Viavi Solutions Inc 10-Q for FY2023 Q3
Viavi Solutions Inc. (VIAV)
10-Q
2023-05-03
For: 2023-04-01
View Original
Added on
April 11, 2026
About this 10-Q
Viavi Solutions Inc filed this 10-Q on May 3, 2023, covering the quarter ended April 1, 2023 (FY2023 Q3).
Headline figures
Quarter ended April 1, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $247.8M
- down 21.5% from $315.5M a year earlier
- Net loss
- $15.4M
- compared with net income of $19.2M a year earlier
- Diluted EPS
- -$0.07
- compared with $0.08 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended April 1, 2023
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 April 29, 2023, the Registrant had 222,449,401 shares of common stock outstanding.
| TABLE OF CONTENTS | Page | ||||||||||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| 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 charges (benefits) | ( | ||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| (Loss) income from operations | ( | ||||||||||||||||||||||
| Loss on convertible note settlement (Note 11) | ( | ( | |||||||||||||||||||||
| Loss on convertible note modification (Note 11) | ( | ( | |||||||||||||||||||||
| Interest income and other income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| (Loss) income before income taxes | ( | ||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Net (loss) income 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 | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Net change in cumulative translation adjustment, net of tax | ( | ( | |||||||||||||||||||||
| Unrealized holding (loss) gain arising during period | ( | ( | |||||||||||||||||||||
Amortization of net actuarial losses and other pension adjustments | ( | ||||||||||||||||||||||
| Net change in accumulated other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive (loss) income | $ | ( | $ | $ | $ | ( | |||||||||||||||||
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)
| April 1, 2023 | July 2, 2022 | ||||||||||
| 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 | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Other non-current liabilities | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
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)
| Nine Months Ended | |||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||
| Depreciation expense | |||||||||||
| Amortization of acquired technologies and other intangibles | |||||||||||
| Stock-based compensation | |||||||||||
| Loss on convertible note settlement | |||||||||||
| Loss on convertible note modification | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Deferred taxes, net | ( | ||||||||||
| Restructuring | |||||||||||
| Gain on legal settlement | ( | ||||||||||
| 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 | ( | ||||||||||
| 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 | ( | ( | |||||||||
| Purchase price adjustment related to business acquisition | ( | ||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
| FINANCING ACTIVITIES: | |||||||||||
Proceeds from issuance of debt (Note 11) | $ | $ | |||||||||
| Payment of debt issuance costs | ( | ( | |||||||||
| Repurchase and retirement of common stock | ( | ( | |||||||||
| Withholding tax payment on vesting of restricted stock and performance based-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 obligations | ( | ( | |||||||||
| Payment of acquisition related contingent consideration | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | $ | $ | ( | ||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | $ | $ | ( | ||||||||
| Net increase (decrease) 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 $12.9 million and $10.6 million as of July 2, 2022 and July 3, 2021, respectively.
(2) These amounts include both current and non-current balances of restricted cash totaling $12.6 million and $11.7 million as of April 1, 2023 and April 2, 2022, 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 April 1, 2023 | ||||||||||||||||||||||||||||||||||||||
| Common Stock | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Convertible note modification (Note 11) | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Three Months Ended April 2, 2022 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| 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 April 2, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Nine Months Ended April 1, 2023 | ||||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||
| Balance at July 2, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Shares issued under employee stock plans, net of tax | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Convertible note modification (Note 11) | — | — | — | |||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
6
| Nine Months Ended April 2, 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 April 2, 2022 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||
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 nine months ended April 1, 2023 and April 2, 2022 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 2, 2022.
There have been no material changes to the Company’s accounting policies during the three and nine months ended April 1, 2023 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 2, 2022 on Form 10-K, filed with the SEC on August 19, 2022.
The Consolidated Balance Sheet as of July 2, 2022 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 nine months ended April 1, 2023 and April 2, 2022 may not be indicative of results for the fiscal year ending July 1, 2023 or any future periods.
Principles of Consolidation
The consolidated financial statements include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
8
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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.
We operate globally and sell our products in countries throughout the world. Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between China and the US, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations. Moreover, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions; inflation, which could result in increases in the cost of manufacturing products, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders; increased risk of cybersecurity attacks; and general market instability, all of which could adversely impact our financial results. As a result of the restrictions on exports to Russia, we suspended transactions in the region effective February 2022, which has negatively impacted our business. Foreign companies in China are facing increasing operational challenges and enhanced scrutiny from governmental entities in region. We are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates, assumptions or conditions due to risks and uncertainties, including the ongoing geopolitical instability as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains. The impact on our future operations and results remains uncertain.
Note 2. Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In November 2021, the FASB issued ASU 2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. ASU 2021-10 requires annual disclosures about transactions with a government entity that are accounted for by applying a grant or contribution accounting model 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. ASU 2021-10 is effective for annual periods beginning after December 15, 2021. The Company adopted the ASU on July 3, 2022 with no material impact expected to disclosures in the Annual Report on Form 10-K for the year ended July 1, 2023.
9
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Recent Accounting Pronouncements Not Yet Adopted
In March 2022, the FASB issued ASU 2022-01 Derivatives and Hedging (Topic 815), which clarifies guidance on fair value hedge accounting of interest rate risk for portfolios of financial assets. The amendments in this update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. This guidance is effective for the Company in the first quarter of fiscal 2024 with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
In March 2022, the FASB issued ASU 2022-02 Financial Instruments - Credit Losses (Topic 326), which eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310 and amends the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to the accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. This guidance is effective for the Company in the first quarter of fiscal 2024 with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
In June 2022, the FASB issued ASU 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. This guidance also requires certain disclosures for equity securities subject to contractual sale restrictions. The new guidance is required to be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. This guidance is effective for the Company in the first quarter of fiscal 2025 with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
In September 2022, the FASB issued ASU 2022-04 Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which makes a number of changes meant to add certain disclosure requirements for a buyer in a supplier finance program. The amendments require a buyer that uses supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period, and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. This guidance is effective for the Company in the first quarter of fiscal 2024 with early adoption permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
10
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| 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 (loss) income per share: | |||||||||||||||||||||||
| Basic | $ | ( | $ | $ | $ | ||||||||||||||||||
| Diluted | $ | ( | $ | $ | $ | ||||||||||||||||||
(1) Represents the dilutive impact for the Company’s 1.75 % Senior Convertible Notes due 2023 (2023 Notes), the 1.00 % Senior Convertible Notes due 2024 (2024 Notes) and the 1.625 % Senior Convertible Notes due 2026 (2026 Notes). As of April 1, 2023, the if-converted value is less than the outstanding principal of the 2023, 2024 and 2026 Notes, respectively. Refer to “Note 11. Debt” for more details.
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 | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
Restricted stock units (1) | |||||||||||||||||||||||
Shares issuable from Senior Convertible Notes (2) | |||||||||||||||||||||||
| Total potentially dilutive securities | |||||||||||||||||||||||
(1) Represents the number of 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 Senior Convertible Notes have been excluded from the dilutive net loss per share computations as their effects were deemed anti-dilutive.
11
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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 nine months ended April 1, 2023, 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 2, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income before reclassification | ( | ||||||||||||||||||||||
| Amounts reclassified out of accumulated other comprehensive loss | ( | ( | |||||||||||||||||||||
| Net current-period other comprehensive (loss) income | ( | ( | |||||||||||||||||||||
| Ending balance as of April 1, 2023 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
(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, net of reclassification adjustments, for the nine months ended April 1, 2023. There was no tax impact for the nine months ended April 1, 2023. 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
On October 5, 2022, the Company acquired all of the equity of Jackson Labs Technologies, LLC (Jackson Labs), a privately held company which specializes in Position, Navigation and Timing (PNT) solutions for critical infrastructure serving both military and civilian applications. The acquisition enables the Company to broaden its solutions offering into the rapidly developing PNT landscape.
The total purchase consideration includes approximately $49.9 million paid in cash at closing and additional contingent consideration of up to $117.0 million for which future cash payments are dependent on the achievement of certain operational and revenue targets over the course of a three-year period beginning in January 2023. The cash consideration paid at closing includes escrow payments of $5.0 million for indemnity holdback and $2.0 million subject to final cash and net working capital adjustments. The acquisition meets the definition of a business and has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were approximately $0.8 million and have been recorded within SG&A in the Consolidated Statements of Operations.
12
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
The total purchase consideration was allocated to tangible and intangible assets acquired and liabilities assumed based on the preliminary fair value on the acquisition date. The following table presents the preliminary allocation of the purchase price ( in millions):
| Amount | |||||||||||||||||
| Cash and cash equivalents | $ | ||||||||||||||||
| Accounts receivable, net | |||||||||||||||||
| Inventory, net | |||||||||||||||||
Goodwill (1) | |||||||||||||||||
| Identified intangible assets acquired | |||||||||||||||||
| Other non-current assets | |||||||||||||||||
| Accounts payable | ( | ||||||||||||||||
| Accrued expenses | ( | ||||||||||||||||
| Deferred revenue | ( | ||||||||||||||||
| Other current liabilities | ( | ||||||||||||||||
| Total purchase consideration | $ | ||||||||||||||||
(1) Goodwill at acquisition date of $48.8 million reduced by measurement period adjustment of $0.5 million.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of acquisition (in millions, except useful life):
| Estimated Useful Life | Amount | ||||||||||||||||
| Developed technology | $ | ||||||||||||||||
| Customer relationship | |||||||||||||||||
| Tradename | |||||||||||||||||
| Backlog | |||||||||||||||||
| Total identifiable assets acquired | $ | ||||||||||||||||
Goodwill represents the excess of the preliminary estimated purchase consideration over the preliminary estimates of the fair value of the net tangible and intangible assets acquired and has been allocated to the Network Enablement segment. Goodwill is primarily attributable to expected synergies in the acquired technologies that may be leveraged by the Company in future PNT offerings. The goodwill is expected to be deductible for U.S. income tax purposes.
On July 18, 2022, the Company completed an acquisition accounted for as a business combination consisting of cash paid at closing of $17.5 million and $2.0 million of indemnity holdback. In connection with this acquisition, the Company recorded approximately $11.2 million of goodwill, $5.1 million of developed technology and $1.8 million of deferred tax liability. The acquired developed technology asset is being amortized over its estimated useful life of four years .
On May 13, 2022 and May 20, 2022, the Company completed acquisitions accounted for as business combinations for cash paid at close of $9.5 million, additional earn-outs of up to $3.3 million in cash to be paid based on the occurrence or achievement of certain agreed upon targets and $2.0 million of indemnity holdback. In connection with these acquisitions, the Company recorded $10.0 million of goodwill, $7.3 million of developed technology and other intangibles and $1.6 million of deferred tax liability. The acquired developed technology and other intangible assets are being amortized over their estimated useful lives ranging from to six years .
13
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
On September 17, 2021, the Company acquired all of the equity of one business for approximately $1.6 million. The acquisition was accounted for as an asset purchase. The developed technology will be amortized over its estimated useful life of five 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 nine months ended April 1, 2023 and April 2, 2022 (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | |||||||||||||||||||||||
| Beginning period balance | $ | $ | $ | $ | ||||||||||||||||||||||
| Additions to Contingent Consideration | ||||||||||||||||||||||||||
| 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 April 1, 2023, and July 2, 2022, the Company had total unbilled receivables of $11.9 million and $7.3 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.
The following tables summarize the activity related to deferred revenue (in millions):
| April 1, 2023 | |||||||||||||||||
| Three Months Ended | Nine 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 | $ | $ | |||||||||||||||
(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.
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 April 1, 2023, was $244.2 million. The Company expects to recognize approximately 91 % of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.
14
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Accounts receivable allowance - Credit losses
The following table presents the activities and balances for allowance for credit losses (in millions):
| July 2, 2022 | Charged to Costs and Expenses | Deductions (1) | April 1, 2023 | ||||||||||||||||||||||||||
| 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):
| April 1, 2023 | July 2, 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Inventories, net | $ | $ | |||||||||
Prepayments and other current assets
The following table presents the components of prepayments and other current assets (in millions):
| April 1, 2023 | July 2, 2022 | ||||||||||
| Refundable income taxes | $ | $ | |||||||||
| Prepayments | |||||||||||
| Advances to contract manufacturers | |||||||||||
| Transaction tax receivables | |||||||||||
| Asset held for sale | |||||||||||
| Other current assets | |||||||||||
| Prepayments and other current assets | $ | $ | |||||||||
Other current liabilities
The following table presents the components of other current liabilities (in millions):
| April 1, 2023 | July 2, 2022 | ||||||||||
| Income tax payable | $ | $ | |||||||||
| Interest payable | |||||||||||
| Restructuring accrual (Note 13) | |||||||||||
| Acquisition related holdback and related accruals | |||||||||||
| Transaction tax payable | |||||||||||
| Warranty accrual | |||||||||||
| Fair value of forward contracts | |||||||||||
| Fair value of contingent consideration | |||||||||||
| Other | |||||||||||
| Other current liabilities | $ | $ | |||||||||
15
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Other non-current liabilities
The following table presents components of other non-current liabilities (in millions):
| April 1, 2023 | July 2, 2022 | ||||||||||
| Pension and post-employment benefits | $ | $ | |||||||||
| Fair value of contingent consideration | |||||||||||
| Long-term deferred revenue | |||||||||||
| Financing obligation | |||||||||||
| Deferred tax liability | |||||||||||
| Uncertain tax position | |||||||||||
| Warranty accrual | |||||||||||
| Other | |||||||||||
| Other non-current liabilities | $ | $ | |||||||||
Note 7. Investments and Forward Contracts
Short-Term Investments
As of April 1, 2023, the Company’s short-term investments of $1.5 million were comprised primarily of trading securities related to the deferred compensation plan, of which $1.0 million was invested in equity securities, $0.2 million was invested in debt securities and $0.3 million was invested in money market instruments.
As of July 2, 2022, the Company’s short-term investments of $1.4 million were comprised primarily of trading securities related to the deferred compensation plan, of which $1.0 million was invested in equity securities, $0.3 million was invested in debt securities and $0.1 million was invested in money market instruments.
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 April 1, 2023, the Company had forward contracts that were effectively closed but not settled with the counterparties as of the balance sheet date. Therefore, the fair value of these contracts of $2.3 million and $1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of July 2, 2022, the fair value of these contracts of $3.8 million and $8.3 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 April 1, 2023 and July 2, 2022, the notional amounts of the forward contracts the Company held to purchase foreign currencies were $97.8 million and $119.1 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $20.2 million and $80.5 million, respectively.
16
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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.
•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 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. The Company’s Level 3 instruments consist of contingent purchase consideration liabilities related to business acquisitions. The fair value of such earn-out liabilities are generally 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 certain earn-out liabilities is derived using the estimated probability of success of achieving the earn-out milestones discounted to present value. 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.
17
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Fair Value Measurements
The Company’s assets and liabilities measured at fair value for the periods presented are as follows (in millions):
| April 1, 2023 | July 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents: Money market funds (1) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Short-term investments: Trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
| Other current assets: Foreign currency forward contracts | |||||||||||||||||||||||||||||||||||||||||||||||
| Other non-current assets: debt available-for-sale securities asset-backed securities | |||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Liability: | |||||||||||||||||||||||||||||||||||||||||||||||
| Current liabilities: Foreign currency forward contracts | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Contingent consideration (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
(1)Includes, as of April 1, 2023, $317.0 million in cash and cash equivalents, $4.4 million in restricted cash, and $7.4 million in other non-current assets on the Company’s Consolidated Balance Sheets. Includes, as of July 2, 2022, $301.5 million in cash and cash equivalents, $3.1 million in restricted cash, and $8.6 million in other non-current assets on the Company’s Consolidated Balance Sheets.
(2) Includes certain amounts in other current liabilities and other non-current liabilities on the Company’s Consolidated Balance Sheets.
Other Fair Value Measures
Fair Value of Debt: If measured at fair value in the Consolidated Balance Sheets, the Company’s 3.75 % Senior Notes (2029 Notes), 1.625 % Senior Convertible Notes (2026 Notes), 1.00 % Senior Convertible Notes (2024 Notes) and 1.75 % Senior Convertible Notes (2023 Notes) would be classified in Level 2 of the fair value hierarchy as they are not actively traded in the markets. The Company’s debt measured at fair value for the periods presented are as follows:
| April 1, 2023 | July 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
| Debt: | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
See “Note 11. Debt”, for further discussion of the Company’s debt.
18
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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 2, 2022 | $ | $ | $ | $ | |||||||||||||||||||
| Acquisition | |||||||||||||||||||||||
| Measurement period adjustment | ( | ( | |||||||||||||||||||||
| Currency translation adjustments | |||||||||||||||||||||||
| Balance as of April 1, 2023 | $ | $ | $ | $ | |||||||||||||||||||
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 2022, 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 nine months ended April 1, 2023.
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 April 1, 2023 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
Acquired developed technology (1) | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
Other (2) | ( | ||||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | |||||||||||||||||||
| As of July 2, 2022 | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||
| Acquired developed technology | $ | $ | ( | $ | |||||||||||||||||||
| Customer relationships | ( | ||||||||||||||||||||||
Other (2) | ( | ||||||||||||||||||||||
| Total intangibles | $ | $ | ( | $ | |||||||||||||||||||
(1) During the third quarter of fiscal 2023, we identified impairment indicators for a developed technology monitoring intangible, resulting in a $0.6 million non-cash impairment charge. This charge has been recorded within SG&A in the Consolidated Statements of Operations.
(2) Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.
19
| 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 | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| 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 April 1, 2023, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
| Fiscal Years | |||||
| Remainder of 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total amortization | $ | ||||
The acquired developed technology, customer relationships and other intangible balances are adjusted quarterly to record the effect of currency translation adjustments.
20
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 11. Debt
As of April 1, 2023 and July 2, 2022, the Company’s debt on the Consolidated Balance Sheets represented the carrying amount of the Senior Convertible and Senior Notes, net of unamortized debt discount and issuance costs.
The following table presents the carrying amounts of the Company’s debt (in millions):
| April 1, 2023 | July 2, 2022 | ||||||||||
Principal amount of | $ | $ | |||||||||
Unamortized | ( | ||||||||||
Principal amount of | |||||||||||
Unamortized | ( | ||||||||||
| Other short-term debt | |||||||||||
| Short-term debt | $ | $ | |||||||||
Principal amount of | $ | $ | |||||||||
Unamortized | ( | ( | |||||||||
Principal amount of | |||||||||||
Unamortized | ( | ||||||||||
Principal amount of | |||||||||||
Unamortized | ( | ||||||||||
Unamortized | ( | ||||||||||
| Long-term debt | $ | $ | |||||||||
The Company was in compliance with all debt covenants as of April 1, 2023 and July 2, 2022.
On March 6, 2023, the Company issued $250.0 million aggregate principal amount of 1.625 % Senior Convertible Notes due 2026 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $132.0 million aggregate principal amount of the 2026 Notes to certain holders of the 1.00 % Senior Convertible Notes due 2024 in exchange for $127.5 million principal amount of the 2024 Notes and issued and sold $118.0 million aggregate principal amount of the 2026 Notes in a private placement to accredited institutional buyers (the Subscription Transactions). Proceeds of the 2026 Notes Subscription Transactions amounted to $113.8 million after issuance costs of $4.2 million. The exchange resulted in $2.2 million of the issuance costs to be recorded as loss on convertible note modification on the Consolidated Statements of Operations. The remaining issuance costs of $2.0 million was capitalized within long-term debt (as a contra-balance) on the Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis until maturity.
The 2026 Notes are an unsecured obligation of the Company and bear annual interest of 1.625 %, payable semi-annually in arrears on March 15 and September 15 of each year, beginning September 15, 2023. The 2026 Notes mature on March 15, 2026 unless earlier converted, redeemed or repurchased. As of April 1, 2023, the expected remaining term of the 2026 Notes is 3.0 years.
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
21
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
unless earlier redeemed or repurchased. As of April 1, 2023, the expected remaining term of the 2029 Notes is 6.5 years.
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 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).
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. As of April 1, 2023, the expected remaining term of the 2023 Notes is 0.2 years. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased. See Senior Convertible Notes Settlement below.
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. As of April 1, 2023, the expected remaining term of the 2024 Notes is 0.9 years. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased. See Senior Convertible Notes Settlement below.
Senior Convertible Notes Settlement
On September 2, 2021, the Company entered into separate privately-negotiated agreements with certain holders of its 2023 and 2024 Notes. 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 2023 and 2024 Notes. 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.
On March 2, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 2023 and 2024 Notes. The Company settled $23.2 million principal amount of the 2023 Notes and $26.8 million principal amount of the 2024 Notes in exchange for $64.7 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.
On June 3, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 2023 and 2024 Notes. The Company settled $19.3 million principal amount of the 2023 Notes and $3.1 million principal amount of the 2024 Notes in exchange for $27.1 million in cash. The Company recorded a loss of $3.1 million in connection with the settlement transactions which is presented as Loss on convertible note settlement in the Company’s Consolidated Statements of Operations.
22
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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 April 1, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $169.4 million.
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 first quarter of fiscal 2022. In connection with the entry into the Senior Secured Asset-Based Revolving Credit Facility noted above, the Company terminated this facility.
Interest Expense
The following table presents the interest expense for contractual interest, amortization of debt issuance costs and accretion of debt discount (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| Interest expense-contractual interest | $ | $ | $ | $ | |||||||||||||||||||
| Amortization of debt issuance cost | |||||||||||||||||||||||
| Accretion of debt discount | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total interest expense | $ | $ | $ | $ | |||||||||||||||||||
23
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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 April 1, 2023 and April 2, 2022, the total operating lease costs were $3.2 million and $3.5 million, respectively. For the nine months ended April 1, 2023 and April 2, 2022, the total operating lease costs were $9.7 million and $10.7 million, respectively. Total variable lease costs were immaterial during the three and nine months ended April 1, 2023 and April 2, 2022. The total operating costs were included in cost of revenues, R&D and SG&A in the Company’s Consolidated Statements of Operations.
As of April 1, 2023, the weighted-average remaining lease term was 6.9 years, and the weighted-average discount rate was 4.7 %.
For the three months ended April 1, 2023 and April 2, 2022, cash paid for amounts included in the measurement of operating lease liabilities were $2.9 million and $3.8 million, respectively; and operating right-of-use (ROU) assets obtained in exchange of new operating lease liabilities were $0.9 million and $3.9 million, respectively.
For the nine months ended April 1, 2023 and April 2, 2022, cash paid for amounts included in the measurement of operating lease liabilities were $11.1 million and $12.5 million, respectively; and operating ROU assets obtained in exchange of new operating lease liabilities were $3.9 million and $10.3 million, respectively.
The balance sheet information related to the Company’s operating leases is as follows (in millions):
| April 1, 2023 | ||||||||
| $ | ||||||||
| Total operating ROU assets | $ | |||||||
| $ | ||||||||
| Total operating lease liabilities | $ | |||||||
Future minimum operating lease payments as of April 1, 2023 are as follows (in millions):
| Fiscal Years | Operating Leases | ||||||||||
| Remainder of 2023 | $ | ||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total lease payments | |||||||||||
| Less: Interest | ( | ||||||||||
| Present value of lease liabilities | $ | ||||||||||
24
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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. On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the FY 2023 Plan) to better align the Company’s workforce with current business needs and strategic growth opportunities. The Company’s restructuring charges include severance, benefit and outplacement costs to eliminate a specified number of positions. The Company expects approximately 5 % of its global workforce to be affected. The Company anticipates the Plan to be substantially complete by the end of fiscal 2023.
| Network and Service Enablement | Optical Security and Performance Products | Total | |||||||||||||||||||||||||||
| Beginning of period balance, July 2, 2022 | $ | $ | $ | ||||||||||||||||||||||||||
| Restructuring and related charges | |||||||||||||||||||||||||||||
| Cash settlements | ( | ( | |||||||||||||||||||||||||||
Non-cash settlements and other adjustments | ( | ( | |||||||||||||||||||||||||||
End of period balance, April 1, 2023 (1) | $ | $ | $ | ||||||||||||||||||||||||||
(1) Included in other current liabilities on the Consolidated Balance Sheets as of April 1, 2023.
Note 14. Income Taxes
The Company recorded an income tax provision of $6.0 million and $28.7 million for the three and nine months ended April 1, 2023, respectively. The Company recorded an income tax provision of $9.4 million and $25.3 million for the three and nine months ended April 2, 2022, respectively.
The income tax provision for the three and nine months ended April 1, 2023 and April 2, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss. The income tax provision for the nine months ended April 2, 2022 includes 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 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 April 1, 2023 and July 2, 2022, the Company’s unrecognized tax benefits totaled $51.1 million and $49.7 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had $2.8 million accrued for the payment of interest and penalties as of April 1, 2023. 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.
25
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
Note 15. Stockholders' Equity
Repurchase of Common Stock
In September 2022 the Board of Directors authorized a new stock repurchase plan (“2022 Repurchase Plan”) of up to $300 million effective October 1, 2022 which will remain in effect until the amount authorized has been fully repurchased or until suspension or termination of the program. Under the 2022 Repurchase Plan, the Company is authorized to repurchase shares through a variety of methods, including open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans. The timing of repurchases under the plan will depend upon business and financial market conditions. During the three months ended April 1, 2023, the Company repurchased 2.8 million shares of its common stock for $30.0 million under the 2022 Repurchase Plan. During the nine months ended April 1, 2023, the Company repurchased 5.0 million shares of its common stock for $55.2 million under the 2022 Repurchase Plan. As of April 1, 2023, the Company had remaining authorization of $244.8 million for future share repurchases under the 2022 Repurchase Plan.
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 granted to eligible employees will generally vest in annual installments over a period of to four years subject to the employees’ continuing service to the Company and do not have an expiration date. 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 nine months ended April 1, 2023 and April 2, 2022, the Company granted 3.1 million and 2.4 million time-based restricted stock awards, respectively. The aggregate grant-date fair value of time-based restricted stock awards granted during the nine months ended April 1, 2023 and April 2, 2022 were estimated to be $42.1 million and $39.8 million, respectively.
During the nine months ended April 1, 2023 and April 2, 2022, the Company granted 0.7 million and 0.4 million, performance-based awards, respectively. In addition, during the nine months ended April 1, 2023, 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 nine months ended April 2, 2022. The aggregate grant-date fair value of performance-based awards granted during the nine months ended April 1, 2023 and April 2, 2022 were estimated to be $11.5 million and $7.9 million, respectively. Performance-based awards will generally vest over to four years based on the attainment of certain performance measures and the employee’s continued service through the vest date.
26
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
As of April 1, 2023, $73.4 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 nine months ended April 1, 2023 and April 2, 2022, is as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| Cost of revenues | $ | $ | $ | $ | |||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Approximately $1.2
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 April 1, 2023, the U.K. plan was fully 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 nine months ended April 1, 2023, the Company contributed $0.9 million to the U.K. plan and $3.9 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 | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| 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.
Based on actuarial assumptions, the Company expects to incur cash outlays of approximately $7.9 million related to its defined benefit pension plans during fiscal 2023 to make current benefit payments and fund future obligations. As of April 1, 2023, approximately $4.8 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 2, 2022.
27
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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 Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company pursued 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 July 2, 2022, the related accrued pension liability of £5.4 million or $6.5 million was included in pension and post-employment benefits within other non-current liabilities in the Company’s Consolidated Balance Sheets.
In September 2022, the Company received a favorable court decision which removed completely and definitively the obligation to fund the increased pension benefit with retrospective effect to 1999. As a result of the judgment, and in accordance with authoritative guidance on contingencies, the Company reversed the liability and recorded a gain (reduction to Selling, general and administrative expense in the Company’s Consolidated Statements of Operations) of £5.7 million or $6.7 million during the three months ended October 1, 2022.
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 April 1, 2023, the Company had standby letters of credit of $11.8 million and performance bonds and other claims of $0.7 million collateralized by restricted cash.
Product Warranties
The following table presents the changes in the Company’s warranty reserve during the three and nine months ended April 1, 2023 and April 2, 2022, (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||
| 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 | $ | $ | $ | $ | |||||||||||||||||||
28
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
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, as the Company’s Chief Operating Decision Maker (CODM), uses operating segment financial information to evaluate segment performance and to allocate resources.
The Company’s reportable segments are:
(i) Network Enablement (NE):
NE 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. 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 provides embedded systems and enterprise performance management solutions that give global communications service providers, enterprises and cloud operators visibility into network, service and application 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 leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell technologies for the anti-counterfeiting, consumer electronics, industrial, government and automotive markets.
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 charges, impairment of goodwill, non-operating income and expenses, 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.
29
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Three Months Ended April 1, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 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 (loss) | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Operating margin | % | % | ( | % | |||||||||||||||||||||||||||||||||||||
| Three Months Ended April 2, 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 | |||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||
| Corporate reconciling items impacting gross profit: | |||||||||||
| Total segment gross profit | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
Other benefits (charges) unrelated to core operating performance (1) | ( | ||||||||||
| GAAP gross profit | $ | $ | |||||||||
| Corporate reconciling items impacting operating (loss) 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 charges | ( | ||||||||||
| GAAP operating (loss) income from continuing operations | $ | ( | $ | ||||||||
(1) During the three months ended April 1, 2023 and April 2, 2022, other benefits (charges) unrelated to core operating performance primarily consisted of certain acquisition and integration related charges, transformational initiatives such as site consolidations, reorganization, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.
30
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Nine Months Ended April 1, 2023 | |||||||||||||||||||||||||||||||||||||||||
| 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 | % | % | % | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended April 2, 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 | % | % | % | ||||||||||||||||||||||||||||||||||||||
31
| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Nine Months Ended | |||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||
| Corporate reconciling items impacting gross profit: | |||||||||||
| Total segment gross profit | $ | $ | |||||||||
| Stock-based compensation | ( | ( | |||||||||
| Amortization of intangibles | ( | ( | |||||||||
Other charges 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 benefits (charges) unrelated to core operating performance (1) | ( | ||||||||||
| Restructuring and related (charges) benefits | ( | ||||||||||
| GAAP operating income from continuing operations | $ | $ | |||||||||
(1) During the nine months ended April 1, 2023 and April 2, 2022, other benefits (charges) unrelated to core operating performance primarily consisted of certain acquisition and integration related charges, transformational initiatives such as site consolidations, reorganization, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.
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 | |||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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| VIAVI SOLUTIONS INC. | ||
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) | ||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
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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 “anticipate,” “believe,” “can,” “can impact,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “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, but are not limited to statements such as:
•Our expectations regarding demand for our products and services, including macroeconomic conditions, 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, including restructuring and workforce reduction plans and the anticipated cost and operational benefits associated with such plans, 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, pricing and demand 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, execution of capital allocation and debt management strategies, acquisitions, partnerships and other strategic opportunities;
•Our expectations regarding the continuing impact of the coronavirus disease (COVID-19) pandemic on our business, financial condition, results of operations and liquidity;
•Our strategies for mitigating the risk of supply chain interruptions and inflationary impacts;
•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 2, 2022.
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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.”
Overview
VIAVI is a global provider of network test, monitoring, and assurance solutions for communications service providers, hyperscalers, equipment manufacturers, enterprises, government and avionics. We help customers harness the power of instruments, automation, intelligence, and virtualization. VIAVI is also a leader in light management technologies for 3D sensing, anti-counterfeiting, consumer electronics, industrial, automotive, government and aerospace applications. Together with our customers and partners we are United in Possibility, finding innovative ways to solve real-world problems.
To serve our markets we operate the following business segments:
•Network Enablement (NE);
•Service Enablement (SE); and,
•Optical Security and Performance Products (OSP).
During the third quarter, we continued to experience a constrained demand outlook and inflationary pressures. Weakness in service provider and network equipment manufacturer spending continues to create headwinds for our NE segment. Demand for anti-counterfeiting is softening driven by fiscal tightening as central banks continue to normalize currency printing from elevated levels during the pandemic, creating pressure on OSP revenues.
Any prolonged disruption of manufacturing of our products, commerce and related activity or significant decrease in demand for our products could materially and adversely affect our results of business, operations, and financial conditions.
Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating profit, non-GAAP diluted earnings per share (EPS) and cash flow from operations. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.
Restructuring plan
On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the Plan) intended to reduce costs and better align the Company’s workforce with current business needs and strategic growth opportunities. The Company expects approximately 5% of its global workforce to be affected. The Company anticipates the Plan to be substantially complete by the end of fiscal 2023.
Looking Ahead
As we look ahead to the remainder of the fiscal year, we expect the macroeconomic headwinds and end market demand volatility to persist into the near future. We remain positive on our long-term growth drivers in 5G Wireless, Fiber, 3D Sensing and Resilient PNT. We will continue to focus on executing against our strategic priorities highlighted during our September 2022 Analyst Day Event such as:
•Defend and consolidate leadership in core business segments;
•Invest in secular trends to drive growth and expand Total Addressable Market (TAM);
•Extend VIAVI technologies and platforms into lucrative adjacent markets and applications; and,
•Continuous productivity improvement in Operations, Research & Development (R&D) and Selling, General and Administrative (SG&A).
35
Recent Global Events
We operate globally and sell our products in countries throughout the world. Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between China and the US, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations. Moreover, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions; inflation, which could result in increases in the cost of manufacturing products, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders; increased risk of cybersecurity attacks; and general market instability, all of which could adversely impact our financial results. As a result of the restrictions on exports to Russia, we suspended transactions in the region effective February 2022, which has negatively impacted our business. Foreign companies with a presence in China are facing increasing operational challenges and enhanced scrutiny from governmental entities in region. We are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates, assumptions or conditions due to risks and uncertainties, including the ongoing geopolitical instability as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains. The impact on our future operations and results remains uncertain.
COVID-19 Pandemic Update
While the Covid pandemic has abated and normal business operations have largely resumed, events have led, at times, to slowdowns in shipping and commercial activities. Through lingering economic turbulence, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures. While the Company expects that all of this could have a negative impact to its sales and its results of operations, the Company is not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates, assumptions or conditions.
36
Financial Highlights
Third quarter fiscal 2023 results included the following notable items:
• Net revenue of $247.8 million, down $67.7 million or 21.5% year-over-year.
• GAAP operating margin of (0.8)%, down 1,370 bps year-over-year.
• Non-GAAP operating margin of 11.4%, down 1,010 bps year-over-year.
• GAAP EPS of $(0.07), down $0.15 or 187.5% year-over-year.
• Non-GAAP EPS of $0.08, down $0.14 or 63.6% year-over-year.
A reconciliation of Non-GAAP financial measures to GAAP financial measures is provided below (in millions, except EPS amounts):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating (Loss) Income | Operating Margin | Operating Income | Operating Margin | Operating Income | Operating Margin | Operating Income | Operating Margin | ||||||||||||||||||||||||||||||||||||||||
| GAAP measures | $ | (2.1) | (0.8) | % | $ | 40.8 | 12.9 | % | $ | 70.6 | 8.4 | % | $ | 137.0 | 14.3 | % | |||||||||||||||||||||||||||||||
| Stock-based compensation | 12.8 | 5.2 | % | 12.8 | 4.1 | % | 38.8 | 4.6 | % | 39.7 | 4.1 | % | |||||||||||||||||||||||||||||||||||
| Change in fair value of contingent liability | (1.9) | (0.8) | % | — | — | % | (0.1) | — | % | 0.3 | — | % | |||||||||||||||||||||||||||||||||||
Other charges (benefits) unrelated to core operating performance (1) | 1.3 | 0.5 | % | 4.5 | 1.4 | % | (3.0) | (0.4) | % | 8.2 | 0.9 | % | |||||||||||||||||||||||||||||||||||
| Amortization of intangibles | 8.0 | 3.2 | % | 9.6 | 3.1 | % | 25.2 | 3.0 | % | 30.2 | 3.2 | % | |||||||||||||||||||||||||||||||||||
| Restructuring and related charges (benefits) | 10.2 | 4.1 | % | — | — | % | 10.2 | 1.2 | % | (0.1) | — | % | |||||||||||||||||||||||||||||||||||
| Total related to Cost of Revenue and Operating Expenses | 30.4 | 12.2 | % | 26.9 | 8.6 | % | 71.1 | 8.4 | % | 78.3 | 8.2 | % | |||||||||||||||||||||||||||||||||||
| Non-GAAP measures | $ | 28.3 | 11.4 | % | $ | 67.7 | 21.5 | % | $ | 141.7 | 16.8 | % | $ | 215.3 | 22.5 | % | |||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | Diluted EPS | Net Income | Diluted EPS | Net Income | Diluted EPS | Net (loss) income | Diluted EPS | ||||||||||||||||||||||||||||||||||||||||
| GAAP measures | $ | (15.4) | $ | (0.07) | $ | 19.2 | $ | 0.08 | $ | 25.6 | $ | 0.11 | $ | (1.0) | $ | 0.00 | |||||||||||||||||||||||||||||||
| Items reconciling GAAP net (loss) income and EPS to non-GAAP net income and EPS: | |||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 12.8 | 0.06 | 12.8 | 0.05 | 38.8 | 0.17 | 39.7 | 0.17 | |||||||||||||||||||||||||||||||||||||||
| Change in fair value of contingent liability | (1.9) | (0.01) | — | — | (0.1) | — | 0.3 | — | |||||||||||||||||||||||||||||||||||||||
Other charges (benefits) unrelated to core operating performance (1) | 1.3 | 0.01 | 4.5 | 0.02 | (3.0) | (0.01) | 8.2 | 0.03 | |||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | 8.0 | 0.04 | 9.6 | 0.04 | 25.2 | 0.11 | 30.2 | 0.13 | |||||||||||||||||||||||||||||||||||||||
| Restructuring and related charges (benefits) | 10.2 | 0.05 | — | — | 10.2 | 0.05 | (0.1) | — | |||||||||||||||||||||||||||||||||||||||
Non-cash interest expense and other expense (2) | 2.6 | 0.01 | 6.5 | 0.03 | 2.6 | 0.01 | 99.2 | 0.43 | |||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | 0.4 | — | (0.6) | — | 2.7 | 0.01 | (7.0) | (0.03) | |||||||||||||||||||||||||||||||||||||||
| Total related to Net income and EPS | 33.4 | 0.15 | 32.8 | 0.14 | 76.4 | 0.34 | 170.5 | 0.73 | |||||||||||||||||||||||||||||||||||||||
| Non-GAAP measures | $ | 18.0 | $ | 0.08 | $ | 52.0 | $ | 0.22 | $ | 102.0 | $ | 0.45 | $ | 169.5 | $ | 0.73 | |||||||||||||||||||||||||||||||
| Shares used in per share calculation for Non-GAAP EPS | 225.3 | 236.8 | 227.6 | 232.1 | |||||||||||||||||||||||||||||||||||||||||||
Note: Certain totals may not add due to rounding.
(1) Other items include charges (benefits) unrelated to core operating performance primarily consisted of certain acquisition and integration related charges, transformational initiatives such as site consolidations, reorganization, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.
(2) The Company incurred a loss of $2.2 million for the three and nine months ended April 1, 2023 in connection with the modification of certain 1.00% Senior Convertible Notes. The Company incurred a loss of $6.4M and $98.7M for the three and nine months ended April 2, 2022, respectively, in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes. The Company eliminates this in calculating non-GAAP net income and non-GAAP net income per share, because it believes that in so doing, it can provide investors a clearer and more consistent view of the Company’s core operating performance.
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Use of Non-GAAP (Adjusted) Financial Measures
The Company provides non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share financial measures as supplemental information regarding the Company’s operational performance. The Company uses the measures disclosed in this Report to evaluate the Company’s historical and prospective financial performance, as well as its performance relative to its competitors. Specifically, management uses these items to further its own understanding of the Company’s core operating performance, which the Company believes represent its performance in the ordinary, ongoing and customary course of its operations. Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition-related intangibles, stock-based compensation, legal settlements, restructuring, separation costs, changes in fair value of contingent consideration liabilities and certain investing expenses and other activities that management believes are not reflective of such ordinary, ongoing and core operating activities. The Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance.
The Company believes providing this additional information allows investors to see Company results through the eyes of management. The Company further believes that providing this information allows investors to better understand the Company’s financial performance and, importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.
The non-GAAP adjustments described in this release are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance. The non-GAAP adjustments are outlined below.
Cost of revenues, costs of research and development and costs of selling, general and administrative: The Company’s GAAP presentation of operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, equipment and intangibles that have been identified for disposal but remained in use until the date of disposal, (ii) workforce related charges such as severance, retention bonuses and employee relocation costs related to formal restructuring plans, (iii) costs for facilities not required for ongoing operations, and costs related to the relocation of certain equipment from these facilities and/or contract manufacturer facilities, (iv) stock-based compensation, (v) amortization expense related to acquired intangibles, (vi) changes in fair value of contingent consideration liabilities and (vii) other charges unrelated to our core operating performance comprised mainly of acquisition related transaction costs, integration costs related to acquired entities, litigation and legal settlements and other costs and contingencies unrelated to current and future operations, including transformational initiatives such as the implementation of simplified automated processes, site consolidations, and reorganizations. The Company excludes these items in calculating non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share.
Non-cash interest expense and other expense: The Company excludes certain investing expenses and non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities, in calculating non-GAAP net income and non-GAAP net income per share.
Income tax expense or benefit: The Company excludes certain non-cash tax expense or benefit items, such as the utilization of net operating losses where valuation allowances were released, intra-period tax allocation benefit and the tax effect for amortization of non-tax deductible intangible assets, in calculating non-GAAP net income and non-GAAP net income per share.
Non-GAAP financial measures are not in accordance with, preferable to, or an alternative for, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to non-GAAP net income is net income. The GAAP measure most directly comparable to non-GAAP net income per share is net income per share. The Company believes these GAAP measures alone are not fully indicative of its core operating expenses and performance and that providing non-GAAP financial measures in conjunction with GAAP measures provides valuable supplemental information regarding the Company’s overall performance.
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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 | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Change | Percent Change | April 1, 2023 | April 2, 2022 | Change | Percent Change | ||||||||||||||||||||||||||||||||||||||||
| Segment net revenue: | |||||||||||||||||||||||||||||||||||||||||||||||
| NE | $ | 149.6 | $ | 204.3 | $ | (54.7) | (26.8) | % | $ | 524.2 | $ | 623.6 | $ | (99.4) | (15.9) | % | |||||||||||||||||||||||||||||||
| SE | 27.7 | 26.5 | 1.2 | 4.5 | % | 79.1 | 79.3 | (0.2) | (0.3) | % | |||||||||||||||||||||||||||||||||||||
| OSP | 70.5 | 84.7 | (14.2) | (16.8) | % | 239.2 | 254.2 | (15.0) | (5.9) | % | |||||||||||||||||||||||||||||||||||||
| Total net revenue | $ | 247.8 | $ | 315.5 | $ | (67.7) | (21.5) | % | $ | 842.5 | $ | 957.1 | $ | (114.6) | (12.0) | % | |||||||||||||||||||||||||||||||
| Amortization of acquired technologies | $ | 5.9 | $ | 7.4 | $ | (1.5) | (20.3) | % | $ | 18.7 | $ | 22.7 | $ | (4.0) | (17.6) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 2.4 | % | 2.3 | % | 2.2 | % | 2.4 | % | |||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 141.0 | $ | 186.9 | $ | (45.9) | (24.6) | % | $ | 492.8 | $ | 572.4 | $ | (79.6) | (13.9) | % | |||||||||||||||||||||||||||||||
| Gross margin | 56.9 | % | 59.2 | % | 58.5 | % | 59.8 | % | |||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 50.8 | $ | 54.9 | $ | (4.1) | (7.5) | % | $ | 155.3 | $ | 159.0 | $ | (3.7) | (2.3) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 20.5 | % | 17.4 | % | 18.4 | % | 16.6 | % | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | $ | 80.0 | $ | 89.0 | $ | (9.0) | (10.1) | % | $ | 250.2 | $ | 269.0 | $ | (18.8) | (7.0) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 32.3 | % | 28.2 | % | 29.7 | % | 28.1 | % | |||||||||||||||||||||||||||||||||||||||
| Amortization of other intangibles | $ | 2.1 | $ | 2.2 | $ | (0.1) | (4.5) | % | $ | 6.5 | $ | 7.5 | $ | (1.0) | (13.3) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 0.8 | % | 0.7 | % | 0.8 | % | 0.8 | % | |||||||||||||||||||||||||||||||||||||||
| Restructuring and related charges (benefits) | $ | 10.2 | $ | — | $ | 10.2 | 100.0 | % | $ | 10.2 | $ | (0.1) | $ | 10.3 | NM | ||||||||||||||||||||||||||||||||
| Percentage of net revenue | 4.1 | % | — | % | 1.2 | % | — | % | |||||||||||||||||||||||||||||||||||||||
| Loss on convertible note settlement | $ | — | $ | (6.4) | $ | 6.4 | (100.0) | % | $ | — | $ | (98.7) | $ | 98.7 | (100.0) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | — | % | 2.0 | % | — | % | 10.3 | % | |||||||||||||||||||||||||||||||||||||||
| Loss on convertible note modification | $ | (2.2) | $ | — | $ | (2.2) | 100.0 | % | $ | (2.2) | $ | — | $ | (2.2) | 100.0 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 0.9 | % | — | % | 0.3 | % | — | % | |||||||||||||||||||||||||||||||||||||||
| Interest income and other income, net | $ | 1.6 | $ | 0.6 | $ | 1.0 | 166.7 | % | $ | 4.9 | $ | 3.1 | $ | 1.8 | 58.1 | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 0.6 | % | 0.2 | % | 0.6 | % | 0.3 | % | |||||||||||||||||||||||||||||||||||||||
| Interest expense | $ | (6.7) | $ | (6.4) | $ | (0.3) | (4.7) | % | $ | (19.0) | $ | (17.1) | $ | (1.9) | (11.1) | % | |||||||||||||||||||||||||||||||
| Percentage of net revenue | 2.7 | % | 2.0 | % | 2.3 | % | 1.8 | % | |||||||||||||||||||||||||||||||||||||||
| Provision for income taxes | $ | 6.0 | $ | 9.4 | $ | (3.4) | (36.2) | % | $ | 28.7 | $ | 25.3 | $ | 3.4 | 13.4 | % | |||||||||||||||||||||||||||||||
Percentage of net revenue | 2.4 | % | 3.0 | % | 3.4 | % | 2.6 | % | |||||||||||||||||||||||||||||||||||||||
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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.
Three months ended April 1, 2023 and April 2, 2022
Net revenue decreased by $67.7 million, or 21.5%, during the three months ended April 1, 2023 compared to the same period a year ago. This decrease was due to revenue decreases from our NE and OSP segments, partially offset by revenue increase in our SE segment.
Product revenues decreased by $70.6 million, or 25.6%, during the three months ended April 1, 2023 compared to the same period a year ago, driven by revenue decreases in all segments.
Service revenues increased by $2.9 million, or 7.3%, during the three months ended April 1, 2023 compared to the same period a year ago. This increase was due to revenue increases from our NE and SE segments.
NE net revenue decreased by $54.7 million, or 26.8%, during the three months ended April 1, 2023 compared to the same period a year ago. This decrease was primarily driven by lower volumes in Field Instruments, Lab & Production and Wireless products compared to the prior year partially offset by PNT revenue not included in the same period a year ago.
SE net revenue increased by $1.2 million, or 4.5%, during the three months ended April 1, 2023 compared to the same period a year ago, primarily due to higher Assurance revenue.
OSP net revenue decreased by $14.2 million, or 16.8%, during the three months ended April 1, 2023 compared to the same period a year ago. This decrease was primarily driven by lower Anti-Counterfeiting and consumer and industrial revenue compared to the same period a year ago.
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 | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | April 1, 2023 | April 2, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Americas: | |||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 82.5 | 33.3 | % | $ | 87.4 | 27.7 | % | $ | 271.6 | 32.2 | % | $ | 280.9 | 29.4 | % | |||||||||||||||||||||||||||||||
| Other Americas | 18.0 | 7.2 | % | 21.4 | 6.8 | % | 58.2 | 6.9 | % | 75.1 | 7.8 | % | |||||||||||||||||||||||||||||||||||
| Total Americas | $ | 100.5 | 40.5 | % | $ | 108.8 | 34.5 | % | $ | 329.8 | 39.1 | % | $ | 356.0 | 37.2 | % | |||||||||||||||||||||||||||||||
| Asia-Pacific: | |||||||||||||||||||||||||||||||||||||||||||||||
| Greater China | $ | 45.2 | 18.3 | % | $ | 65.8 | 20.9 | % | $ | 171.6 | 20.4 | % | $ | 194.9 | 20.4 | % | |||||||||||||||||||||||||||||||
| Other Asia-Pacific | 30.3 | 12.2 | % | 48.7 | 15.4 | % | 120.6 | 14.3 | % | 136.9 | 14.3 | % | |||||||||||||||||||||||||||||||||||
| Total Asia-Pacific | $ | 75.5 | 30.5 | % | $ | 114.5 | 36.3 | % | $ | 292.2 | 34.7 | % | $ | 331.8 | 34.7 | % | |||||||||||||||||||||||||||||||
| EMEA: | |||||||||||||||||||||||||||||||||||||||||||||||
| Switzerland | $ | 13.5 | 5.5 | % | $ | 18.8 | 6.0 | % | $ | 42.5 | 5.1 | % | $ | 43.7 | 4.6 | % | |||||||||||||||||||||||||||||||
| Other EMEA | 58.3 | 23.5 | % | 73.4 | 23.2 | % | 178.0 | 21.1 | % | 225.6 | 23.5 | % | |||||||||||||||||||||||||||||||||||
| Total EMEA | $ | 71.8 | 29.0 | % | $ | 92.2 | 29.2 | % | $ | 220.5 | 26.2 | % | $ | 269.3 | 28.1 | % | |||||||||||||||||||||||||||||||
| Total net revenue | $ | 247.8 | 100.0 | % | $ | 315.5 | 100.0 | % | $ | 842.5 | 100.0 | % | $ | 957.1 | 100.0 | % | |||||||||||||||||||||||||||||||
Net revenue from customers outside the Americas during the three and nine months ended April 1, 2023 represented 59.5% and 60.9% of net revenue, respectively. Net revenue from customers outside the Americas during the three and nine months ended April 2, 2022 represented 65.5% and 62.8% 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 decreased by 2.3 percentage points during the three months ended April 1, 2023 from 59.2% in the same period a year ago to 56.9% in the current period. The decrease was primarily due to gross margin reduction from our NE and OSP segments, offset by gross margin increase in our SE segment, as discussed below in the Operating Segment Information section.
Gross margin decreased by 1.3 percentage points during the nine months ended April 1, 2023 from 59.8% in the same period a year ago to 58.5% in the current period. The decrease was primarily driven by gross margin reduction in all segments 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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Amortization of Acquired Technologies and Other Intangibles
Amortization of acquired technologies and other intangibles decreased $1.6M or 16.7% during the three months ended April 1, 2023 compared to the same period a year ago. This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.
Amortization of acquired technologies and other intangibles decreased $5.0M or 16.6% during the nine months ended April 1, 2023 compared to the same period a year ago. This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.
Research and Development
R&D expense decreased by $4.1 million, or 7.5%, during the three months ended April 1, 2023 compared to the same period a year ago. This decrease was driven primarily by variable expense reductions and cost efficiencies realized during the period. As a percentage of net revenue, R&D expense increased by 3.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.
R&D expense decreased by $3.7 million or 2.3%, during the nine months ended April 1, 2023 compared to the same period a year ago. This decrease was driven primarily by variable expense reductions and cost efficiencies realized during the period. As a percentage of net revenue, R&D expense increased by 1.8 percentage points during the nine months ended April 1, 2023 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 decreased by $9.0 million, or 10.1%, during the three months ended April 1, 2023 compared to the same period a year ago. This decrease was primarily due to fair value adjustment of contingent consideration related to acquisitions and variable expense reductions. As a percentage of net revenue, SG&A increased 4.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.
SG&A expense decreased by $18.8 million, or 7.0%, during the nine months ended April 1, 2023 compared to the same period a year ago. This decrease was primarily due to the reversal of the U.K. pension accrued liability, lower commission expense and outside service expenses. As a percentage of net revenue, SG&A increased 1.6 percentage points during the nine months ended April 1, 2023 compared to the same period a year ago.
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. On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the FY 2023 Plan) to better align the Company’s workforce with current business needs and strategic growth opportunities. The Company expects approximately 5% of its global workforce to be affected with approximately $25.0 million of annual savings and anticipates to be substantially complete by the end of fiscal 2023.
During the three and nine months ended April 1, 2023, the Company recorded restructuring charges of $10.2 million related to the FY 2023 Plan. The restructuring charges include severance, benefit and outplacement costs to eliminate a specified number of positions. Refer to “Note 13. Restructuring and Related Charges” for more information.
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Loss on convertible note settlement
During the three months ended April 2, 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 $64.7 million in cash in exchange for $23.2 million principal amount of the 2023 Notes and $26.8 million principal amount of the 2024 Notes. The Company recorded a loss of $6.4 million in connection with the transactions.
During the nine months ended April 2, 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 $320.2 million in cash in exchange for $137.6 million principal amount of the 2023 Notes and $233.0 million principal amount of the 2024 Notes. The Company recorded a loss of $98.7 million in connection with the settlement transactions.
Loss on convertible note modification
During the three months ended April 1, 2023, the Company exchanged $127.5 million principal value of its 1.00% Senior Convertible Notes due 2024 for $132.0 million principal value of its 1.625% Senior Convertible Notes due 2026. The Company incurred $4.2 million of issuance costs related to the modification, of which $2.2 million of the issuance costs were recorded as loss on convertible note modification on the Consolidated Statements of Operations. The remaining issuance costs of $2.0 million was capitalized within long-term debt (as a contra-balance) on the Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis until maturity.
Interest income and other income, net
Interest income and other income, net, was $1.6 million during the three months ended April 1, 2023 compared to $0.6 million during the same period a year ago. This $1.0 million increase was primarily driven by higher interest income during the current period offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.
Interest income and other income, net, was $4.9 million during the nine months ended April 1, 2023 compared to $3.1 million during the same period a year ago. This $1.8 million increase was primarily driven by higher interest income offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.
Interest Expense
Interest expense increased by $0.3 million, or 4.7%, during the three months ended April 1, 2023 compared to the same period a year ago. This increase was primarily driven by the accretion of debt discount on the Senior Convertible Notes due 2026 as a result of the issuance in March 2023.
Interest expense increased by $1.9 million, or 11.1%, during the nine months ended April 1, 2023 compared to the same period a year ago. This increase was primarily driven by full nine month interest expense on the Senior Notes due 2029 in the current period as a result of the issuance in September 2021 offset by lower interest expense on our convertible notes as a result of convertible notes settlement transactions during September 2021, November 2021, March 2022 and June 2022.
Provision for Income Taxes
We recorded an income tax provision of $6.0 million and $28.7 million for the three and nine months ended April 1, 2023, respectively. We recorded an income tax provision of $9.4 million and $25.3 million for the three and nine months ended April 2, 2022, respectively.
The income tax provision for the three and nine months ended April 1, 2023 and April 2, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss. The income tax provision for the nine months ended April 2, 2022 includes a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.
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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 April 1, 2023, and July 2, 2022, our unrecognized tax benefits totaling $51.1 million and $49.7 million, respectively, are included in deferred taxes and other non-current tax liabilities, net. We had $2.8 million accrued for the payment of interest and penalties as of April 1, 2023. 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.
Operating Segment Information
Information related to our operating segments were as follows, (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||
| April 1, 2023 | April 2, 2022 | Change | Percentage Change | April 1, 2023 | April 2, 2022 | Change | Percentage Change | ||||||||||||||||||||||||||||||||||||||||
| Network Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 149.6 | $ | 204.3 | $ | (54.7) | (26.8) | % | $ | 524.2 | $ | 623.6 | $ | (99.4) | (15.9) | % | |||||||||||||||||||||||||||||||
| Gross profit | 92.8 | 130.3 | (37.5) | (28.8) | % | 333.5 | 401.0 | (67.5) | (16.8) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 62.0 | % | 63.8 | % | 63.6 | % | 64.3 | % | |||||||||||||||||||||||||||||||||||||||
| Service Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 27.7 | $ | 26.5 | $ | 1.2 | 4.5 | % | $ | 79.1 | $ | 79.3 | $ | (0.2) | (0.3) | % | |||||||||||||||||||||||||||||||
| Gross profit | 19.5 | 18.3 | 1.2 | 6.6 | % | 53.8 | 54.4 | (0.6) | (1.1) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 70.4 | % | 69.1 | % | 68.0 | % | 68.6 | % | |||||||||||||||||||||||||||||||||||||||
| Network and Service Enablement | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 177.3 | $ | 230.8 | $ | (53.5) | (23.2) | % | $ | 603.3 | $ | 702.9 | $ | (99.6) | (14.2) | % | |||||||||||||||||||||||||||||||
| Operating income | 2.5 | 34.4 | (31.9) | (92.7) | % | 49.8 | 110.7 | (60.9) | (55.0) | % | |||||||||||||||||||||||||||||||||||||
| Operating margin | 1.4 | % | 14.9 | % | 8.3 | % | 15.7 | % | |||||||||||||||||||||||||||||||||||||||
| Optical Security and Performance | |||||||||||||||||||||||||||||||||||||||||||||||
| Net revenue | $ | 70.5 | $ | 84.7 | $ | (14.2) | (16.8) | % | $ | 239.2 | $ | 254.2 | $ | (15.0) | (5.9) | % | |||||||||||||||||||||||||||||||
| Gross profit | 35.7 | 47.0 | (11.3) | (24.0) | % | 128.0 | 143.8 | (15.8) | (11.0) | % | |||||||||||||||||||||||||||||||||||||
| Gross margin | 50.6 | % | 55.5 | % | 53.5 | % | 56.6 | % | |||||||||||||||||||||||||||||||||||||||
| Operating income | 25.8 | 33.3 | (7.5) | (22.5) | % | 91.9 | 104.6 | (12.7) | (12.1) | % | |||||||||||||||||||||||||||||||||||||
| Operating margin | 36.6 | % | 39.3 | % | 38.4 | % | 41.1 | % | |||||||||||||||||||||||||||||||||||||||
Network Enablement
During the three months ended April 1, 2023, NE gross margin decreased by 1.8 percentage points from 63.8% in the same period a year ago to 62.0% in the current period due to lower volumes.
During the nine months ended April 1, 2023, NE gross margin decreased by 0.7 percentage points from 64.3% in the same period a year ago to 63.6% in the current period due to lower volumes.
Service Enablement
During the three months ended April 1, 2023, SE gross margin increased by 1.3 percentage points from 69.1% in the same period a year ago to 70.4% in the current period. This increase was primarily due to higher volumes and improved product mix.
During the nine months ended April 1, 2023, SE gross margin decreased by 0.6 percentage points from 68.6% in the same period a year ago to 68.0% in the current period. This decrease was primarily due to lower volumes.
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Network and Service Enablement
During the three months ended April 1, 2023, NSE operating margin decreased by 13.5 percentage points from 14.9% in the same period a year ago to 1.4% in the current period. This decrease in operating margin was primarily driven by lower volumes.
During the nine months ended April 1, 2023, NSE operating margin decreased by 7.4 percentage points from 15.7% in the same period a year ago to 8.3% in the current period. This decrease in operating margin was primarily driven by lower volumes.
Optical Security and Performance Products
During the three months ended April 1, 2023, OSP gross margin decreased by 4.9 percentage points from 55.5% in the same period a year ago to 50.6% in the current period. This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.
During the nine months ended April 1, 2023, OSP gross margin decreased by 3.1 percentage points from 56.6% in the same period a year ago to 53.5% in the current period. This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.
OSP operating margin decreased by 2.7 percentage points during the three months ended April 1, 2023 from 39.3% in the same period a year ago to 36.6% in the current period. The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.
OSP operating margin decreased by 2.7 percentage points during the nine months ended April 1, 2023 from 41.1% in the same period a year ago to 38.4% in the current period. The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.
Liquidity and Capital Resources
We believe our existing liquidity and sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet our liquidity needs, including but not limited to, contractual obligations, working capital and capital expenditure requirements, financing strategic initiatives, fund debt maturities, and execute purchases under our share repurchase program over the next twelve months and beyond. 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;
•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 markets which impact the liquidity and valuation of our investment portfolios;
•Volatility in credit markets which would impact our ability to obtain additional financing on favorable terms or at all;
•Volatility in foreign exchange markets which impacts our financial results;
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•Possible investments or acquisitions of complementary businesses, products or technologies;
•While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, 1.625% Senior Convertible Notes due 2026 and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt;
•Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes, 2026 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 Quarterly Report on Form 10-Q.
Cash and Cash Equivalents and Short-Term Investments
Our cash and cash equivalents consist mainly of investments in institutional money market funds, short-term deposits held at major global financial institutions, and similar short duration instruments. Our strategy is focused on the preservation of capital and supporting our liquidity requirements that meet high credit quality standards, as specified in our investment policy approved by the Audit Committee of our Board of Directors. Our investments in debt securities and marketable equity securities are primarily classified as available for sale or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity. As of April 1, 2023, U.S. subsidiaries owned approximately 47.2% of our cash and cash equivalents, short-term investments and restricted cash.
As of April 1, 2023, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Nonetheless we could realize investment losses under adverse market conditions. During the three months ended April 1, 2023, 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.
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, we 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.
As of April 1, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $169.4 million.
Refer to “Note 11. Debt” for more information.
Cash Flows for the Nine Months Ended April 1, 2023
As of April 1, 2023, our combined balance of cash and cash equivalents and restricted cash increased by $20.4 million to $593.2 million from $572.8 million as of July 2, 2022.
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During the nine months ended April 1, 2023, Cash provided by operating activities was $90.6 million, consisting of net income of $25.6 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $106.6 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $41.6 million. Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $35.1 million, a decrease in accrued expenses and other current and non-current liabilities of $27.3 million, an increase in inventory of $20.0 million, a decrease in accounts payable of $13.3 million, a decrease in deferred revenue of $6.3 million and a decrease in income taxes payable of $6.2 million. These were partially offset by a decrease in accounts receivable of $47.6 million and a decrease in other current and non-current assets of $19.0 million.
During the nine months ended April 1, 2023, Cash used in investing activities was $105.3 million, primarily related to $64.4 million used for acquisitions, $43.7 million used for capital expenditures and $0.7 million for a purchase price adjustment related to business acquisition, offset by $3.5 million proceeds from sales of assets.
During the nine months ended April 1, 2023, Cash provided by financing activities was $29.3 million, primarily resulting from $118.0 million proceeds from the issuance of 2026 Senior Convertible Notes and $7.9 million in proceeds from the issuance of common stock under our employee stock purchase plan. These were offset by $73.9 million cash paid to repurchase common stock under our share repurchase program, $11.4 million in withholding tax payments on the vesting of restricted stock awards, $7.4 million in other payments, primarily acquisition related and $3.9 million for payments of debt issuance costs.
Share Repurchase Program
In September 2022 the Board of Directors authorized a new stock repurchase plan (“2022 Repurchase Plan”) of up to $300 million effective October 1, 2022 which will remain in effect until the amount authorized has been fully repurchased or until suspension or termination of the program. Under the 2022 Repurchase Plan, the Company is authorized to repurchase shares through a variety of methods, including open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans. The timing of repurchases under the plan will depend upon business and financial market conditions. During the three months ended April 1, 2023, the Company repurchased 2.8 million shares of its common stock for $30.0 million under the 2022 Repurchase Plan. During the nine months ended April 1, 2023, the Company repurchased 5.0 million shares of its common stock for $55.2 million under the 2022 Repurchase Plan. As of April 1, 2023, the Company had remaining authorization of $244.8 million for future share repurchases under the 2022 Repurchase Plan.
The 2022 Repurchase Plan replaces the $200 million stock repurchase plan that the Board previously authorized in September 2019 (“2019 Repurchase Plan”) and expired on September 30, 2022. During the three months ended October 1, 2022, the Company repurchased 1.3 million shares of its common stock for $18.7 million under the 2019 Repurchase Plan.
Refer to “Note 15. Stockholders Equity” for more information.
Contractual Obligations
There were no material changes to our existing contractual commitments during the third quarter of fiscal 2023.
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.
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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 fully funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of April 1, 2023, our pension plans were under-funded by $57.4 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 April 1, 2023, the fair value of plan assets had increased approximately 2.1% since July 2, 2022, our most recent fiscal year end.
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.
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 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.
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 $5.0 million based upon data as of July 2, 2022.
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 2, 2022.
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 April 1, 2023.
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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
Global Risks
Geopolitical conditions, including political turmoil and volatility, regional conflicts, terrorism and war could result in market instability, which could negatively impact our business results.
We operate globally and sell our products in countries throughout the world. Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between the U.S. and China, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations. Foreign companies with a presence in China are facing increasing operational challenges and enhanced scrutiny from governmental entities in region. International conflict has resulted in (i) increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions (ii) inflation, which could result in increases in the cost of manufacturing products, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders (iii) increased risk of cybersecurity attacks and (iv) general market instability, all of which could adversely impact our financial results. Moreover, domestically, U.S. political dissension on raising the debt ceiling may increase the possibility of a government shutdown, default by the U.S. government on its debt obligations, or related credit-rating downgrades, all of which could also have adverse effects on the broader global economy and contribute to, or worsen, an economic recession.
The COVID-19 pandemic has and may continue to adversely affect how we and our customers are operating our businesses.
The worldwide spread of the COVID-19 virus resulted in a global slowdown of economic activity which could continue to impact demand for a broad variety of goods and services, including from the Company’s customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time. New and potentially more contagious variants of the virus have emerged over the course of the pandemic, along with a surge in cases in several regions across the globe, including Europe and Asia, resulting in renewed shutdown, mandatory quarantines and shelter in place orders in certain regions. These events have led, at times, to slowdowns in shipping and commercial activities. Through continued economic challenges, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures.
As normal business operations resume and we transition to a hybrid work model, we continue to practice enhanced sanitation procedures, health checks and social distancing protocols, however, none of these measures can completely eliminate the risk of exposure or spread of COVID-19. There could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts. The reopening of China and ending of its “zero-Covid” policy could have unforeseen impacts on our operations, facilities and supply chain.
Further, the lingering impacts of the COVID-19 pandemic may continue to adversely affect the economies and financial markets in many countries. In December 2021, we entered into a $300 million asset-based secured credit facility. If there is a long-term economic downturn or a prolonged recession, 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 or shipment of our products 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 or quarantines, 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.
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Risks Related to Our Business Strategy and Industry
Our future profitability is not assured.
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, advanced chip component shortages, and 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, the ongoing conflict between Russia and Ukraine, tensions between the U.S. and China, supply chain constraints, pricing and inflationary pressures;
•Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture and/or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic;
•Financial stability of our customers, including the solvency of private sector customers and statutory authority for government customers to purchase goods and services; and
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•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.
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.
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 chain 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 an 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.
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•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 products. Our business 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 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 new technologies may cause our growth forecasts to be inaccurate and/or cause fluctuations in our financial results.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimates of the market opportunities related to 5G infrastructure, 3D sensing and other developing technologies are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis, industry experience and third-party data. Accordingly, these markets may not develop in the manner or in the time periods we anticipate and our estimated market opportunities may prove to be materially inaccurate.
If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, pricing and inflationary pressures, overall spending on 5G infrastructure, 3D sensing and other developing technologies 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 such technologies may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in these markets.
Our growth and ability to serve a significant portion of these markets is subject to many factors, including our success in implementing our business strategy and market adoption and expansion of 5G infrastructure, 3D sensing and other applications for consumer electronics. We cannot assure you that we will be able to serve a significant portion of these markets and the growth forecasts should not be taken as indicative of our future growth. Even if the markets and rates 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, 3D sensing products and other technologies, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
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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 key customer sales 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.
We have a strategic alliance with SICPA to market and sell our OVP and OVMP product lines for banknote anti-counterfeiting applications worldwide. A material reduction in sales, or loss of the relationship with SICPA, may harm our business and operating results as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves in a timely manner.
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:
•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;
•Inability of an acquisition to further our business strategy as expected or 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;
•Lack of ability 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;
•Difficulty in forecasting revenues and margins;
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•The impact of the 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; and
•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.
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;
•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.
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 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.
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, including one recently announced for fiscal 2023. 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.
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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, Russia and China and related impacts on 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;
•Integration of foreign operations;
•Longer payment cycles;
•Difficulties in management of foreign distributors; and
•Potential adverse tax consequences.
The spread of COVID-19 has affected 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 could adversely impact our business, along with delays in shipment of our products as well as increased logistics costs.
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.
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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, 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. For example, the United States has increased tariffs on certain categories of high-tech and consumer goods imported from China pursuant to Section 301 of the Trade Act of 1974, including a current 25% tariff on List 1, List 2 and List 3 goods, which lists cover certain materials and/or products that we import from China.
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. Products that VIAVI sells to Huawei have been affected by the restrictions, however the impact is not expected to be material to our overall operations.
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 result, these actions, including potential retaliatory measures by China and further escalation into a potential “trade war”, may adversely impact our business. While recent US export controls on China’s semiconductor and artificial intelligence industries may have an indirect impact on VIAVI, the implications of such controls are still being evaluated and are not expected to have a material impact on our consolidated annual revenues.
Furthermore, the geopolitical and economic uncertainty and/or instability that may result from changes in the relationship among the United States, Taiwan and China, may, directly or indirectly, materially harm our business, financial condition and results of operations. For example, certain of our suppliers are dependent on products sourced from Taiwan which has been distinguished in its prevalence in certain global markets, most specifically semiconductor manufacturing. Hence, greater restrictions and/or disruptions of our suppliers’ ability to operate facilities and/or do business in these jurisdictions may increase the cost of certain materials and/or limit the supply of products and may result in deterioration of our profit margins, a potential need to increase our pricing and, in so doing, may decrease demand for our products and thereby adversely impact our revenue or profitability.
Due to the ongoing conflict between Russia and Ukraine, the U.S., E.U. and U.K. have broadened restrictions on exports to Russia, thereby blocking shipments of technology, telecommunications and consumer electronics products to Russia. This caused us to suspend transactions in the region effective February 2022 and has negatively impacted our business in the region. Sales in the region are not material to our total consolidated revenues or net income and we are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities at this time. However, these estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates assumptions or conditions due to risks and uncertainties, including the ongoing situation in Ukraine as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains, and the impact on our future operations and results in the region remains uncertain.
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Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may harm our business.
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, there are five new state privacy laws that go into effect in 2023, the California Privacy Rights Act, expanding the CCPA to provide for certain obligations with respect to California employee’s sensitive personal data and an expansion of rights, including the right to limit, correct and request deletion of certain sensitive personal data, the Virginia Consumer Data Protection Act, the Utah Consumer Privacy Act, the Colorado Privacy Act and the Connecticut Data Privacy Act, and a number of other states are considering similar laws. In addition, a federal privacy bill, called the American Data Privacy and Protection Act was recently published. The new state privacy laws and proposed federal law 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. The new and proposed privacy laws may result in further uncertainty and would require us to incur additional expenditures to comply. 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.
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.
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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 internet has experienced an increase in cyber threats in the form of phishing emails, malware attachments and malicious websites. 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 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, loss of customers or business, 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.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.
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.
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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 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.
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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.
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.
Our disclosures, initiatives and goals related to ESG matters expose us to numerous risks.
There is an increasing focus from U.S. and foreign government agencies, certain investors, customers, consumers, employees, and other stakeholders concerning environmental, social and governance (“ESG”) matters. We may communicate certain initiatives and goals, regarding environmental matters, diversity, responsible sourcing and social investments and other ESG matters, in our ESG Report, on our website, in our SEC filings, and elsewhere. These initiatives and goals could be difficult and expensive to implement, and we could be criticized for the accuracy, adequacy, or completeness of the disclosure of our ESG initiatives. Further, statements about our ESG initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change in the future. In addition, we could be criticized for the scope or nature of such initiatives or goals, or for any revisions to these goals. It is anticipated that the SEC will finalize rules in 2023 related to climate disclosures, human capital management and cybersecurity disclosures. Compliance with these complex regulations could be costly, burdensome and will require significant internal and external resources to achieve. If our ESG-related data, processes and reporting are incomplete or inaccurate, or if we fail to achieve progress with respect to our ESG goals on a timely basis, or at all, our reputation, business, financial performance and growth could be adversely affected and we could be subject to additional regulatory scrutiny.
We may be subject to risks related to climate change, 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 Chandler, 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, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region, has previously implemented and may continue to implement 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
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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. We have recently and could continue to experience changes in our leadership team. 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 Chandler, Arizona. As remote work has become more available the competition for highly qualified talent has intensified. 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 which has certain limitations based on our borrowing capacity. 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.
Our notes increased our overall leverage and our convertible notes could dilute our existing stockholders and lower our reported earnings per share.
The issuance of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, our 1.625% Senior Convertible Notes due 2026 and our 3.75% Senior Notes due 2029 (together 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, 2024 and 2026 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.
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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 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.
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.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more debt.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indentures that govern the Notes and the agreement that governs our secured credit facility 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.
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The terms of the indentures that govern the Notes and the agreement that governs our secured credit facility restrict our current and future operations.
The indentures governing the Notes and the agreement governing the secured credit facility 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 exist 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 and/or changes in regulations.
Changes in U.S. federal income or other tax laws or the interpretation of tax laws, including the Inflation Reduction Act of 2022, as recently passed by Congress, may impact our tax liabilities. 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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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our common stock is traded on the Nasdaq Global Select Market under the symbol “VIAV”. As of April 29, 2023, we had 1,784 holders of record of our common stock. We have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.
The following table provides stock repurchase activity during the three months ended April 1, 2023 (in millions, except per share amounts):
| Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Dollar Value of Shares that May Still Be Purchased Under the Plans or Programs(1) | |||||||||||||||||||||||
| Period | ||||||||||||||||||||||||||
| January 1 - January 28, 2023 | — | — | — | 274.8 | ||||||||||||||||||||||
| January 29 - February 25, 2023 | — | — | — | 274.8 | ||||||||||||||||||||||
| February 26 - April 1, 2023 | 2.8 | $10.79 | 2.8 | 244.8 | ||||||||||||||||||||||
| Total | 2.8 | 2.8 | ||||||||||||||||||||||||
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
On May 1, 2023, the Compensation Committee (the "Committee") of our Board of Directors (the “Board”) approved the Viavi Solutions Inc. Section 16 Officer Incentive Compensation Plan (the "Section 16 Incentive Plan"). All Section 16 officers including our named executive officers are eligible to participate in the Section 16 Incentive Plan. Participants in the Section 16 Incentive Plan will be eligible to earn cash incentive awards through the achievement of performance targets to be established by the Committee each year. The degree of performance achievement will determine the amount of each award earned relative to the participant's target amount, which generally will be a percentage of base salary. Participants in the Section 16 Incentive Plan generally must be employed on the date the cash incentive awards are actually paid in order to receive payment. We expect to adopt an annual cash incentive program under the Section 16 Incentive Plan for each fiscal year following adoption of the Section 16 Incentive Plan consistent with the terms as described above.
A copy of the Section 16 Incentive Plan is attached as Exhibit 10.1 hereto and is incorporated herein by reference. The foregoing description of the Section 16 Incentive Plan does not purport to be complete and is qualified in its entirety by reference to such exhibit.
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Item 6. Exhibits
The exhibits required to be filed herewith by Item 601 of Regulation S-K, as described in the following index of exhibits, are attached hereto unless otherwise indicated as being incorporated by reference, as follows:
| Incorporated by Reference | Filed | Furnished | ||||||||||||||||||||||||||||||||||||
| Exhibit No. | Exhibit Description | Form | Exhibit | Filing Date | Herewith | Not Filed | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||||||||
| 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: May 3, 2023 | VIAVI SOLUTIONS INC. | |||||||
| (Registrant) | ||||||||
| By: | /s/ HENK DERKSEN | |||||||
| Name: | HENK DERKSEN | |||||||
| Title: | Executive Vice President and Chief Financial Officer | |||||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||||||||
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VIAVI SOLUTIONS INC.
SECTION 16 OFFICER INCENTIVE PLAN
(Adopted and approved on May 1, 2023)
1.Purposes of the Plan. The purpose of the Viavi Solutions Inc. Section 16 Officer Incentive Plan (the “Plan”) is to motivate Section 16 Officers (as defined below) to achieve financial and other performance objectives and to reward them when such objectives are met. To this end, the Plan provides a means of rewarding Participants based on the performance of the Company and/or its lines of business or business units and, where applicable, on a Participant’s personal performance.
2.Definitions.
(a)“Affiliate” means any corporation or other entity (including, but not limited to, subsidiaries, partnerships and joint ventures) controlled by the Company.
(b)“Actual Award” means as to any Performance Period, the actual award (if any) payable to a Participant for the Performance Period, subject to the Plan Administrator’s authority under Section 3 to modify the award.
(c)“Board” means the Board of Directors of the Company.
(d)“Cash Incentive Pool” means the pool of funds available for distribution to Participants. Subject to the terms of the Plan, the Plan Administrator establishes the Cash Incentive Pool for each Performance Period.
(e)“Cause” means, with respect to the termination by the Company or any Affiliate of a Participant’s employment, that such termination is for “Cause” as such term is expressly defined in a then-effective written agreement between the Participant and the Company or its applicable Affiliate, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Board or the Committee, as applicable, (i) the Participant’s gross negligence or willful misconduct in the Participant’s performance of duties to the Company or an Affiliate, as applicable; (ii) the Participant’s violation of any federal or state law that if made public would injure the business or reputation of the Company or an Affiliate; (iii) the Participant’s failure to comply with any specific lawful direction or order of the Company or an Affiliate or the policies and procedures of the Company or an Affiliate, including but not limited to, the Company’s Code of Business Conduct and Insider Trading Policy; (iv) the substantial and continuing willful refusal by the Participant to perform duties ordinarily performed by an individual in the same position and having similar duties as the Participant; or (v) the material unauthorized use, disclosure or misappropriation by the Participant of any proprietary information, trade secret or other asset of the Company or entrusted to the Company by a third party. The determination as to whether a Participant is being terminated for Cause will be made in good faith by the Board or the Committee, as applicable, and will be final and binding on the Participant.
(f)“Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder will include such section or regulation, any valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.
(g)“Committee” means the Compensation Committee of the Board.
(h)“Company” means Viavi Solutions Inc., a Delaware corporation, and any successor corporation.
(i)“Determination Date” means any time when the achievement of the performance goals associated with the applicable Performance Period remains substantially uncertain; provided, however, that if the Determination Date occurs on or before the date on which 25% of the Performance Period has elapsed, the achievement of such performance goals will be deemed to be substantially uncertain.
(j)“Exchange Act” means the Securities and Exchange Act of 1934, as amended.
(k)“Fiscal Year” means the fiscal year of the Company.
(l)“Participant” means as to any Performance Period, a Section 16 Officer who has been selected by the Plan Administrator for participation in the Plan for that Performance Period.
(m)“Plan Administrator” means the Board or the Committee, as applicable.
(n)“Performance Period” means the period of time for the measurement of the performance criteria that must be met to receive an Actual Award, as determined by the Plan Administrator in its sole discretion. A Performance Period may be divided into one or more shorter periods.
(o)“Section 16 Officer” means an “officer” of the Company or of an Affiliate as that term is defined in Rule 16a-1(f) under the Exchange Act.
(p)“Target Incentive” means the target award, at 100% performance achievement, payable under the Plan to a Participant for the Performance Period, as determined by the Plan Administrator in accordance with Section 3(b).
3.Selection of Participants and Determination of Awards.
(a)Selection of Participants. The Plan Administrator, in its sole discretion, will select the Section 16 Officers who will be Participants for any Performance Period. Participation in the Plan is in the sole discretion of the Plan Administrator, on a Performance Period by Performance Period basis. Accordingly, a Section 16 Officer who is a Participant for a given Performance Period in no way is guaranteed or assured of being selected for participation in any subsequent Performance Period or Periods.
(b)Determination of Target Incentives. The Committee, in its sole discretion, will establish a Target Incentive for each Participant, other than the CEO, which generally will be a percentage of a Participant’s actual base salary for the Performance Period (which will be reflective of any base salary adjustments that occurred during the Performance Period). The Committee shall make a recommendation to the Board regarding the CEO’s Target Incentive, and the Board, in its sole discretion, will establish a Target Incentive for the CEO.
(c)Cash Incentive Pool. Each Performance Period, the Plan Administrator, in its sole discretion, will establish a Cash Incentive Pool, which may be established before, during or after the applicable Performance Period. Actual Awards will be paid from the Cash Incentive Pool.
(d)Discretion to Modify Awards and Cash Incentive Pool. Notwithstanding any contrary provision of the Plan, the Plan Administrator may, in its sole discretion, (i) in determining the Participant’s Actual Award, increase, reduce or eliminate the Participant’s Target Incentive, (ii) increase, reduce or eliminate the amount allocated to the Cash Incentive Pool, and/or (ii) modify the performance goals necessary to achieve an Actual Award. The Actual Award may be below, at or above the Target Incentive, in the Plan Administrator’s discretion. The Plan Administrator may determine the amount of
any reduction on the basis of such factors as it deems relevant and will not be required to establish any allocation or weighting with respect to the factors it considers.
(e)Discretion to Determine Criteria. Notwithstanding any contrary provision of the Plan, the Plan Administrator will, in its sole discretion, determine the performance goals applicable to any Target Incentive on or prior to the Determination Date which may include, without limitation:
•Revenue;
•Net revenue;
•Earnings per share;
•Earnings before income taxes, interest, depreciation and amortization;
•Operating income;
•Net income;
•Net operating income;
•Total stockholder return;
•Return on equity;
•Return on investment and/or return on invested capital;
•Return on assets;
•Cash flow;
•Free cash flow;
•Economic value added;
•Market share;
•Control of expenses;
•Cost of goods sold;
•Profit margin;
•Operating margin;
•Gross margin;
•Operating profit;
•Gross profit;
•Stock price;
•Debt and/or debt-to-equity;
•Bookings;
•Sales;
•Annual recurring revenue;
•Liquidity;
•Intellectual property (e.g., patents)/product development;
•Mergers, acquisitions, divestitures or other strategic transactions;
•Individual business and/or management objectives;
•Cost per order dollar;
•Design or design wins;
•Operational metrics, key performance indicators or strategic goals;
•Environmental, social and governance goals; and
•Any other financial and/or non-financial objectives the Plan Administrator so designates.
As determined by the Plan Administrator, any criteria used may be measured, as applicable, (i) in absolute terms, (ii) in relative terms, including, but not limited, passage of time (such as year over year growth) and/or against another company, a comparison group of companies or index designated by the Committee, (iii) on a per-share basis, (iv) against the performance of the Company as a whole or one or more identifiable business units, divisions, products, lines of business or segments of the Company, (v) on a pre-tax or after-tax basis, and/or (vi) on a GAAP or non-GAAP basis. Prior to the Determination Date, the Plan Administrator will determine whether any significant elements will be included in or excluded from the calculation of any performance goal with respect to any Participants. The performance goals may differ from Participant to Participant and from award to award. Failure to meet the goals will result in a failure to earn the Target Incentive, except as provided in Section 3(d).
4.Payment of Awards.
(a)Determination and Certification. After the end of each Performance Period, the Plan Administrator will certify in writing (which may be by approval of the minutes in which the certification was made) the extent to which the performance goals applicable to each Participant for the Performance Period were achieved or exceeded.
(b)Right to Receive Payment. Each Actual Award will be paid solely from the general assets of the Company. Nothing in this Plan will be construed to create a trust or to establish or evidence any Participant’s claim of any right other than as an unsecured general creditor with respect to any payment to which he or she may be entitled. Unless otherwise determined by the Plan Administrator, to earn an Actual Award, a Participant must be employed by the Company or any Affiliate through the date of payment.
(c)Timing of Payment. Payment of each Actual Award will be made as soon as practicable after the determination by the Plan Administrator of the Actual Award for a particular Performance Period. It is the intent that this Plan comply with the requirements of Code Section 409A so that none of the payments to be provided hereunder will be subject to the additional tax imposed under Code Section 409A, and any ambiguities herein will be interpreted to so comply.
(d)Form of Payment. Each Actual Award will be paid in cash (or its equivalent).
5.Plan Administration.
(a)Plan Administrator. Unless and until the Board otherwise determines, and consistent with the authorities and responsibilities set forth under its charter, the Committee will administer the Plan, except with respect to the CEO’s Target Incentive, Performance Goals and Actual Award, which shall be administered by the Board.
(b)Plan Administrator Authority. It will be the duty of the Plan Administrator to administer the Plan in accordance with the Plan’s provisions. The Plan Administrator will have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (i) determine which Section 16 Officers will be granted awards, (ii) prescribe the terms and conditions of awards, (iii) interpret the Plan and the awards, (iv) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Section 16 Officers who are foreign nationals or employed outside of the United States, (v) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (vi) interpret, amend or revoke any such rules.
(c)Decisions Binding. All determinations and decisions made by the Plan Administrator, and any delegate of the Plan Administrator pursuant to the provisions of the Plan will be final, conclusive, and binding on all persons, and will be given the maximum deference permitted by law.
(d)Delegation by Plan Administrator. The Plan Administrator, in its sole discretion and on such terms and conditions as it may provide, may delegate all or part of its authority and powers under the Plan to one or more members of the Board or the Committee.
(e)Indemnification. Each person who is or will have been a member of the Plan Administrator will be indemnified and held harmless by the Company against and from (i) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any award, and (ii) from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she will give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification will not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.
6.Recoupment. Unless the Plan Administrator determines otherwise and subject to applicable law, all Actual Awards paid under this Plan shall be subject to the VIAVI Compensation Clawback Policy, as amended from time to time. Notwithstanding the foregoing, the Plan Administrator may, in its sole discretion, implement any recoupment or clawback policies or make any changes to the VIAVI Compensation Clawback Policy, which terms shall apply to Actual Awards as the Plan Administrator deems necessary or advisable in order to comply with applicable law or regulatory guidance.
7.General Provisions.
(a)Tax Withholding. The Company will withhold all applicable taxes from any Actual Award, including any federal, state and local taxes (including, but not limited to, the Participant’s FICA, FUTA and SDI obligations).
(b)No Effect on Employment. Nothing in the Plan will interfere with or limit in any way the right of the Company or an Affiliate to terminate any Participant’s employment at any time, with or without Cause, and if a Participant is a party to an employment contract with the Company or one of its Affiliates, in accordance with the terms and conditions of the Participant’s employment agreement. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) will not be deemed a termination of employment. Employment with the Company and its Affiliates is on an at-will basis only. The Company and its Affiliates expressly reserve the right, which may be exercised at any time and without regard to when during a Performance Period such exercise occurs, to terminate any individual’s employment with or without Cause, and to treat him or her without regard to the effect that such treatment might have upon him or her as a Participant.
(c)Participation. No Section 16 Officer will have the right to be selected to receive an award under this Plan, or, having been so selected, to be selected to receive a future award.
(d)Successors. All obligations of the Company under the Plan, with respect to awards granted hereunder, will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business or assets of the Company.
(e)Beneficiary Designations. If permitted by the Plan Administrator, a Participant under the Plan may name a beneficiary or beneficiaries to whom any earned but unpaid award will be paid in the event of the Participant’s death. Each such designation will revoke all prior designations by the Participant and will be effective only if given in a form and manner acceptable to the Plan Administrator. In the absence of any such designation, any vested benefits remaining unpaid at the Participant’s death will be paid to the Participant’s estate.
(f)Nontransferability of Awards. No award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 7(e). All rights with respect to an award granted to a Participant will be available during his or her lifetime only to the Participant.
(g)Deferrals. The Plan Administrator, in its sole discretion, may permit a Participant to defer receipt of the payment of cash that would otherwise be delivered to a Participant under the Plan under the Company’s Deferred Compensation Plan (or any similar successor plan). Any such deferral elections shall be made in compliance with Section 409A of the Code.
8.Amendment, Termination, and Duration.
(a)Amendment, Suspension, or Termination. The Plan Administrator, in its sole discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan will not, without the consent of the Participant, alter or impair any rights or obligations under any Actual Award theretofore earned by such Participant. No award may be granted during any period of suspension or after termination of the Plan.
(b)Duration of Plan. The Plan will commence on the date specified herein, and subject to Section 8(a) (regarding the Board’s right to amend or terminate the Plan), will remain in effect thereafter.
9.Legal Construction.
(a)Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also will include the feminine; the plural will include the singular and the singular will include the plural.
(b)Severability. In the event any provision of the Plan will be held illegal or invalid for any reason, the illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included.
(c)Requirements of Law. The granting of awards under the Plan will be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.
(d)Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan, and any cash incentive payment will be determined in accordance with the laws of the State of Arizona (without giving effect to principles of conflicts of laws thereof) and applicable Federal law.
(e)Bonus Plan. Cash incentive payments represent unfunded and unsecured obligations of the Company and a holder of any right hereunder in respect of any incentive payment will have no rights other than those of a general unsecured creditor to the Company. The Plan is intended to be a “bonus program” as defined under U.S. Department of Labor regulation 2510.3-2(c) and will be construed and administered in accordance with such intention.
(f)Captions. Captions are provided herein for convenience only, and will not serve as a basis for interpretation or construction of the Plan.
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: May 3, 2023
| /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: May 3, 2023
| /s/ HENK DERKSEN | |||||
| Henk Derksen | |||||
| Executive Vice President and Chief Financial 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 April 1, 2023 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: May 3, 2023
| /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 April 1, 2023 as filed with the Securities and Exchange Commission (the “Report”), I, Henk Derksen, Executive Vice President and Chief Financial 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: May 3, 2023
| /s/ HENK DERKSEN | |||||
| Henk Derksen | |||||
| Executive Vice President and Chief Financial Officer | |||||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | |||||