ | $ | $ | ||||||||||||||
| Shares used in per-share calculation: | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
10
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers which requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. This guidance is effective for the Company in first quarter of fiscal year 2024 and early adoption is permitted. The Company elected to early adopt this guidance in the second quarter of fiscal 2022 on a retrospective basis to the beginning of the fiscal year. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
Recent Accounting Pronouncements Not Yet Adopted
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance to increase the transparency of government assistance including the disclosure of the types of assistance, an entity's accounting for the assistance, and the effect of the assistance on an entity's financial statements. This guidance is effective for the Company in the first quarter of fiscal 2023 with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share (in millions, except per share data):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) | $ | $ | $ | ( | $ | ||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
Shares issuable assuming conversion of convertible notes (1) | |||||||||||||||||||||||
| Effect of dilutive securities from stock-based compensation plans | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Net income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | ( | $ | ||||||||||||||||||
| Diluted | $ | $ | $ | ( | $ | ||||||||||||||||||
(1) Represents the number of shares that would be issued if the Company’s 1.00 % Senior Convertible Notes (2024 Notes) and 1.75 % Senior Convertible Notes (2023 Notes) had been converted. The par amount of the Company’s convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest. The “in-the money” conversion benefit feature above the conversion price of the 2023 Notes and 2024 Notes of $13.94 and $13.22 per share respectively, is payable in cash, shares of the Company’s common stock or a combination of both, at the Company’s election. Refer to “Note 11. Debt” for more details.
11
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income per share because their effect would have been anti-dilutive (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
Restricted stock units (1) | |||||||||||||||||||||||
Shares issuable from Senior Convertible Notes (2) | |||||||||||||||||||||||
| Total potentially dilutive securities | |||||||||||||||||||||||
(1) Represents the number of restricted stock units (RSUs) that are excluded from the computation of diluted earnings per share as their inclusion would have been anti-dilutive.
(2) As the Company incurred a loss from continuing operations in the period, potential securities from employee stock options, Employee Stock Purchase Plan (ESPP), RSUs, performance stock units (PSUs) and Senior Convertible Notes have been excluded from the dilutive net loss per share computations as their effects were deemed anti-dilutive.
Note 4. Accumulated Other Comprehensive Loss
The Company’s accumulated other comprehensive loss consists of the accumulated net unrealized gains or losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.
For the six months ended January 1, 2022, the changes in accumulated other comprehensive loss, net of tax, by component were as follows (in millions):
| Unrealized losses on available-for sale investments | Foreign currency translation adjustments, net of tax | Change in unrealized components of defined benefit obligations (1) | Total | ||||||||||||||||||||
| Beginning balance as of July 3, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss before reclassification | ( | ( | |||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive loss | |||||||||||||||||||||||
| Net current-period other comprehensive loss | ( | ( | |||||||||||||||||||||
| Ending balance as of January 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(1) The amount reclassified out of accumulated other comprehensive loss represents the amortization of actuarial losses included as a component of cost of revenues, research and development (R&D) and selling, general and administrative (SG&A) in the Consolidated Statement of Operations for the six months ended January 1, 2022. There was no tax impact for the six months ended January 1, 2022. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.
Note 5. Acquisitions
Prior Year Acquisitions
RPC Photonics, Inc. Acquisition
During the second quarter of fiscal year 2019, the Company acquired all of the equity interest of RPC Photonics, Inc. (RPC). The consideration paid for RPC was approximately $33.4 million in cash and an additional earn-out of up to $53.0 million in cash to be paid based on the achievement of certain gross profit targets over approximately a year period. The acquisition of RPC expands the Company’s 3D Sensing offerings.
12
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Other Acquisitions
During the first quarter of fiscal year 2022, the Company acquired all of the equity of one business for approximately $1.6 million cash consideration, of which $1.2 million was paid with cash on hand and $0.4 million remains in current liabilities. The acquisition was accounted for as an asset purchase under the authoritative guidance. The developed technology will be amortized over its estimated useful life of 5 years.
During the fourth quarter of fiscal year 2020, the Company completed a business acquisition for total consideration of approximately $5.2 million in cash paid at close and an earn-out liability of up to $5.5 million in cash to be paid based on the occurrence or achievement of certain agreed upon targets. In connection with this acquisition, the Company recorded approximately $6.2 million of developed technology and customer relationships and $1.4 million of deferred tax liability resulting from the acquisitions. The acquired developed technology and customer relationship assets are being amortized over their estimated useful lives of six years .
Acquisition-related Contingent Consideration
The following table provides a reconciliation of changes in the fair value of the Company’s earn-out liabilities associated with the Company’s acquisitions for the three and six months ended January 1, 2022 and January 2, 2021 (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | |||||||||||||||||||||||
| Beginning period balance | $ | $ | $ | $ | ||||||||||||||||||||||
| Payments of Contingent Consideration | ( | ( | ||||||||||||||||||||||||
| Fair value adjustment of earn-out liabilities | ( | ( | ||||||||||||||||||||||||
| Currency translation adjustment | ||||||||||||||||||||||||||
| Ending period balance | $ | $ | $ | $ | ||||||||||||||||||||||
Note 6. Balance Sheet and Other Details
Contract Balances
Gross receivables include both billed and unbilled receivables (including Contract Assets). As of January 1, 2022, and July 3, 2021, the Company had total unbilled receivables of $7.7 million and $6.2 million, respectively.
The Company also has short-term and long-term deferred revenues related to undelivered product and professional services, consisting of installations and consulting engagements, which are recognized as the Company's performance obligations under the contract are completed and accepted by the customer.
13
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The following tables summarize the activity related to deferred revenue (in millions):
| January 1, 2022 | |||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||
| Deferred revenue: | |||||||||||||||||
| Balance at beginning of period | $ | $ | |||||||||||||||
Revenue deferrals for new contracts (1) | |||||||||||||||||
Revenue recognized during the period (2) | ( | ( | |||||||||||||||
Balance at end of period (3) | $ | $ | |||||||||||||||
(1) Included in these amounts is the impact from foreign currency exchange rate fluctuations.
(2) Revenue recognized during the period represents releases from the balance at the beginning of the period as well as releases from the current period deferrals.
(3) The long-term portion of deferred revenue is included as a component of other non-current liabilities on the Consolidated Balance Sheets and included below.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, adjustments for revenue that have not materialized, and adjustments for currency.
The value of the transaction price allocated to remaining performance obligations as of January 1, 2022, was $271.8 million. The Company expects to recognize approximately 92 % of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.
Accounts receivable allowance - Credit losses
The following table presents the activities and balances for allowance for credit losses (in millions):
| July 3, 2021 | Charged to Costs and Expenses | Deductions (1) | January 1, 2022 | ||||||||||||||||||||||||||
| Allowance for credit losses | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
(1) Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
Inventories, net
The following table presents the components of inventories, net (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Inventories, net | $ | $ | |||||||||
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| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Prepayments and other current assets
The following table presents the components of prepayments and other current assets (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||
| Prepayments | $ | $ | |||||||||
| Asset held for sale | |||||||||||
| Advances to contract manufacturers | |||||||||||
| Refundable income taxes | |||||||||||
| Transaction tax receivables | |||||||||||
| Other current assets | |||||||||||
| Prepayments and other current assets | $ | $ | |||||||||
Other current liabilities
The following table presents the components of other current liabilities (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||
| Customer prepayments | $ | $ | |||||||||
| Restructuring accrual | |||||||||||
| Income tax payable | |||||||||||
| Warranty accrual, current | |||||||||||
| Transaction tax payable | |||||||||||
| Other | |||||||||||
| Other current liabilities | $ | $ | |||||||||
Other non-current liabilities
The following table presents components of other non-current liabilities (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||
| Pension and post-employment benefits | $ | $ | |||||||||
| Financing obligation | |||||||||||
| Deferred tax liability | |||||||||||
| Long-term deferred revenue | |||||||||||
| Warranty accrual, non-current | |||||||||||
| Uncertain tax position | |||||||||||
| Other | |||||||||||
| Other non-current liabilities | $ | $ | |||||||||
Note 7. Investments and Forward Contracts
Short-Term Investments
As of January 1, 2022 the Company’s short-term investments of $1.7 million were comprised primarily of trading securities related to the deferred compensation plan, of which $0.4 million was invested in debt securities, $0.2 million was invested in money market instruments and $1.1 million was invested in equity securities.
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| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
As of July 3, 2021, the Company’s short-term investments of $1.6 million were comprised primarily of trading securities related to the deferred compensation plan, of which $0.3 million was invested in debt securities, $0.3 million was invested in money market instruments and $1.0 million was invested in equity securities.
Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of Interest income and other income, net.
Non-Designated Foreign Currency Forward Contracts
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated
monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions. The Company does not use these foreign currency forward contracts for trading purposes.
As of January 1, 2022, the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end. Therefore, the fair value of these contracts of $1.8 million and $2.2 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of July 3, 2021, the fair value of these contracts of $2.6 million and $1.4 million is reflected as prepayments and other current assets and other current liabilities, respectively.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near quarter end; therefore, the fair value of the contracts is not significant. As of January 1, 2022 and July 3, 2021, the notional amounts of the forward contracts the Company held to purchase foreign currencies were $123.4 million and $114.0 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $25.5 million and $27.8 million, respectively.
Note 8. Fair Value Measurements
Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are inputs which market participants would use in valuing an asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs which reflect the assumptions market participants would use in valuing an asset or liability.
The three levels of inputs that may be used to measure fair value are as follows:
•Level 1: includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds, U.S. Treasury securities and marketable equity securities as they are traded with sufficient volume and frequency of transactions.
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| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
•Level 2: includes financial instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 instruments of the Company generally include certain U.S. and foreign government and agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, certificates of deposit, foreign currency forward contracts and long-term debt. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events.
•Level 3: includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and significant to the overall fair value measurement. As of January 1, 2022 and July 3, 2021, the Company did not hold any Level 3 investment securities. The Company’s Level 3 liabilities as of January 1, 2022 and July 3, 2021, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2020 and 2019. The fair value of earn-out liabilities was determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in the Selling, General and Administrative expense of the Consolidated Statements of Operations.
Fair Value Measurements
The Company’s assets and liabilities measured at fair value for the periods presented are as follows (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
| Debt available-for-sale securities: | 40 | ||||||||||||||||||||||||||||||||||||||||||||||
Asset-backed securities (1) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Total debt available-for-sale securities | |||||||||||||||||||||||||||||||||||||||||||||||
Money market funds (2) | |||||||||||||||||||||||||||||||||||||||||||||||
Trading securities (3) | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts (4) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Liability: | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency forward contracts (5) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Contingent consideration (5) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
(1)Included in other non-current assets on the Company’s Consolidated Balance Sheets.
(2)Includes, as of January 1, 2022, $419.6 million in cash and cash equivalents, $3.1 million in restricted cash, and $6.1 million in other non-current assets on the Company’s Consolidated Balance Sheets. Includes, as of July 3, 2021, $401.0 million in cash and cash equivalents, $2.7 million in restricted cash, and $5.2 million in other non-current assets on the Company’s Consolidated Balance Sheets.
(3)Included in short-term investments on the Company’s Consolidated Balance Sheets.
(4)Included in other current assets on the Company’s Consolidated Balance Sheets.
17
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Other Fair Value Measures
Fair Value of Long-term Debt: If measured at fair value in the Consolidated Balance Sheets, the Company’s 1.75 % Senior Convertible Notes (2023 Notes), 1.00 % Senior Convertible Notes (2024 Notes) and 3.75 % Senior Notes (2029 Notes) would be classified in Level 2 of the fair value hierarchy as they are not actively traded in the markets. As of January 1, 2022, the fair value of the 2023 Notes, 2024 Notes, and 2029 Notes was approximately $148.4 million, $359.5 million and $400.6 million, respectively. As of July 3, 2021, the fair value of the 2023 Notes and 2024 Notes was approximately $300.7 million and $646.9 million, respectively. See “Note 11. Debt”, for further discussion of the Company’s long-term debt.
Note 9. Goodwill
The following table presents changes in goodwill allocated to the Company’s reportable segments (in millions):
| Network Enablement | Service Enablement | Optical Security and Performance Products | Total | ||||||||||||||||||||
| Balance as of July 3, 2021 | $ | $ | $ | $ | |||||||||||||||||||
| Currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Balance as of January 1, 2022 | $ | $ | $ | $ | |||||||||||||||||||
The Company tests goodwill for impairment at the reporting unit level annually during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired. In the fourth quarter of fiscal 2021, the Company reviewed goodwill under the qualitative assessment of the authoritative guidance and concluded that it was more likely than not that the fair value of each reporting unit exceeded its carrying amount and that no indication of impairment existed.
There were no events or changes in circumstances which triggered an impairment review during the three and six months ended January 1, 2022.
Note 10. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles (in millions):
| As of January 1, 2022 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Acquired developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
Other (1) | ( | ||||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | |||||||||||||||||||
| As of July 3, 2021 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Acquired developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
Other (1) | ( | ||||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | |||||||||||||||||||
(1)Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.
18
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The following table presents the amortization recorded relating to acquired developed technology, customer relationships and other intangibles (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Total amortization of intangible assets | $ | $ | $ | $ | |||||||||||||||||||
Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of January 1, 2022, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
| Fiscal Years | |||||
| Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total amortization | $ | ||||
The acquired developed technology, customer relationships and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.
Note 11. Debt
As of January 1, 2022 and July 3, 2021, the Company’s debt on the Consolidated Balance Sheets represented the carrying amount of the Senior Convertible and Senior Notes, net of unamortized issuance costs.
The following table presents the carrying amounts of the Company’s debt (in millions):
| January 1, 2022 | July 3, 2021 | ||||||||||
Principal amount of | $ | $ | |||||||||
| Unamortized Senior Convertible Notes debt issuance cost, short-term | ( | ||||||||||
| Short-term debt | $ | $ | |||||||||
Principal amount of | $ | $ | |||||||||
Unamortized | ( | ||||||||||
Principal amount of | |||||||||||
Principal amount of | |||||||||||
| Unamortized Senior Convertible Notes debt issuance cost, long-term | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
The Company was in compliance with all debt covenants as of January 1, 2022 and July 3, 2021.
19
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
On September 29, 2021, the Company issued $400.0 million aggregate principal amount of 3.75 % Senior Notes due 2029 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Proceeds of the 2029 Notes amounted to $393.0 million after issuance costs. The 2029 Notes are an unsecured obligation of the Company and bear annual interest of 3.75 %, payable semi-annually in arrears on April 1 and October 1 of each year, beginning April 1, 2022. The 2029 Notes mature on October 1, 2029 unless earlier redeemed or repurchased.
Senior Secured Asset-Based Revolving Credit Facility
On December 30, 2021, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties. The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300 million, which matures on December 30, 2026. The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100 million so long as certain conditions are met. The proceeds from the credit facility established under the Credit Agreement will be used for working capital and other general corporate purposes. The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and those of its subsidiaries that are borrowers and guarantors under the Credit Agreement.
Amounts outstanding under the Credit Agreement accrue interest as follows: (i) if the amounts outstanding are denominated in US Dollars, at a per annum rate equal to either, at the Company’s election, Term Secured Overnight Financing Rate (SOFR) plus a margin of 1.35 % to 1.85 % per annum, or a specified base rate plus a margin of 0.25 % to 0.75 %, in each case, depending on the average excess availability under the facility, (ii) if the amounts outstanding are denominated in Sterling, at a per annum rate equal to the Sterling Overnight Interbank Average Rate (SONIA) plus a margin of 1.2825 % to 1.7825 %, depending on the average excess availability under the facility, (iii) if the amounts outstanding are denominated in Euros, at a per annum rate equal to the Euro Interbank Offered Rate plus a margin of 1.25 % to 1.75 %, depending on the average excess availability under the facility, or (iv) if the amounts outstanding are denominated in Canadian Dollars, at a per annum rate equal to either, at the Company’s election, the Canadian Dollar Offered Rate plus a margin of 1.25 % to 1.75 %, or a specified base rate plus a margin of 0.25 % to 0.75 %, in each case, depending on the average excess availability under the facility.
The covenants of the Credit Agreement include customary restrictive covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, grant liens and make certain acquisitions, investments, asset dispositions and restricted payments. In addition, the Credit Agreement contains certain financial covenants that require the Company to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 if excess availability under the facility is less than the greater of 10 % of the lesser of maximum revolver amount and borrowing base and $20 million.
As of January 1, 2022, we had no borrowings under this facility.
Revolving Credit Facility
On May 5, 2020, the Company entered into a credit agreement with Wells Fargo as administrative agent, and other lender related parties. The Company borrowed $150 million and repaid $150 million under this Credit Agreement during the six months ended January 1, 2022. In connection with the entry into the Senior Secured Asset-Based Revolving Credit Facility noted above, the Company terminated this facility.
20
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
On May 29, 2018, the Company issued $225.0 million aggregate principal amount of 1.75 % Senior Convertible Notes due 2023 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $155.5 million aggregate principal of the 2023 Notes to certain holders of the 2033 Notes in exchange for $151.5 million principal of the 2033 Notes (the Exchange Transaction) and issued and sold $69.5 million aggregate principal amount of the 2023 Notes in a private placement to accredited institutional buyers (the Private Placement). As of January 1, 2022, the expected remaining term of the 2023 Notes is 1.4 years.
The proceeds from the 2023 Notes Private Placement amounted to $67.3 million after issuance costs. The 2023 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.75 % payable in cash semi-annually in arrears on June 1st and December 1st of each year, beginning December 1, 2018. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.
On March 3, 2017, the Company issued $400.0 million aggregate principal amount of 1.00 % Senior Convertible Notes due 2024 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On March 22, 2017, the Company issued an additional $60.0 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00 % payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased. As of January 1, 2022, the expected remaining term of the 2024 Notes is 2.2 years.
During the fourth quarter of fiscal 2021, the closing price of the Company’s common stock exceeded 130 % of the applicable conversion price of the 2024 Notes on at least 20 of the last 30 consecutive trading days of the calendar quarter, causing the 2024 Notes to be convertible by the holders for the period of July 1, 2021 to September 30, 2021. As a result, $456.6 million carrying value of the notes was reclassified to short-term debt as of July 3, 2021. The Company received four requests for conversion when the conversion was opened during the first quarter of fiscal 2022. The requests were for trivial amounts.
In the first and second quarter of fiscal 2022 the closing price of the Company’s stock did not exceed 130 % of the applicable conversion price of the 2024 Notes for at least 20 of the last 30 consecutive trading days of the calendar quarter. The carrying value of the 2024 Notes was reclassified to long-term debt as of October 2, 2021.
Senior Convertible Notes Settlement
On September 2, 2021, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75 % Senior Convertible Notes due 2023 and 1.00 % Senior Convertible Notes due 2024. The Company settled $93.8 million principal amount of the 2023 Notes and $181.2 million principal amount of the 2024 Notes in exchange for an aggregate of 10.6 million shares of its common stock, par value $0.001 per share, and $196.5 million in cash. The Company recorded a loss of $85.9 million in connection with the settlement transactions which is presented as Loss on convertible note settlement in the Company’s Consolidated Statements of Operations.
On November 17, 2021 and November 22, 2021, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75 % Senior Convertible Notes due 2023 and 1.00 % Senior Convertible Notes due 2024. The Company settled $20.6 million principal amount of the 2023 Notes and $25.0 million principal amount of the 2024 Notes in exchange for $59.0 million in cash. The Company recorded a loss of $6.4 million in connection with the settlement transactions which is presented as Loss on convertible note settlement in the Company’s Consolidated Statements of Operations.
After the transaction the outstanding aggregate principal amount of the 2023 Notes and 2024 Notes was $110.7 million and $253.7 million, respectively, in each case, with terms unchanged.
21
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Interest Expense
The following table presents the interest expense for contractual interest and amortization of debt issuance costs (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Interest expense-contractual interest | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance cost | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total interest expense | $ | $ | $ | $ | |||||||||||||||||||
Note 12. Leases
The Company is a lessee in several operating leases, primarily real estate facilities for office space. The Company's lease arrangements are comprised of operating leases with various expiration dates through March 31, 2042. The Company's leases do not contain any material residual value guarantees.
For the three months ended January 1, 2022 and January 2, 2021, the total operating lease costs were $3.7 million and $3.4 million, respectively. For the six months ended January 1, 2022 and January 2, 2021, the total operating lease costs were $7.2 million and $6.8 million, respectively. Total variable lease costs were immaterial during the three and six months ended January 1, 2022 and January 2, 2021. The total operating costs were included in cost of revenues, research and development, and selling, general and administrative in the Company’s Consolidated Statements of Operations.
As of January 1, 2022, the weighted-average remaining lease term was 6.6 years, and the weighted-average discount rate was 4.7 %.
For the three months ended January 1, 2022 and January 2, 2021, cash paid for amounts included in the measurement of operating lease liabilities were $3.5 million and $3.7 million, respectively; and operating ROU assets obtained in exchange of new operating lease liabilities were $6.4 million and $1.9 million, respectively.
For the six months ended January 1, 2022 and January 2, 2021, cash paid for amounts included in the measurement of operating lease liabilities were $8.7 million and $8.1 million, respectively; and operating ROU assets obtained in exchange of new operating lease liabilities were $6.5 million and $3.5 million, respectively
The balance sheet information related to the Company’s operating leases is as follows (in millions):
| January 1, 2022 | ||||||||
| $ | ||||||||
| Total operating ROU assets | $ | |||||||
| $ | ||||||||
| Total operating lease liabilities | $ | |||||||
22
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Future minimum operating lease payments as of January 1, 2022 are as follows (in millions):
| Fiscal Years | Operating Leases | ||||||||||
| Remainder of 2022 | $ | ||||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | |||||||||||
| Less: Interest | ( | ||||||||||
| Present value of lease liabilities | $ | ||||||||||
Future minimum operating lease payments as of July 3, 2021, were as follows (in millions):
| Fiscal Years | Operating Leases | ||||||||||
| 2022 | $ | ||||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | |||||||||||
| Less: Interest | ( | ||||||||||
| Present value of lease liabilities | $ | ||||||||||
Note 13. Restructuring and Related Charges
The Company restructuring events are primarily intended to reduce costs, consolidate operations, integrate various acquisitions, streamline product manufacturing and address market conditions. During the three and six months ended January 1, 2022, the Company recorded restructuring related benefits of $0.1 million. During the three and six months ended January 2, 2021, the Company recorded restructuring related charges of $0.2 million and benefits of $0.4 million, respectively. A summary of the activity in the restructuring plan is outlined below (in millions):
| Fiscal 2019 NSE, | |||||||||||||||||||||||
Including AW Plan | |||||||||||||||||||||||
Beginning of period balance, July 3, 2021 (1) | $ | ||||||||||||||||||||||
| Cash settlements | ( | ||||||||||||||||||||||
| Restructuring and related benefits | ( | ||||||||||||||||||||||
End of period balance, January 1, 2022 | $ | ||||||||||||||||||||||
(1) Included in other current liabilities on the Consolidated Balance Sheets as of July 3, 2021, respectively.
Note 14. Income Taxes
The Company recorded an income tax expense of $2.3 million and $15.9 million for the three and six months ended January 1, 2022, respectively. The Company recorded an income tax expense of $12.5 million and $21.1 million for the three and six months ended January 2, 2021, respectively.
23
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The income tax provision for the three and six months ended January 1, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss and offset by a $8.1
The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to the Company’s income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign income from continuing operations.
As of January 1, 2022, and July 3, 2021, the Company’s unrecognized tax benefits totaled $50.0 million and $55.5 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had $1.7 million accrued for the payment of interest and penalties as of January 1, 2022. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although the Company does not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, the Company is unable to estimate the full range of possible adjustments to this balance.
Note 15. Stockholders' Equity
Repurchase of Common Stock
In September 2021 the Board of Directors authorized a new stock repurchase plan (“2021 Repurchase Plan”) of up to $190 million. The 2021 Repurchase plan is separate from the 2019 Repurchase Plan noted below and is anticipated to result in the repurchase of the Company’s common stock issued in connection with the exchange transaction with certain holders of its Senior Convertible Notes (refer to “Note 11. Debt” for more details).
During the three months ended January 1, 2022, the Company repurchased 7.5 million shares of its common stock for $119.4 million under the 2021 Repurchase Plan. As of January 1, 2022, the Company had remaining authorization of $70.6 million for future share repurchases under the 2021 Repurchase Plan.
In September 2019, the Board of Directors authorized a stock repurchase program (“2019 Repurchase Plan”) of up to $200 million of the Company’s common stock through open market or private transactions before September 30, 2021. On August 18, 2021, the Board of Directors approved to extend the 2019 Repurchase Plan until September 30, 2022. Under the 2019 Repurchase Plan, the Company may repurchase its common stock from time to time at the discretion of the Company’s management.
During the three months ended January 1, 2022 the Company did not repurchase any shares of its common stock under the 2019 Repurchase Plan. The Company repurchased 0.5 million shares of its common stock for $8.5 million during the six months ended January 1, 2022 under the 2019 Repurchase Plan. As of January 1, 2022, the Company had remaining authorization of $104.5 million for future share repurchases under the 2019 Repurchase Plan.
Under the 2021 Repurchase Plan and the 2019 Repurchase Plan the number of shares to be repurchased and the timing of such repurchases will be based on several factors, including business and financial market conditions.
24
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 16. Stock-Based Compensation
The Company's stock-based compensation includes a combination of time-based restricted stock awards and performance-based awards. Restricted stock awards are granted without an exercise price and are converted to shares immediately upon vesting. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.
The Company generally estimates the fair value of stock-based awards based on the closing market price of the Company’s common stock. In the case of performance-based awards that include a market condition, the Company will estimate the fair value of the award using a combination of the closing market price of the Company’s common stock on the grant date and the Monte Carlo simulation model. For performance-based awards, shares attained over target upon vesting are reflected as awards granted during the period.
Time-based restricted stock awards will generally vest in annual or quarterly installments over a period of to four years subject to the employees’ continuing service to the Company. The Company's performance-based awards may include performance conditions, market conditions, time-based service conditions or a combination thereof and are generally expected to vest over to four years . In addition, the actual number of shares awarded upon vesting of performance-based grants may vary from the target shares depending upon the achievement of the relevant performance or market-based conditions.
During the six months ended January 1, 2022 and January 2, 2021, the Company granted $2.1 million and $2.7 million time-based restricted stock awards, respectively. The aggregate grant-date fair value of time-based restricted stock awards granted during the six months ended January 1, 2022 and January 2, 2021 were estimated to be $35.0 million and $35.7 million, respectively. Time-based restricted stock awards granted to eligible employees generally vest in annual or quarterly installments over a period of four years , are subject to the employees’ continuing service to the Company and do not have an expiration date.
During the six months ended January 1, 2022 and January 2, 2021, the Company granted $0.4 million and $0.6 million, performance-based awards, respectively. In addition, during the six months ended January 2, 2021, the Company granted an additional 0.1 million shares due to performance-based shares attained over target. There were no performance-based shares attained over target during the six months ended January 1, 2022. The aggregate grant-date fair value of performance-based awards granted during the six months ended January 1, 2022 and January 2, 2021 were estimated to be $7.9 million and $8.9 million, respectively. The majority of performance-based awards vest in equal annual installments over four years based on the attainment of certain performance measures and the employee’s continued service through the vest date. Performance-based awards with market conditions were valued using a Monte Carlo simulation.
As of January 1, 2022, $79.4 million of unrecognized stock-based compensation costs remain to be amortized.
The impact on the Company’s results of operations of recording stock-based compensation by function for the three and six months ended January 1, 2022 and January 2, 2021, is as follows (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Approximately $1.2 million and $1.1 million of stock-based compensation was capitalized to inventory as of January 1, 2022 and January 2, 2021, respectively.
25
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 17. Employee Pension and Other Benefit Plans
The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the United Kingdom (U.K.) and Germany. The Company also is responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition.
Most of the plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service.
As of January 1, 2022, the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the post-retirement benefits when due. During the six months ended January 1, 2022, the Company contributed $0.6 million to the U.K. plan and $1.8 million to the other plans. The funded plan assets consist primarily of managed investments.
The following table presents the components of net periodic cost for the pension and benefits plans (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of net actuarial losses | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
Both the calculation of the projected benefit obligation and net periodic cost are based upon actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The Company expects to incur cash outlays of approximately $9.0 million related to its defined benefit pension plans during fiscal 2022 to make current benefit payments and fund future obligations. As of January 1, 2022, approximately $2.4 million had been incurred. These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at July 3, 2021.
Note 18. Commitments and Contingencies
Legal Proceedings
In June 2016, the Company received a court decision regarding the validity of an amendment to a pension deed of trust related to one of its foreign subsidiaries which the Company contends contained an error requiring the Company to increase the pension plan’s benefit. The Company had subsequently further amended the deed to rectify the error. The court ruled that the amendment increasing the pension plan benefit was valid until the subsequent amendment. The Company estimated the liability to range from (amounts represented as £ denote GBP) £5.7 million to £8.4 million. The Company determined the likelihood of loss to be probable and accrued £5.7 million as of July 2, 2016 in accordance with authoritative guidance on contingencies. The accrual is included in pension and post-employment benefits, which is a component of other non-current liabilities in the Company’s Consolidated Balance Sheets.
The Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company is pursuing a motion for summary judgement on the deed of rectification claim and continues to pursue a claim against the U.K. law firm responsible for the error. As of January 1, 2022, the related accrued pension liability was £7.0 million or $9.5 million.
26
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Guarantees
Outstanding Letters of Credit, Performance Bonds and Other Claims
As of January 1, 2022, the Company had standby letters of credit of $9.2 million, performance bonds and other claims of $2.4 million collateralized by restricted cash.
Product Warranties
The following table presents the changes in the Company’s warranty reserve during the three and six months ended January 1, 2022 and January 2, 2021, (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||
| Balance as of beginning of period | $ | $ | $ | $ | |||||||||||||||||||
| Provision for warranty | |||||||||||||||||||||||
| Utilization of reserve | ( | ( | ( | ( | |||||||||||||||||||
| Adjustments to pre-existing warranties (includes changes in estimates) | ( | ( | ( | ||||||||||||||||||||
| Balance as of end of period | $ | $ | $ | $ | |||||||||||||||||||
Note 19. Operating Segments and Geographic Information
The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer is the Company’s Chief Operating Decision Maker (CODM). The Company's reportable segments reflect the way the Company's CODM reviews and assesses performance of the business.
The Company’s reportable segments are:
(i) Network Enablement (NE):
NE provides testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. The Company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for its products. NE’s avionics products provide test and measuring solutions for aviation, aerospace, government, defense, communications and public safety.
(ii) Service Enablement (SE):
SE solutions are embedded systems that yield network, service and application performance data. These solutions—including instruments, microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.
(iii) Optical Security and Performance Products (OSP):
OSP provides innovative, precision, high performance optical products for anti-counterfeiting, consumer and industrial, government, automotive, industrial and other electronic markets.
27
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Segment Reporting
The CODM manages the Company in two broad business categories: NSE and OSP. The CODM evaluates segment performance of the NSE business based on the combined segment gross and operating margins. Operating expenses associated with the NSE business are not allocated to the individual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on segment operating margin. The Company allocates corporate-level operating expenses to its segment results, except for certain non-core operating and non-operating activities as discussed below.
The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related benefits, impairment of goodwill, changes in fair value of contingent consideration liabilities, or other charges unrelated to core operating performance to its segments because management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.
The following tables present information on the Company’s reportable segments for the three months ended January 1, 2022 and January 2, 2021 (in millions):
| Three Months Ended January 1, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||
| Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Other Items (1) | Consolidated GAAP Measures | ||||||||||||||||||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Service revenue | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Operating margin | % | % | % | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended January 2, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||
| Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Other Items (1) | Consolidated GAAP Measures | ||||||||||||||||||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Service revenue | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Operating margin | % | % | % | ||||||||||||||||||||||||||||||||||||||
28
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Three Months Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Corporate reconciling items impacting gross profit: | |||||||||||
| Total segment gross profit | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
Other benefits unrelated to core operating performance (1) | |||||||||||
| GAAP gross profit | $ | $ | |||||||||
| Corporate reconciling items impacting operating income: | |||||||||||
| Total segment operating income | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
| Change in fair value of contingent liability | |||||||||||
Other (charges) benefits unrelated to core operating performance (1) | ( | ||||||||||
| Restructuring and related benefits (charges) | ( | ||||||||||
| GAAP operating income from continuing operations | $ | $ | |||||||||
(1) During the three months ended January 1, 2022 and January 2, 2021, other charges unrelated to core operating performance primarily consisted of certain acquisition and integration related changes, transformational initiatives such as site consolidations, reorganization, and loss on disposal of long-lived assets.
| Six Months Ended January 1, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||
| Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Other Items (1) | Consolidated GAAP Measures | ||||||||||||||||||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Service revenue | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Operating margin | % | % | % | ||||||||||||||||||||||||||||||||||||||
29
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Six Months Ended January 2, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||
| Network Enablement | Service Enablement | Network and Service Enablement | Optical Security and Performance Products | Other Items (1) | Consolidated GAAP Measures | ||||||||||||||||||||||||||||||||||||
| Product revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Service revenue | |||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||
| Gross margin | % | % | % | % | % | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||||||
| Operating margin | % | % | % | ||||||||||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||
| Corporate reconciling items impacting gross profit: | |||||||||||
| Total segment gross profit | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
Other benefits unrelated to core operating performance (1) | |||||||||||
| GAAP gross profit | $ | $ | |||||||||
| Corporate reconciling items impacting operating income: | |||||||||||
| Total segment operating income | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
| Change in fair value of contingent liability | ( | ||||||||||
Other charges unrelated to core operating performance (1) | ( | ( | |||||||||
| Restructuring and related benefits | |||||||||||
| GAAP operating income from continuing operations | $ | $ | |||||||||
(1) During the six months ended January 1, 2022 and January 2, 2021, other charges unrelated to core operating performance primarily consisted of certain acquisition and integration related changes, transformational initiatives such as site consolidations, reorganization, and loss on disposal of long-lived assets.
30
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The Company operates primarily in three geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where the Company’s product is initially shipped. For example, certain customers may request shipment of the Company’s product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three (in millions):
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||||||||||||||||||||||||||
| Product Revenue | Service Revenue | Total | Product Revenue | Service Revenue | Total | ||||||||||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other Americas | |||||||||||||||||||||||||||||||||||
| Total Americas | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Asia-Pacific: | |||||||||||||||||||||||||||||||||||
| Greater China | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other Asia-Pacific | |||||||||||||||||||||||||||||||||||
| Total Asia-Pacific | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| EMEA: | |||||||||||||||||||||||||||||||||||
| Switzerland | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other EMEA | |||||||||||||||||||||||||||||||||||
| Total EMEA | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | ||||||||||||||||||||||||||||||||||
| Product Revenue | Service Revenue | Total | Product Revenue | Service Revenue | Total | ||||||||||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other Americas | |||||||||||||||||||||||||||||||||||
| Total Americas | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Asia-Pacific: | |||||||||||||||||||||||||||||||||||
| Greater China | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other Asia | |||||||||||||||||||||||||||||||||||
| Total Asia-Pacific | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| EMEA: | |||||||||||||||||||||||||||||||||||
| Switzerland | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Other EMEA | |||||||||||||||||||||||||||||||||||
| Total EMEA | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Total net revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
31
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 20. Subsequent Events
During the period between January 1, 2022 and February 4, 2022, the Company repurchased approximately 3.9 million shares of its common stock, under the 2021 Repurchase Plan approved by the Board in September 2021, for approximately $64.4 million. The Company has approximately $6.2 million remaining available for future repurchase of the $190 million authorized under the 2021 Repurchase Plan.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements contained in this Quarterly report on Form 10-Q, which we also refer to as the Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipates,” “believes,” “can,” “can impact,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “ongoing,” “plans,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as:
•Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition and results of operations;
•Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;
•Our plans for growth and innovation opportunities;
•Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;
•Our plans for continued development, use and protection of our intellectual property;
•Our strategies for achieving our current business objectives, including related risks and uncertainties;
•Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;
•Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;
•Our research and development plans and the expected impact of such plans on our financial performance; and
•Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.
Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S. Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.
In addition, Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 3, 2021.
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You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors” and “Forward-Looking Statements.”
OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS
Viavi Solutions Inc. (VIAVI also referred to as the Company, we, our and us), is a global provider of network test, monitoring and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network. VIAVI is also a leader in management solutions for 3D Sensing, anti-counterfeiting, consumer electronics, industrial, aerospace, automotive, and medical applications.
To serve our markets we operate the following business segments:
•Network Enablement (NE);
•Service Enablement (SE), and;
•Optical Security and Performance Products (OSP).
Network Enablement
Our NE segment provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, turn-up, certify, troubleshoot and optimize networks. They also support more profitable, higher-performing networks and help speed time-to-revenue.
Our solutions address lab and production environments, field deployment and service assurance for wireless and wireline networks, including computing and storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major NEMs, operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks, which help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them.
Within the NE product portfolio, our wireless products consist of flexible application software and multi-function hardware that our customers can easily use as standalone test and measurement solutions or combine with industry-standard computers, networks and third-party devices to create measurement, automation and embedded systems. Our Radio Access Network (RAN to Core) test and validation product addresses the various communications infrastructure market segments.
We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
Our Avionics Communications (AvComm) products are a global leader in test and measurement instrumentation for communication and safety in the government, civil, aerospace and military markets. AvComm solutions encompass a full spectrum of instrumentation from turnkey systems, stand-alone instruments or modular components that provide customers with highly reliable, customized, innovative and cost-effective testing tools.
NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage device manufacturers, storage network and switch vendors, radio and avionics commercial companies, OEMs, and civil, state and federal agencies. Our customers include América Móvil, AT&T Inc., Lumen Technologies (formerly CenturyLink Inc.), Cisco Systems, Inc., Nokia, and Verizon Communications, Inc.
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Service Enablement
SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions, which primarily consist of instruments, microprobes and software, monitor, collect and analyze network data to reveal the actual customer experience, and identify opportunities for new revenue streams and network optimization.
Our assurance solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control, and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.
SE customers include similar CSPs, NEMs, government organizations, large corporate customers, and storage-segment customers that are served by our NE segment.
Optical Security and Performance Products
Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, automotive industrial and other markets.
Our security offerings for the anti-counterfeiting market include OVP® and OVMP®. OVP® enables color-shifting effects and OVMP® enables depth and motion effects in addition to color-shifting effects. Both OVP® and OVMP® are formulated into inks used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents. Our technologies are deployed on the banknotes of more than 100 countries today.
Leveraging our unique high-precision coating and light shaping optics capabilities, OSP provides a range of products and technologies for the consumer, electronics, government, automotive and industrial markets, including, for example, optical filters and Engineered DiffusersTM for 3D sensing applications.
Other OSP product lines include custom color solutions and spectral sensing. Custom color solutions include innovative special effects pigments that provide product enhancement for brands in the automotive and other industries. Spectral sensing solutions include handheld and process miniature near infrared spectrometers for pharmaceutical, agriculture, food, feed, and industrial applications.
OSP serves customers such as SICPA Holding SA Company (SICPA), STMicroelectronics Holding N.V., Lockheed Martin Corporation and Seiko Epson Corporation.
COVID-19 Pandemic Update
The COVID-19 pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, and temporary business closures among others. The ongoing COVID-19 pandemic, the emergence of new variants, and these aforementioned measures, continue to have an impact on businesses and economies worldwide. These conditions may continue and could result in an adverse impact to our operations.
Worldwide distribution by central governments of the vaccines commenced in late 2020. There have been logistical and operational challenges with the rollout and global demand for the vaccine, particularly in developing nations, has far exceeded supply. New and potentially more contagious variants of the virus have developed in several countries and regions in which we operate.
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Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of our employees, customers, suppliers, and communities, including implementing early and regular updates to our health and safety policies and procedures. We continue to follow COVID-19 pandemic protocols as required by local, state and federal guidelines. These COVID-19 pandemic protocols have not thus far had a substantial net impact on our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. To date, we have not observed any material or materially adverse indication of impairments under the authoritative guidance, to any of our assets or a significant change to the fair value of assets due to the COVID-19 pandemic.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has impacted and may continue to negatively impact our sales and operating results. In addition, we have experienced and may continue to experience shipping and logistics challenges and delays. NSE has experienced some impact to customer demand. Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic. We will continue to take the measures described above to ensure the health and safety of our employees and those they come in contact with.
We have a global supply chain footprint with our primary manufacturing located in China, France, Germany, United Kingdom and the United States. We have experienced increased freight and logistics costs due to supply chain shortages resulting in extended lead times with respect to our NE Field Instrument products. Our supply chain team has been working to meet our customer needs by executing on a risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers. Nonetheless, surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner. Although COVID-19 has brought unprecedented challenges, we believe that we have a robust and adaptable supply chain. While our industry faced supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and material shortages resulted in extended lead-times, increased logistics costs, and product volume impact, these factors did not materially impact our business in fiscal year 2021. In the first six months of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure. We expect these high costs to continue through the remainder of fiscal year 2022.
As the pandemic spread across the globe in Spring 2020, there was a tightening of the credit markets. We entered into a $300 million secured credit facility in May 2020 to strengthen our liquidity position. In December 2021, we terminated this facility and entered into a $300 million asset-based secured credit facility. While capital markets and worldwide economies have stabilized and recovered since being significantly impacted by the COVID-19 pandemic, in the event of a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.
We intend to comply with US Federal and other governmental vaccine mandates. Such mandates could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner. Additional vaccine mandates may be announced in other countries in which we operate or source inputs. Some laws and directives may also hinder our ability to move certain products across borders. Economic conditions can also influence order patterns. These factors could negatively impact our consolidated results of operations and cash flow
Despite the continued challenges that we are facing due to the COVID-19 pandemic, we remain confident that the actions that we are taking to manage such challenges, combined with our strong liquidity, position us well to navigate through the current economic environment and continue to execute on our long-term value creation strategy. We expect 5G Wireless and Fiber to continue driving growth and profitability in fiscal 2022.
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Recently Issued Accounting Pronouncements
Refer to “Note 2. Recently Issued Accounting Pronouncements” regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (U.S. GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.
For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC). There have been no material changes to our critical accounting policies and estimates.
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RESULTS OF OPERATIONS
The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | Change | Percent Change | January 1, 2022 | January 2, 2021 | Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||
| Segment net revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| NE | $ | 214.4 | $ | 180.9 | $ | 33.5 | 18.5 | % | $ | 419.3 | $ | 343.0 | $ | 76.3 | 22.2 | % | |||||||||||||||||||||||||||||||
| SE | 29.8 | 25.8 | 4.0 | 15.5 | % | 52.8 | 47.2 | 5.6 | 11.9 | % | |||||||||||||||||||||||||||||||||||||
| OSP | 70.6 | 93.2 | (22.6) | (24.2) | % | 169.5 | 194.4 | (24.9) | (12.8) | % | |||||||||||||||||||||||||||||||||||||
| Total net revenue | $ | 314.8 | $ | 299.9 | $ | 14.9 | 5.0 | % | $ | 641.6 | $ | 584.6 | $ | 57.0 | 9.8 | % | |||||||||||||||||||||||||||||||
| Gross profit | $ | 190.5 | $ | 180.1 | $ | 10.4 | 5.8 | % | $ | 385.5 | $ | 349.5 | $ | 36.0 | 10.3 | % | |||||||||||||||||||||||||||||||
| Gross margin | 60.5 | % | 60.1 | % | 60.1 | % | 59.8 | % | |||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 50.5 | $ | 50.0 | $ | 0.5 | 1.0 | % | $ | 104.1 | $ | 98.8 | $ | 5.3 | 5.4 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 16.0 | % | 16.7 | % | 16.2 | % | 16.9 | % | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 88.2 | $ | 79.5 | $ | 8.7 | 10.9 | % | $ | 180.0 | $ | 160.9 | $ | 19.1 | 11.9 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 28.0 | % | 26.5 | % | 28.1 | % | 27.5 | % | |||||||||||||||||||||||||||||||||||||||
| Restructuring and related charges (benefits) | $ | (0.1) | $ | 0.2 | $ | (0.3) | (150.0) | % | $ | (0.1) | $ | (0.4) | $ | 0.3 | (75.0) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | — | % | 0.1 | % | — | % | (0.1) | % | |||||||||||||||||||||||||||||||||||||||
| Loss on convertible note exchange | $ | (6.4) | $ | — | $ | (6.4) | 100.0 | % | $ | (92.3) | $ | — | $ | (92.3) | 100.0 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | (2.0) | % | — | % | (14.4) | % | — | % | |||||||||||||||||||||||||||||||||||||||
| Interest income and other income, net | $ | 1.1 | $ | 1.1 | $ | — | — | % | $ | 2.5 | $ | 1.7 | $ | 0.8 | 47.1 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 0.3 | % | 0.4 | % | 0.4 | % | 0.3 | % | |||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | (7.1) | $ | (3.6) | $ | 3.5 | 97.2 | % | $ | (10.7) | $ | (7.2) | $ | 3.5 | 48.6 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 2.3 | % | 1.2 | % | 1.7 | % | 1.2 | % | |||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 2.3 | $ | 12.5 | $ | (10.2) | (81.6) | % | $ | 15.9 | $ | 21.1 | $ | (5.2) | (24.6) | % | |||||||||||||||||||||||||||||||
Percentage of net revenue | 0.7 | % | 4.2 | % | 2.5 | % | 3.6 | % | |||||||||||||||||||||||||||||||||||||||
Net Revenue
Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.
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COVID-19
We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the ultimate impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, if the COVID-19 pandemic is prolonged, the vaccine rollouts lag globally, new, and potentially more virulent variants continue to emerge, and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.
Three months ended January 1, 2022 and January 2, 2021
Net revenue increased by $14.9 million, or 5.0%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was due to revenue increase from our NE and SE segments, partially offset by revenue decrease in our OSP segment.
Product revenues increased by $15.3 million, or 5.8%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was due to revenue increase from our NE and SE segments, partially offset by revenue decrease in our OSP segment.
Service revenues decreased by $0.4 million, or 1.1%, during the three months ended January 1, 2022 compared to the same period a year ago. This decrease was due to revenue decrease from our SE and OSP segments, partially offset by revenue increase in our NE segment.
NE net revenue increased by $33.5 million, or 18.5%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was primarily driven by increased revenue volume from our Field Instruments and Lab and Production Equipment, including Fiber and Wireless products.
SE net revenue increased by $4.0 million, or 15.5%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was primarily driven by increased revenue from our Growth Assurance and Data Center products.
OSP net revenue decreased by $22.6 million, or 24.2%, during the three months ended January 1, 2022 compared to the same period a year ago. This decrease was primarily driven by decreased revenue from our 3D Sensing and Anti-Counterfeiting Product lines.
Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period over period variability in our financial measures and present foreign exchange rate risks.
Additionally, we have seen demand for our NE and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) chip component shortages, supply chain and shipping logistic constraints; (f) the impact of ongoing global trade policies, tariffs and sanctions; and (g) regulatory or economic developments and/or technology challenges that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms.
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Revenue by Region
We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | January 1, 2022 | January 2, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 100.2 | 31.8 | % | $ | 88.6 | 29.5 | % | $ | 193.5 | 30.2 | % | $ | 166.4 | 28.5 | % | |||||||||||||||||||||||||||||||
| Other Americas | 25.5 | 8.1 | % | 19.8 | 6.7 | % | 53.7 | 8.3 | % | 37.4 | 6.4 | % | |||||||||||||||||||||||||||||||||||
| Total Americas | $ | 125.7 | 39.9 | % | $ | 108.4 | 36.2 | % | $ | 247.2 | 38.5 | % | $ | 203.8 | 34.9 | % | |||||||||||||||||||||||||||||||
| Asia-Pacific: | |||||||||||||||||||||||||||||||||||||||||||||||
| Greater China | $ | 56.5 | 17.9 | % | $ | 73.2 | 24.4 | % | $ | 129.1 | 20.1 | % | $ | 152.2 | 26.0 | % | |||||||||||||||||||||||||||||||
| Other Asia-Pacific | 34.5 | 11.0 | % | 23.2 | 7.7 | % | 88.2 | 13.7 | % | 52.4 | 9.0 | % | |||||||||||||||||||||||||||||||||||
| Total Asia-Pacific | $ | 91.0 | 28.9 | % | $ | 96.4 | 32.1 | % | $ | 217.3 | 33.9 | % | $ | 204.6 | 35.0 | % | |||||||||||||||||||||||||||||||
| EMEA: | |||||||||||||||||||||||||||||||||||||||||||||||
| Switzerland | $ | 11.7 | 3.7 | % | $ | 19.9 | 6.6 | % | $ | 24.9 | 3.9 | % | $ | 37.9 | 6.5 | % | |||||||||||||||||||||||||||||||
| Other EMEA | 86.4 | 27.5 | % | 75.2 | 25.1 | % | 152.2 | 23.7 | % | 138.3 | 23.6 | % | |||||||||||||||||||||||||||||||||||
| Total EMEA | $ | 98.1 | 31.2 | % | $ | 95.1 | 31.7 | % | $ | 177.1 | 27.6 | % | $ | 176.2 | 30.1 | % | |||||||||||||||||||||||||||||||
| Total net revenue | $ | 314.8 | 100.0 | % | $ | 299.9 | 100.0 | % | $ | 641.6 | 100.0 | % | $ | 584.6 | 100.0 | % | |||||||||||||||||||||||||||||||
Net revenue from customers outside the Americas during the three and six months ended January 1, 2022 represented 60.1% and 61.5% of net revenue, respectively. Net revenue from customers outside the Americas during the three and six months ended January 2, 2021 represented 63.8% and 65.1% of net revenue, respectively.
We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.
Gross Margin
Gross margin increased by 0.4 percentage points during the three months ended January 1, 2022 from 60.1% in the same period a year ago to 60.5% in the current period. This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments. This increase was partially offset by gross margin reduction in our OSP segment as discussed below in the Operating Segment Information section.
Gross margin increased by 0.3 percentage points during the six months ended January 1, 2022 from 59.8% in the same period a year ago to 60.1% in the current period. This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments. This increase was partially offset by gross margin reduction in our OSP segment as discussed below in the Operating Segment Information section.
As discussed in more detail under “Net Revenue” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.
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Research and Development
R&D expense increased by $0.5 million, or 1.0%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was driven by targeted investments to support increased demand for our key product lines. As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.
R&D expense increased by $5.3 million, or 5.4%, during the six months ended January 1, 2022 compared to the same period a year ago. This increase was driven by targeted investments to support increased demand for our key product lines. As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.
We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.
Selling, General and Administrative
SG&A expense increased by $8.7 million, or 10.9%, during the three months ended January 1, 2022 compared to the same period a year ago. This increase was primarily due to targeted investments in people, processes and technology. As a percentage of net revenue, SG&A increased 1.5 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.
SG&A expense increased by $19.1 million, or 11.9%, during the six months ended January 1, 2022 compared to the same period a year ago. This increase was primarily due to targeted investments in people, processes and technology. As a percentage of net revenue, SG&A increased 0.6 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.
Restructuring and Related Charges
From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, integrate various acquisitions, rationalize the manufacturing of our products and align our businesses to address market conditions.
As of January 1, 2022 the Company did not have a restructuring accrual compared to an accrual of $0.5 million as of July 3, 2021. During the three and six months ended January 1, 2022, the Company recorded restructuring and related benefits of $(0.1) million and $(0.1) million, respectively. During the three and six months ended January 2, 2021, the Company recorded restructuring and related charges (benefits) of $0.2 million and $(0.4) million, respectively. Refer to “Note 13. Restructuring and Related Charges” for more information.
Loss on convertible note exchange
During the three months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024. The Company paid $59.0 million in cash in exchange for $20.6 million principal amount of the 2023 Notes and $25.0 million principal amount of the 2024 Notes. The Company recorded a loss of $6.4 million in connection with the transactions.
During the six months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024. The Company paid an aggregate of 10.6 million shares of its common stock, par value $0.001 per share, and $255.5 million in cash in exchange for $114.3 million principal amount of the 2023 Notes and $206.3 million principal amount of the 2024 Notes. The Company recorded a loss of $92.3 million in connection with the settlement transactions.
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Interest income and other income, net
Interest income and other income, net, was $1.1 million during the three months ended January 1, 2022 and January 2, 2021, respectively.
Interest income and other income, net, was $2.5 million during the six months ended January 1, 2022 compared to $1.7 million the same period a year ago. This $0.8 million increase was primarily driven by higher interest income and foreign exchange gains.
Interest Expense
Interest expense increased by $3.5 million or 97.2% during the three months ended January 1, 2022 compared to the same period a year ago. This increase was primarily due to higher debt levels, higher interest rate on Senior Notes due 2029 and amortization of issuance costs as a result of the issuance of Senior Notes due 2029 in September 2021.
Interest expense increased by $3.5 million or 48.6% during the six months ended January 1, 2022 compared to the same period a year ago. This increase was primarily due to higher debt levels, higher interest rate on Senior Notes due 2029 and amortization of issuance costs as a result of the issuance of Senior Notes due 2029 in September 2021.
Provision for Income Taxes
We recorded an income tax expense of $2.3 million and $15.9 million for the three and six months ended January 1, 2022, respectively. We recorded an income tax expense of $12.5 million and $21.1 million for the three and six months ended January 2, 2021, respectively.
The income tax expense for the three and six months ended January 1, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year offset by a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction. The income tax expense for the three and six months ended January 2, 2021 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss.
The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations.
As of January 1, 2022, and July 3, 2021, our unrecognized tax benefits totaled $50.0 million and $55.5 million, respectively, are included in deferred taxes and other non-current tax liabilities, net. We had $1.7 million accrued for the payment of interest and penalties as of January 1, 2022. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.
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Operating Segment Information
Information related to our operating segments were as follows, (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| January 1, 2022 | January 2, 2021 | Change | Percentage Change | January 1, 2022 | January 2, 2021 | Change | Percentage Change | ||||||||||||||||||||||||||||||||||||||||
| Network Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 214.4 | $ | 180.9 | $ | 33.5 | 18.5 | % | $ | 419.3 | $ | 343.0 | $ | 76.3 | 22.2 | % | |||||||||||||||||||||||||||||||
| Gross profit | 138.0 | 113.3 | 24.7 | 21.8 | % | 270.7 | 216.8 | 53.9 | 24.9 | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 64.4 | % | 62.6 | % | 64.6 | % | 63.2 | % | |||||||||||||||||||||||||||||||||||||||
| Service Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 29.8 | $ | 25.8 | $ | 4.0 | 15.5 | % | $ | 52.8 | $ | 47.2 | $ | 5.6 | 11.9 | % | |||||||||||||||||||||||||||||||
| Gross profit | 21.4 | 17.6 | 3.8 | 21.6 | % | 36.1 | 31.9 | 4.2 | 13.2 | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 71.8 | % | 68.2 | % | 68.4 | % | 67.6 | % | |||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 244.2 | $ | 206.7 | $ | 37.5 | 18.1 | % | $ | 472.1 | $ | 390.2 | $ | 81.9 | 21.0 | % | |||||||||||||||||||||||||||||||
| Operating income | 45.6 | 22.2 | 23.4 | 105.4 | % | 76.3 | 35.5 | 40.8 | 114.9 | % | |||||||||||||||||||||||||||||||||||||
| Operating margin | 18.7 | % | 10.7 | % | 16.2 | % | 9.1 | % | |||||||||||||||||||||||||||||||||||||||
| Optical Security and Performance | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 70.6 | $ | 93.2 | $ | (22.6) | (24.2) | % | $ | 169.5 | $ | 194.4 | $ | (24.9) | (12.8) | % | |||||||||||||||||||||||||||||||
| Gross profit | 39.7 | 58.4 | (18.7) | (32.0) | % | 96.8 | 119.4 | (22.6) | (18.9) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 56.2 | % | 62.7 | % | 57.1 | % | 61.4 | % | |||||||||||||||||||||||||||||||||||||||
| Operating income | 27.7 | 44.6 | (16.9) | (37.9) | % | 71.3 | 91.9 | (20.6) | (22.4) | % | |||||||||||||||||||||||||||||||||||||
| Operating margin | 39.2 | % | 47.9 | % | 42.1 | % | 47.3 | % | |||||||||||||||||||||||||||||||||||||||
Network Enablement
During the three months ended January 1, 2022, NE gross margin increased by 1.8 percentage points from 62.6% in the same period a year ago to 64.4% in the current period, reflecting higher revenue volumes and favorable product mix.
During the six months ended January 1, 2022, NE gross margin increased by 1.4 percentage points from 63.2% in the same period a year ago to 64.6% in the current period, reflecting higher revenue volumes and favorable product mix.
Service Enablement
During the three months ended January 1, 2022, SE gross margin increased by 3.6 percentage points from 68.2% in the same period a year ago to 71.8% in the current period. This increase was primarily due to higher revenue and favorable product mix.
During the six months ended January 1, 2022, SE gross margin increased by 0.8 percentage points from 67.6% in the same period a year ago to 68.4% in the current period. This increase was primarily due to higher revenue and favorable product mix.
Network and Service Enablement (NSE)
During the three months ended January 1, 2022, NSE operating margin increased by 8.0 percentage points from 10.7% in the same period a year ago to 18.7% in the current period. This increase in operating margin was primarily driven by higher revenue volume.
During the six months ended January 1, 2022, NSE operating margin increased by 7.1 percentage points from 9.1% in the same period a year ago to 16.2% in the current period. This increase in operating margin was primarily driven by higher revenue volume.
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Optical Security and Performance Products
During the three months ended January 1, 2022, OSP gross margin decreased by 6.5 percentage points from 62.7% in the same period a year ago to 56.2% in the current period. This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.
During the six months ended January 1, 2022, OSP gross margin decreased by 4.3 percentage points from 61.4% in the same period a year ago to 57.1% in the current period. This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.
OSP operating margin decreased by 8.7 percentage points during the three months ended January 1, 2022 from 47.9% in the same period a year ago to 39.2% in the current period. The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.
OSP operating margin decreased by 5.2 percentage points during the six months ended January 1, 2022 from 47.3% in the same period a year ago to 42.1% in the current period. The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.
Liquidity and Capital Resources
As of January 1, 2022 and July 3, 2021, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $738.5 million and $703.7 million, respectively.
Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our Form 10-K for the fiscal year ended July 3, 2021. As of January 1, 2022, U.S. entities owned approximately 53.3% of our cash and cash equivalents, short-term investments and short-term restricted cash. The recent COVID-19 pandemic has caused disruption in global capital markets and over time may impact our ability to obtain credit and/or negotiate acceptable financing terms.
As of January 1, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales. During the three months ended January 1, 2022, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts that are with third-party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
On December 30, 2021, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties. The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300 million, which matures on December 30, 2026. The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100 million so long as certain conditions are met. The proceeds from the credit facility established under the Credit Agreement will be used for working capital and other general corporate purposes. The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and those of its subsidiaries that are borrowers and guarantors under the Credit Agreement.
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Amounts outstanding under the Credit Agreement accrue interest as follows: (i) if the amounts outstanding are denominated in US Dollars, at a per annum rate equal to either, at the Company’s election, Term SOFR plus a margin of 1.35% to 1.85% per annum, or a specified base rate plus a margin of 0.25% to 0.75%, in each case, depending on the average excess availability under the facility, (ii) if the amounts outstanding are denominated in Sterling, at a per annum rate equal to SONIA plus a margin of 1.2825% to 1.7825%, depending on the average excess availability under the facility, (iii) if the amounts outstanding are denominated in Euros, at a per annum rate equal to the Euro Interbank Offered Rate plus a margin of 1.25% to 1.75%, depending on the average excess availability under the facility, or (iv) if the amounts outstanding are denominated in Canadian Dollars, at a per annum rate equal to either, at the Company’s election, the Canadian Dollar Offered Rate plus a margin of 1.25% to 1.75%, or a specified base rate plus a margin of 0.25% to 0.75%, in each case, depending on the average excess availability under the facility.
The covenants of the Credit Agreement include customary restrictive covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, grant liens and make certain acquisitions, investments, asset dispositions and restricted payments. In addition, the Credit Agreement contains certain financial covenants that require the Company to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 if excess availability under the facility is less than the greater of 10% of the lesser of maximum revolver amount and borrowing base and $20 million.
As of January 1, 2022, we had no amounts outstanding under the Credit Agreement. In connection with the entry into the Credit Agreement described above, the Company terminated its existing $300 million revolving credit agreement, dated May 5, 2020.
Six Months Ended January 1, 2022
As of January 1, 2022, our combined balance of cash and cash equivalents and restricted cash increased by $35.3 million to $743.7 million from $708.4 million as of July 3, 2021.
During the six months ended January 1, 2022, Cash provided by operating activities was $75.6 million, consisting of net loss of $20.2 million adjusted for non-cash charges (e.g., loss on convertible note settlement, depreciation, amortization, stock-based compensation and other non-cash items) which totaled $156.4 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $60.6 million. Changes in our operating assets and liabilities related primarily to an increase in inventory of $24.3 million, a decrease in income taxes payable of $21.1 million, an increase in other current and non-current assets of $9.4 million, a decrease in deferred revenue of $6.9 million and an increase in accounts receivable of $6.0 million. These were partially offset by an increase in accounts payable of $5.4 million and increase in accrued payroll and related expenses of $2.2 million.
During the six months ended January 1, 2022, Cash used in investing activities was $32.5 million, primarily related to $34.1 million of cash used for capital expenditures and $1.2 million of cash used for acquisitions, offset by $2.8 million proceeds from sales of assets.
During the six months ended January 1, 2022, Cash used in financing activities was $2.9 million, primarily resulting from $259.3 million paid in connection with the Convertible Note Exchange transactions, $125.6 million cash paid to repurchase common stock under our share repurchase program, $10.9 million in withholding tax payments on the vesting of restricted stock awards and $9.6 million debt issuance costs paid in the period. These were partially offset by $400.0 million gross proceeds from issuance of the 3.75% Notes due 2029, and $3.7 million in proceeds from the issuance of common stock under our employee stock purchase plan.
We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve months. However, there are a number of factors that could positively or negatively impact our liquidity position, including:
•Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
•Impact of the COVID-19 pandemic on our financial condition;
•Changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
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•Increase in capital expenditure to support the revenue growth opportunity of our business;
•Changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;
•Timing of payments to our suppliers;
•Factoring or sale of accounts receivable;
•Volatility in fixed income and credit market which impact the liquidity and valuation of our investment portfolios;
•Volatility in foreign exchange market which impacts our financial results;
•Possible investments or acquisitions of complementary businesses, products or technologies;
•Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes and/or 2029 Notes prior to their maturity or of our common stock;
•Potential funding of pension liabilities either voluntarily or as required by law or regulation;
•Compliance with covenants and other terms and conditions related to our financing arrangements; and
•The risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K, filed with the SEC on August 23, 2021.
Contractual Obligations
There were no material changes to our existing contractual commitments during the second quarter of fiscal 2022.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in “Note 18. Commitments and Contingencies.”
Employee Equity Incentive Plan
Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. Refer to “Note 16. Stock-Based Compensation” for more details.
Pension and Other Post-Retirement Benefits
We sponsor significant pension plans for certain past and present employees in the United Kingdom (U.K.) and Germany. We are also responsible for the non-pension post-retirement benefit obligation (PBO) assumed from a past acquisition. All of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010. The U.K. plan is partially funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of January 1, 2022, our pension plans were under funded by $98 million since the PBO exceeded the fair value of plan assets. Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of January 1, 2022, the fair value of plan assets had increased approximately 2.1% since July 3, 2021, our most recent fiscal year end.
A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.2 million based upon data as of July 3, 2021.
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In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
The Company’s market risk has not changed materially from the foreign exchange and interest rate risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2021.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO),as appropriate, to allow timely decisions regarding required disclosure. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of January 1, 2022.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems will be achieved. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company, have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objective.
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PART II—OTHER INFORMATION
We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. If an unfavorable final outcome were to occur, it may have a material adverse impact on our financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
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Item 1A. Risk Factors
COVID-19 Risks
The effects of the COVID-19 pandemic have significantly affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
The ongoing COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the broader economies, financial markets and may affect the overall demand environment for our products and services.
In response to the COVID-19 pandemic, we have prioritized employee, customer and partner safety and have temporarily shut down, slowed or limited activity in certain locations, including limiting production in certain locations to essential business needs, all in conjunction with federal, state and local health and safety regulations and shelter-in-place orders. While the majority of our global workforce continues to work from home, we are beginning to resume normal business operations with certain continued limitations on business travel, participation in trade shows, marketing activities, sales and development activities.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results. In addition, we have experienced and may continue to experience shipping and logistics challenges. In the first six months of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure. We expect these high costs to continue through the remainder of fiscal year 2022. NSE has experienced some impact to customer demand. Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.
Worldwide distribution by central governments of the vaccines commenced in late 2020. There have been logistical and operational challenges with the rollout and global demand for the vaccine has far exceeded supply, particularly in developing nations. New and potentially more contagious variants of the virus are developing in several countries and regions in which we operate.
When and as normal business operations resume, we will need to expand globally the safety measures we have already undertaken at sites conducting essential business, such as enhanced sanitation procedures, health checks and social distancing protocols, none of which can completely eliminate the risk of exposure or spread of COVID-19. Even after shelter-in-place restrictions have been lifted by governmental authorities, there could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts.
We intend to comply with U.S. federal and other governmental vaccine mandates. Such mandates, could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner. Additional vaccine mandates may be announced in other regions in which we operate or source supplies. Some laws and directives may also hinder our ability to move certain products across borders. Economic conditions can also influence order patterns. These factors could negatively impact our consolidated results of operations and cash flow.
Further, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets in many countries. In fiscal 2020, we entered into a $300 million secured credit facility to strengthen our liquidity position. In December 2021, we terminated this facility and entered into a $300 million asset-based secured credit facility. If there is a long-term economic downturn or a prolonged recession as a result of the pandemic, we could face additional liquidity needs and challenges. There can be no assurance that we will be able to obtain financing on favorable terms or at all.
Any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of operations and financial conditions. Surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner. Further, ongoing supply chain constraints and inflationary pressure could have a negative impact on our results. To the extent the COVID-19 pandemic adversely affects our business
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and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.
We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.
Risks Related to Our Business Strategy and Industry
We have a history of net losses, and our future profitability is not assured.
Historically, we operated as a portfolio company comprised of many product lines, with diverse operating metrics and markets. As a result, our profitability in a particular period will be impacted by revenue, product mix and operational costs that vary significantly across our product portfolio and business segments.
Specific factors that may undermine our profit and financial objectives include, among others:
•Uncertain future telecom carrier and cable operator capital and R&D spending levels, which particularly affects our NE and SE segments;
•Adverse changes to our product mix, both fundamentally (resulting from new product transitions, the declining profitability of certain legacy products and the termination of certain products with declining margins, among other things) and due to quarterly demand fluctuations;
•Pricing pressure across our NSE product lines due to competitive forces and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements;
•Our OSP operating margin may experience some downward pressure as a result of a higher mix of 3D Sensing products and increased operating expenses;
•Limited availability of components and resources for our products which leads to higher component prices;
•Resource rationing, including rationing of utilities like electricity by governments and/or service providers;
•Increasing commoditization of previously differentiated products, and the attendant negative effect on average selling prices and profit margins;
•Execution challenges, which limit revenue opportunities and harm profitability, market opportunities and customer relations;
•Decreased revenue associated with terminated or divested product lines;
•Redundant costs related to periodic transitioning of manufacturing and other functions to lower-cost locations;
•Ongoing costs associated with organizational transitions, consolidations and restructurings, which are expected to continue in the nearer term;
•Cyclical demand for our currency products;
•Changing market and economic conditions, including the impacts due to tariffs, the COVID-19 pandemic and inflationary pressures;
•Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic;
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•Financial stability of our customers, including the solvency of private sector customers and statutory authority for government customers to purchase goods and services;
•Factors beyond our control resulting from pandemics and similar outbreaks such as the COVID-19 pandemic, manufacturing restrictions, travel restrictions and shelter-in-place orders to control the spread of a disease regionally and globally, and limitations on the ability of our employees and our suppliers’ and customers’ employees to work and travel; and
•Supply chain constraints, pricing and inflationary pressure.
Taken together, these factors limit our ability to predict future profitability levels and to achieve our long-term profitability objectives. If we fail to achieve profitability expectations, the price of our debt and equity securities, as well as our business and financial condition, may be materially adversely impacted.
Rapid technological change in our industry presents us with significant risks and challenges, and if we are unable to keep up with the rapid changes, our customers may purchase less of our products which could adversely affect our operating results.
The manufacture, quality and distribution of our products, as well as our customer relations, may be affected by several factors, including the rapidly changing market for our products, supply issues and internal restructuring efforts. We expect the impact of these issues will become more pronounced as we continue to introduce new product offerings and when overall demand increases.
Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable cost to our customers. The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these issues and provide solutions that meet our customers’ current and future needs. As a technology company, we also constantly encounter quality, volume and cost concerns such as:
•Our continuing cost reduction programs which include, site and organization consolidations, asset divestitures, outsourcing the manufacture of certain products to contract manufacturers, other outsourcing initiatives, and reductions in employee headcount, requirements related to re-establishment and re-qualification by our customers of complex manufacturing lines, and modifications to systems, planning and operational infrastructure. During this process, we have experienced, and may continue to experience, additional costs, delays in re-establishing volume production levels, planning difficulties, inventory issues, factory absorption concerns and systems integration problems.
•We have experienced variability of manufacturing yields caused by difficulties in the manufacturing process, the effects from a shift in product mix, changes in product specifications and the introduction of new product lines. These difficulties can reduce yields or disrupt production and thereby increase our manufacturing costs and adversely affect our margin.
•We may incur significant costs to correct defective products (despite rigorous testing for quality both by our customers and by us), which could include lost future sales of the affected product and other products, and potentially severe customer relations problems, litigation and damage to our reputation.
•We are dependent on a limited number of vendors, who are often small and specialized, for raw materials, packages and standard components. We also rely on contract manufacturers around the world to manufacture certain of our products. Our business and results of operations have been, and could continue to be, adversely affected by this dependency. Specific concerns we periodically encounter with our suppliers include stoppages or delays of supply, insufficient vendor resources to supply our requirements, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of supplies and an inability to obtain reduced pricing from our suppliers in response to competitive pressures. Additionally, the ability of our contract manufacturers to fulfill their obligations may be affected by economic, political or other forces that are beyond our control, including the COVID-19
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pandemic. Any such failure could have a material impact on our ability to meet customers’ expectations and may materially impact our operating results.
•New product programs and introductions involve changing product specifications and customer requirements, unanticipated engineering complexities, difficulties in reallocating resources and overcoming resource limitations and increased complexity, which expose us to yield and product risk internally and with our suppliers.
These factors have caused considerable strain on our execution capabilities and customer relations. We have and could continue to see periodic difficulty responding to customer delivery expectations for some of our products, and yield and quality problems, particularly with some of our new products and higher volume products which could require additional funds and other resources required to respond to these execution challenges. From time to time, we have had to divert resources from new product R&D and other functions to assist with resolving these matters. If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged, and our customers may choose to reduce or terminate their purchases of our products and purchase additional products from our competitors.
Unfavorable, uncertain or unexpected conditions in the transition to 5G may cause fluctuations in our rate of revenue growth or financial results.
Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate. If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets. In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in this area. Further, the COVID-19 pandemic resulted in global work-office shut down and Work-From-Home policies among network service providers, NEMs and its related supply chain. This in turn disrupted and delayed new network construction build out, general network maintenance and new technology development.
Even if the 5G infrastructure market and rate of adoption develop in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G platforms and systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our forecasts related to our growth strategy in 3D sensing and other applications may prove to be inaccurate.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimate of the market opportunity related to 3D sensing is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis, industry experience and third-party data. Accordingly, our estimated market opportunity may prove to be materially inaccurate. In addition, our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D sensing and other applications for consumer electronics. We cannot assure you that we will be able to serve a significant portion of this market and the growth forecasts should not be taken as indicative of our future growth.
We may experience increased pressure on our pricing and contract terms due to our reliance on a limited number of customers for a significant portion of our sales.
We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for the foreseeable future. Any failure by us to continue capturing a significant share of these customers could materially harm our business. Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue. Further, to the extent that there is consolidation among communications equipment manufacturers and service providers, we will have increased dependence on fewer customers who may be able to exert increased pressure on our prices and other contract terms. Customer consolidation activity and periodic manufacturing and inventory initiatives could also create the potential for disruptions in demand for our products as a consequence of such customers streamlining, reducing or delaying purchasing decisions.
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We have a strategic alliance with SICPA, our principal customer for our anti-counterfeiting pigments that are used to, among other things, provide security features for banknotes. Under a license and supply agreement, we rely exclusively on SICPA to market and sell one of these product lines, Optical Variable Pigment (OVP®) and Optical Variable Magnetic Pigment (OVMP®), for document authentication applications worldwide. The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement. If SICPA fails to purchase these quantities, as and when required by the agreement, our business and operating results (including among other things, our revenue and gross margin) will be harmed as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.
Movement towards virtualized networks and software solutions may result in lower demand for our hardware products and increased competition.
The markets for our NE and SE segments are increasingly looking towards virtualized networks and software solutions. While we are devoting substantial resources to meet these needs, this trend may result in lower demand for our legacy hardware products. Additionally, barriers to entry are generally lower for software solutions, which may lead to increased competition for our products and services.
We face a number of risks related to our strategic transactions.
Our strategy continues to include periodic acquisitions and divestitures of businesses and technologies. Strategic transactions of this nature involve numerous risks, including the following:
•The impact of the recent COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and both our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns;
•Inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or business’s procedures and controls;
•Diversion of management’s attention from normal daily operations of the business;
•Potential difficulties in completing projects associated with in-process R&D;
•Difficulties in entering markets in which we have no or limited prior experience and where competitors have stronger market positions;
•Difficulties in obtaining or providing sufficient transition services and accurately projecting the time and cost associated with providing these services;
•An acquisition may not further our business strategy as we expected or we may overpay for, or otherwise not realize the expected return on, our investments;
•Expected earn-outs may not be achieved in the time frame or at the level expected or at all;
•We may not be able to recognize or capitalize on expected growth, synergies or cost savings;
•Insufficient net revenue to offset increased expenses associated with acquisitions;
•Potential loss of key employees of the acquired companies; and
•Difficulty in forecasting revenues and margins.
Acquisitions may also cause us to:
•Issue common stock that would dilute our current stockholders’ percentage ownership and may decrease earnings per share;
•Assume liabilities, some of which may be unknown at the time of the acquisitions;
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•Record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;
•Incur additional debt to finance such acquisitions;
•Incur amortization expenses related to certain intangible assets; or
•Acquire, assume, or become subject to litigation related to the acquired businesses or assets.
Operational Risks
Restructuring
We have from time to time engaged in restructuring activities to realign our cost base with current and anticipated future market conditions. Significant risks associated with these types of actions that may impair our ability to achieve the anticipated cost reductions or disrupt our business include delays in the implementation of anticipated workforce reductions in highly regulated locations outside of the U.S. and the failure to meet operational targets due to the loss of key employees. In addition, our ability to achieve the anticipated cost savings and other benefits from these actions within the expected timeframe is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected.
We may not generate positive returns on our research and development strategy.
Developing our products is expensive, and the investment in product development may involve a long payback cycle. We expect to continue to invest heavily in R&D in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology. We believe one of our greatest strengths lies in our innovation and our product development efforts. By investing in R&D including through our acquisitions, we believe we are well positioned to continue to execute on our strategy and take advantage of market opportunities. We expect that our results of operations may be impacted by the timing and size of these investments. In addition, these investments may take several years to generate positive returns, if ever.
We face risks related to our international operations and revenue.
Our customers are located throughout the world. In addition, we have significant operations outside North America, including product development, manufacturing, sales and customer support operations.
Our international presence exposes us to certain risks, including the following:
•Fluctuations in exchange rates between the U.S. dollar and among the currencies of the countries in which we do business may adversely affect our operating results by negatively impacting our revenues or increasing our expenses;
•Our ability to comply with a wide variety of laws and regulations of the countries in which we do business, including, among other things, customs, import/export, anti-bribery, anti-competition, tax and data privacy laws, which may be subject to sudden and unexpected changes;
•Difficulties in establishing and enforcing our intellectual property rights;
•Tariffs and other trade barriers;
•Political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and product development facilities;
•Strained or worsening relations between the United States and China or other countries;
•Difficulties in staffing and management;
•Language and cultural barriers;
•Seasonal reductions in business activities in the countries where our international customers are located;
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•Integration of foreign operations;
•Longer payment cycles;
•Difficulties in management of foreign distributors; and
•Potential adverse tax consequences.
The spread of COVID-19 has and is likely to continue to affect the manufacturing and shipment of goods globally. Any delay in production or delivery of our products due to an extended closure of our suppliers’ plants as a result of efforts to limit the spread of COVID-19 could adversely impact our business. Worldwide travel restrictions have been imposed by many countries, including air travel and transport, that have caused and are likely to continue to cause delays in shipment of our products as well as increased logistics costs and will restrict our ability to attract, develop, integrate and retain highly skilled employees with appropriate qualifications from other countries.
We expect that net revenue from customers outside North America will continue to account for a significant portion of our total net revenue. Lower sales levels that typically occur during the summer months in Europe and some other overseas markets may materially and adversely affect our business. In addition, the revenues we derive from many of our customers depend on international sales and further expose us to the risks associated with such international sales.
Legal, Regulatory and Compliance Risks
Certain of our products are subject to governmental and industry regulations, certifications and approvals.
The commercialization of certain of the products we design, manufacture and distribute through our OSP segment may be more costly due to required government approval and industry acceptance processes. Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the U.S. Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years. If we change a product for any reason, including technological changes or changes in the manufacturing process, prior approvals or certifications may be invalid and we may need to go through the approval process again. If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be adversely affected.
U.S. Government trade actions could have an adverse impact on our business, financial position, and results of operation.
The United States and China have been engaged in protracted negotiations over the Chinese government’s acts, policies, and practices related to technology transfer, intellectual property, and innovation. Former President Trump used his authority under Section 301 of the Trade Act of 1974 three times to levy a 25% retaliatory tariff on 6,830 subheading categories of imported Chinese high-tech and consumer goods valued at $250 billion per year. Although List 3 (under Section 301) valued at $200 billion, had originally set an additional duty rate at 10%, that rate was increased to 25% effective May 10, 2019. Moreover, in August 2019, Former President Trump announced a 15% tariff on a fourth list of goods valued at nearly $300 billion. Pursuant to a U.S.-China trade deal signed in January 2020, the List 3 rate remains at 25% and the List 4 rate decreased to 7.5% on February 14, 2020.
On May 16, 2019, Huawei Technologies Co. Ltd. and 68 designated non-U.S. affiliates (collectively, Huawei) were added to the Entity List of the Bureau of Industry and Security of the U.S. Department of Commerce (BIS), which imposes limitations on the supply of certain U.S. items and product support to Huawei. On August 17, 2020, BIS issued final rules that further restrict access by Huawei to items produced domestically and abroad from U.S. technology and software. While the majority of our products were unaffected, the final rules prevent us from selling certain products to Huawei entities without a license issued subject to the Export Administration Regulations. If we are unable to obtain such a license, our business, financial condition and results of operations could be negatively impacted.
These measures, along with any additional tariffs or other trade actions that may be implemented, may increase the cost of certain materials and/or products that we import from China, thereby adversely affecting our profitability. These actions could require us to raise our prices, which could decrease demand for our products. As a
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result, these actions, including potential retaliatory measures by China and further escalation into a potential “trade war”, may adversely impact our business.
In January 2021, President Biden commenced his new administration with a number of executive orders and actions, including a temporary halt of pending U.S. defense transfers and sales to Saudi Arabia and the United Emirates. This executive order could negatively impact certain products and equipment we deliver to military and defense clients. In January 2022, in light of the military conflict between Russia and Ukraine and potential military incursions by Russia, the Biden administration indicated that it could broaden restrictions on exports to Russia and potentially block foreign shipments of technology, telecommunications and consumer electronics products to Russia if made using U.S. technology. If these measures are invoked, we may not be able to ship certain orders and our business could be negatively impacted. Given the uncertainty regarding the scope and duration of these trade actions by the United States or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain.
Information Security, Technology and Intellectual Property Risks
Our business and operations could 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 rely upon third-party hosting and support services to meet these needs. The growing and evolving cyber-risk environment means that individuals, companies, and organizations of all sizes, including ourselves and our hosting and support partners, are increasingly vulnerable to attacks and disruptions on their networks and systems by a wide range of actors on an ongoing and regular basis. We also design and manage IT systems and products that contain IT systems for various customers, and generally face the same threats for these systems as for our own internal systems.
We maintain information security tools and technologies, staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats. Our network security controls are comprised of administrative, physical and technical controls, which include, but are not limited to, the implementation of firewalls, anti-virus protection, patches, log monitors, routine backups, off-site storage, network audits and other routine updates and modifications. We also routinely monitor and develop our internal information technology systems to address risks to our information systems. Despite our implementation of these and other security measures and those of our third-party vendors, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions and attacks that continue to emerge and evolve. Any system failure, accident or security breach could result in disruptions to our business processes, network degradation, and system down time, along with the potential that a third-party will gain unauthorized access to, or acquire intellectual property, proprietary business information, and data related to our employees, customers, suppliers, and business partners, including personal data. To the extent that any disruption, degradation, downtime or other security event results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential or personal information, it could adversely impact us and our clients, potentially resulting in, among other things, financial losses, our inability to transact business on behalf of our clients, adverse impact on our brand and reputation, violations of applicable privacy and other laws, regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs. We may also incur additional costs related to cyber-security risk management and remediation. There can be no assurance that we or our service providers, if applicable, will not suffer losses relating to cyber-attacks or other information security breaches in the future or that our insurance coverage will be adequate to cover all the costs resulting from such events. No assurances can be given that our efforts to reduce the risk of such attacks will be successful.
The COVID-19 pandemic may adversely affect our systems, and the health of members of our internal IT team who monitor and address the cyber threats and attacks against VIAVI. In particular, the internet is currently experiencing an increase in cyber threats during the COVID-19 pandemic in the form of phishing emails, malware attachments and malicious websites which seemingly offer information regarding COVID-19. We have employed efforts to mitigate any potential impact that could result from increased cyber threats and the loss of members of our internal IT team and by providing our employees with enhanced awareness materials and training, updating our business continuity plans, and cross training staff.
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Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may subject us to substantial negative financial consequences and civil or criminal penalties.
Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy laws and regulations are quickly evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. In addition, our legal and regulatory obligations in jurisdictions outside of the U.S. are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issue rulings that invalidate prior laws or regulations, or to increase penalties significantly. Complying with these laws and regulations can be costly and can impede the development and offering of new products and services. For example, the E.U. General Data Protection Regulation (GDPR), which became effective in May 2018, imposes stringent data protection requirements and provides for significant penalties for noncompliance. Additionally, California enacted legislation, the California Consumer Privacy Act (CCPA), which became effective January 1, 2020. The CCPA requires, among other things, covered companies to provide new disclosures to California consumers, and allow such consumers new abilities to opt-out of certain sales of personal data. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. Further, the California Privacy Rights Act (CPRA) recently passed in California. The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue regulations and could result in increased privacy and information security enforcement. The majority of the provisions will go into effect on January 1, 2023, and additional compliance investment and business process changes may be required. The CPRA may result in further uncertainty and would require us to incur additional expenditures to comply. Several other states have signed into law or are intending to enact laws relating to personal information. The U.S. federal government may also pass data privacy laws. These regulations and legislative developments have potentially far-reaching consequences and may require us to modify our data management practices and incur substantial compliance expense.
Our failure to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal data, or to protect personal data from unauthorized access, use, or other processing, could result in enforcement actions and regulatory investigations against us, claims for damages by customers and other affected individuals, fines, damage to our reputation, and loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed. Our intellectual property rights may not be adequate to protect our products or product roadmaps.
We seek to protect our products and our product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents, trade secrets, know-how and continuing technological innovation. The steps taken by us to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing other technologies that are similar to our own. It is possible that patents may not be issued from any of our pending applications or those we may file in the future and, if patents are issued, the claims allowed may not be sufficiently broad to deter or prohibit others from making, using or selling products that are similar to ours. We do not own patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries where we do not have intellectual property protection. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States.
Any patents issued to us may be challenged, invalidated or circumvented. Additionally, we are currently a licensee in all of our operating segments for a number of third-party technologies, software and intellectual property rights from academic institutions, our competitors and others, and are required to pay royalties to these licensors for the use thereof. Unless we are able to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products, impede the sale of some of our current products, substantially increase the cost to provide these products to our customers, and could have a significant adverse impact on our operating results. In the past, licenses generally have been available to us where
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third-party technology was necessary or useful for the development or production of our products. In the future licenses to third-party technology may not be available on commercially reasonable terms, if at all.
Our products may be subject to claims that they infringe the intellectual property rights of others.
Lawsuits and allegations of patent infringement and violation of other intellectual property rights occur in our industry on a regular basis. We have received in the past, and anticipate that we will receive in the future, notices from third parties claiming that our products infringe their proprietary rights. Over the past several years there has been a marked increase in the number and potential severity of third-party patent infringement claims, primarily from two distinct sources. First, large technology companies, including some of our customers and competitors, are seeking to monetize their patent portfolios and have developed large internal organizations that have approached us with demands to enter into license agreements. Second, patent-holding companies, entities that do not make or sell products (often referred to as “patent trolls”), have claimed that our products infringe upon their proprietary rights. We will continue to respond to these claims in the course of our business operations. In the past, the resolution of these disputes has not had a material adverse impact on our business or financial condition; however, this may not be the case in the future. Further, the litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not we are successful. If we are unsuccessful, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We may not be successful in such development, or such licenses may not be available on terms acceptable to us, if at all. Without such a license, we could be enjoined from future sales of the infringing product or products, which could adversely affect our revenues and operating results.
The use of open-source software in our products, as well as those of our suppliers, manufacturers and customers, may expose us to additional risks and harm our intellectual property position.
Certain of the software and/or firmware that we use and distribute (as well as that of our suppliers, manufacturers and customers) may be, be derived from, or contain, “open source” software, which is software that is generally made available to the public by its authors and/or other third parties. Such open-source software is often made available under licenses which impose obligations in the event the software or derivative works thereof are distributed or re-distributed. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our own software products. While we believe we have complied with our obligations under the various applicable licenses for open-source software, in the event that a court rules that these licenses are unenforceable, or in the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work. Additionally, open-source licenses are subject to occasional revision. In the event future iterations of open-source software are made available under a revised license, such license revisions may adversely affect our ability to use such future iterations.
Environmental, Social and Governance Risks
We may be subject to environmental liabilities which could increase our expenses and harm our operating results.
We are subject to various federal, state and foreign laws and regulations governing the environment, including those governing pollution and protection of human health and the environment and, recently, those restricting the presence of certain substances in electronic products and holding producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, are often complex and are subject to frequent changes. We will need to ensure that we comply with such laws and regulations as they are enacted, as well as all environmental laws and regulations, and as appropriate or required, that our component suppliers also comply with such laws and regulations. If we fail to comply with such laws, we could face sanctions for such noncompliance, and our customers may refuse to purchase our products, which would have a materially adverse effect on our business, financial condition and results of operations.
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With respect to compliance with environmental laws and regulations in general, we have incurred, and in the future could incur, substantial costs for the cleanup of contaminated properties, either those we own or operate or to which we have sent wastes in the past, or to comply with such environmental laws and regulations. Additionally, we could be subject to disruptions to our operations and logistics as a result of such clean-up or compliance obligations. If we were found to be in violation of these laws, we could be subject to governmental fines and liability for damages resulting from such violations. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenditures in connection with a violation of these laws, our financial condition or operating results could be materially adversely impacted.
Climate, Natural Disasters and Catastrophic Events
We operate in geographic regions which face a number of climate and environmental challenges. Our new corporate headquarters are located in Scottsdale, Arizona, a desert climate, subject to extreme heat and drought. The geographic location of our Northern California offices and production facilities subject them to drought, earthquake and wildfire risks. It is impossible to predict the timing, magnitude or location of such natural disasters or their impacts on the local economy and on our operations. If a major earthquake, wildfire or other natural disaster were to damage or destroy our facilities or manufacturing equipment, we may experience potential impacts ranging from production and shipping delays to lost profits and revenues. In October 2017 and again in October 2019, we temporarily closed our Santa Rosa, California facility resulting in production stoppage, due to wildfires in the region and the facility’s close proximity to the wildfire evacuation zone. The location of our production facility could subject us to production delays and/or equipment and property damage. Moreover, in October 2019, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region, commenced planned widespread blackouts during the peak wildfire season to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failure. While we have not experienced damage to our facilities or a material disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward.
Management Transitions and Talent Retention Create Uncertainties and Could Harm our Business.
Management changes could adversely impact our results of operations and our customer relationships and may make recruiting for future management positions more difficult. Our executives and other key personnel are at-will employees and we generally do not have employment or non-compete agreements with our other employees, and we cannot assure you that we will be able to retain them. Competition for people with the specific technical and other skills we require is significant. Moreover, we may face new and unanticipated difficulties in attracting, retaining and motivating employees in connection with the change of our headquarters to Scottsdale, Arizona, effective January 1, 2021. If we are unable to attract and retain qualified executives and employees, or to successfully integrate any newly hired personnel within our organization, we may be unable to achieve our operating objectives, which could negatively impact our financial performance and results of operations.
Risks Related to our Liquidity and Indebtedness
Any deterioration or disruption of the capital and credit markets may adversely affect our access to sources of funding.
Global economic conditions have caused and may cause volatility and disruptions in the capital and credit markets. When the capital or credit markets deteriorate or are disrupted, our ability to incur additional indebtedness to fund a portion of our working capital needs and other general corporate purposes, or to refinance maturing obligations as they become due, may be constrained. In the event that we were to seek to access the capital markets or other sources of financing, there can be no assurance that we will be able to obtain financing on acceptable terms or within an acceptable time, if at all. We may seek to access the capital or credit markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. For example, in December 2021, we entered into a $300 million asset-based secured credit facility. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates. In addition, if we do access the capital or credit markets, agreements governing any borrowing arrangement could contain covenants restricting our operations.
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The issuance of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the “Notes”) increases our overall leverage and could dilute our existing stockholders and lower our reported earnings per share.
The issuance of the Notes substantially increased our principal payment obligations. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. In addition, the holders of the 2023 and 2024 Notes are entitled to convert the Notes into shares of our common stock or a combination of cash and shares of common stock under certain circumstances which would dilute our existing stockholders and lower our reported per share earnings.
Our ability to make payments on our indebtedness when due, to make payments upon conversion with respect to our convertible senior notes or to refinance our indebtedness as we may need or desire, depends on our future performance and our ability to generate cash flow from operations, which is subject to economic, financial, competitive and other factors beyond our control. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. We may not be able to engage in these activities on desirable terms or at all, which may result in a default on our existing or future indebtedness and harm our financial condition and operating results.
Our outstanding indebtedness may limit our operational and financial flexibility.
Our level of indebtedness could have important consequences, including:
•Impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes;
•Requiring us to dedicate a substantial portion of our operating cash flow to paying principal and interest on our indebtedness, thereby reducing the funds available for operations;
•Limiting our ability to grow and make capital expenditures due to the financial covenants contained in our debt arrangements;
•Impairing our ability to adjust rapidly to changing market conditions, invest in new or developing technologies, or take advantage of significant business opportunities that may arise;
•Making us more vulnerable if a general economic downturn occurs or if our business experiences difficulties; and
•Resulting in an event of default if we fail to satisfy our obligations under the Notes or our other debt or fail to comply with the financial and other restrictive covenants contained in the indentures governing the Notes, or any other debt instruments, which event of default could result in all of our debt becoming immediately due and payable and could permit certain of our lenders to foreclose on our assets securing such debt.
We may not generate sufficient cash flow to meet our debt service and working capital requirements, which may expose us to the risk of default under our debt obligations.
We will need to implement our business strategy successfully on a timely basis to meet our debt service and working capital needs. We may not successfully implement our business strategy, and even if we do, we may not realize the anticipated results of our strategy and generate sufficient operating cash flow to meet our debt service obligations and working capital needs. In addition, our ability to make scheduled payments on our indebtedness, including the notes, is affected by general and regional economic, financial, competitive, business and other factors beyond our control, including the COVID-19 pandemic.
In the event our cash flow is inadequate to meet our debt service and working capital requirements, we may be required, to the extent permitted under the indentures covering the Notes and any other debt agreements, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned capital or operating expenditures. Any insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all.
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Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt. This could exacerbate the risks to our financial condition described above.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indentures that govern the Notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness under the agreements governing our existing debt.
The terms of the indentures that govern the Notes restrict our current and future operations, particularly our ability to respond to changes or to take certain actions.
The indentures governing the Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
•Incur or guarantee additional indebtedness;
•Incur or suffer to existing liens securing indebtedness;
•Make investments;
•Consolidate, merge or transfer all or substantially all of our assets;
•Sell assets;
•Pay dividends or other distributions on, redeem or repurchase capital stock;
•Enter into transactions with affiliates;
•Amend, modify, prepay or redeem subordinated indebtedness;
•Enter into certain restrictive agreements;
•Engage in a new line of business;
•Amend certain material agreements, including material leases and debt agreements; and
•Enter into sale leaseback transactions.
Tax Risks
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
Utilization of our NOLs and tax credit carryforwards may be subject to a substantial annual limitation if the ownership change limitations under Sections 382 and 383 of the Internal Revenue Code and similar state provisions are triggered by changes in the ownership of our capital stock. In general, an ownership change occurs if there is a cumulative change in our ownership by “5-percent shareholders” that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws. Accordingly, purchases of our capital stock by others could limit our ability to utilize our NOLs and tax credit carryforwards in the future.
Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs and tax credit carryforwards before they expire. Due to uncertainty regarding the timing and extent of our future profitability, we continue to record a valuation allowance to offset our U.S. and certain of our foreign deferred tax assets because of uncertainty related to our ability to utilize our NOLs and tax credit carryforwards before they expire.
If any of these events occur, we may not derive some or all of the expected benefits from our NOLs and tax credit carryforwards.
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General Risks
Failure to maintain effective internal controls may adversely affect our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We are required to annually evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. A material weakness in our internal controls has been identified in the past, and we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business, financial condition and the market price of our common stock and other securities.
Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.
We have significant long-lived assets recorded on our balance sheet. We evaluate intangible assets and goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. We have in the past and may in the future experience impairment charges to goodwill. The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken. In addition, the economic disruptions caused by the COVID-19 pandemic could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill. Refer to Note 9 and Note 10 of the Notes to the Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the impairment testing of goodwill and long-lived assets.
Our actual operating results may differ significantly from our guidance.
We release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, will be based on projections prepared by our management.
Such projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change.
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section could result in the actual operating results being different from our guidance, and the differences may be adverse and material.
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Certain provisions in our charter and under Delaware laws could hinder a takeover attempt.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law prohibiting, under some circumstances, publicly-held Delaware corporations from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short-term, to the interests of the stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions providing for the limitations of liability and indemnification of our directors and officers, allowing vacancies on our Board of Directors to be filled by the vote of a majority of the remaining directors, granting our Board of Directors the authority to establish additional series of preferred stock and to designate the rights, preferences and privileges of such shares (commonly known as “blank check preferred”) and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders, which may only be called by the Chairman of the Board, the Chief Executive Officer or the Board of Directors. These provisions may also have the effect of deterring hostile takeovers or delaying changes in control or change in our management.
We face certain litigation risks that could harm our business.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we are unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial condition, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits have been significant, will continue to be costly and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations, which could harm our business. For additional discussion regarding litigation, see “Legal Proceedings” in Note 18. “Commitments and Contingencies.”
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed as Exhibits to this report:
| Incorporated by Reference | Filed | Furnished | ||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | Not Filed | ||||||||||||||||||||||||||||||||
| 8-K | 10.1 | 1/6/2022 | ||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | X | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements 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.
| Date: February 7, 2022 | VIAVI SOLUTIONS INC. | |||||||
| (Registrant) | ||||||||
| By: | /s/ HENK DERKSEN | |||||||
| Name: | HENK DERKSEN | |||||||
| Title: | Executive Vice President and Chief Accounting Officer | |||||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||||||||
65
Exhibit 31.1
VIAVI SOLUTIONS INC.
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Oleg Khaykin, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Viavi Solutions Inc.;
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 (or persons performing the equivalent functions):
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.
Dated: February 7, 2022
| /s/ OLEG KHAYKIN | |||||
Oleg Khaykin Chief Executive Officer (Principal Executive Officer) | |||||
Exhibit 31.2
VIAVI SOLUTIONS INC.
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Henk Derksen, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Viavi Solutions Inc.;
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 (or persons performing the equivalent functions):
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.
Dated: February 7, 2022
| /s/ HENK DERKSEN | |||||
| Henk Derksen | |||||
| Executive Vice President and Chief Accounting Officer | |||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||
Exhibit 32.1
VIAVI SOLUTIONS INC.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Viavi Solutions Inc. (the “Company”) on Form 10-Q for the quarter ended January 1, 2022 as filed with the Securities and Exchange Commission (the “Report”), I, Oleg Khaykin, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: February 7, 2022
| /s/ OLEG KHAYKIN | |||||
| Oleg Khaykin | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
Exhibit 32.2
VIAVI SOLUTIONS INC.
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Viavi Solutions Inc. (the “Company”) on Form 10-Q for the quarter ended January 1, 2022 as filed with the Securities and Exchange Commission (the “Report”), I, Henk Derksen, Executive Vice President and Chief Accounting Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.
Dated: February 7, 2022
| /s/ HENK DERKSEN | |||||
| Henk Derksen | |||||
| Executive Vice President and Chief Accounting Officer | |||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||