UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedJuly 1, 2017June 27, 2020
OR
o☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 0-22874000-22874
Viavi Solutions Inc.
(Exact name of Registrant as specified in its charter)
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| Delaware | | 94-2579683 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
430 North McCarthy Boulevard, Milpitas, 6001 America Center Drive, San Jose, California 9503595002
(Address of principal executive offices including Zip code)
(408) (408) 404-3600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common Stock, par value of $0.001 per share | | VIAV | | The NASDAQNasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒ No ☐
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o☐Nox☒
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. Yesx☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesx☒ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | x☒ | Accelerated filer | o☐ | Non-accelerated filer (Do not check if a smaller reporting company)
| o☐ | Smaller reporting company | o☐ | Emerging growth company
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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.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a 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 o ☐No x☒
As of December 31, 2016 28, 2019, the last business day of the registrant’s most recently completed second fiscal quarter,the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $1.9$3.5 billion, based upon the closing sale prices of the common stock as reported on the NASDAQNasdaq Stock Market LLC. Shares of common stock held by executive officers and directors have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of July 28, 201725, 2020, the Registrant had 227,547,102228,318,250 shares of common stock outstanding.
Documents Incorporated by Reference:DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Notice of Annual Meeting of Stockholders and Proxy Statement to be filed pursuant to Regulation 14A within 120 days after Registrant’s fiscal year end of July 1, 2017June 27, 2020 are incorporated by reference into Part III of this Report.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K for the year ended June 27, 2020 (Annual Report on Form 10-K), which we also refer to as the Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipates,” “believes,” “can,” “can impact,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “ongoing,” “plans,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as:
Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition, results of operations and liquidity;
Our expectations regarding demand for our products and services, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;
Our plans for growth and innovation opportunities;
Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;
Our plans for continued development, use and protection of our intellectual property;
Our strategies for achieving our current business objectives, including related risks and uncertainties;
Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;
Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;
Our research and development plans and the expected impact of such plans on our financial performance; and
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| • | Our plans for growth and innovation opportunities; |
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| • | Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation; |
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| • | Our plans for continued development, use and protection of our intellectual property; |
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| • | Our strategies for achieving our current business objectives, including related risks and uncertainties; |
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| • | Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities; |
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| • | Our strategies for mitigating the risk of supply chain interruptions; |
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| • | 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 I, Item 1A “Risk Factors” and elsewhere in this Annual Report on Form 10-K 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-K to conform such statements to actual results or to changes in our expectations.
PART I
ITEM 1. BUSINESS
GENERAL
Overview
Viavi Solutions Inc. (“Viavi,”(VIAVI, also referred to as “thethe Company,” “we,” “our,” we, our, and “us”), formerly JDS Uniphase Corporation (“JDSU”),us) is a global provider of network test, monitoring and assurance solutions tofor communications service providers, enterprises, network equipment manufacturers, government and their ecosystems, supported by a worldwide channel community including Viavi Velocity Solution Partners. Our Velocity program (“Velocity”) allows usavionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to optimizeCommand the use of direct or partner sales depending on application and sales volume. Velocity expands our reach into new market segments as well as expands our capability to sell and deliver solutions. Our solutions deliver end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. Viavinetwork. VIAVI is also a leader in high performance thin film optical coatings, providing light management solutions tofor 3D sensing, anti-counterfeiting, consumer andelectronics, industrial, government, automotive and healthcare and other markets. On August 1, 2015, we completed the separation (“Separation”) of our optical components and lasers business and created two publicly-traded companies:
an optical components and commercial lasers company, Lumentum Holdings Inc. (“Lumentum”), consisting of our former Communications and Commercial Optical Products (“CCOP”) segment and the WaveReady product line within our Network Enablement (“NE”) segment; and
a network and service enablement and optical coatings company, renamed Viavi, consisting of our NE, Service Enablement (“SE”) and Optical Security and Performance Products (“OSP”) segments.
In connection with the Separation we distributed approximately 80.1% of the outstanding shares of Lumentum common stock to our stockholders on August 1, 2015. The Company was renamed Viavi and, at the time of the distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. Activities related to the Lumentum business have been presented as discontinued operations in all periods of the Company’s consolidated financial statements in this Annual Report on Form 10-K and the accompanying disclosures, discussion and analysis herein pertains to the Company’s continuing operations, unless noted otherwise.defense applications.
To serve our markets, during fiscal 2017 we operated in the following business segments:
Network Enablement (NE);
Service Enablement (SE); and
Optical Security and Performance Products (OSP)
Industry Trends
NE and SE
NE and SE are collectively referred to as Network and Service Enablement (NSE).
The telecommunication (“Telecom”)telecommunications (Telecom) and cable industries are facing substantial businessexperiencing a major evolution in technology that is likely to last for the next decade as wireless communications expand and evolve from 4G to 5G technology disruptions that are transforming the users’ experience in accessing voice, data, social media and video content. Multiple network technologies are being deployed to meet the needswith its promise of increased networkgreater bandwidth capacity, and faster transmission speeds across bothand lower latency response time. 5G is a disruptive technology that is being gradually deployed by service providers using millimeter wave and sub-6 GHz technologies.
Wireless communications connectivity at the physicaledge, or the “last mile” or “last hundred yards”, will bring gigahertz speeds and capacity to the virtual networkshome as well as to “all devices” and across the airwaves. All formsto “all connected things (e.g. Cars, Drones, Bots, etc.)”. The 5G transition is being deployed globally and is expected to be disruptive to businesses, consumers and potentially create new applications and vertical industries. The adoption of 5G also requires increased bandwidth, high speed, and low latency backhaul capability from the network edge to the network core. This requires optical fiber upgrade or buildout as legacy copper line networks are being upgraded to faster speeds to achieve multi-gigabit per second (“Gbps”) broadband speeds and faster response time. 100Gdecommissioned. 100GbE optical fiber is being deployed in many metropolitan networks, with the Metro networks. Opticalleading-edge networks installing 400GbE optical fiber. In the labs, 800GbE fiber technology is being deliveredevaluated for the future next generation optical network. These investments will extend fiber connectivity beyond the office and home and permeate “fiber-to-the-everywhere.”
While new networks are deploying 5G wireless and advanced optical fiber technology, existing network infrastructure that is not otherwise being upgraded is still expected to fiber-to-the-home (“FTTH”)be modernized with new cable and permeating to everywhere.access technologies. Cable service providers are investing in highDOCSIS 3.1 to enhance existing cable networks with higher speed connectionsconnectivity and increased bandwidth availabilitycapacity. Some telecom operators with the deployment of DOCSIS 3.1. Telecom operators are upgrading legacy copper digital subscriber line (“DSL”)(DSL) have chosen to extend the useful life of these legacy networks by upgrading to G.fastGfast technology. Over the airwaves, 4G/Long Term Evolution (“LTE”) wirelessMany operators, however, have decided to run existing legacy networks until no longer operable and then replace them with new optical fiber. The COVID-19 pandemic resulted in global work-office shutdown and Work-From-Home policies among network service providers, network equipment manufacturers and its related supply chain. This in turn disrupted and delayed new network construction build out, general network maintenance and new technology is expected to expand coverage with advanced LTE and development.
5G in the next couple years and provide 100x faster speeds than current LTE networks.
With the growing number of connectedWireless has broader applications beyond smart mobile devices. 5G’s increased bandwidth capacity and speed, as well as lower latency, should enable numerous devices, referred to as the exponential growth in Internet“Internet of Things (“IOT”) devices,Things” (IOT), to have greater device-to-device connectivity to enable smart homes, smart cities, smart grid, smart and demand for high-speed broadband access to support videoautonomous cars, factory automation and other high-bandwidth applications capacity and intelligencethat are increasing at the edge of the network pushing the expansion of the overall network and larger links along with new networks requiring re-architecture for scalability and flexibility. This increased demand for capacity will require networksyet to be conceptualized.
The scale and complexity of these technology shifts are also challenging service providers to rearchitect their networks, becoming more agile, flexible, programmableautomated, virtualized and more cost effective. It also will drive the network transition from a hardware-centric approach to a hybrid of physical and virtualized software-centric approach through software defined networking (“SDN”) and network function virtualization (“NFV”). Long term, network providers are pursuing automation to provide enhanced offerings including machine to machine communications, connected cars, mobile payment and security.
optimized based on real-time intelligence.
The convergence of network technologies requires sizablesignificant investments from communication service providers (“CSPs”), which consist of telecommunications, cableboth the traditional carriers (telecom and cable) and cloud service providers. In order toTo achieve scale and a profitable return on investment, the telecom and cable industriesthese communications service providers (CSPs) in recent years have consolidated and are experiencing increased consolidation. New entrants have emerged with the rise of cloud service providers, who are increasing their capital expenditures and investing in advanced networks as enterprises are off-loading private corporate networksexpected to the cloud. Traditionalcontinue to consolidate. While traditional service provider capital spending in physical networks has been declining, whichand this impacts the served available market opportunity for our NSE segment.
However, the emergence ofnew cloud service providers and virtualized networks create new opportunities for NSE. We believe ourNSE opportunities. Our NE and SE products and solutions are well positioned to meet these rapidly changing industry trends, given our technology and products, as well as customer installed basebase.
NE’s AvComm (or Avionics Communications) products from our acquisition of that business from Cobham plc in March 2018, further expand NSE’s Test & Measurement (T&M) opportunity into the government, civil, aerospace and product offerings.military markets for communications and public safety testing. Military radio test and avionics products are a growth opportunity as defense and public safety department budgets increase significantly due to the ongoing upgrade from analog to digital communications.
OSP
CounterfeitingThe threat of counterfeiting of banknotes and other goodsdocuments of value is on the rise becauserising as counterfeiters now have increasing access to a broad range of advanced but relatively low-cost imaging technologies and printing tools giving themtools. With this access, counterfeiters have the ability to potentially create convincing simulations of actual documents and products for illicit purposes. Atpurposes, creating the same time, the penaltiesneed for counterfeiting can often be relatively modest when comparedrobust, technically sophisticated and easy to the penalties for other crimes.validate anti-counterfeiting features. We have decades of anti-counterfeiting expertise leveraging our Optically Variable Pigment (“OVP®”(OVP®), and more recently our Optically Variable Magnetic Pigment (“OVMP®”(OVMP®) technologies to protect the integrity of banknotes and other high-value documents by delivering optical effects that, are very easy foron one hand, consumers tocan easily recognize but alsoon the other hand, counterfeiters find very difficult for counterfeiters to reproduce. We
In addition to Anti-Counterfeiting solutions, we also provide optical technologies for government, healthcare,the 3D sensing, consumer electronics, government, automotive, and industrial markets.
In addition to anti-counterfeiting solutions, we extend our technology expertise to solve complex problems and deliver unique solutions in other industries. For example, we manufacture and sell optical filters for 3D sensing productsapplications that separateenable consumers to interact with their devices more naturally by allowing electronic devices to accurately measure depth and motion. Our filters play an important role in those applications, separating out ambient light from the incoming data used by sensors to allow devicesmake precise measurements. Notably, our patented low angle shift technology enables our customers to be controlledsignificantly improve the signal-to-noise ratio of their systems and deliver reliable system performance. Through the development of multiple generations of products for 3D sensing and by delivering improved performance and competitive value with each iteration, we believe we have established ourselves as the industry’s leading supplier of high-performance filters enabling depth-sensing systems in consumer electronics. In October 2018, we broadened our portfolio of 3D sensing technologies when we acquired RPC Photonics (RPC), a technology leader in engineered optical diffusers, marketed under the trademark “Engineered DiffusersTM.” Engineered DiffusersTM diffuse the infrared laser light transmitted by a person’s movements or gestures.smartphone in 3D sensing applications, enabling reliable system performance while guarding eye safety. In user facing applications of 3D sensing including facial recognition, our Engineered DiffusersTM enable infrared light to safely impinge on the target, i.e. human facial profile. That light is then reflected back to the 3D Sensor on the smartphone and an image process gathers the target information.
Sales and Marketing
CSPs make up the majority of NE and SE revenues. We also market and sell our products to network-equipmentnetwork equipment manufacturers ("NEMs")(NEMs), original equipment manufacturers (“OEMs”)(OEMs), enterprises, governmental organizations, distributors and strategic partners worldwide. We have a dedicated sales force organized around each of the markets our segmentsthat we serve that works directly with customers’ executive, technical, manufacturing and purchasing personnel to determine design, performance and cost requirements. We are also supported by a worldwide channel community, including Viavi’sour Velocity Solution Partners who support our NE and SE segments.
OSP sales and marketing efforts are targeted primarily toward customers in the consumer electronics, government, industrial, medical and automotive markets. We have a dedicated direct global sales force focused on understanding customers’ requirements and building market awareness and acceptance of our products. Our direct sales force is complemented by a highly trained team of field applications engineers who assist customers in designing, testing and qualifying our products. We market our products and capabilities through attendance at trade shows, the production of promotional webinars, participation in technical forums, select advertising and by developing customer partnerships.
A high level of support is a critical part of our strategy to develop and maintain long-term collaborative relationships with our customers. We develop innovative products by engaging our customers at the initial design phase and continuecontinues to build that relationship as our customers’ needs change and develop. Service and support are provided through our offices and those of our partners worldwide.
Corporate Information
We wereThe Company was incorporated in California in 1979 as Uniphase Corporation and reincorporated in Delaware in 1993. We are the product ofOur heritage includes several significant mergers and acquisitions including, among others, the combination of Uniphase Corporation and JDS FITEL in 1999. In 2000, we acquired Optical Coatings Lab,Laboratory, Inc., which is currently part of our OSP business segment, and in 2005 we acquired Acterna, Inc. which is currently part of our Network and Service Enablement (“NSE”)NSE business which consists of our NE and SE segments. Following these acquisitions, we operated as a company comprised of a portfolio of businesses with a focus on optical innovation, communications network
and service enablement, commercial lasers and anti-counterfeiting solutions. In August 2015, we separatedJDSU completed the separation of our portfolio of businesses into two separate publicly-traded companiesLumentum business (the Separation) to gain greater strategic flexibility to address rapidly changing market dynamics. At the same time, we changed our name to Viavi Solutions Inc. Additionally, for the last several years, we have implemented multiple manufacturing, facility, organizational and product line transitions. We expect some of these activities to continue for the foreseeable future. Our headquarters are located at 430 North McCarthy Boulevard, Milpitas, CA 95035,6001 America Center Drive, San Jose, California 95002, and our telephone number is (408) 404-3600. Our website address is www.viavisolutions.com.www.viavisolutions.com.
We are subject to the requirements of the Securities Exchange Act of 1934, as amended or the(the Exchange Act, pursuant toAct), under which we file annual, quarterly and periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements, and other information are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 or may be obtained by calling the SEC at 1-800-SEC-0330. In addition, theThe SEC maintains a website, (www.sec.gov) thatwww.sec.gov, which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. We also make available free of charge, all of our SEC filings on our website at www.viavisolutions.com/investors as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. The information contained on our website is not incorporated by reference intoany of the websites referenced in this Annual Report on Form 10-K and you shouldare not consider any information contained on, or that can be accessed through, our website as part of or incorporated by reference into this Annual Report on Form 10-K or in deciding whetherany other report we file with, or furnish to,
purchase our common stock. We have included our website address only as an inactive textual reference and do not intend it to be an active link to our website. the SEC.
Corporate Strategy
Our objective is to continue to be a leading provider for allin the markets and industries we serve. In support of our business segments, we are pursuing a corporate strategy that we believe will best position us for future opportunities as follows:
Market leadership in physical and virtualized test and measurement instruments with opportunity to grow market shareshare;
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| • | Market leadership in Anti-Counterfeiting pigments, 3D sensing optical filters and Engineered DiffusersTM; |
Market leadership in anti-counterfeiting pigments
Acceleration in OSP growth through diversification in high value applications5G wireless, public safety radio and navigation/communication transponder test instruments;
Increase the benefit from the use of our net operating loss carryforwards (“NOL”)(NOL) by improving our profitability organically and inorganicallyinorganically; and,
Greater flexibility in capital structure enabling greater capital return to shareholdersshareholders.
Our long termnear-term strategy, and next transformation phase, will be a greater focus on growth, both organic and inorganic. We expect to leverage major secular growth trends in 5G Wireless, Fiber and 3D Sensing to achieve higher levels of revenue and profitability.
Our long-term capital allocation strategy, which supports our corporate strategy, is as follows:
Maintenance and run-rate investments to support operational and capital spendingoperations;
Organic investments in initiatives to support revenue growth and productivityproductivity;
Return capital to shareholders through share buybacksbuybacks; and,
Mergers and acquisitionacquisitions that are synergistic to company strategy and business segmentssegments.
Although we expect to successfully implement our strategy, internal and/or external factors could impact our ability to meet any, or all, of our objectives. These factors are discussed under Item 1A - Risk Factors.
Business Segments
Following the Separation of the Lumentum business on August 1, 2015, we operatedWe operate in two broad business categories: NSE and OSP. NSE operates in two reportable segments, NE and SE, whereas OSP operates as a single segment. Our NSE and OSP businesses are each are organized with its own engineering, manufacturing and dedicated sales and marketing groups focused on each of the markets we serve to better support our customers and respond quickly to market needs. In addition, our segments share common corporate services that provide capital, infrastructure, resources and functional support, allowing them to focus on core technological strengths to compete and innovate in their markets.
The table below discloses the percentage of our total net revenue attributable to each of our three reportable segments.
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Network Enablement | 54.7 | % | | 55.7 | % | | 58.0 | % | 65.7 | % | | 65.3 | % | | 61.6 | % |
| Service Enablement | 16.7 |
| | 16.9 |
| | 19.9 |
| 9.0 |
| | 9.1 |
| | 13.5 |
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| Optical Security and Performance Products | 28.6 |
| | 27.4 |
| | 22.1 |
| 25.3 |
| | 25.6 |
| | 24.9 |
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Network Enablement
Our NE segment provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, turn-up, certify, troubleshoot, and optimize networks. They also support more profitable, higher-performing networks and help speed time-to-revenue.
Our solutions address lab and production environments, field deployment and service assurance for wireless and wireline networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major NEMs, operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks that help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them.
Within the NE product portfolio, our wireless products consist of flexible application software and multi-function hardware that our customers can easily use as standalone test and measurement solutions or combine with industry-standard computers, networks and third-party devices to created measurement, automation and embedded systems. Our NE solutions areRadio Access Network (RAN to Core) test and validation product addresses the various communications infrastructure market segments.
We also used by NEMs in the design and production of next-generation network equipment.
Viavi also offersoffer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer
product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
Our Avionics products group is a global leader in T&M instrumentation for communication and safety in the government, civil, aerospace and military markets. Avionic product solutions encompass a full spectrum of instrumentation from turnkey systems, stand-alone instruments or modular components that provide customers with highly reliable, customized, innovative and cost-effective testing tools.
Markets
Viavi’sOur NE segment provides solutions for CSPs, as well as NEMs and data center providers that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications. These solutions support the development and production of network equipment, the deployment of next generation network technologies and services, and ensure a higher-quality customer experience. AvComm products are positioned in all of the customers’ product life cycle phases from R&D, manufacturing, installation, deployment and field, to depot repair and maintenance of devices.
Customers
NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, radio and avionics commercial companies, OEMs, civil, state and federal agencies, utilities, law enforcement, military contractors and the armed forces and deployed private enterprise customers. Our customers include Alcatel-Lucent International, América Móvil, S.A.B. de C.V., AT&T Inc., Inc., CenturyLink, Inc., Cisco Systems, Inc., Comcast Corporation, Nokia Solutions and Networks Reliance Industries, Time Warner Inc. and Verizon Communications Inc.
No single NE customer accounted for more than 10% of Viaviour net revenue from continuing operations during fiscal 2017, 20162020, 2019 or 2015.2018.
Trends
Several network technology trends are taking place to support the growing bandwidth demand and are impacting the way NEMs and CSPs design, build and deploy new network systems. These trends are driving shifts in capital spending with the transition to advanced LTE and 5G, cable upgrades to DOCSIS 3.1, DSL copper line upgrades to Gfast, deployment of 100G Metro optical fiber, cable upgrade to DOCSIS 3.1, DSL copper line upgrade to G.fast as well as increased wireless deployment of 4G/LTE400G in optical transport, and emergenceadoption of advanced LTEnetwork management technologies such as virtualization, assurance and 5G.automation. As service providers face pricing pressure on their average revenue per user (“ARPU”)(ARPU) metrics, they are turning to our NE products solutions to both reduce the need for physical customer service call truck rollsvisits through faster installation and repair completion and improve user satisfaction.
Strategy
We plan For our avionics products, many governments across the globe are increasing their military and public safety budgets to maintain market leadership in NE reinforced by:
Scaling NE through share gain, consolidation, and expansion into adjacent markets
Scale down, highly focused investment in SE that is synergistic with and leverages our NE position
“Go deep” corporate development model to drive operating leverageupgrade communication infrastructure.
Competition
Our NE segment competes against various companies, including Anritsu Corporation, EXFO Inc., Keysight Technologies Inc., Rohde & Schwarz, VeEX Inc., and Spirent Communications plc. and Artiza Networks, Inc. While we face multiple competitors
for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless products available in the network enablement industry. In Aerospace and Tactical Communications, AvComm competes against Anritsu, Astronics DME Corp., General Dynamics and Tel Instruments.
Offerings
Viavi’sOur NE solutions include instruments and software that support the development and production of network systems in the lab. These solutions activate, certify, troubleshoot and optimize networks that are differentiated through superior efficiency, reliable performance and greater customer satisfaction. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks. They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by NEMs in the design and production of next-generation network equipment. Thorough testing by NEMs plays a critical role in producing the components and equipment that are the building blocks of network infrastructure. We leverage our installed base and knowledge of network management methods and procedures to develop these advanced customer experience solutions.
The CompanyWe also offersoffer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
During the first quarter of fiscal 2017, we re-grouped ourOur NE products and associated services from three product groupings to twoincluding the acquired Trilithic and AW businesses are, as described below:follows:
Field Instruments: Primarily consisting of (a) Access and Cable products; (b) Avionics products; (c) Fiber Instrument products; (c)(d) Metro products; and (d)(e) RF Test products; and (f) Radio Test products.
Lab Instruments: Primarily consisting of (a) Capacity Advisor products; (b) Fiber Optic Production Lab Test; (c)(b) Optical Transport products; and (d)(c) Storage Network Test products.
Additionally, following the Separation we no longer sell products or services from the WaveReady product line.
For the purposes of providing year-over-year variance analysis in the “Management’s Discussionproducts; and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K, we have reflected these changes for all prior periods presented so that they are comparable with our current groupings.(d) Wireless products.
Service Enablement
SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions - which primarily consist of instruments, microprobes and software - monitor, collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization.
Our portfolio of SE solutions addresses the same lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks, as our NE portfolio. Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control, and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.
Our network performance management products help enterprise IT and security teams monitor and optimize connectivity for their employees across on-premise and cloud domains and conduct preventative and forensic analysis to address rising security challenges. This functionality has become more critical as organizations have been forced to adopt remote working procedures, increasing network challenges and security risks.
Markets
Our SE segment provides solutions and services primarily for communication service providers and enterprises that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications. These solutions provide network and application visibility to enable more cost-effective ways to provide a higher-quality customer experience.
Customers
SE customers include similar CSPs, NEMs, government organizations, large corporate customers and storage-segment customers that are served by our NE segment.
Trends
Our Service Enablement solutions portfolio grew as a result of several acquisitions made during the past several years to address the network industry shift to a more agile, flexible, programmable, and cost-effective virtualized software-centric network. Our Data Center (formerly called Enterprise) product and solutions offerings address customers’ needs to support data center network traffic through application and performance monitoring.
While the network industry is shifting towards SDN and NFV, in fiscal 2016 we experienced a decline in SE net revenue compared to fiscal 2015 and certain growth products will require a longer investment cycle than originally expected. In accordance with the authoritative guidance, the Company recorded a goodwill impairment charge of $91.4 million related to our SE segment in fiscal 2016. Refer to “Note 8. Goodwill” included in Item 8 of this Annual Report on Form 10-K.
Strategy
Consistent with the communication on our last Analyst Day on September 15, 2016, we have taken steps to follow the “Big NE, Focused SE” strategy to emphasize Virtualized Instruments and Assurance and invest in areas of tight integration and synergies with NE to align with industry macro trends and focus the SE portfolio on products and solutions we believe will provide meaningful return on investment (“ROI”) and drive profitability.
Competition
Our NE and SE segments compete against many of the same companies. Competitors of SE include NetScout Systems, Inc., Riverbed Technology and Spirent Communications plc. While we face multiple competitors for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless monitoring solutions available in the service enablement industry.
Offerings
Viavi’sOur SE solutions are embedded network systems-includingsystems, including microprobes and software-thatsoftware that collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams. These solutions provide our customers enhanced network management, control, optimization and differentiation for our customers. Using these solutions, ourdifferentiation. Our customers are able to access and analyze the growing amount of network data from a single console, simplifying the process of deploying, provisioning and managing network equipment and services. These capabilities allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services.
During the first quarter of fiscal 2017, we re-grouped ourOur SE products and associated services from three product groupings to twoare, as described below:follows:
Data Center: Consisting of our Network Instrument products.Performance Monitoring and Security tools (Apex, GigaStor, Observer).
Assurance: Primarily consisting of our (a) Growth Products (Location Intelligence and Nitro Mobile products) and (b) Mature Products (Legacy Assurance and Legacy Wireline, Protocol Test, Video Assurance products and RAN (formerly component of Wireless)) (b) Growth Products (Xsight, Packet Portal products, Location Intelligence (formerly components of Wireless))Wireline).
For the purposes of providing year-over-year variance analysis in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K, we have reflected these changes for all prior periods presented so that they are comparable with our current groupings.
In the second half fiscal 2017, Viavi implemented our Focused NSE restructuring plan as part of its strategy to improve profitability in the Company’s NSE business by narrowing the scope and focus of the SE business. The smaller, more focused SE segment includes Data Center products, mobile assurance products like Xsight and Location Intelligence and invest in development of automation and virtualized network. The SE segment also retains the more mature Assurance product portfolio that is largely maintenance and service contract.
Optical Security and Performance Products
Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, healthcareautomotive, industrial and other markets.
Our security offerings for the currencyanti-counterfeiting market include OVP®, and OVMP® and banknote thread substrates.. OVP® enables a color-shifting effecteffects and OVMP® enables depth and motion effects in addition to color-shifting effects. Both OVP® and OVMP® are formulated into inks used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents. Our technologies are deployed on the banknotes of more than 100 countries today. OSP also develops and delivers overt and covert anti-counterfeiting products that utilize its proprietary printing platform and are targeted primarily at the pharmaceutical and consumer-electronics markets.
Leveraging our expertise in spectral management and our unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer and industrial market, including, for example, 3D sensing optical filters.
OSP value-added solutions meet the stringent requirements of commercial and government customers. Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings, and optical filters and Engineered DiffusersTM, are optimized for each specific application.
Markets
Our OSP segment delivers overt and covert features to protect governmentsbanknotes and brand ownersdocuments of value against counterfeiting, with a primary focusfocus on the currency market. OSP also produces precise, high-performance, optical thin-film coatings for a variety of applications inin consumer electronics, government, healthcareautomotive, industrial, and other markets. For example, we design and produce optical filters which are used in 3D sensing products and other applications.
In addition, we offer custom color solutions that include innovative optically-based color-shifting and other featuresspecial effects pigments that provide product enhancement for brands in the automotive and other industries.
Customers
OSP serves customers such as 3M Company, FLIR Systems, Inc., IDT Corporation, Lockheed Martin Corporation, Seiko Epson Corporation, SICPA Holding SA Company (SICPA) and, STMicroelectronics Holding N.V.. Following the separation from Lumentum, one OSP customer generated more than 10% of Viavi net revenue from continuing operations.N.V., Lockheed Martin Corporation and Seiko Epson Corporation. During fiscal 2017, 20162020, 2019 and 2015,2018, net revenue from SICPA represented 20.6%represented 12.3%, 21.0% and 16.4%14.3%, 14.8%, respectively, of Viaviour net revenue from continuing operations.revenue.
Trends
Counterfeiting of banknotes and other goodsdocuments of value is on the rise becauserising as counterfeiters now have access to a broad range of advanced but relatively low-cost imaging technologies and printing tools, giving them the potential ability to create convincing simulations of actualbanknotes and other documents and productsof value for illicit purposes. At the same time, the penalties for counterfeiting can often be relatively modest when compared to the penalties for other crimes. As a result, of these trends, demand is increasing for sophisticated overt anti-counterfeiting features, such as Viavi’sour OVP® and OVMP® technologies. These technologies which are easy forenable consumers, merchants, and law enforcement to easily validate banknotes and documents of value without the use of special tools buttools. At the same time, the effects created by these technologies are difficult to create or simulate using conventional printing technology.
The aerospace, defense, consumer electronics, government, automotive and medical/environmental instrumentation markets require customized, high-precision coated products and optical components that selectively absorb, transmit or reflect light to meet the performance requirements of sophisticated systems. Our custom optics productsunique and proprietary deposition platforms and decades of know-how enable us to offer an array of advanced technologies and precision optics-from the UV to the far IR portion of the light spectrum to meet the specific requirements of our customers.
3D sensing is an emerging technology, where OSP’s optical filters plan to beand Engineered DiffusersTM are deployed in smartphones forto enable 3D sensing applications including facial recognition biometric authentication. 3D sensing optical filters separate out ambient light from incoming data to allowfor more natural interactions between consumers and devices, allowing devices to be controlled by a person’s movements, gestures or features. Other potential technology marketsapplications for OSP’s optical filters include augmented/virtual reality, sensors deployed in autonomous vehicles and Internet of Things (IoT).
Strategy
Our strategy is to leverage proprietary pigments and optical coating technologies to build market leadershipIoT. Engineered DiffusersTMoptimize transmitted infrared laser light in large, high value applications.
Defend and expand core anti-counterfeiting product offering
Expand into high value existing and emerging automotive, military and industrial applications
Selectively target high volume consumera 3D sensing applicationsmodule while ensuring visual eye safety. The diffuser redirects the laser light to avoid direct eye contact, a critical safety feature for 3D sensing applications.
Competition
OSP’s competitors include providers of anti-counterfeiting features such as Giesecke & Devrient, De La Rue plc; special-effect pigments like Merck KGA; coating companies such as Nidek, Toppan, and Toray and optics companies such as MaterionMaterion; and Deposition Sciences.optical filter companies such as II-VI Inc. and AMS.
Offerings
Viavi’sOur OSP business provides innovative optical security and performance products which serve a variety of applications for customers in the anti-counterfeiting, consumer andelectronics, government, automotive, industrial, government, healthcare and other markets.
Anti-counterfeiting: Viavi’sAnti-Counterfeiting: Our OVP® technology has become a standard used by many governments worldwide for currency protection. This technology provides a color-shifting effect that enables intuitive visual verification of banknotes. We also provide other technologies to the banknote market including OVMP®, a technology that delivers depth and other visualmotion effects for intuitive overt verification. In addition, our proprietary printing processes deliver anti-counterfeiting solutions for security labels, used by the pharmaceutical and consumer electronics industries for brand protection.authenticating banknotes.
For product differentiation and brand enhancement, we provide custom color solutions for a variety of applications using our ChromaFlair® and SpectraFlair® pigments to create color effects that emphasize body contours, create dynamic environments, or enhance products in motion. These pigments are added to paints, plastics or textiles for productsautomotive, packaging, and packaging.other applications.
Consumer and Industrial: Our OSP business manufactures and sells optical filters for 3D sensing products that separate out ambient light from incoming data to allow devices to be controlled by a person’s movements or gestures. Our Engineered DiffusersTM optimize the 3D sensing module for laser use eye safety.
Government: Viavi Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application.
HealthcareIndustrial and Other Markets: Viavi providesWe provide multicavity and linear variable optical filters on a variety of substrates for applications including, thermal imaging, and spectroscopy and pollution monitoring. We also develop and manufacture miniature near infrared spectrometers that leverage our linear variable optical filters for use in applications for agriculture, pharmaceuticals government and other markets.
Acquisitions
As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products, technologies or businesses that are complementary to, or strengthen, our existing products.
In January 2014,On May 31, 2019, we completed the acquisition of Network Instruments,3Z, a privately-held U.S. companyprovider of antenna alignment installation and leading developermonitoring solutions.
On October 30, 2018, we completed the acquisition of enterprise network and application-performance management solutions for global 2000 companies.RPC. The acquisition diversifiedof RPC expands our 3D Sensing offerings.
On March 15, 2018, we completed the acquisition of AW, which further strengthens our competitive position asin 5G deployment and diversifies our product offerings into military, public safety and avionics test markets.
On August 9, 2017, we completed the acquisition of Trilithic, a key solutions provider to the enterprise, data centerof electronic test and cloud networking markets. Network Instruments helps enterprises simplify the managementmeasurement equipment for telecommunications service providers.
The acquisitions of 3Z, AW and optimization of their networks with high-performance solutions that provide actionable intelligence and deep network visibility. We acquired all outstanding shares of Network Instruments for a total purchase price of approximately $208.5 million in cash. This acquisition wasTrilithic have been integrated into our SENE business segment.
In December 2013, we acquired certain technology and other assets from Trendium, a privately-held provider The acquisition of real-time intelligence software solutions for customer experience assurance (“CEA”), asset optimization and monetization of big data for 4G/LTE mobile network operators. The addition of Trendium employees and technology enabled the Company to introduce a new paradigm of CEA in our Assurance solutions, enabling operators of 4G/LTE networks to achieve a real and relevant improvement in customer satisfaction while maximizing productivity and profitability for dynamic converged 4G/LTE networks and beyond. We acquired certain technology and other assets from Trendium for a total purchase price of approximately $26.1 million in cash. This acquisition wasRPC has been integrated into SEour OSP business segment. Refer to “Note 5. Acquisitions” for additional information related to our acquisitions.
Restructuring Programs
We continue to engage in targeted restructuring events intended to consolidate our operations and align our businesses in response to market conditions and our current investment strategy. In fiscal 2017,2019, we initiatedimplemented a restructuring plan within our Network Service and Enablement business, including actions related to the NErecently acquired AW business. These actions further drive our strategy for organizational alignment and SE business segmentsconsolidation as part of ourits continued strategycommitment to a more cost effective and agile organization and to improve overall profitability in our NSE business. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business by narrowing the scope of the SE business and reducing costs by streamlining NSE operations. We also continued to restructure and reorganize our segments to eliminate certain positions by consolidating and shifting resources in our sales, manufacturing and R&D functions to focus on our strategic growth areas and optimize our operational efficiency.segment.
Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and “Note 11.13. Restructuring and Related Charges” under Item 8 of this Annual Report on Form 10-K for further discussion on these charges.
Research and Development
During fiscal 2017, 20162020 and 2015,2019, we incurred R&D expenses of $136.3 million, $166.4$193.6 million and $173.3$187.0 million, respectively. The numberAs of June 27, 2020, we had approximately 1,000 employees engaged in R&D was approximately 600 as of July 1, 2017.&D.
We devote substantial resources to R&D to develop new and enhanced products to serve our markets. Once the design of a product is complete, our engineering efforts shift to enhancing both product performance and our ability to manufacture it in greater volume and at lower cost.
In our NE and SE segments, we develop portable test instruments for field service technicians, systems and software used in Network Operations Centers, and instruments used in the development, testing and production of communications network components, modules and equipment. We are increasing our focus on IP-based service assurance and customer experience management, and test instruments for wireless networks and services, while continuing to develop tools for fiber optic, optical transport, Ethernet, broadband access, video test and storage network testing. We have centers of excellence for product marketing and development in Asia, Europe and North America.
In our OSP segment, our R&D efforts concentrate on developing more innovative technologies and products for customers in the anti-counterfeiting, consumer electronics, government, healthcare and automotive markets. Our strength in the banknote anti-counterfeiting market is complemented by our advances in developing novel pigments and foils for a variety of applications. Other areas of R&D focus for OSP include our efforts to leverage our optical coating technology expertise to develop applications
for the government and defense markets as well as efforts related to new products for 3D sensing and smart phone sensors. OSP has also introduced an innovative handheldhand-held spectrometer solution with applications in the agriculture, healthcare and defense markets.
Manufacturing
As of July 1, 2017June 27, 2020, we have significant manufacturing facilities for our NE, SE and OSP segments were located in China, France, Germany, KoreaUnited Kingdom and the United States and ourStates. Our most significant contract manufacturing partners wereare located in China and Mexico.
Sources and Availability of Raw Materials
Viavi usesWe use various suppliers and contract manufacturers to supply parts and components for the manufacture and support of multiple product lines. Although our intention iswe intend to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements. We may not be able to procure these components from alternative sources at acceptable prices within a reasonable time, or at all; therefore, the loss or interruption of such arrangements could impact our ability to deliver certain products on a timely basis.
Patents and Proprietary Rights
Intellectual property rights apply to our various products include patents, trade secrets and trademarks. We do not intend to broadly license our intellectual property rights unless we can obtain adequate consideration or enter into acceptable patent cross-license agreements. As of July 1, 2017,June 27, 2020, we owned approximately 740793 U.S. patents and 10151,478 foreign patents and have 535913 patent
applications pending throughout the world. The average age of the patents we hold is 11.6 years, which is slightly older than the midpoint of the average 20-year life of a patent.
Backlog
We consider our backlog balance to be an estimate of future revenue to be earned from contractually committed product and service arrangements. As of July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, our backlog was approximately $177$204.6 million and $234$244.1 million, respectively.
Due to possible changes in product delivery schedules and cancellation of product orders, and because our sales often reflect orders shipped in the same quarter in which they are received, our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.
Employees
We employed approximately 2,7003,600 employees as of July 1, 2017,June 27, 2020, which included approximately 9001,200 employees in manufacturing, 6001,000 employees in R&D, 750research and development, 900 employees in sales and marketing, and 450500 employees in general and administration. This compared to a workforce of approximately 3,000 as of July 2, 2016, and 4,9003,600 as of June 27, 2015 which also included29, 2019, and 3,500 as of June 30, 2018. None of our employees who transferred to Lumentum as partin the U.S. is represented by a labor union; however, in certain foreign subsidiaries, labor unions or workers’ councils represent some of our employees.
COVID-19
At VIAVI, the health, safety and wellbeing of our employees, customers, partners, suppliers, communities are of the Separation. On August 1, 2015, approximately 1,700utmost importance. We have suspended international business travel and are conducting meetings with customers and partners remotely. We have established an internal COVID-19 task force with management representation from human resources, legal, facilities and business units and are closely monitoring developments. We have updated our business continuity plans and our IT team continues to enhance remote work capabilities and cybersecurity tools. Our employees were transferredhave access to Lumentum as parta centralized resource portal for COVID-19 where they can find health and safety information and support tools. While we, along with the rest of the separation ofworld continue to navigate the Lumentum business which included approximately 850risks and uncertainties associated with the COVID-19 pandemic, we are committed to continuing to provide a safe and supportive work environment for our employees and are following all recommended protocols from manufacturing, 550 employees from R&D, 150 employees from salesstate and marketinglocal regulators and 150 employees from generalhealth authorities.
Environmental, Social and administration.Governance
Similar to other technology companies, we rely upon our ability to use “Full Value Awards” (as defined below) and other forms of stock-based compensation as key componentsAll of our executivestakeholders are essential to our business-stockholders, customers, suppliers, employees, communities as well as the environment and employee compensation structure. Full Value Awards refersociety. We are working to Restricted Stock Units (“RSUs”)making our workforce more inclusive, our business more sustainable, and performance-based RSUsour communities more engaged by maintaining strong environmental, social and governance (ESG) practices. We detail our overall ESG strategy and our ESG progress on our ESG web page and in our annual Corporate Social Responsibility Report, which can both be found at www.viavisolutions.com/csr.
Seasonality
Our business is seasonal, as is typical for our competitors and many large companies. For NSE, revenue is typically higher in the second and fourth fiscal quarter, all else being equal. There is typically a modest end of calendar year customer spending budget flush that benefits the December quarter. Telecom and cable spending budgets are grantedtypically set at the start of a new calendar year, the March quarter and thus NSE’s weakest revenue quarter, all else being equal, with spending release and benefiting the exercise price equal to zero and are converted to shares immediately upon vesting. The performance-based RSUs are also referred to as Market Stock Units (“MSUs”) and have vesting requirements tiedJune quarter. For our OSP business, given our recent exposure to the performance ofconsumer market, namely our 3D Sensing products into the Company’s stock as comparedsmart phone market, OSP revenue is expected to the NASDAQ telecommunications index, and could vest at abe seasonally higher or lower rate or not at all, based on this relative performance. Historically, these components have been critical to our ability to retain important personnel and offer competitive compensation packages. Without these components, we would be required to significantly increase cash compensation levels or develop alternative compensation structures to retain our key employees.
Outside of the United States, our businesses are subject to labor laws that differ from those in the United States. The Company follows statutory requirements,first and second fiscal quarter followed by seasonal demand declines in certain European countries it is common for a works council, consisting of elected employees, to represent the sites when discussing matters such as compensation, benefits or terminations of employment. We consider our employee relations to be good.third and fourth fiscal quarters.
ITEM 1A. RISK FACTORS
The effects of the COVID-19 pandemic have significantly affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
The COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the broader economies, financial markets and may affect the overall demand environment for our products and services.
In response to the COVID-19 pandemic, we have prioritized employee, customer and partner safety and have temporarily shut down, slowed or limited activity in certain locations, including limiting production in certain locations to essential business needs, all in conjunction with federal, state and local health and safety regulations and shelter-in-place orders. The majority of our global workforce is working from home, and we have canceled participation in trade shows and marketing events and restricted business travel, resulting in the limitation of normal sales and business development activity.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results. In addition, we have experienced and may continue to experience shipping and logistics challenges as our customers have also closed their facilities and are operating under similar restrictions. Both NE and SE net revenue declined in the second half of fiscal 2020. NE revenue declined as the COVID-19 pandemic resulted in certain customer operation and logistic shutdowns that resulted in shipment or acceptance delays, which resulted in a demand slowdown in Field Instruments with orders pushed out into future periods, and SE revenue declined as customers were unable to provide on-site verification and acceptance due to facility closures and other restrictions.
There is currently no vaccine for COVID-19 and therapeutic medications to date have had limited efficacy in alleviating symptoms. When and as normal business operations resume, we will need to expand globally the safety measures we have already undertaken at sites conducting essential business, such as enhanced sanitation procedures, health checks and social distancing protocols, none of which can completely eliminate the risk of exposure or spread of COVID-19. Even after shelter-in-place restrictions have been lifted by governmental authorities, there could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts.
Further, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets in many countries. On June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. Deterioration of macro-economic conditions could further curtail or delay spending by our customers and decrease demand for our products as well as cause an increased risk of customer defaults or delays in payment. Current economic conditions have already led to a tightening of credit markets. We entered into a $300 million dollar secured credit facility to strengthen our liquidity position but have not drawn on this facility to date. If there is a long-term economic downturn or a prolonged recession as a result of the pandemic, we could face additional liquidity needs and challenges. There can be no assurance that we will be able to obtain financing on favorable terms or at all.
Due to the evolving and highly uncertain nature of this event, it is currently not possible to estimate the ultimate direct or indirect impacts the COVID-19 pandemic may have on our business. However, any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of operations and financial conditions. To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.
We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussions of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.
We have a history of net losses, and our future profitability is not assured.
We earned net income of $166.9$28.7 million and $5.4 million in fiscal 2017 including recognized gross gains on sales2020 and fiscal 2019, respectively. In fiscal 2018 we incurred a net loss of Lumentum common stock of $203.0$48.6 million. We also incurred net losses of $99.2 million and $88.1 million in fiscal 2016 and 2015, respectively. Historically, Viaviwe operated as a portfolio company comprised of many product lines, with diverse operating metrics and markets. As a result, our profitability in a particular period was impacted by revenue, product mix and operational costs that varied significantly across our product portfolio and business segments. While we completed the separation of our Lumentum business in 2015, this variability continues to be a factor across our remaining business segments.
Additionally, for the last several years, we have undergone multiple manufacturing, facility, organizational and product line transitions. We expect some of these activities to continue for the foreseeable future. These activitiestransitions are costly and may impair our profitabilityprofit objectives. Specific factors that may undermine our 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, increasingly from Asia, and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements;
our OSP operating margin may experience some downward pressure as a result of 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;
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;
continuing high levels of selling, general and administrative, (“SG&A”)(SG&A) expenses; and
cyclical demand for our currency products.products;
changing market and economic conditions, including the impacts due to tariffs and the COVID-19 pandemic;
ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic;
financial stability of our customers, including the solvency of private sector customers, which may be impacted by the COVID-19 pandemic and statutory authority for government customers to purchase goods and services; and
factors beyond our control resulting from public health epidemics, pandemics and similar outbreaks as well as the fear of exposure to a widespread health epidemic, 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.
The separation of the Lumentum business could result in substantial tax liability to us and our stockholders.
One of the conditions for completing the Separation was our receipt of a tax opinion from our advisors substantially to the effect that, for U.S. federal income tax purposes, the Separation will qualify as a tax-free distribution under certain sections of the Internal Revenue Code. If any of the factual representations and assumptions made in connection with obtaining the tax opinion were inaccurate or incomplete in any material respect, then we will not be able to rely on the tax opinion. Furthermore, the tax opinion is not binding on the Internal Revenue Service (IRS) or the courts. Accordingly, the IRS or the courts may challenge the conclusions stated in the tax opinion and such challenge could prevail.
If, notwithstanding our receipt of the tax opinion, the Separation is determined to be taxable, then (i) we would be subject to tax as if we sold the stock distributed in the Separation in a taxable sale for its fair market value; and (ii) each stockholder who received stock distributed in the Separation would be treated as receiving a distribution of property in an amount equal to the fair market value of the stock that would generally result in tax liabilities for each stockholder, which may be substantial.
Management turnover creates uncertainties and could harm our business.
We hired a new President and Chief Executive Officer in February 2016 and a new Chief Financial Officer in September 2015. In addition, during fiscal years 2016 and 2017 we made leadership changes in several other key functions throughout the Company, including sales, HR, IT and others. The extent of our management changes could adversely impact our results of operations and our customer relationships and may make recruiting for future management positions more difficult. 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.
Restructuring
We continue to restructure and realign our cost base with current and anticipated future market conditions. Significant risks associated with these actions that may impair our ability to achieve the anticipated cost reductions or that may 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.
Our operating results may be adversely affected by unfavorable economic and market conditions.
Global macroeconomic and geopolitical risks, including those resulting from the COVID-19 pandemic which are beyond our control, could adversely impact customer business conditions that could decrease or delay capital spending among communications service providers, enterprise budgets and consumer demand. This could also result in increased price competition for our products, increase our risk of excess and obsolete inventories and higher overhead costs as a percentage of revenue.
Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.
We have significant long-lived assets recorded on our balance sheet. We evaluate intangible assets and goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. The test for impairment of goodwill requires a comparison of the carrying value of the reporting unit for which goodwill is assigned with the fair value of the reporting unit calculated based on discounted future cash flows. When testing goodwill for impairment during the fourth quarter of fiscal 2016, we concluded that the carrying value of the SE reporting unit was higher than its fair value. Accordingly step two of the impairment analysis was performed which indicated that the entire SE goodwill balance was impaired resulting in an impairment charge of $91.4 million. This charge does not impact our liquidity, cash flows from operations, future operations, or compliance with debt covenants. Although the analysis indicated only the SE reporting unit was impaired, we will continue to monitor the remaining reporting units which had an excess fair value over carrying value as of the date of annual impairment assessment. As of July 1, 2017 our NE and OSP reporting goodwill balances were $143.3 million and $8.3 million, respectively. Refer to Note 8 and Note 9 of the Notes to the Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the impairment testing of goodwill and long-lived assets.
We will continue to evaluate the recoverability of the carrying amount of our goodwill and long-lived assets on an ongoing basis, and we may incur substantial impairment charges, which would adversely affect our financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. If, in any period, our stock price decreases to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period.
Rapid technological change in our industry presents us with significant risks and challenges, and if we are unable to keep up with the rapid changes, our customers may purchase less of our products which could adversely affect our operating results.
The manufacture, quality and distribution of our products, as well as our customer relations, may be affected by several factors, including the rapidly changing market for our products, supply issues and internal restructuring efforts. We expect the impact of these issues will become more pronounced as we continue to introduce new product offerings and when overall demand increases.
Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable cost to our customers. The markets for our products are characterized by rapid technological change, frequent
new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address these issues and provide solutions that meet our customers’ current and future needs. As a technology company, we also constantly encounter quality, volume and cost concerns such as:
Our continuing cost reduction programs, which include site and organization consolidations, asset divestitures, outsourcing the manufacture of certain products to contract manufacturers, other outsourcing initiatives, and reductions in employee headcount, require the re-establishment and re-qualification by our customers of complex manufacturing lines, as well as modifications to systems, planning and operational infrastructure. During this process, we have experienced, and may continue to experience, additional costs, delays in re-establishing volume production levels, planning difficulties, inventory issues, factory absorption concerns and systems integration problems.
We have experienced variability of manufacturing yields caused by difficulties in the manufacturing process, the effects from a shift in product mix, changes in product specifications and the introduction of new product lines. These difficulties can reduce yields or disrupt production and thereby increase our manufacturing costs and adversely affect our margin.
We may incur significant costs to correct defective products (despite rigorous testing for quality both by our customers and by us), which could include lost future sales of the affected product and other products, and potentially severe customer relations problems, litigation and damage to our reputation.
We are dependent on a limited number of vendors, who are often small and specialized, for raw materials, packages and standard components. We also rely on contract manufacturers around the world to manufacture certain of our products. Our business and results of operations have been, and could continue to be, adversely affected by this dependency. Specific concerns we periodically encounter with our suppliers include stoppages or delays of supply, insufficient vendor resources to supply our requirements, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of supplies and an inability to obtain reduced pricing from our suppliers in response to competitive pressures. Additionally, the ability of our contract manufacturers to fulfill their obligations may be affected by economic, political or other forces that are beyond our control.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 with their 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 (a) periodic difficulty responding to customer delivery expectations for some of our products, (b) yield and quality problems, particularly with some of our new products and higher volume products and (c) additional funds and other resources required to respond to these execution challenges. From time to time, we have had to divert resources from new product R&D and other functions to assist with resolving these matters. If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged and our customers may choose to reduce or terminate their purchases of our products and purchase additional products from our competitors.
Unfavorable, uncertain or unexpected conditions in the transition to 5G may cause fluctuations in our rate of revenue growth or financial results.
Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate. If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets. In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in this area. Further, the COVID-19 pandemic resulted in global work-office shut down and Work-From-Home policies among network service providers, network equipment manufacturers and its related supply chain. This in turn disrupted and delayed new network construction build out, general network maintenance and new technology development.
Even if the 5G infrastructure market and rate of adoption develop in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G platforms and systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Our forecasts related to our growth strategy in 3D sensing and other applications may prove to be inaccurate.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimate of the market opportunity related to 3D sensing is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis, industry experience and third-party data. Accordingly, our estimated market opportunity may prove to be materially inaccurate. In addition, our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D sensing and other applications for consumer electronics. We cannot assure you that we will be able to serve a significant portion of this market and the growth forecasts should not be taken as indicative of our future growth.
Natural Disasters and Catastrophic Events
In October 2017 and again in October 2019, we temporarily closed our Santa Rosa, California facility, which resulted 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. The geographic location of our Northern California headquarters and production facilities subject them to 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.
Restructuring
We continue to restructure and realign our cost base with current and anticipated future market conditions. Significant risks associated with these actions that may impair our ability to achieve the anticipated cost reductions or that may 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.
Impairment in the carrying value of goodwill or other assets could negatively affect our results of operations or net worth.
We have significant long-lived assets recorded on our balance sheet. We evaluate intangible assets and goodwill for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We monitor factors or indicators, such as unfavorable variances from forecasted cash flows, established business plans or volatility inherent to external markets and industries that would require an impairment test. The test for impairment of intangible assets requires a comparison of the carrying value of the asset or asset group with their estimated undiscounted future cash flows. If the carrying value of the asset or asset group is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the asset or asset group exceeds its fair value. We have in the past and may in the future experience impairment charges to goodwill. The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken. In addition, the economic disruptions caused by the COVID-19 pandemic could also adversely impact the impairment risks for certain long-lived assets, equity method investments and goodwill. Refer to Note 9 and Note 10 of the Notes to the Consolidated Financial Statements and “Critical Accounting Policies and Estimates” in Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the impairment testing of goodwill and long-lived assets.
We will continue to evaluate the recoverability of the carrying amount of our goodwill and long-lived assets on an ongoing basis, and we may incur substantial impairment charges, which would adversely affect our financial results. There can be no assurance that the outcome of such reviews in the future will not result in substantial impairment charges. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, significant changes in any one of our assumptions could produce a significantly different result. If, in any period, our stock price decreases to the point where the fair value of the Company, as determined by our market capitalization, is less than our book value, this too could indicate a potential impairment and we may be required to record an impairment charge in that period.
We rely on a limited number of customers for a significant portion of our sales.
We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for the foreseeable future. Any failure by us to continue capturing a significant share of these customers could materially harm our business. Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue. Further, to the extent that there is consolidation among communications equipment manufacturers and service providers, we will have increased dependence on fewer customers who may be able to exert increased pressure on our prices and other contract terms. Customer consolidation activity and periodic manufacturing and inventory initiatives could also create the potential for disruptions in demand for our products as a consequence of such customers streamlining, reducing or delaying purchasing decisions.
We have a strategic alliance with SICPA, our principal customer for our light interference microflakesanti-counterfeiting pigments that are used to, among other things, provide security features in currency.for banknotes. Under a license and supply agreement, we rely exclusively on SICPA to market
and sell one of these product lines, optically variable pigment,Optical Variable Pigment (OVP®) and Optical Variable Magnetic Pigment (OVMP®), for document authentication applications worldwide. The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement. If SICPA fails to purchase these quantities, as and when required by the agreement, our business and operating results (including, among other things, our revenue and gross margin) will be harmed as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.
Our forecasts related to our growth strategy in 3D sensing and other applications may prove to be inaccurate.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimate of the market opportunity related to 3D sensing is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis, industry experience and third-party data. Accordingly, our estimated market opportunity may prove to be materially inaccurate. In addition, our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D sensing and other applications for consumer electronics. We cannot assure you that we will be able to serve a significant portion of this market and the growth forecasts should not be taken as indicative of our future growth.
Movement towards virtualized networks and software solutions may result in lower demand for our hardware products and increased competition.
The markets for our NE and SE segments are increasingly looking towards virtualized networks and software solutions. While we are devoting substantial resources to meet these needs, this trend may result in lower demand for our legacy hardware products. Additionally, barriers to entry are generally lower for software solutions, which may lead to increased competition for our products and services.
We face a number of risks related to our strategic transactions.
Our strategy continues to include periodic acquisitions and divestitures of businesses and technologies. Strategic transactions of this nature involve numerous risks, including the following:
the impact of the recent COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns;
inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or business’s procedures and controls;
diversion of management’s attention from normal daily operations of the business;
potential difficulties in completing projects associated with in-process R&D;
difficulties in entering markets in which we have no or limited prior experience and where competitors have stronger market positions;
difficulties in obtaining or providing sufficient transition services and accurately projecting the time and cost associated with providing these services;
an acquisition may not further our business strategy as we expected or we may overpay for, or otherwise not realize the expected return on, our investments;
expected earn-outs may not be achieved in the time frame or at the level expected or at all;
we may not be able to recognize or capitalize on expected growth, synergies or cost savings;
insufficient net revenue to offset increased expenses associated with acquisitions;
potential loss of key employees of the acquired companies; and
difficulty in forecasting revenues and margins.
Acquisitions may also cause us to:
issue common stock that would dilute our current stockholders’ percentage ownership and may decrease earnings per share;
assume liabilities, some of which may be unknown at the time of the acquisitions;
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.
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 light interferenceanti-counterfeiting and diffractive microflakesspecial effects pigments may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the U.S. Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our decorative microflakesspecial 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.
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:
currency fluctuations; | |
| • | 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 resultsby negatively impacting our revenues or increasing our expenses; |
our ability to comply with a wide variety of laws and regulations of the countries in which we do business, including, among other things, customs, import/export, anti-bribery, anti-competition, tax and data privacy laws, which may be subject to sudden and unexpected changes;
difficulties in establishing and enforcing our intellectual property rights;
tariffs and other trade barriers;
political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and product development facilities;
strained or worsening relations between the United States and China or other countries;
difficulties in staffing and management;
language and cultural barriers;
seasonal reductions in business activities in the countries where our international customers are located;
integration of foreign operations;
longer payment cycles;
difficulties in management of foreign distributors; and
potential adverse tax consequences.
The spread of COVID-19 has and is likely to continue to affect the manufacturing and shipment of goods globally. For example, while the Chinese government has lifted certain restrictions on movement of people and goods to limit the spread of COVID-19, it is continuing to take control measures and recently imposed certain restrictions to limit the spread of COVID-19
in Beijing. Further, most other countries have imposed or are imposing certain restrictions on the movement of people and goods and may continue to lift and reimpose such restrictions as needed. Any delay in production or delivery of our products due to an extended closure of our suppliers’ plants as a result of efforts to limit the spread of COVID-19 could adversely impact our business. Worldwide travel restrictions have been imposed by many countries, including air travel and transport, that have caused and are likely to continue to cause delays in shipment of our products as well as increased logistics costs and will restrict our ability to attract, develop, integrate and retain highly skilled employees with appropriate qualifications from other countries.
Net revenue from customers outside the Americas accounted for 53.3%63.5%, 48.9%62.3% and 44.3%52.4% of our total net revenue, for fiscal 2017, 20162020, 2019 and 20152018, respectively. 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.
Economic conditions and regulatory changes that may result from the United Kingdom’s pending exit from the European Union could adversely affect our business, financial condition and results of operations.
In June 2016, the United Kingdom (the U.K.) held a referendum in which voters narrowly approved an exit from the European Union (the E.U.), commonly referred to as “Brexit.” The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The withdrawal of the U.K. from the E.U. in January 2020 and the current transition period may also contribute to further global economic uncertainty, which may cause our current and future customers to closely monitor their costs and reduce their spending on our products and services.
The withdrawal and transition period could significantly disrupt the free movement of goods, services, and people between the U.K. and the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. Given the lack of comparable precedent, it is unclear how Brexit may negatively impact the economies of the U.K., the E.U. countries and other nations, as well as our operations in these locations. However, any of these effects of Brexit, among others, could adversely affect our financial position, results of operations or cash flows.
While we have not experienced any material financial impact from Brexit on our business to date, we cannot predict its future implications.
US 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 that the Trump Administration has found to be unreasonable and burdensome to US commerce. To date, the President has used his authority under Section 301 of the Trade Act of 1974 three times to levy a 25% retaliatory tariff on 6,830 subheading categories of imported Chinese high-tech and consumer goods valued at $250 billion per year. Although List 3, alone valued at $200 billion, had originally set an additional duty rate at 10%, that rate was increased to 25% effective May 10, 2019. Moreover, in August 2019, the President announced a 15% tariff on a fourth list of goods valued at nearly $300 billion. Pursuant to a US-China trade deal signed in January 2020, the List 3 rate remains at 25% and the List 4 rate decreased to 7.5% on February 14, 2020. These tariffs, 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. Given the uncertainty regarding the scope and duration of these trade actions by the United States or other countries, as well as the potential for additional trade actions, the impact on our operations and results remains uncertain.
Our business and operations wouldcould be adversely impacted in the event of a failure of our information technology infrastructure.
We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to our changing needs. In some cases, we rely upon third party hosting and support services to meet these needs. The growing cyber riskand evolving cyber-risk environment means that individuals, companies, and organizations of all sizes, including Viavi,ourselves and our hosting and support partners, are increasingly subjectvulnerable to the threat of intrusions and disruptions on their networks and systems by a wide range of actors on an ongoing and regular basis. Any failureWe also design and manage IT systems and products that contain IT systems for various customers, and generally face the same threats for these systems as for our own internal systems.
We maintain information security staff, policies and procedures for managing risk to manage, expandour networks and updateinformation systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats. Our
network security measures include, but are not limit 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 technology infrastructure, any failure in the extension or operation of this infrastructure, or any failure by our hosting and support partners in the performance of their services could materially and adversely harm our business.
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.disruptions and intrusions that continue to emerge and evolve. Any system failure, accident or security breach could result in disruptions to our operations.business processes, network degradation, and system down time, along with the potential that a third party will exploit our critical assets such as intellectual property, proprietary business information, and data related to our customers, suppliers, and business partners. To the extent that any disruptionsdisruption, degradation, downtime or other security breach results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential information, it could causeadversely impact us and our clients, potentially resulting in, among other things, financial losses; our inability to transact business on behalf of our clients; violations of applicable privacy and other laws; regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs; and/or additional compliance costs. We may also incur additional costs related to cyber-security risk management and remediation. There can be no assurance that we or our service providers, if applicable, will not suffer losses relating to cyber-attacks or other information security breaches in the future or that our insurance coverage will be adequate to cover all the costs resulting from such events. No assurances can be given that our efforts to reduce the risk of such attacks will be successful.
The COVID-19 pandemic may adversely affect our systems, and the health of members of our internal IT team who monitor and address the cyber threats and attacks against VIAVI. In particular, the internet is currently experiencing an increase in cyber threats during the COVID-19 pandemic in the form of phishing emails, malware attachments and malicious websites which seemingly offer information regarding COVID-19. We have employed efforts to mitigate any potential impact that could result from increased cyber threats and the loss of members of our internal IT team and by providing our employees with enhanced awareness materials and training, updating our business continuity plans, and cross training staff.
Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may subject us to substantial negative financial consequences and civil or criminal penalties.
Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data. These privacy laws and regulations are quickly evolving, with new or modified laws and regulations proposed and implemented frequently and existing laws and regulations subject to new or different interpretations. In addition, our legal and regulatory obligations in jurisdictions outside of the U.S. are subject to unexpected changes, including the potential for regulatory or other governmental entities to enact new or additional laws or regulations, to issues rulings that invalidate prior laws or regulations, or to increase penalties significantly. Complying 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 recently 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. We may also be subject to additional obligations relating to personal data by contract that industry standards apply to our practices. Further, other states are considering expanding or passing privacy laws in the near term.
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
affectgoodwill, any of which could have a material adverse effect on our relationships with our customersoperations, financial performance, and ultimately harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Failure to maintain effective internal controls may adversely affect our stock price.
Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. The Company isWe are required to annually evaluate the effectiveness of the design and operation of itsour internal controls over financial reporting. Based on these evaluations, the Companywe may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. While management evaluates the effectiveness of the Company’sour internal controls on a regular basis, these controls may not always be effective. In August 2016A material weakness in our internal controls has been identified in the past, and we determinedcannot assure you that we hador our independent registered public accounting firm will not identify a material weakness related to an errorin our internal controls in the determination of interim income taxes which causedfuture. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to issueevaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered
effective, we may experience a qualified reportloss of public confidence, which could have an adverse effect on our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended July 2, 2016. As a result, management initiated a thorough and detailed remediation plan which included enhanced processes and designed controls to ensure a more precise review of the interim income tax provisions beginning in the first quarter of fiscal 2017. As of July 1, 2017, the remediation plan has been completedbusiness, financial condition and the material weakness has been remediated.market price of our common stock and other securities.
There are inherent limitations on the effectiveness of internal controls, including collusion, management override and failure in human judgment. In addition, control procedures are designed to reduce rather than eliminate financial statement risk. Additionally, if we or our independent registered public accounting firm are not satisfied with our internal control over financial reporting or the level at which these controls are documented, designed, operated or reviewed in the future, or if our independent registered public accounting firm interprets the requirements, rules and/or regulations differently from our interpretation, then they may issue a qualified report. Furthermore, we may discover that the internal controls of businesses we acquire are inadequate or changes to our existing businesses may impact the effectiveness of our internal controls. These situations could require us to make changes to our internal controls and could cause our independent registered public accounting firm to issue a qualified report, which could result in a loss of investor confidence in the reliability of our financial statements and could negatively impact our stock price.
In August 2013, we issued $650.0 million of 0.625% Senior Convertible Notes due 2033, and in March 2017, we issued $460.0 million of 1.00% Senior Convertible Notes due 2024.2024, and in May 2018 we issued $225.0 million of 1.75% Senior Convertible Notes due 2023. The issuance of the Notes increases our overall leverage and could dilute our existing stockholders and lower our reported earnings per share.
We issued $650.0 million of indebtedness in August 2013 in the form of 0.625% Senior Convertible Notes due 2033 (the “2033 Notes”) of which $610.0 million are outstanding as of July 1, 2017 and $460.0 million of indebtedness in March 2017 in the form of 1.00% Senior Convertible Notes due 2024 (the “2024 Notes”2024 Notes). In May 2018, we issued $225.0 million of indebtedness in the form of 1.75% Senior Convertible Notes due 2023 (the 2023 Notes, and, together with the 20332024 Notes, the “Notes”)Notes). The issuance of the Notes substantially increased our principal payment obligations. Additionally, in fiscal 2016 we contributed $137.6 million in cash to Lumentum in connection with the Separation, subject to the requirements as set forth in the Contribution Agreement between the Company and Lumentum Operations LLC. Following the Separation we have substantially lower cash flow which increased our leverage. 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 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.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.Our intellectual property rights may not be adequate to protect our products or product roadmaps.
We seek to protect our products and our product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents, trade secrets, know-how and continuing technological innovation. The steps taken by us to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing other technologies that are similar to our own. It is possible that patents may not be issued from any of our pending applications or those we may file in the future and, if patents are issued, the claims allowed may not be sufficiently broad to deter or prohibit others from making, using or selling products that are similar to ours. We do not own patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries where we do not have intellectual property protection. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States.
Any patents issued to us may be challenged, invalidated or circumvented. Additionally, we are currently a licensee in all of our operating segments for a number of third-party technologies, software and intellectual property rights from academic institutions, our competitors and others, and are required to pay royalties to these licensors for the use thereof. Unless we are able
to obtain such licenses on commercially reasonable terms, patents or other intellectual property held by others could inhibit our development of new products, impede the sale of some of our current products, substantially increase the cost to provide these products to our customers, and could have a significant adverse impact on our operating results. In the past, licenses generally have been available to us where 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,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.
We face certain litigation risks that could harm our business.
We are and may become subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of complex legal proceedings are difficult to predict. Moreover, many of the complaints filed against us do not specify the amount of damages that plaintiffs seek, and we therefore are unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we are unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial condition, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation is costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits have been significant, will continue to be costly and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations, which could harm our business. For additional discussion regarding litigation, see the “Legal Proceedings” portion of this Annual Report.Report on Form 10-K.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely affect interest rates on our future indebtedness and may otherwise adversely affect our financial condition and results of operations.
Certain of our indebtedness is made at variable interest rates that use the London Interbank Offered Rate, or LIBOR (or metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established, or alternative reference rates to be established. The potential consequences cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows. In addition, any transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that rely on LIBOR, reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks.
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.
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. For fiscal years 2019, 2018 and 2017, our research and development expenses were $187.0 million, or approximately 17.0% of our revenue, $133.3 million, or approximately 16.5% of our revenue, and $136.3 million, or approximately 15.2% of our revenue, respectively. We expect to continue to invest heavily in research and development in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology. We believe one of our greatest strengths lies in our innovation and our product development efforts. By investing in research and development including through our acquisitions, we believe we are well positioned to continue to execute on our strategy and take advantage of market opportunities. We expect that our results of operations may be impacted by the timing and size of these investments. In addition, these investments may take several years to generate positive returns, if ever.
Our actual operating results may differ significantly from our guidance.
We release guidance in our quarterly earnings conference calls, quarterly earnings releases, or otherwise, regarding our future performance that represents our management’s estimates as of the date of release. This guidance, which includes forward-looking statements, will be based on projections prepared by our management.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to provisionssignificant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. We will continue to state possible outcomes as high and low ranges which are intended to provide a sensitivity analysis as variables are changed but are not intended to imply that actual results could not fall outside of the Dodd-Frank Wall Street Reformsuggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and Consumer Protection Actinvestors. We do not accept any responsibility for any projections or reports published by any such third parties.
Guidance is necessarily speculative in nature, and it can be expected that could subject us to additional costs and liabilities.
We are subject to the SEC rules implementing the requirements of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which establish disclosure and reporting requirements for companies who use “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries in their products. Complying with the disclosure requirements requires substantial diligence efforts to determine the source of any conflict minerals used in our products and may require third-party auditing of our diligence process. These efforts may require internal resources that would otherwise be directed towards operational activities.
Since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of the conflict minerals used in our products. Additionally, if we are unable to satisfy those customers who require thatsome or all of the componentsassumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our productsguidance and the variations may be material. In light of the foregoing, investors are certified as conflict free, theyurged not to rely upon our guidance in making an investment decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different from our guidance, and the differences may choose a competitor’s products which could materially impact our financial conditionbe adverse and operating results.material.
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.
Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
As of July 1, 2017,June 27, 2020, we had U.S. federal and state net operating losses, or NOLs, of $5,115.1$4,752.2 million and $762.2$575.8 million, respectively, and U.S. federal and state tax credit carryforwards of $103.9$105.8 million and $40.7$52.6 million respectively, which may be utilized against future income taxes. Utilization of these 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.
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.
The geographic location of our Northern California headquarters and production facilities subject them to 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. Moreover, in October 2019, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region commenced planned widespread blackouts during the peak wildfire season to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failure. While we have not experienced damage to our facilities or a material disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own and lease various properties in the United States and in 2125 other countries around the world. We use the properties for executive and administrative offices, data centers, product development offices, customer service offices, and manufacturing facilities. Our corporate headquarters of approximately 54,00037,000 square feet is located in Milpitas, California.at 6001 America Center Drive, San Jose, California 95002. As of July 1, 2017, our leased and owned properties in total were approximately 1.3June 27, 2020, we have 1.5 million square feet of leased or owned property, of which approximately 18,000316,000 square feet is owned. Larger leased sites include properties located in China, France, Germany, United Kingdom and the United States. We believe our existing properties, including both owned and leased sites, are in good condition and suitable for the conduct of our business.
While we believe our existing facilities are adequate to meet our immediate needs, it may become necessary to lease, acquire, or sell additional or alternative space to accommodate future business needs.
ITEM 3. LEGAL PROCEEDINGS
We are subject to a variety of claimsThe information set forth under the heading “Legal Proceedings” in “Note 18, Commitments and suits that arise from time to timeContingencies” in the ordinary courseNotes to Consolidated Financial Statements in Item 8 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, resultsPart II 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 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.this Report is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQNasdaq Global Select Market under the symbol “VIAV.” Prior to the separation of the Lumentum business, our common stock was traded on the NASDAQ Global Select Market under the symbol “JDSU.” As of July 28, 2017 we had 227,547,102 shares of common stock outstanding.(VIAV). The closing price on July 28, 201725, 2020 was $11.00.
On August 1, 2015, we completed the previously announced distribution of approximately 80.1% of the outstanding shares of Lumentum common stock to Viavi’s stockholders (the “Distribution”). JDSU was renamed Viavi Solutions Inc. and, at the time of the Distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. We agreed not to liquidate the retained shares during the first six months following the Distribution. However, in connection with a private letter ruling from the Internal Revenue Service, we committed to liquidate these shares within three years from the Distribution. We have sold all of our ownership of Lumentum common stock as of July 1, 2017. The Distribution was made to Viavi’s stockholders of record as of the close of business on July 27, 2015 (the “Record Date”), who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on the Record Date and not sold prior to August 4, 2015. Viavi stockholders received cash in lieu of any fractional shares of Lumentum common stock. Our trading commenced “regular-way” trading on August 4, 2015 on NASDAQ under the ticker symbol “VIAV.”
The following table summarizes the high and low intraday sales prices for our common stock as reported on the NASDAQ Global Select Market during fiscal 2017 and 2016. The stock prices in the following table prior to August 4, 2015, the date of “regular-way” trading commenced following the Lumentum separation, have not been adjusted for the distribution.
|
| | | | | | | |
| | High | | Low |
| Fiscal 2017 | | | |
| Fourth Quarter | $ | 11.89 |
| | $ | 9.46 |
|
| Third Quarter | 11.15 |
| | 8.13 |
|
| Second Quarter | 8.76 |
| | 6.99 |
|
| First Quarter | 7.94 |
| | 6.36 |
|
| | | | |
| Fiscal 2016 | | | |
| Fourth Quarter | $ | 7.20 |
| | $ | 5.93 |
|
| Third Quarter | 6.94 |
| | 4.68 |
|
| Second Quarter | 6.56 |
| | 5.45 |
|
| First Quarter subsequent to August 3, 2015 | 6.88 |
| | 4.99 |
|
| First Quarter through August 3, 2015 | 12.00 |
| | 10.68 |
|
As of July 29, 2017,25, 2020, we had 3,7162,906 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.
During the fourth quarter of the fiscal 20172020, we made the following repurchasesrepurchased and retired shares of our common stock (in millions, except shares and per share amounts):pursuant to the stock repurchase program authorized by the Board of Directors. Refer to “Note 15. Stockholders' Equity” of Item 8 for more details.
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| April 2, 2017 to April 29, 2017 (1) | | 8,000 |
| | $ | 9.50 |
| | 8,000 |
| | $ | 53.8 |
|
| April 30, 2017 to May 27, 2017 | | — |
| | — |
| | — |
| | 53.8 |
|
| May 28, 2017 to July 1, 2017 (1) | | 30,430 |
| | 10.92 |
| | 30,430 |
| | 53.5 |
|
| | | 38,430 |
| | $ | 10.62 |
| | 38,430 |
| | $ | 53.5 |
|
| |
(1) | Repurchases were made in open market transactions pursuant to the program announced in February 2016. In February 2016, the Company's Board of Directors authorized a stock repurchase program under which the Company may purchase shares of its common stock worth up to an aggregate purchase price of $100.0 million through open market or private transactions.In September 2016, the Board of Directors increased the Company’s previously authorized stock |
repurchase program from $100 million to $150 million. Under the revised repurchase authorization, the Company may repurchase up to $150 million of the Company’s common stock from time to time at the discretion of the Company’s management. This stock repurchase authorization expires on December 31, 2017.
STOCK PERFORMANCE GRAPH
The information contained in the following graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
The following graph and table set forth the total cumulative return, assuming reinvestment of dividends, on an investment of $100 in June 20122015 and ending June 20172020 in: (i) our Common Stock, (ii) the S&P 500 Index, (iii) the NASDAQNasdaq Stock Market (U.S.) Index, and (iv) the NASDAQNasdaq Telecommunications Index. The table below includes our stock performance prior to the separation of the Lumentum business as traded on the NASDAQNasdaq Global Select Market under the symbol “JDSU.” Historical stock price performance is not necessarily indicative of future stock price performance. For the purpose of this graph, the distribution of approximately 80.1% of the outstanding common stock of Lumentum to our stockholders, pursuant to which Lumentum became an independent company, is treated as a non-taxable cash dividend of $21.15 for every five shares of Viaviour common stock held, an amount equal to the closing price of Lumentum common stock on August 4, 2015 which was deemed reinvested in Viaviour common stock at the closing price on August 4, 2015.
*$100 invested on 6/30/1215 in stock or index.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 6/2015 | | 6/2016 | | 6/2017 | | 6/2018 | | 6/2019 | | 6/2020 |
| VIAVI | $ | 100.00 |
| | $ | 96.07 |
| | $ | 152.57 |
| | $ | 148.37 |
| | $ | 192.57 |
| | $ | 181.12 |
|
| S&P 500 | $ | 100.00 |
| | $ | 101.73 |
| | $ | 117.46 |
| | $ | 131.76 |
| | $ | 142.59 |
| | $ | 145.85 |
|
| Nasdaq Composite | $ | 100.00 |
| | $ | 97.11 |
| | $ | 123.13 |
| | $ | 150.60 |
| | $ | 160.55 |
| | $ | 195.66 |
|
| Nasdaq Telecommunications | $ | 100.00 |
| | $ | 98.99 |
| | $ | 112.65 |
| | $ | 133.23 |
| | $ | 156.83 |
| | $ | 159.55 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 6/12 | | 6/13 | | 6/14 | | 6/15 | | 6/16 | | 6/17 |
| Viavi | $ | 100.00 |
| | $ | 130.82 |
| | $ | 113.36 |
| | $ | 105.27 |
| | $ | 101.13 |
| | $ | 160.62 |
|
| S&P 500 | 100.00 |
| | 117.92 |
| | 143.91 |
| | 151.46 |
| | 154.08 |
| | 177.91 |
|
| NASDAQ Composite | 100.00 |
| | 115.95 |
| | 150.19 |
| | 169.91 |
| | 164.99 |
| | 209.21 |
|
| NASDAQ Telecommunications | 100.00 |
| | 124.28 |
| | 141.30 |
| | 143.68 |
| | 142.22 |
| | 161.85 |
|
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Viavi (in millions, except share and per share amounts)VIAVI for the periods indicated. This data should be read in conjunction with and is qualified by reference to “Management’s“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K and our audited consolidated financial statements, including the notes thereto and the other financial information included in Item 88. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The selected financial data presented in this section is not intended to replace the consolidated financial statements included in this report. Amounts provided below are (in millions, except share and per share amounts)
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 | | July 1, 2017 | | July 2, 2016 |
| | (1) (2) (3) | | (4) (9) | | (5) (6) | | (5) (7) (9) | | (7) (8) (9) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Net revenue | $ | 1,136.3 |
| | $ | 1,130.3 |
| | $ | 875.7 |
| | $ | 805.0 |
| | $ | 906.3 |
|
| Income (loss) from continuing operations, net of tax | 28.7 |
| | 7.8 |
| | (48.6 | ) | | 158.6 |
| | (50.4 | ) |
| Income (loss) from discontinued operations, net of tax | — |
| | (2.4 | ) | | — |
| | 1.6 |
| | (48.8 | ) |
| Net income (loss) | $ | 28.7 |
| | $ | 5.4 |
| | $ | (48.6 | ) | | $ | 160.2 |
| | $ | (99.2 | ) |
| | | | | | | | | | |
| Net income (loss) per share from - basic: | | | | | | | | | |
| Continuing operations | $ | 0.13 |
| | $ | 0.03 |
| | $ | (0.21 | ) | | $ | 0.69 |
| | $ | (0.22 | ) |
| Discontinued operations | — |
| | (0.01 | ) | | — |
| | 0.01 |
| | (0.20 | ) |
| Net income (loss) | $ | 0.13 |
| | $ | 0.02 |
| | $ | (0.21 | ) | | $ | 0.70 |
| | $ | (0.42 | ) |
| | | | | | | | | | |
| Net income (loss) per share from - diluted: | | | | | | | | | |
| Continuing operations | $ | 0.12 |
| | $ | 0.03 |
| | $ | (0.21 | ) | | $ | 0.68 |
| | $ | (0.22 | ) |
| Discontinued operations | — |
| | (0.01 | ) | | — |
| | — |
| | (0.20 | ) |
| Net income (loss) | $ | 0.12 |
| | $ | 0.02 |
| | $ | (0.21 | ) | | $ | 0.68 |
| | $ | (0.42 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | | June 28, 2014 | | June 29, 2013 |
| | (8)(10) | | (8)(9)(10) | | (7)(8) | | (5)(6)(8) | | (1)(2)(3)(4)(8) |
| Consolidated Statements of Operations Data: | | | | | | | | | |
| Net revenue | $ | 811.4 |
| | $ | 906.3 |
| | $ | 873.9 |
| | $ | 926.9 |
| | $ | 909.1 |
|
| Income (loss) from continuing operations, net of tax | 165.3 |
| | (50.4 | ) | | (131.4 | ) | | (74.6 | ) | | 11.0 |
|
| Income (loss) from discontinued operations, net of tax | 1.6 |
| | (48.8 | ) | | 43.3 |
| | 56.8 |
| | 46.0 |
|
| Net income (loss) | $ | 166.9 |
| | $ | (99.2 | ) | | $ | (88.1 | ) | | $ | (17.8 | ) | | $ | 57.0 |
|
| | | | | | | | | | |
| Net income (loss) per share from - basic: | | | | | | | | | |
| Continuing operations | $ | 0.72 |
| | $ | (0.22 | ) | | $ | (0.57 | ) | | $ | (0.32 | ) | | $ | 0.04 |
|
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
| | 0.24 |
| | 0.20 |
|
| Net income (loss) | $ | 0.73 |
| | $ | (0.42 | ) | | $ | (0.38 | ) | | $ | (0.08 | ) | | $ | 0.24 |
|
| | | | | | | | | | |
| Net income (loss) per share from - diluted: | | | | | | | | | |
| Continuing operations | $ | 0.70 |
| | $ | (0.22 | ) | | $ | (0.57 | ) | | $ | (0.32 | ) | | $ | 0.04 |
|
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
| | 0.24 |
| | 0.20 |
|
| Net income (loss) | $ | 0.71 |
| | $ | (0.42 | ) | | $ | (0.38 | ) | | $ | (0.08 | ) | | $ | 0.24 |
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| | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 | | July 1, 2017 | | July 2, 2016 |
| | (1) (2) (3) | | (4) | | (5) (6) | | (5) (7) | | (7) (8) |
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Cash and cash equivalents, short-term investments, and short-term restricted cash | $ | 544.0 |
| | $ | 526.5 |
| | $ | 788.0 |
| | $ | 1,447.8 |
| | $ | 979.8 |
|
| Working capital | 680.8 |
| | 632.8 |
| | 877.3 |
| | 1,456.6 |
| | 985.3 |
|
| Total assets | 1,776.3 |
| | 1,815.1 |
| | 2,026.8 |
| | 2,113.1 |
| | 1,678.1 |
|
| Long-term obligations | 832.1 |
| | 805.3 |
| | 738.7 |
| | 1,095.8 |
| | 762.4 |
|
| Total stockholders’ equity | 711.4 |
| | 725.8 |
| | 734.9 |
| | 803.5 |
| | 689.3 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | | June 28, 2014 | | June 29, 2013 |
| | (8)(10) | | (8)(9) | | (7)(8) | | (5)(6) | | (2)(3)(4) |
| Consolidated Balance Sheets Data: | | | | | | | | | |
| Cash and cash equivalents, short-term investments, and restricted cash | $ | 1,447.8 |
| | $ | 979.8 |
| | $ | 825.6 |
| | $ | 881.3 |
| | $ | 515.9 |
|
| Working capital | 1,438.2 |
| | 985.3 |
| | 1,004.6 |
| | 1,001.1 |
| | 682.6 |
|
| Total assets | 2,110.5 |
| | 1,678.1 |
| | 2,210.6 |
| | 2,342.7 |
| | 1,715.2 |
|
| Long-term obligations | 1,095.3 |
| | 762.4 |
| | 722.8 |
| | 746.6 |
| | 206.2 |
|
| Total stockholders’ equity | 786.4 |
| | 689.3 |
| | 1,101.4 |
| | 1,187.7 |
| | 1,161.3 |
|
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| (1) | During the firstthird quarter of fiscal 2013, we entered into2020, the Company recorded a definitive agreementtax provision of $31.6 million for withholding taxes related to sell the hologram business (“Hologram Business”) within our OSP segment,planned repatriation of cash from a foreign subsidiary to US, of which subsequently closed on October 12, 2012. As a result, the operations of the Hologram Business have been presented as discontinued operations for the period presented. $19.4 million was paid in fiscal 2020. |
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| (2) | During fiscal 2020, the third quarterCompany recorded a gain on change in fair value of fiscal 2013, we acquired Arieso Ltd. (“Arieso”) in a transaction accountedRPC related earn-out liability of $29.5 million. Refer to “Note 8. Fair Value Measurements” for in accordance with the authoritative guidance on business combinations. The Consolidated Statements of Operations for fiscal 2013 included the results of Arieso subsequent to March 7, 2013 and the Consolidated Balance Sheet as of June 29, 2013 included Arieso’s financial position. more information. |
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| (3) | DuringReflects the third quarterimpact of the adoption of the new lease accounting standard (ASC 842) in fiscal 2013, we approved a strategic plan to exit NSE’s legacy low-speed wireline product line, which resulted in a $2.2 million charge for accelerated amortization of related intangibles, of which $1.8 million and $0.4 million are included in amortization of acquired technologies and amortization of other intangibles in the Consolidated Statement of Operations, respectively. In addition, we incurred $11.3 million of inventory-related charges included in cost of revenues in the Consolidated Statement of Operations, primarily related to the write-off of inventory no longer being sold due to the legacy low-speed wireline product line exit. year 2020. |
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| (4) | During the second quarter of fiscal 2019 we acquired RPC. During the fourth quarter of fiscal 2013,2019 we determined that it is more likely than not that a portionacquired 3Z Telecom, Inc. Both transactions were accounted for as business combinations. The Consolidated Statement of Operations for fiscal 2019 includes the results of the deferred tax assetsacquired businesses subsequent to the respective acquisition dates. The Consolidated Balance Sheet as of a non-U.S. jurisdiction will be realized after considering all positive and negative evidence. Accordingly, a deferred tax valuation allowance release of $107.9 million was recorded as an income tax benefit duringJune 29, 2019 includes the quarter. acquired businesses’ financial position. Refer to “Note 5. Acquisitions” for more information. |
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| (5) | During the third quarter of fiscal 2014, we recognized $21.7 million of uncertain tax benefits related to deferred tax assets due to the expirationFiscal 2018 and 2017 have been adjusted for our retrospective adoption of the statute of limitations in a non-U.S. jurisdiction. new revenue recognition accounting standard (ASC 606). |
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| (6) | During the first quarter of fiscal 2018 we acquired Trilithic Inc. During the third quarter of fiscal 2014,2018 we acquired Network Instruments in a transactionthe AvComm and Wireless businesses of Cobham plc. Both transactions were accounted for in accordance with the authoritative guidance onas business combinations. The Consolidated Statement of Operations for fiscal 2014 included2018 and fiscal 2019 includes the results of operations from Network Instrumentsthe acquired businesses subsequent to January 6, 2014 and the respective acquisition dates. The Consolidated Balance Sheet as of June 28, 2014 included Network Instruments’30, 2018 includes the acquired businesses’ financial position. Refer to “Note 5. Acquisitions” for more information. |
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| (7) | In the third quarter of fiscal 2015, we recognized a $21.8 million tax benefit upon the settlement of an audit in a non-U.S. jurisdiction. |
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(8) | During the first quarter of fiscal 2016, we completed the Separation. As a result, the operations of the Lumentum business have been presented as discontinued operations in all periods of the Company’s Consolidated Statements of Operations and in the Consolidated Balance Sheet as of June 27, 2015. |
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(9) | During the fourth quarter of fiscal 2016, the Company recorded a $91.4 million goodwill impairment charge related to the SE reporting unit in the Consolidated Statements of Operations.Refer to “Note 8. Goodwill” for more information.
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(10) | During fiscal yearyears ended 2017 and 2016, the Companywe recorded $203.0 million and $71.5 million, respectively, gross realized gains on the sale of Lumentum common stock that was retained as part of the Separation. Refer |
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| (8) | During the fourth quarter of fiscal 2016, we recorded a $91.4 million goodwill impairment charge related to “Note 7. Investments, Forward Contracts and Fair Value Measurements”for more information.the SE reporting unit in the Consolidated Statements of Operations. |
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| (9) | During the first quarter of fiscal 2016, we completed the separation of Lumentum. Operations of Lumentum have been presented as discontinued operations in all periods of our Consolidated Statements of Operations. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.”
Our Industries and Developments
Viavi formerly JDSU,Solutions Inc. (VIAVI, also referred to as the Company, we, our, and us) is a global provider of network test, monitoring and assurance solutions tofor communications service providers, enterprises, network equipment manufacturers, government and their ecosystems, supported by a worldwide channel community including Viavi Velocity Solution Partners (“Velocity”)avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network. Our Velocity program allows us to optimize the use of direct or partner sales depending on application and sales volume. Its strategy is to expand our reach into new market segments as well as expand our capability to sell and deliver solutions. Our solutions deliver end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. ViaviVIAVI is also a leader in high performance thin film optical coatings, providing light management solutions tofor 3D sensing, anti-counterfeiting, consumer andelectronics, industrial, government, automotive and healthcare and other markets. On August 1, 2015, we completed the separation of our optical components and lasers business and created two publicly traded companies:
an optical components and commercial lasers company named Lumentum, consisting of our CCOP segment and the WaveReady product line formerly within our NE segment; and
a network and service enablement and optical coatings company, renamed Viavi, consisting of our NE, SE and OSP segments.
In connection with the Separation we distributed approximately 80.1% of the outstanding shares of Lumentum common stock to our stockholders on August 1, 2015. The Company was renamed Viavi and, at the time of the distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. Activities related to the Lumentum business have been presented as discontinued operations in all periods of the Company’s consolidated financial statements in this Annual Report on Form 10-K and the accompanying disclosures, discussion and analysis herein pertains to the Company’s continuing operations, unless noted otherwise.defense applications.
To serve our markets, during fiscal 20172020 we operated the following business segments:
•Network Enablement (NE);
•Service Enablement (SE); and
•Optical Security and Performance Products (OSP).
Network Enablement
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, activate, certify, troubleshoot and optimize networks. They also support more profitable, higher-performing networks and facilitate time-to-revenue.
Our solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major NEMs,network-equipment manufacturers (NEMs), operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks. They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by network-equipment manufacturers (“NEMs”)NEMs in the design and production of next-generation network equipment. Other Test & Measurement communications products also serve the public safety, government, and aerospace and defense markets.
ViaviWe also offersoffer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, and deployed private enterprise customers. Our customers include Alcatel-Lucent International, América Móvil, S.A.B. de C.V., AT&T Inc., Inc., CenturyLink, Inc., Cisco Systems, Inc., Comcast Corporation, Nokia Solutions and Networks Reliance Industries, Time Warner Inc. and Verizon Communications Inc..Inc.
Our NE products and associated services including acquired business are described below:
Field Instruments: Primarily consisting of (a) Access and Cable products; (b) Avionics products; (c) Fiber Instrument products; (d) Metro products; (e) RF Test products; and (f) Radio Test products.
Lab Instruments: Primarily consisting of (a) Fiber Optic Production Lab Test; (b) Optical Transport products; (c) Storage Network Test products; and (d) Wireless products.
Service Enablement
SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions, - which primarily consist of instruments, microprobes and software, - monitor, collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization.
Our portfolio of SE solutions addresses the same lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks, as our NE portfolio. Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.
SE customers include similar CSPs, NEMs, government organizations, large corporate customers and storage-segment customers that are served by our NE segment.
Our SE products and associated services are described below:
Data Center: Consisting of our Network Performance Monitoring and Security tools.
Assurance: Primarily consisting of our (a) Growth Products (Location Intelligence and Nitro Mobile products) and (b) Mature Products (Legacy Assurance and Legacy Wireline).
Optical Security and Performance Products
Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, healthcareautomotive, industrial and other markets.
Our securityanti-counterfeiting offerings for the currency market include OVP®, and OVMP® and banknote thread substrates.. OVP® enables a color-shifting effect used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents. We also provide OVMP®, a technology that delivers depth and motion effects for authenticating banknotes. Our anti-counterfeiting technologies are deployed on the banknotes of more than 100 countries today. OSP also develops and delivers overt and covert anti-counterfeiting products that utilize its proprietary printing platform and are targeted primarily at the pharmaceutical and consumer-electronics markets.
Leveraging our expertise in spectral management and our unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer and industrial market, including, for example, 3D sensingSensing optical filters.filters and Engineered DiffusersTM.
OSP value-added solutions meet the stringent requirements of commercial and government customers. Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application.
OSP serves customers such as FLIR Systems, Kingston Digital, L-3 Communications,SICPA Holding SA Company (SICPA), STMicroelectronics Holding N.V., Lockheed Martin Corporation and SICPA.Seiko Epson Corporation.
COVID-19 Pandemic Update
The COVID-19 pandemic has confirmed cases in the U.S. and most of the countries and territories we operate in worldwide. The pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, temporary business closures among others. The COVID-19 pandemic and these aforementioned measures, have had and continue to have, a substantial macroeconomic impact on businesses and economies worldwide. These conditions may continue and result in an adverse impact to our operations.
Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of all those we serve, - our employees, customers, suppliers, and communities, including implementing early and regular updates to our health and safety policies and procedures. We have shut down, slowed, or modified business operations and activities in certain geographies, including in some instances, limiting production to essential business services, all in conjunction with federal, state, and local health and safety regulations and shelter-in-place directives. We continue to follow the guidance of local and national governments, including monitoring the health of our employees who have returned to our offices, by limiting the gathering size of employee groups in indoor spaces per social distancing guidelines, and requiring those employees to wear masks and to undergo screenings prior to entering our offices.
The COVID-19 pandemic has not had a substantial net impact on our liquidity position in the second half of the fiscal year. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our strong credit ratings. To date, we have not observed any material or materially adverse indication of impairments under the authoritative guidance, to any of our assets or a significant change to the fair value of assets due to the COVID-19 pandemic.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results. In addition, we have experienced and may continue to experience shipping and logistics challenges as many of our customers have also closed their facilities and are operating under similar restrictions. Both NE and SE net revenue declined in the second half of fiscal 2020. NE revenue declined as the COVID-19 pandemic resulted in certain customer operation and logistic shutdowns that resulted in shipment or acceptance delays, which resulted in a demand slowdown in Field Instruments with orders pushed out into future periods, and SE revenue declined as customers were unable to provide on-site verification and acceptance due to facility closures and other restrictions.
We have a global supply chain footprint with our primary manufacturing partners located in China, France, Germany, United Kingdom and the United States. Supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and materials shortages resulted in extended lead-times to our customers, increased logistics costs, and impacted the volume of product we were able to deliver, which negatively impacted our ability to fully recognize the associated revenue in the second half of 2020.
While COVID-19 has brought unprecedented challenges, we believe that we have a robust and adaptable supply chain. Our supply chain team has been working to meet our customer needs by executing on a risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers.
We have also experienced shipping and logistics challenges with respect to our NE Field Instruments products as many of our customers closed facilities and are continuing to operate under similar restrictions, and have delayed purchase decisions or placed orders on hold due to shipment or acceptance delays. In addition, many of our customers have been unable provide on-site verification and acceptance of our SE products due to facility closures and other restrictions.
Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and on June 8, 2020, the National Bureau of Economic Research announced that the U.S. was in a recession. Deterioration of macro-economic conditions could have a material adverse impact on our longer-term business as customers curtail and reduce overall spending. As the pandemic spread across the globe, there has been a tightening of the credit markets. We entered into a $300 million secured credit facility in May 2020 to strengthen our liquidity position but have not drawn on this facility to date. Under a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.
Despite the continued challenges that we are facing due to the COVID-19 pandemic, we remain confident that the actions that we are taking to manage such challenges, combined with our strong liquidity, position us well to navigate through the current economic environment and continue to execute on our long-term value creation strategy.
Recently Issued Accounting Pronouncements
Refer to “Note 2. Recently Issued Accounting Pronouncements” regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of ourOur consolidated financial statements have been prepared in conformityaccordance with accounting principles generally accepted in the United States requires usof America (U.S. GAAP), which require management to make judgments, estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the related disclosures. We base ourdisclosure of contingent assets and liabilities. Our estimates are based on historical experience our knowledge of economic and market factors and various other assumptions that we believe to be reasonable under the circumstances. Estimatescircumstances, the results of which form the basis for making judgments about the carrying values of assets and judgments used inliabilities. We believe that the preparation of our financial statementsaccounting estimates employed and the resulting balances are by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be incorrect andreasonable; however, actual results may differ from these estimates under different assumptions or conditions.and such differences may be material. We believe the following critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements:
Revenue Recognition
We derive revenue from a diverse portfolio of network solutions and optical technology products and services, as follows:
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| • | Products: NE and SE products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. Our OSP products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications. |
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| • | Services: We also offer a range of product support and professional services designed to comprehensively address customer requirements. These include repair, calibration, extended warranty, software support, technical assistance, training and consulting services. Implementation services provided in conjunction with hardware or software solution projects include sale of the products along with project management, set-up and installation. |
Steps of revenue recognition
We account for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue when it is realized or realizablerevenue:
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| 1. | Identify the contract with a customer: Generally, we consider customer purchase orders which, in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before we consider an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable; and, (v) the agreement has commercial substance. We exercise reasonable judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures that we implement. |
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| 2. | Identify the performance obligations in the contract: We assess whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) our promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. Our performance obligations consist of a variety of products and services offerings, which include networking equipment; proprietary pigment; optical filters; proprietary software licenses; and support and maintenance, which includes hardware support that extends beyond our standard warranties, software maintenance, installation, professional and implementation services, and training. |
Identifying and earned. We consider revenue realized or realizableevaluating whether products and earned when there is persuasive evidenceservices are considered distinct performance obligations may require significant judgment particularly in NSE due to the underlying nature of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. Delivery does not occur until products have been shipped or services have been provided, risk of loss has transferred and in cases where formal acceptance is required, customer acceptance has been obtained or customer acceptance provisions have lapsed. In situations where a formal acceptance is required but the acceptance only relates to whether the product meets its published specifications, revenue is recognized upon delivery provided all other revenue recognition criteria are met.
Historical return rates are monitored onand service offerings. We may enter into contracts that involve a product-by-product basis. In addition, some distributor agreements allow for partial returnsignificant level of products and/or price protection under certain conditions within limited time periods. Such return rights are generally limited to contractually defined, short-term stock rotationintegration and defective or damaged product. We maintain reserves for sales returnsinterdependency between a software license and price adjustments based on historical experience and other qualitative factors. As new products or distributors are introduced, these historical rates are used to establish initial sales returns reserves and are adjusted as better information becomes available. We also have market development incentive programs for certain distributors whereby rebates are offered based upon exceeding volume goals. Estimated rebates, sales returns and other such allowances are deducted from revenue.
In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-element arrangements and for each major category of revenue.
Multiple-Element Arrangements
When a sales arrangement contains multiple deliverables, such as sales of products that include services, the multiple deliverables are evaluatedinstallation services. Judgment may be required to determine whether there are onethe software license is considered distinct in the context of the contract and accounted for separately, or more unitsnot distinct in the context of accounting. Where there is more than one unitthe contract and accounted for together with the installation service.
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| 3. | Determine the transaction price: Transaction price reflects the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to the customer. Our contracts may include terms that could cause variability in the transaction price including rebates, sales returns, market incentives and volume discounts. Variable consideration is generally accounted for at the portfolio level and estimated based on historical information. If a contract includes a variable amount, the price adjustments are estimated at contract inception. In both cases, estimates are updated at the end of each reporting period as additional information becomes available. |
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| 4. | Allocate the transaction price to performance obligations in the contract: If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Many of our contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training. Contracts may also include rights or options to acquire future products and/or services, which are accounted for as separate performance obligations by us, only if the right or option provides the customer with a material right that it would not receive without entering into the contract. For contracts with multiple performance obligations, we allocate the total transaction value to each distinct performance obligation based on relative standalone selling price (SSP). Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when we sell that good or service separately under similar circumstances to similar customers. If a directly observable price is not available, the SSP must be estimated based on multiple factors including, but not limited to, historical pricing practices, internal costs, and profit objectives as well as overall market conditions. |
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| 5. | Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales, transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and solution contracts or in instances where software is sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if we have evidence that all acceptance provisions will be, or have been, satisfied. For fixed-price support and extended warranty contracts, or certain software arrangements, which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services outside of an extended warranty or support contract is recognized at the time of completion of the related service. For other professional services or time-based labor contracts, revenue is recognized as we perform the services and the customers receive and/or consume the benefits. |
Business Combinations
We use the acquisition method of accounting then the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price. Under this approach, the selling price of a unit of accounting is determined by using a selling price hierarchy which requires the use of vendor-specific objective evidence (“VSOE”) of fair value if available, third-party evidence (“TPE”) if VSOE is not available, or management’s best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Revenue is recognized when the revenue recognition criteria for each unit of accounting are met.
We establish VSOE of selling price using the price charged for a deliverable when sold separately. TPE of selling price is established by evaluating similar and interchangeable competitor goods or services in sales to similarly situated customers. When VSOE or TPE are not available then we use BESP. Generally, we are not able to determine TPE because our product strategy differs from that of others in our markets, and the extent of customization varies among comparable products or services from our peers. We establish BESP using historical selling price trends and considering multiple factors including, but not limited to geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices.
The determination of BESP is made through consultation with and approval by the Pricing Committee. We may modify or develop new pricing practices and strategies in the future. As these pricing strategies evolve, we may modify our pricing practices in the future, which may result in changes in BESP. The aforementioned factors may result in a different allocation of revenue to the deliverables in multiple element arrangements from the current fiscal year, which may change the pattern and timing of revenue recognition for these elements but will not change the total revenue recognized for the arrangement.
To the extent a deliverable(s) in a multiple-element arrangement is subject to specific guidance (for example, software that is subject tounder the authoritative guidance on software revenue recognition), we allocatebusiness combinations. Each acquired company’s operating results are included in our Consolidated Financial Statements beginning on the date of acquisition. The purchase price is equivalent to the fair value of the units of accounting using relative selling priceconsideration transferred. Tangible and that unit of accounting is accounted for in accordance with the specific guidance. Some of our product offerings include hardware that are integrated with or sold with software that delivers the functionalityidentifiable intangible assets acquired and liabilities assumed as of the equipment. We believe this equipment is not considered software-related and would therefore be excluded from the scopedate of the authoritative guidance on software revenue recognition.
Hardware
Revenue from hardware sales is typically recognized when the product meet delivery criteria.
Services
Revenue from services and system maintenance is recognized on a straight-line basis over the services term. Revenue from professional service engagements is recognized once its delivery obligation is fulfilled. Revenue related to extended warranty and product maintenance contracts is deferred and recognized on a straight-line basis over the delivery period. We also generate service revenue from hardware repairs and calibration which is recognized as revenue upon completion of the service.
Software
The Company’s software arrangements generally consist of a perpetual license fee, installation services and Post-Contract Support (“PCS”) as well as other non-software deliverables.
VSOE of fair value for PCS is established based on the renewal rate or the bell curve methodology. Non-software and software-related arrangements are bifurcated based on a relative selling price using BESP. The software related elements are bifurcated into separate units of accounting if VSOE of fair value has been established for the undelivered element(s) and the functionality of the delivered element(s) is not dependent on the undelivered element(s).
Revenue from multiple-element software arrangements that include installation services, is deferred until installation service obligation for the software solution is fulfilled. If VSOE has been established for the undelivered elements, the software, installation services and non-software elements are recognized upon completion of delivery and the PCS is recognized ratably over the remaining support contract term. If VSOE has not been established for the undelivered element, the software related elements are recognized ratably over the remaining support period.
Investments
Our investments in debt securities and marketable equity securities are primarily classified as available-for-sale investments or trading securities andacquisition are recorded at their estimated fair value. The costvalues as of securities soldthe acquisition date. Goodwill is based onrecognized for the specific identification method. Unrealized gains and losses on available-for-sale investments,excess of purchase price over the net of tax, are reported as a separate component within our Consolidated Statements of Stockholders’ Equity. Unrealized gains or losses on trading securities resulting from changes in fair value are recognizedof assets acquired and liabilities assumed.
The allocation of purchase price requires management to make significant estimates and assumptions in current earnings. Our short-term investments, which are classified as current assets, include certain securities with stated maturities of longer than twelve months as they are highly liquid and available to support current operations. We periodically review our investments for impairment. If a debt security’s market value is below amortized cost and we either intend to selldetermining the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, we record an other-than-temporary impairment charge to investment income (loss) for the entire amountfair values of the impairment. If a debt security’s market value is below amortized costassets acquired and we do not expectliabilities assumed. With respect to recover the entire amortized cost of the security, we separate the other-than-temporary impairment into the portion of the loss related to credit factors, or the credit loss portion, and the portion of the loss that is not related to credit factors, or the non-credit loss portion. The credit loss portion is the difference between the amortized cost of the security and our best estimate of the present value of the cash flows expected to be collected from the debt security. The non-credit loss portion is the residual amount of the other-than-temporary impairment. The credit loss portion is recorded as a charge to income (loss), and the non-credit loss portion is recorded as a separate component of other comprehensive income (loss).
Inventory Valuation
We assess the value of our inventory on a quarterly basis and write down those inventories that are obsolete orintangible assets, critical estimates in excess of our forecasted usage to their estimated realizable value. Our estimates of realizable value are based upon our analysis and assumptions including, but not limited to, forecasted sales levels by product, expected product lifecycle, product development plans and future demand requirements. Our product line management personnel play a key role in our excess review process by providing updated sales forecasts, managing product transitions and working with manufacturing to maximize recovery of excess inventory. If actual market conditions are less favorable than our forecasts or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write-downs. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower cost of sales and higher income from operations than expected in that period.
Goodwill Valuation
We test goodwill for possible impairment on an annual basis in our fourth quarter and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable. Circumstances that could trigger an impairment testvaluing intangible assets include, but are not limited to, future cash flows from customer relationships, developed technology, trade names and acquired patents; and discount rates. Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.
Goodwill Valuation
Goodwill represents the excess of the purchase price paid, over the net fair value of assets acquired and liabilities assumed, to purchase an enterprise or asset. We test goodwill for impairment at the reporting unit level at least annually, during the fourth quarter of each fiscal year, or more frequently if events or changes in circumstance indicate that the asset may be impaired.
The accounting guidance provides us the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that might indicate that a reporting unit’s fair value is less than its carry amount. These events and circumstances include, macro-economic conditions, such as a significant adverse change in the business climateour operating environment, industry or legal factors, an adverse actionmarket considerations; entity-specific events such as increasing costs, declining financial performance, or assessment by a regulator, change in customers, target market and strategy, unanticipated competition, loss of key personnel,personnel; or other events, such as the likelihood that a reporting unit or significant portionsale of a reporting unit, will be soldadverse regulatory developments or otherwise disposed.a sustained decrease in our stock price.
The authoritative guidance allows an entity to assess qualitative factors to determine whetherIf it is necessary to perform the quantitative goodwill impairment test. If an entity determines thatdetermined, as a result of the qualitative assessment, that it is more likely than not (i.e. greater than 50% likelihood) that the fair value of a reporting unit is less than its carrying amount, then thea quantitative test is required. Otherwise, no further testing is required. The
Under the quantitative test, if the carrying amount of the reporting unit goodwill impairment test requires us to estimate and compare the fair value of our reporting units with their carrying values.
In the fourth quarter of fiscal 2017, we early adopted the new authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) that eliminated the requirement to calculateexceeds the implied fair value of that goodwill, to measure a goodwillan impairment charge. Instead, anyloss is recorded in the Consolidated Statements of Operations as impairment charge would be based onof goodwill. Measurement of the excessfair value of a reporting unit's carrying amount over itsunit is based on one or more of the following fair value as determined under the quantitative goodwill impairment test.measures: using present value techniques of estimated future cash flows or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.
Application of the goodwill impairment test requires judgments, including: identification of the reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of each reporting unit. We generally estimate the fair value of a reporting unit using a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Our significant estimates in the income approach include our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business and working capital effects. The market approach estimates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market approach include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.
We base our estimates on historical experience and on various assumptions about the future that we believe are reasonable based on available information. Unanticipated events and circumstances may occur that affect the accuracy of our assumptions, estimates and judgments. For example, if the price of our common stock were to significantly decrease combined with other adverse changes in market conditions, thus indicating that the underlying fair value of our reporting units may have decreased, we might be required to reassess the value of our goodwill in the period such circumstances were identified.
In the fourth quarter of fiscal 2017,2020, we performed the goodwill impairment test in accordance with the authoritative guidance for NE, SE and OSP reporting units, and determined no indicator of impairment. As of July 1, 2017, the SE reporting unit did not have any goodwill, which was fully impaired in the fourth quarter of fiscal 2016. Refer to “Note 8.9. Goodwill” for more information.
Long-lived Asset Valuation (Property, Plant and Equipment and Intangible Assets)
We test long-lived assets for recoverability, at the asset group level, when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset, current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset, or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability is assessed based on the difference between the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Income Taxes
In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, we have determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for such deferred tax assets. If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax provision may decrease in the period in which we determine that realization is more likely than not. Likewise, if we determine that it is not more likely than not that our deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period in which we make the determination.
The authoritative guidance on accounting for uncertainty in income taxes prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification and disclosure of tax positions. We are subject to
income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. We recognize liabilities based on our estimate of whether, and the extent to which, additional tax liabilities are more likely than not. If we ultimately determine that the payment of such a liability is not necessary, then we reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary.
The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.
Restructuring Accrual
In accordance with authoritative guidance on accounting for costs associated with exit or disposal activities, generally costs associated with restructuring activities are recognized when they are incurred. However, in the case of leases, the expense is estimated and accrued when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made from the time the property was vacated, including evaluating real estate market conditions for expected vacancy periods and sub-lease income. Additionally, a liability for post-employment benefits for workforce reductions related to restructuring activities is recorded when payment is probable and, the amount is reasonably estimable. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.
Pension and Other Postretirement Benefits
The funded status of our retirement-related benefit plans is recognized in the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal year end, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (“PBO”); and for the non-pension postretirement benefit plan, the benefit obligation is the accumulated postretirement benefit obligation (“APBO”). The PBO represents the actuarial present value of benefits expected to be paid upon our employee’s retirement. The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Unfunded or partially funded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and non-pension postretirement benefit obligation equal to this excess. The current portion of the retirement-related benefit obligation represents the actuarial present value of benefits payable in the next 12 months in excess of the fair value of plan assets, measured on a plan-by-plan basis. This liability is recorded in other current liabilities in the Consolidated Balance Sheets.
Net periodic pension cost is recorded in the Consolidated Statements of Operations and includes service cost, interest cost, expected return on plan assets, amortization of prior service cost (credit) and (gains) losses previously recognized as a component of accumulated other comprehensive income. Service cost represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year. Interest cost represents the time value of money cost associated with the passage of time. (Gains) losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service cost (credit) represents the cost of or credit resulting from benefit improvements attributable to prior service granted in plan amendments. (Gains) losses and prior service cost (credit) not recognized as a component of net periodic pension cost in the Consolidated Statements of Operations as they arise are recognized as a component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets, net of tax. Those (gains) losses and prior service cost (credit) are subsequently recognized as a component of net periodic pension cost pursuant to the recognition and amortization provisions of the authoritative guidance.
The measurement of the benefit obligation and net periodic pension cost is based on our estimates and actuarial valuations, provided by third-party actuaries, which are approved by our management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, and mortality rates. We evaluate these assumptions periodically but not less than annually. In estimating the expected return on plan assets, we consider historical returns on plan assets, diversification of plan investments, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plan’s invested assets.
Beginning in the fourth quarter of fiscal 2016, we measure our benefit obligation and plan assets using the month-end date of June 30, which is closest to our fiscal year-end.
Loss Contingencies
We are subject to the possibility of various potential loss contingencies arising in the ordinary course of business. WeIn determining a loss contingency, we consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as ourits ability to reasonably estimate the amount of loss in determining loss contingencies.loss. An estimated loss is accrued when it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.
Contingent liabilities include contingent consideration in connection with our acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and is remeasured each reporting period with subsequent adjustments recognized in the Selling, general and administrative expense of our Consolidated Statements of Operations. Contingent consideration is valued using significant inputs that are not observable in the market pursuant to fair value measurement accounting. While we believe the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
Adoption of Lease Accounting Standard
Refer to “Note 2. Recently Issued Accounting Pronouncements” regarding the impact to our financial statements of the adoption of the accounting standard leases (ASC 842 - Lease) on June 30, 2019.
In the first quarter of fiscal 2020 the Company adopted this standard lease using the modified retrospective approach. Adoption of the leasing standard resulted in $35.5 million of Right-of-Use (ROU) assets and $37.0 million of lease liabilities on June 30,
2019. In addition, the Company recorded an adjustment to accumulated deficit, net of taxes, of $3.0 million from the recognition of previously deferred profit under sale-leaseback arrangements and de-recognition of related real estate assets of $7.1 million and financing obligations of $10.1 million. The adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Operations and Statements of Cash Flows. For additional information refer to “Note 12. Leases.”
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 as a percentage of net revenue:
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Segment net revenue: | | | | | | | | | | |
| NE | 54.7 | % | | 55.7 | % | | 58.0 | % | |
| SE | 16.7 |
| | 16.9 |
| | 19.9 |
| |
| OSP | 28.6 |
| | 27.4 |
| | 22.1 |
| |
| Network Enablement | | 65.7 | % | | 65.3 | % | | 61.6 | % |
| Service Enablement | | 9.0 |
| | 9.1 |
| | 13.5 |
|
| Optical Security and Performance | | 25.3 |
| | 25.6 |
| | 24.9 |
|
| Net revenue | 100.0 |
| | 100.0 |
| | 100.0 |
| 100.0 |
| | 100.0 |
| | 100.0 |
|
| Cost of revenues | 38.3 |
| | 37.4 |
| | 36.8 |
| 38.6 |
| | 39.4 |
| | 41.2 |
|
| Amortization of acquired technologies | 1.8 |
| | 1.9 |
| | 3.7 |
| 2.9 |
| | 3.0 |
| | 3.0 |
|
| Gross profit | 59.9 |
| | 60.7 |
| | 59.5 |
| 58.5 |
| | 57.6 |
| | 55.8 |
|
| Operating expenses: | | | | | | | | | | |
| Research and development | 16.8 |
| | 18.4 |
| | 19.8 |
| 17.0 |
| | 16.5 |
| | 15.2 |
|
| Selling, general and administrative | 37.0 |
| | 38.7 |
| | 43.1 |
| 27.7 |
| | 30.4 |
| | 37.1 |
|
| Impairment of goodwill | — |
| | 10.1 |
| | — |
| |
| Amortization of other intangibles | 1.7 |
| | 1.6 |
| | 2.2 |
| 3.1 |
| | 3.4 |
| | 2.4 |
|
| Restructuring and related charges | 2.7 |
| | 1.2 |
| | 3.1 |
| 0.3 |
| | 1.4 |
| | 0.9 |
|
| Total operating expenses | 58.2 |
| | 70.0 |
| | 68.2 |
| 48.1 |
| | 51.7 |
| | 55.6 |
|
| Income (loss) from operations | 1.7 |
| | (9.3 | ) | | (8.7 | ) | |
| Interest and other income, net | 1.6 |
| | 0.3 |
| | 0.5 |
| |
| Income from operations | | 10.4 |
| | 5.9 |
| | 0.2 |
|
| Interest income and other income, net | | 0.8 |
| | 0.6 |
| | 1.1 |
|
| Gain on sale of investments | 25.0 |
| | 7.8 |
| | — |
| — |
| | — |
| | — |
|
| Interest expense | (5.3 | ) | | (3.9 | ) | | (3.8 | ) | (2.9 | ) | | (3.0 | ) | | (5.3 | ) |
| Income (loss) from continuing operations before income taxes | 23.0 |
| | (5.1 | ) | | (12.0 | ) | 8.3 |
| | 3.5 |
| | (4.0 | ) |
| Provision for income taxes | 2.6 |
| | 0.5 |
| | 3.0 |
| 5.8 |
| | 2.8 |
| | 1.5 |
|
| Income (loss) from continuing operations, net of taxes | 20.4 |
| | (5.6 | ) | | (15.0 | ) | 2.5 |
| | 0.7 |
| | (5.5 | ) |
| Income (loss) from discontinued operations, net of taxes | 0.2 |
| | (5.3 | ) | | 4.9 |
| |
| (Loss) income from discontinued operations, net of taxes | | — |
| | (0.2 | ) | | — |
|
| Net income (loss) | 20.6 | % | | (10.9 | )% | | (10.1 | )% | 2.5 | % | | 0.5 | % | | (5.5 | )% |
Financial Data for Fiscal 2017, 20162020, 2019 and 20152018
The following table summarizes selected Consolidated Statement of Operations items (in(in millions, except for percentages)percentages):
| | | | 2017 | | 2016 | | Change | | Percent Change | | 2016 | | 2015 | | Change | | Percent Change | 2020 | | 2019 | | Change | | Percent Change | | 2019 | | 2018 | | Change | | Percent Change |
| Segment net revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NE | $ | 444.0 |
| | $ | 504.6 |
| | $ | (60.6 | ) | | (12.0 | )% | | $ | 504.6 |
| | $ | 506.8 |
| | $ | (2.2 | ) | | (0.4 | )% | $746.7 | | $737.8 | | $8.9 | | 1.2 | % | | $737.8 | | $539.1 | | $198.7 | | 36.9 | % |
| SE | 135.2 |
| | 153.6 |
| | (18.4 | ) | | (12.0 | ) | | 153.6 |
| | 174.3 |
| | (20.7 | ) | | (11.9 | ) | 102.7 | | 103.4 | | (0.7) | | (0.7 | )% | | 103.4 | | 118.5 | | (15.1) | | (12.7 | )% |
| OSP | 232.2 |
| | 248.1 |
| | (15.9 | ) | | (6.4 | ) | | 248.1 |
| | 192.8 |
| | 55.3 |
| | 28.7 |
| 286.9 | | 289.1 | | (2.2) | | (0.8 | )% | | 289.1 | | 218.1 | | 71.0 | | 32.6 | % |
| Net revenue | $ | 811.4 |
| | $ | 906.3 |
| | $ | (94.9 | ) | | (10.5 | )% | | $ | 906.3 |
| | $ | 873.9 |
| | $ | 32.4 |
| | 3.7 | % | $1,136.3 | | $1,130.3 | | $6.0 | | 0.5 | % | | $1,130.3 | | $875.7 | | $254.6 | | 29.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of acquired technologies | $ | 14.3 |
| | $ | 17.3 |
| | $ | (3.0 | ) | | (17.3 | )% | | $ | 17.3 |
| | $ | 31.9 |
| | $ | (14.6 | ) | | (45.8 | )% | $ | 32.7 |
| | $ | 34.4 |
| | $ | (1.7 | ) | | (4.9 | )% | | $ | 34.4 |
| | $ | 26.7 |
| | $ | 7.7 |
| | 28.8 | % |
| Percentage of net revenue | 1.8 | % | | 1.9 | % | | | | | | 1.9 | % | | 3.7 | % | | | | | 2.9 | % | | 3.0 | % | | | | | | 3.0 | % | | 3.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | 486.0 |
| | 549.7 |
| | $ | (63.7 | ) | | (11.6 | )% | | 549.7 |
| | 520.1 |
| | $ | 29.6 |
| | 5.7 | % | $ | 665.3 |
| | $ | 651.4 |
| | $ | 13.9 |
| | 2.1 | % | | $ | 651.4 |
| | $ | 488.4 |
| | $ | 163.0 |
| | 33.4 | % |
| Gross margin | 59.9 | % | | 60.7 | % | | | | | | 60.7 | % | | 59.5 | % | | | | | 58.5 | % | | 57.6 | % | | | | | | 57.6 | % | | 55.8 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of intangibles | 14.0 |
| | 14.6 |
| | (0.6 | ) | | (4.1 | )% | | 14.6 |
| | 19.5 |
| | (4.9 | ) | | (25.1 | )% | $ | 35.1 |
| | $ | 38.1 |
| | $ | (3.0 | ) | | (7.9 | )% | | $ | 38.1 |
| | $ | 21.0 |
| | $ | 17.1 |
| | 81.4 | % |
| Percentage of net revenue | 1.7 | % | | 1.6 | % | | | | | | 1.6 | % | | 2.2 | % | | | | | 3.1 | % | | 3.4 | % | | | | | | 3.4 | % | | 2.4 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Research and development | 136.3 |
| | 166.4 |
| | (30.1 | ) | | (18.1 | )% | | 166.4 |
| | 173.3 |
| | (6.9 | ) | | (4.0 | )% | $ | 193.6 |
| | $ | 187.0 |
| | $ | 6.6 |
| | 3.5 | % | | $ | 187.0 |
| | $ | 133.3 |
| | $ | 53.7 |
| | 40.3 | % |
| Percentage of net revenue | 16.8 | % | | 18.4 | % | | | | | | 18.4 | % | | 19.8 | % | | | | | 17.0 | % | | 16.5 | % | | | | | | 16.5 | % | | 15.2 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | 300.5 |
| | 351.1 |
| | (50.6 | ) | | (14.4 | )% | | 351.1 |
| | 376.3 |
| | (25.2 | ) | | (6.7 | )% | $ | 315.0 |
| | $ | 343.5 |
| | $ | (28.5 | ) | | (8.3 | )% | | $ | 343.5 |
| | $ | 323.9 |
| | $ | 19.6 |
| | 6.1 | % |
| Percentage of net revenue | 37.0 | % | | 38.7 | % | |
| | | | 38.7 | % | | 43.1 | % | | | | | 27.7 | % | | 30.4 | % | |
|
| | | | 30.4 | % | | 37.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impairment of goodwill | — |
| | 91.4 |
| | (91.4 | ) | | 100.0 | % | | 91.4 |
| | — |
| | 91.4 |
| | 100.0 | % | |
| Percentage of net revenue | — | % | | 10.1 | % | | | | | | 10.1 | % | | — | % | | | | | |
| | | | | | | | | | | | | | | | | |
| Restructuring and related charges | 21.6 |
| | 10.5 |
| | 11.1 |
| | 105.7 | % | | 10.5 |
| | 26.8 |
| | (16.3 | ) | | (60.8 | )% | $ | 3.5 |
| | $ | 15.4 |
| | $ | (11.9 | ) | | (77.3 | )% | | $ | 15.4 |
| | $ | 8.3 |
| | $ | 7.1 |
| | 85.5 | % |
| Percentage of net revenue | 2.7 | % | | 1.2 | % | | | | | | 1.2 | % | | 3.1 | % | | | | | 0.3 | % | | 1.4 | % | | | | | | 1.4 | % | | 0.9 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and other income, net | 13.1 |
| | 2.5 |
| | 10.6 |
| | 424.0 | % | | 2.5 |
| | 3.7 |
| | (1.2 | ) | | (32.4 | )% | 9.6 |
| | 6.2 |
| | $ | 3.4 |
| | 54.8 | % | | 6.2 |
| | 9.7 |
| | $ | (3.5 | ) | | (36.1 | )% |
| Percentage of net revenue | 1.6 | % | | 0.3 | % | | | | | | 0.3 | % | | 0.5 | % | | | | | 0.8 | % | | 0.5 | % | | | | | | 0.5 | % | | 1.1 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest expense | (43.2 | ) | | (35.7 | ) | | (7.5 | ) | | 21.0 | % | | (35.7 | ) | | (33.3 | ) | | (2.4 | ) | | 7.2 | % | $ | (33.7 | ) | | $ | (34.3 | ) | | $ | 0.6 |
| | (1.7 | )% | | $ | (34.3 | ) | | $ | (47.3 | ) | | $ | 13.0 |
| | (27.5 | )% |
| Percentage of net revenue | (5.3 | )% | | (3.9 | )% | | | | | | (3.9 | )% | | (3.8 | )% | | | | | (2.9 | )% | | (3.0 | )% | | | | | | (3.0 | )% | | (5.4 | )% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain on sale of investments | 203.1 |
| | 71.6 |
| | 131.5 |
| | 183.7 | % | | 71.6 |
| | 0.1 |
| | 71.5 |
| | 71,500.0 | % | |
| Percentage of net revenue | 25.0 | % | | 7.8 | % | | | | | | 7.8 | % | | — | % | | | | | |
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | 21.3 |
| | 4.5 |
| | 16.8 |
| | 373.3 | % | | 4.5 |
| | 26.1 |
| | (21.6 | ) | | (82.8 | )% | $ | 65.3 |
| | $ | 31.5 |
| | $ | 33.8 |
| | 107.3 | % | | $ | 31.5 |
| | $ | 12.9 |
| | $ | 18.6 |
| | 144.2 | % |
| Percentage of net revenue | 2.6 | % | | 0.5 | % | | | | | | 0.5 | % | | 3.0 | % | | | | | 5.8 | % | | 2.8 | % | | | | | | 2.8 | % | | 1.5 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (loss) from discontinued operations, net of taxes | 1.6 |
| | (48.8 | ) | | 50.4 |
| | (103.3 | )% | | (48.8 | ) | | 43.3 |
| | (92.1 | ) | | (212.7 | )% | |
| (Loss) income from discontinued operations, net of taxes | | $ | — |
| | $ | (2.4 | ) | | $ | 2.4 |
| | (100.0 | )% | | $ | (2.4 | ) | | $ | — |
| | $ | (2.4 | ) | | — | % |
| Percentage of net revenue | 0.2 | % | | (5.3 | )% | | | | | | (5.3 | )% | | 4.9 | % | | | | | — | % | | (0.2 | )% | | | | | | (0.2 | )% | | — | % | | | | |
Foreign Currency Impact on Results of Operations
While the majority of our net revenue and operating expenses are denominated in U.S. dollar, a portion of our international operations are denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates may significantly affect revenue and expenses. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses. We have presented below “constant
dollar” comparisons of our net sales and operating expenses which exclude the impact of currency exchange rate fluctuations. Constant dollar net revenue and operating expenses are non-GAAP financial measures, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management believes these non-GAAP measures, when considered in conjunction with the corresponding U.S. GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses.
Fiscal 20172020 and 20162019
If currency exchange rates had been constant in fiscal 20172020 and fiscal 2016,2019, our consolidated net revenue in “constant dollars” would have increased by approximately $4$8.4 million, or 0.5%0.7% of net revenue, which primarily impacted our NE and SE segments. The impact of foreign currency fluctuations on net revenue was not indicative of the impact on net income due to the offsetting foreign currency impact on operating costs and expenses. If currency exchange rates had been constant in fiscal 20172020 and fiscal 2016,2019, our consolidated operating expenses in “constant dollars” would have increased by approximately $4$6.2 million, or 0.5% of net revenue.
Fiscal 20162019 and 20152018
If currency exchange rates had been constant in fiscal 20162019 and fiscal 2015,2018, our consolidated net revenue in “constant dollars” would have increased by approximately $22$13.7 million, or 2.5%1.2% of net revenue, which primarily impacted our NE and SE segments. The impact of foreign currency fluctuations on net revenue was not indicative of the impact on net income due to the offsetting foreign currency impact on operating costs and expenses. If currency exchange rates had been constant in fiscal 20162019 and fiscal 2015,2018, our consolidated operating expenses in “constant dollars” would have increased by approximately $16$10.1 million, or 1.8%0.9% of net revenue.
The Results of Operations are presented in accordance with U.S. GAAP and not using constant dollars. Refer to Item 7A. Qualitative and Quantitative Disclosures about Market Risk of this Annual Report on Form 10-K for further details on foreign currency instruments and our related risk management strategies.
Net Revenue
Following the Separation, revenueRevenue 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, Managementmanagement 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.
Fiscal 20172020 and 20162019
Net revenue decreasedincreased by $94.9$6.0 million, or 10.5%0.5%, during fiscal 20172020 compared to fiscal 2016. There has not been any significant changes2019. This increase was driven by a slight growth in NE revenue, partially offset by a small decrease in our pricing strategy.OSP and SE segments.
Product revenues remained relatively flat by $1.0 million, or 0.1%, during fiscal 2020 compared to fiscal 2019. During the period we realized strength from our NE segment, which was largely offset by declines in our SE and OSP segments as further discussed below.
Service revenues increased $5.0 million, or 4.0%, during fiscal 2020 compared to fiscal 2019. This increase was primarily due to increased support revenue from our NE and SE segments, primarily driven by increased support revenues from our Wireless and Mature Assurance products.
NE net revenue increased by $8.9 million, or 1.2%, during fiscal 2020 compared to fiscal 2019. This increase was primarily driven by 5G wireless secular growth trends, higher fiber demand from Field Instruments due to the 400Gb upgrade cycle. The increase in revenue was partially offset by the effect of COVID-19.
SE net revenue decreased by $0.7 million, or 0.7%, during fiscal 2020 compared to fiscal 2019. This was primarily driven by the continued run-off in our Mature Assurance portfolio solutions.
OSP net revenue decreased by $2.2 million, or 0.8%, during fiscal 2020 compared to fiscal 2019. This decrease was primarily driven by decrease in demand for our Anti-Counterfeiting products which benefited from higher banknote redesign demand in fiscal 2019, This decrease was partially offset by continued 3D Sensing products demand driven by further adoption and the broadening of our customer base.
Fiscal 2019 and 2018
Net revenue increased by $254.6 million, or 29.1%, during fiscal 2019 compared to fiscal 2018. This increase was primarily due to decreases across the threeincreases from our NE and OSP segments, partially offset by a revenue decrease from our SE segment.
Product revenues increased by $231.7 million, or 30.0%, during fiscal 2019 compared to fiscal 2018. This increase was primarily from our NE and OSP segment as discussed below.
Product
Service revenues decreased by $82.4increased $22.9 million, or 10.2%22.2%, during fiscal 20172019 compared to fiscal 2016.2018. This increase was primarily due to increased support revenue from the NE segment primarily driven by revenues from the AW business acquired in the third quarter of fiscal 2018, partially offset by a decline in support contract renewals from the SE segment as discussed below.
NE net revenue increased by $198.7 million or 36.9%, during fiscal 2019 compared to fiscal 2018. This increase was primarily driven by revenue from the AW business acquired in the third quarter of fiscal 2018, the 5G wireless secular growth trend and organic growth in our Fiber business across Lab and Field Instruments. This increase was partially offset by revenue declines primarily in Cable products from peak levels a year ago driven by the DOCSIS 3.1 upgrade cycle.
SE net revenue decreased by $15.1 million, or 12.7%, during fiscal 2019 compared to fiscal 2018. This decrease was primarily due to end market demand weaknessdriven by a decline in our NE Field InstrumentsData Center customer demand and from the expected run-off in our planned restructuring to narrow the scope of SE segment as we exited certain SE product lines. The OSP segment experienced lower demand for our Anti-Counterfeiting product offerings driven by decreased banknote volume.
Service revenues decreased $12.5 million, or 12.8%, during fiscal 2017 compared to fiscal 2016. This decrease wasMature Assurance products due to a decline in support contract renewals for SE segment, resulting from our continued run-off of our more mature Assurance portfolio solutions, as well as reduction in revenue from repair services in our NE segment.
NE net revenue decreased by $60.6 million, or 12.0%, during fiscal 2017 compared to fiscal 2016.renewal contracts. This decrease was driven by a $53.2 million net decrease in Field Instruments offerings and a $6.9 million net decrease in our Lab Instruments offerings. Most of the Field Instruments product offerings experienced decreases due to weaker demand in North America from communication service providers. This was offset by increased demand for Cable products driven by a DOCSIS 3.1 technology upgrade cycle. The decrease in our Lab Instruments was primarily due to weak spending by NEMs and slowdown in spending by Chinese telecommunication companies impacting our lab customers.
SE net revenue decreased by $18.4 million, or 12.0%, during fiscal 2017 compared to fiscal 2016. This decrease was primarily driven by $13.7 million of net revenue decreases from our Assurance offerings. The decrease was attributable to the planned restructuring that narrowed the scope of SE segment and our more mature Assurance product offerings being negatively impacted by service maintenance contracts expiration, partially offset by increase in Growth Assurance product offerings. Additionally, a
net revenue decrease of $4.7 million from our Data Center primarily relating to prior large deals that did not recur in the current period.
OSP net revenue decreased by $15.9 million, or 6.4%, during fiscal 2017 compared to fiscal 2016. This decrease was primarily driven by net revenue decreases from our Anti-Counterfeiting product line. The Company expects the anti-counterfeiting business to continue to follow its historical pattern of cyclicality as currency customers continually rebalance their inventories relative to market demand. The decrease was partially offset by net revenue growthan increase in our Consumer and IndustrialGrowth Assurance product lines.portfolio.
Fiscal 2016 and 2015
NetOSP net revenue increased by $32.4$71.0 million, or 3.7%32.6%, during fiscal 20162019 compared to fiscal 2015.2018. This increase was primarily driven by increase in demand from out Anti-Counterfeiting products due to an increase in our OSP segment, partially offset by decreases in our SEbank note redesign and NE segments as discussed below.
Product revenues increased by $37.6 million, or 4.9%, during fiscal 2016 compared to fiscal 2015. This increase was driven by $62.4 million of producthigher revenue increases from our OSPout Consumer and NE segments, primarilyIndustrial products, due to higher demand for our Anti-Counterfeiting product line in our OSP segment3D Sensing optical filters and newly acquired Engineered DiffusersTM products as discussed below. This was partially offset by a $24.8 million product revenue decrease from our SE segment primarily due to a decline in our more mature Assurance solutions.
Service revenues decreased $5.2 million, or 5.1%, during fiscal 2016 compared to fiscal 2015. This decrease was driven by a $9.6 million decline in service revenue from our NE segment primarily related to the releasetechnology adoption of new product offerings impacting the timing of renewalsfacial recognition applications for support and maintenance contracts, coupled with lower revenue from repair services. This was partially offset by $4.4 million of service revenue increases from SE driven by maintenance and support contracts for our Data Center offerings.
NE net revenue remained relatively flat, decreasing by $2.2 million or 0.4%, during fiscal 2016 compared to fiscal 2015. This was driven by $21.7 million of net revenue decreases from our Field Instruments offerings, partially offset by $19.5 million of net revenue increases from our Lab Instruments offerings. Field Instruments net revenue decreased in the fiscal 2016 primarily as the prior period net revenue from a significant ramp for a one-time project from a key customer, coupled with lower services revenue. This was partially offset by strength in our fiber lab and field test instruments driven by “FTTH” and “Fiber for Wireless Backhaul” deployments in North America and 100G deployments globally as well as higher demand for our optical transport products.
SE net revenue decreased by $20.7 million, or 11.9%, during fiscal 2016 compared to fiscal 2015. This decrease was driven by $23.5 million of net revenue decreases from our Assurance offerings primarily due to a change in product mix as our more mature offerings declined at a steeper pace than the growth in our new offerings. This was partially offset by $2.8 million of net revenue increases from our Data Center offerings.
OSP net revenue increased by $55.3 million, or 28.7%, during fiscal 2016 compared to fiscal 2015. This increase was driven by net revenue increases primarily from our Anti-Counterfeiting product line driven by cyclical demand for our currency products resulting from an increase in currency reprinting and banknote redesigns over the normal run-rate in fiscal 2016, coupled with net revenue growth in our Consumer and Industrial and Government product lines.smartphones increased.
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, profitability and general financial performance, and that could create quarter over quarter variability in our financial measures. For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations are denominated in foreign currencies. The strengthening of the U.S. dollar relative to foreign currencies could negatively impact reported revenue and expenses.revenue.
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; and (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.projections; (e) the impact of ongoing global trade policies, political tensions between the U.S. and China, tariffs and sanctions; and (f) regulatory or economic developments that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms.
In fiscal 2018, we expect to continue to see a decline in net revenue from our more mature Assurance product offerings within our SE segment. In our OSP segment, we expect Anti-Counterfeiting net revenue to moderate in first half of fiscal 2018 due to customer inventory rebalancing to realign with end market demand before rebounding in second half of fiscal 2018. We also expect to initially ship 3D sensing products in the first half fiscal of fiscal 2018 with a greater revenue ramp in second half of fiscal 2018.
Revenue by Region
We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (“EMEA”)(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 (dollars in millions):
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Americas: | | | | | | | | | | | | | | | | | | | | | | |
| United States | $ | 307.3 |
| | 37.9 | % | | $ | 396.6 |
| | 43.8 | % | | $ | 424.3 |
| | 48.5 | % | $ | 341.6 |
| | 30.1 | % | | $ | 342.1 |
| | 30.3 | % | | $ | 335.5 |
| | 38.3 | % |
| Other Americas | 71.3 |
| | 8.8 | % | | 66.0 |
| | 7.3 | % | | 62.5 |
| | 7.2 | % | 73.2 |
| | 6.4 | % | | 84.2 |
| | 7.4 | % | | 81.0 |
| | 9.3 | % |
| Total Americas | $ | 378.6 |
| | 46.7 | % | | $ | 462.6 |
| | 51.1 | % | | $ | 486.8 |
| | 55.7 | % | $ | 414.8 |
| | 36.5 | % | | $ | 426.3 |
| | 37.7 | % | | $ | 416.5 |
| | 47.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Asia-Pacific | | | | | | | | | | | | |
| Asia-Pacific: | | | | | | | | | | | | |
| Greater China | $ | 100.8 |
| | 12.4 | % | | $ | 103.2 |
| | 11.3 | % | | $ | 83.1 |
| | 9.5 | % | $ | 245.7 |
| | 21.6 | % | | $ | 216.6 |
| | 19.1 | % | | $ | 128.6 |
| | 14.7 | % |
| Other Asia | 72.4 |
| | 8.9 | % | | 63.1 |
| | 7.0 | % | | 61.4 |
| | 7.0 | % | |
| Other Asia-Pacific | | 122.5 |
| | 10.8 | % | | 155.6 |
| | 13.8 | % | | 85.2 |
| | 9.7 | % |
| Total Asia-Pacific | $ | 173.2 |
| | 21.3 | % | | $ | 166.3 |
| | 18.3 | % | | $ | 144.5 |
| | 16.5 | % | $ | 368.2 |
| | 32.4 | % | | $ | 372.2 |
| | 32.9 | % | | $ | 213.8 |
| | 24.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| EMEA: | | | | | | | | | | | | | | | | | | | | | | |
| Switzerland | $ | 124.0 |
| | 15.3 | % | | $ | 135.6 |
| | 15.0 | % | | $ | 97.7 |
| | 11.2 | % | $ | 64.6 |
| | 5.7 | % | | $ | 97.0 |
| | 8.6 | % | | $ | 75.3 |
| | 8.6 | % |
| Other EMEA | 135.6 |
| | 16.7 | % | | 141.8 |
| | 15.6 | % | | 144.9 |
| | 16.6 | % | 288.7 |
| | 25.4 | % | | 234.8 |
| | 20.8 | % | | 170.1 |
| | 19.4 | % |
| Total EMEA | $ | 259.6 |
| | 32.0 | % | | $ | 277.4 |
| | 30.6 | % | | $ | 242.6 |
| | 27.8 | % | $ | 353.3 |
| | 31.1 | % | | $ | 331.8 |
| | 29.4 | % | | $ | 245.4 |
| | 28.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total net revenue | $ | 811.4 |
| | 100.0 | % | | $ | 906.3 |
| | 100.0 | % | | $ | 873.9 |
| | 100.0 | % | $ | 1,136.3 |
| | 100.0 | % | | $ | 1,130.3 |
| | 100.0 | % | | $ | 875.7 |
| | 100.0 | % |
Net revenue from customers outside the Americas for the fiscal years ended 2017, 20162020, 2019 and 20152018 represented 53.3%63.5%, 48.9%62.3% and 44.3%52.4% of net revenue, respectively. We expect revenue from customers outside of 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 in fiscal 2017 decreased 0.8 percentage points2020 increased by 0.9% to 59.9%58.5% from 60.7%57.6% in fiscal 2016.2019. This decreaseincrease was primarily due todriven by higher revenue volume in our NE segment and better manufacturing absorption in our NE and OSP segments. The increase was partially offset by gross margin reduction in NE andour SE gross margin assegment, further discussed below in the “Operating Segment Information” section.sections below.
Gross margin in fiscal 20162019 increased 1.2 percentage points1.8% to 60.7%57.6% from 59.5%55.8% in fiscal 2015.2018. This increase was primarily due to a $14.6 million reduction in amortization of developed technology driven by certain intangible assets becoming fully amortized during fiscal 2015, coupled with an improvement in gross margin from our OSP segment primarily due tohigher revenue volume and a favorable product mix with higher anti-counterfeiting revenuewithin our NE segment and a decrease in fiscal 2016.acquisition related costs incurred from our past acquisitions. This increase was partially offset by lower gross margin reduction in our SE segment and a changeincrease in overall segment mix as our OSP segment, whose products generally carry a lower gross margin than our NE and SE products, represented a higher percentageamortization of our total net revenueacquired developed technology from recent acquisitions, further discussed in fiscal 2016.the sections below.
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.
Research and Development
R&D expense decreasedincreased by $30.1$6.6 million, or 18.1%3.5%, during fiscal 20172020 compared to fiscal 2016.2019. This decreaseincrease was primarily driven by net cost savings realizedtargeted investments to support increased demand for our key products lines and additional R&D costs incurred from our strategic restructuring activities pertainingacquired businesses. As a percentage of revenue net revenue R&D increased by 0.5% during fiscal 2020 compared to the NSE businessfiscal 2019.
R&D expense increased by $53.7 million, or 40.3%, during fiscal 2019 compared to fiscal 2018. This increase was driven by full period R&D expense from acquisitions in the fourth quarterpast; in particular, the AW business and targeted investments to support the
demand of our Wireless and the third quarter of fiscal 2017 and internal reorganizations to align our investment strategy following the Separation, coupled with a $2.7 million net reduction in stock-based compensation primarily due to modification of equity awards in connection with the Separation that did not recur this period.Fiber products. As a percentage of net revenue R&D decreasedincreased by 1.6 percentage points1.3% during fiscal 20172019 compared to fiscal 2016 as the Company continues to execute targeted cost savings initiatives.
R&D expense decreased by $6.9 million, or 4.0%, during fiscal 2016 compared to fiscal 2015. This decrease was primarily due to a $3.6 million in-process research and development (“IPR&D”) impairment charge in the prior year related to a fiscal 2014 acquisition, coupled with $4.0 million net cost savings realized from our strategic restructuring activities related to site consolidations, reorganizations, and the insourcing or outsourcing of R&D activities to align our investment strategy following the Separation. This was partially offset by various other incremental expenses incurred, including additional cost as fiscal 2016 was a 53-week fiscal year and contained one additional week compared to fiscal 2015. As a percentage of net revenue, R&D decreased 1.4 percentage points in fiscal 2016 compared to fiscal 2015 as the Company continues to execute targeted cost savings initiatives.2018.
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 $50.6$28.5 million, or 14.4%8.3%, in fiscal 20172020 compared to fiscal 2016.2019. This decrease was primarily due to (a) a $16.8decrease in the fair value of the earn-out liability of $29.5 million related to the RPC Photonics, Inc. (RPC) acquisition, driven by the lower-than-expected rate of adoption by Android customers further compounded by the macroeconomic impact of COVID-19 and the reduction in labor and facilitiesnet expenses driven by lower headcount and site consolidations associated with our strategicrecent restructuring activities and ongoingon-going cost reduction efforts, (b) a $5.3 million net reduction in stock-based compensation primarily due toefforts. Offset by costs incurred for intellectual property protection and prosecution during the impact of Separation related activities on equity awards that did not recur this year and (c) a $3.9 million reduction in costs related to Viavi-specific activities to complete the Separation.period. As a percentage of net revenue, SG&A decreased by 1.7 percentage points8.3% in fiscal 2017 primarily driven by our strategic cost reduction efforts to optimize our expense structure.2020.
SG&A expense decreasedincreased by $25.2$19.6 million, or 6.7%6.1%, in fiscal 20162019 compared to fiscal 2015.2018. This decreaseincrease was primarily due to $30.5incremental SG&A expense from the AW business acquired in fiscal 2018 and on-going investment in upgrading our ERP and related systems, partially offset by the decrease of acquisition related costs from high levels a year ago, a decrease in the fair value of our RPC earn-out liability of $5.9 million, the reduction in labor, benefits and facilitiesnet expenses driven by lower headcount and site consolidations associated with our strategicrecent restructuring activities and ongoingon-going cost reduction efforts coupled with incremental charge from modification of equity awards pursuant to Change of Control Benefits Plan covering spin-off in the prior year that were not there this fiscal year. This was partially offset by an $8.4 million charge in fiscal 2016 related to a litigation ruling impacting our pension obligation.efforts. As a percentage of net revenue, SG&A decreased by 4.4 percentage points6.7% in fiscal 2016 primarily driven by our strategic cost reduction efforts to optimize our expense structure.2019.
We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue. However, we have in the recent past experienced, and may continue to experience in the future, certain charges unrelated to our core operating performance, such as mergersacquisitions and acquisitions-relatedintegration related expenses and litigation expenses, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.
Impairment of Goodwill
In the fourth quarter of fiscal 2017, we performed the goodwill impairment test in accordance with the authoritative guidance for NE and OSP reporting units, and determined no indicator of impairment. As of July 1, 2017, the SE reporting unit did not have any goodwill, which was fully impaired in the fourth quarter of fiscal 2016 . Refer to “Note 8. Goodwill” for more information.
Amortization of Acquired Technologies and Intangibles
Amortization of acquired technologies and intangibles for fiscal 20172020 decreased $3.6$4.7 million, or 11.3%6.4%, to $28.3$67.8 million from $31.9$72.5 million in fiscal 2016.2019. This decrease is primarily due to the impact from foreign exchange and acquisition related intangible assets becoming fully amortized in 2016 and 2017.fiscal 2020.
Amortization of acquired technologies and intangibles for fiscal 2016 decreased $19.52019 increased $24.8 million, or 37.9%52.0%, to $31.9$72.5 million from $51.4$47.7 million in fiscal 2015.2018. This decreaseincrease is driven by a $14.6 million reduction in amortization of developed technology primarily due to the acquisition relatedof RPC in October 2018, and a full period of amortization from the acquisition of AW, acquired in the third quarter of fiscal 2018, which contributed a $34.7 million incremental charge; partially offset by the impact of intangible assets becoming fully amortized in the fourth quarter of fiscal 2015.2018 and 2019.
Acquired In-Process Research and Development (“IPR&D”)
In accordance with authoritative guidance, we recognize IPR&Dacquired in-process and development (IPR&D) at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. We periodically review the stage of completion and likelihood of success of each IPR&D project. The nature of the efforts required to develop IPR&D projects into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.
During fiscal 2014In connection with the AW acquisition, we acquiredrecorded IPR&D throughassets of $9.0 million at their fair value and account for them as indefinite-lived intangible assets that shall last until the acquisitionscompletion or abandonment of Network Instrumentsthe associated research and Trendium. The status of our significant IPR&D projects from acquisitions was as follows:
Network Instruments Acquisition
Network Instruments was acquired indevelopment projects. During the third quarter of fiscal 20142019, the IPR&D activities were completed and was accounted for in accordance with the authoritative guidance on business combinations. At the time of acquisition, Network Instruments was in the process of developing next generation integrated network software solutions. During the first quarter of fiscal 2015, we completed our IPR&D project relatedtransferred to the acquisition of Network Instruments. Accordingly, $1.7 million was transferred from indefinite life intangible assets to acquired developed technology, intangible assets and began amortizing over itswith an estimated useful life of fifty-two months.
Trendium Acquisition
Trendium was acquired in6 years. See “Note 10. Acquired Developed Technology and Other Intangibles” of the second quarter of fiscal 2014 and was accountednotes to our Consolidated Financial Statements for in accordance with the authoritative guidance on business combinations. At the time of acquisition, Trendium was in the process of developing network probe software and next generation service assurance solutions. During fiscal 2015, we recorded a $3.6 million IPR&D impairment charge related to the fiscal 2014 acquisition of Trendium in accordance with the authoritative accounting guidance. The charge was recorded to research and development expense in the Consolidated Statements of Operations. During fiscal 2016, we completed our IPR&D project related to the acquisition of Trendium. Accordingly, $1.8 million was transferred from indefinite life intangible assets to acquired developed technology intangible assets and began amortizing over its useful life of thirty-six months.more detail.
Restructuring and Related Charges
From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our businesses in response to market conditions. We estimate annualized gross cost savings of approximately $43.0$36.2 million excluding any one-time charges as a result of the recent restructuring activities initiated in the past year.activities. Refer to “Note 11.13. Restructuring and Related Charges” for more information.
As of July 1, 2017,June 27, 2020, our total restructuring accrual was $11.0$6.5 million.
During fiscal 2017,2020, we recorded $21.6$3.5 million in restructuring and related charges. These charges are combination of new and previously announced restructuring plans and are primarily the result of the following:
| |
i. | During the fourth quarter of fiscal 2017, Management approved a plan within the OSP business segment to realign its operations and exit from the printed security product offering. As a result, a restructuring charge of $0.8 million was recorded for severance and employee benefits for approximately 30 employees in manufacturing and SG&A functions located in the United States. Payments related to the severance and benefits accrual are expected to be paid by the end of the third quarter of fiscal 2018. |
| |
ii. | During the second and third quarters of fiscal 2017, Management approved a plan within the NE and SE business segments as part of Viavi’s continued strategy to improve profitability in the Company’s Network and Service Enablement (NSE) business by narrowing the scope of the Service Enablement business and reducing costs by streamlining NSE operations. As a result, a restructuring charge of $21.0 million was recorded for severance and employee benefits for approximately 300 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia. Payments related to the severance and benefits accrual are expected to be paid by the end of second quarter of fiscal 2018. |
During fiscal 2016, we recorded $10.5 million in restructuring and related charges. The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:
| |
| i. | During May and Junethe fourth quarter of fiscal 2016, Management approved a2020, we updated our NSE, including AW Restructuring plan withinto include additional headcount to further drive operational improvement consistent with the NE and SE business segment and Shared Services function for organizational alignment and consolidation in as part of Viavi’s continued commitment for a more cost effective organization.original plan. As a result, a net restructuring charge of $8.8$3.5 million, was recorded for severance and employee benefits for approximately 19060 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia.Asia was recorded in the year ended June 27, 2020. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the firstfourth quarter of fiscal 2018.2021. |
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ii. | During the second quarter of fiscal 2016, Management approved a plan primarily impacting the NE and SE business segments as part of Viavi’s ongoing commitment for an agile and more efficient operating structure. As a result, a restructuring charge of $2.4 million was recorded for severance and employee benefits for approximately 50 employees primarily in manufacturing, R&D, and SG&A functions located in North America, Latin America, Europe and Asia. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2018. |
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iii. | A restructuring benefit of $1.0 million primarily related to a reduction in the number of employees impacted by the Central Finance and IT Restructuring Plan. |
During fiscal 2015,2019, we recorded $26.8$15.4 million in restructuring and related charges. The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:
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| i. | During the second, third and fourth quartersfirst quarter of fiscal 2015,2019, Management approved restructuring and workforce reduction plans within our Network Service and Enablement (NSE) business, including actions related to the recently acquired AW business (NSE, including AW Restructuring plan). These actions further drive our strategy for organizational alignment and consolidation as part of our continued commitment to a more cost effective and agile organization and to improve overall profitability of the NSE business. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment. During the third quarter of fiscal 2019, we updated the plan to eliminate certain positions in its shared services functions in connection withinclude additional headcount primarily to transfer a portion of the Company’s plan to split into two separate public companies. Further, Management consolidated itsmanufacturing operations sales and R&D organizations and eliminated positions within the NE and SE segments to alignrelated to the Company’s product market strategy and lower manufacturing costs in connection with the Separation.recently acquired AW business to a contract manufacturer. As a result, a total restructuring charge of $24.9$16.1 million, was recorded for severance and employee benefits for approximately 330240 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted.was recorded in the year ended June 29, 2019. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the thirdfourth quarter of fiscal 2018.2020. |
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ii. | A restructuring charge of $1.9 million for previously announced restructuring plans. |
Our restructuring and other lease exit cost obligations are net of sublease income or lease settlement estimates of approximately $2.1 million. Our ability to generate sublease income, as well as our ability to terminate lease obligations and recognize the anticipated related savings, is highly dependent upon the economic conditions, particularly commercial real estate market conditions in certain geographies, at the time we negotiate the lease termination and sublease arrangements with third parties as well as the performances by such third parties of their respective obligations. While the amount we have accrued represents the best estimate of the remaining obligations we expect to incur in connection with these plans, estimates are subject to change. Routine adjustments are required and may be required in the future as conditions and facts change through the implementation period. If adverse macroeconomic conditions continue, particularly as they pertain to the commercial real estate market, or if, for any reason, tenants under subleases fail to perform their obligations, we may be required to reduce estimated future sublease income and adjust the estimated amounts of future settlement agreements, and accordingly, increase estimated costs to exit certain facilities. Amounts related to the lease expense, net of anticipated sublease proceeds, will be paid over the respective lease terms through fiscal 2019.
Interest Income and Other Income, Net
Interest income and other income, net was $13.1$9.6 million in fiscal 20172020 as compared to $2.5$6.2 million in fiscal 2016.2019. This $10.6$3.4 million increase was primarily driven by (i) an increase in interest income of $5.2a $5.1 million primarily due to higher cash and short-term investment balances coupled with higher yield, (ii) a $3.5 million more favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period, (iii) a $3.0 million gain on sale of other assets. This was partiallyfiscal 2020, offset by $1.1a decrease of $1.0 million lossin interest income due to lower yields on extinguishment of debt.money market funds and deposits during fiscal 2020.
Interest income and other income, net was $2.5$6.2 million in fiscal 20162019 as compared to $3.7$9.7 million in fiscal 2015.2018. This $1.2$3.5 million changedecrease was primarily driven by $3.6 million of more gains recorded during fiscal 2015 mostly related to our receipt of proceeds from the Fair Fund established to provide compensation for losses incurred from investments in Nortel securities in connection with the SEC’s claims against Nortel as well as higher sublease rental income. This was partially offset by (i) a $1.3 million more interest income during fiscal 2016 due to balance in higher-yielding investment vehicles in our investment portfolios, (ii) a decrease in foreign exchange lossinterest income in the amount of $1.2$7.9 million during fiscal 2016 as2019 due to a decrease in the investment balance sheet hedging program providedin the US and a more favorablemuch lower yield on money market funds in China, offset toby a loss on repurchase of our 2033 Notes in the remeasurementamount of underlying foreign exchange exposures.
Gain on Sale of Investments
During$5.0 million during fiscal 2017, the Company sold approximately 7.2 million shares of the 11.7 million shares of Lumentum common stock which was retained as part of the Separation. We recognized a gross realized gain of $203.0 million from the sale.
During2018 with no such loss recorded in fiscal 2016, the Company sold approximately 4.5 million shares of the 11.7 million shares of Lumentum common stock which was retained as part of the Separation. We recognized a gross realized gain of $71.5 million from the sale.
As of July 1, 2017, the Company has sold all ownership of Lumentum’s common stock. Refer to “Note 7. Investments, Forward Contracts and Fair Value Measurements” for more information.2019.
Interest Expense
Interest expense increaseddecreased by $7.5$0.6 million, or 21.0%1.7%, during fiscal 20172020 compared to fiscal 2016.2019. This was primarily due to the increase of $1.5 milliona decrease in accretion of unamortized debt discount and debt issuance cost related toaccretion from the 2033 Notes. Additionally, interest expenseNotes as the notes were fully redeemed or converted in the second quarter of $5.7 million was incurred in relation to the 2024 Notes newly issued in March 2017.fiscal 2019.
Interest expense increaseddecreased by $2.4$13.0 million, or 7.2%27.5%, during fiscal 20162019 compared to fiscal 2015.2018. This was primarily due to a decrease in debt discount accretion from the 2033 Notes as the notes were fully redeemed or converted in the second quarter of fiscal 2019, offset by the accretion of unamortized debt discount related tofrom the 2033 Notes.
issuance of the 2023 Notes in the fourth quarter of fiscal 2018.
Provision for (Benefit from) Income Tax
Fiscal 20172020 Tax Expense/BenefitExpense
We recorded an income tax expense of $21.3$65.3 million for fiscal 2017.2020. The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 20172020 differed from the incomeincome tax expenseexpense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.allowances and to a $32.5 million charge for withholding taxes expected to be paid on the repatriation of $324.0 million of foreign earnings that we do not consider to be permanently reinvested. During the third quarter of fiscal 2020, which included changing our intent with regard to the indefinite reinvestment of such foreign earnings, we initially accrued $31.6 million for withholding taxes expected to be paid on the repatriation of $316.4 million of accumulated foreign earnings that we no longer considers to be permanently reinvested as of the third quarter. During the Fiscal year 2020, we paid $19.5 million withholding income tax on the repatriation of foreign earnings. In light of the economic uncertainty caused by COVID-19, we reevaluated our historic assertion on foreign earnings and no longer consider a majority of these earnings to be permanently reinvested. The repatriation of these earnings increases available cash in the U.S. and provides greater U.S. financial flexibility to assist us in navigating the expected downturn in the economy. The foreign earnings are being repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense.
On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Tax provisions of the
Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The provisions of the legislation did not have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2017,2020, the valuation allowance for deferred tax assets decreasedincreased by $76.5$0.2 million primarily duerelated to the utilization of deferred tax assets andbusiness acquired during the increase in deferred tax liabilities as result of the issuance of convertible debt. year.
We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any adjustments that may result from these examinations.
Fiscal 20162019 Tax Expense/BenefitExpense
We recorded an income tax expense of $4.5$31.5 million for fiscal 2016.2019. The expected tax benefitexpense derived by applying the federal statutory rate to our lossincome before income taxes for fiscal 2016 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances and a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation. The tax expense was partially offset by a deferred tax benefit of $9.5 million related to the write off of tax deductible goodwill and a tax benefit of $20.7 million related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, Management has determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2016, the valuation allowance for deferred tax assets decreased by $160.2 million primarily due to the Lumentum transaction. We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any adjustments that may result from these examinations.
Fiscal 2015 Tax Expense/Benefit
We recorded an income tax expense of $26.1 million for fiscal 2015. The expected tax benefit derived by applying the federal statutory rate to our loss before income taxes for fiscal 20152019 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, Managementmanagement has determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2015,2019, the valuation allowance for deferred tax assets increased by $12.7 million. The increase was$23.2 million primarily relateddue to the increasesnet increase of deferred tax assets resulting from the inclusion of our foreign subsidiaries in the US tax return as a consequence of U.S. Tax Cuts and Jobs Act enacted in December 2017.
We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any adjustments that may result from these examinations.
Fiscal 2018 Tax Expense
We recorded an income tax expense of $12.9 million for fiscal 2018. The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2018 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act was enacted. Income tax effects resulting from changes in tax laws were accounted for by us in accordance with the authoritative guidance and the effects were recorded as a component of the provision for income taxes from continuing operations. The law has significantly changed the way the U.S. taxes corporations. The Act repealed the alternative minimum tax (AMT) for corporations and provided that the existing AMT credit carryforwards would be refunded in 2022 if not utilized. As a result, we recognized a benefit of $4.5 million for the year ended June 30, 2018 for the release of the valuation allowance previously maintained against the AMT credit deferred tax asset. As a result, our deferred tax liability associated with indefinite-lived intangible assets was offset against these indefinite-lived deferred tax assets, resulting in a benefit of $2.0 million for the year ended June 30, 2018 due to release of the valuation allowance.
The Act imposed a deemed repatriation of our foreign subsidiaries’ post-1986 earnings and profits (E&P) which had previously been deferred from U.S. income tax. The deemed repatriation was reported in our fiscal 2018 U.S. Tax return. We completed the calculation of the total post-1986 foreign E&P for all foreign subsidiaries during the quarter ended December 29, 2018. The change in estimate did not materially impact our financial statements.
The Act reduced the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. We have remeasured our U.S. deferred tax assets and intangible amortization. liabilities which resulted in a net reduction of $734.9 million of our net deferred tax assets and an equal and offsetting reduction to the valuation allowance against these deferred tax assets.
Upon adoption of the new guidance on share-based payment awards, we had $117.7 million of net operating loss carryforwards resulting from excess tax benefit deductions. The deferred tax asset recorded for these net operating loss carryforwards was fully offset by a corresponding increase in valuation allowance, resulting in no impact to opening accumulated deficit. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits for the year ended June 30, 2018.
Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions. During fiscal 2018, the valuation allowance for deferred tax assets decreased by $712.9 million primarily due to the remeasurement of the US deferred tax assets and liabilities related to U.S. Tax Cuts and Jobs Act.
We are routinely subject to various federal, state and foreign audits by taxing authorities. We believe that adequate amounts have been provided for any adjustments that may result from these examinations.
Discontinued Operations
Our discontinued operations activities during fiscal 2017, 2016 and 2015 related to the Separation on August 1, 2015 and activities in fiscal 2016 related to the sale of the hologram business (“Hologram Business”).
Lumentum Separation
As a result of the Separation, the financial results of Lumentum are presented as discontinued operations during fiscal 2017, 2016 and 2015. Net revenue attributable to the Lumentum discontinued operations was $66.5 million and $835.2 million during fiscal 2016 and 2015, respectively. Net income (loss) attributable to the Lumentum discontinued operations was $1.6 million,$(49.0) million, and $43.3 million during fiscal 2017, 2016 and 2015, respectively. Refer to “Note 3. Discontinued Operations” for more information.
Hologram Business Disposition
During fiscal 2016, we recorded $0.3 million of net income from discontinued operations related to the Hologram Business related to proceeds received following a favorable arbitration ruling to resolve a dispute regarding the amount we were owed under an earnout clause in connection with the sale in 2013.
Operating Segment Information (in millions):
| | | | 2017 | | 2016 | | Change | | Percentage Change | | 2016 | | 2015 | | Change | | Percentage Change | 2020 | | 2019 | | Change | | Percentage Change | | 2019 | | 2018 | | Change | | Percentage Change |
| NE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 444.0 |
| | $ | 504.6 |
| | $ | (60.6 | ) | | (12.0 | )% | | $ | 504.6 |
| | $ | 506.8 |
| | $ | (2.2 | ) | | (0.4 | )% | $ | 746.7 |
| | $ | 737.8 |
| | $ | 8.9 |
| | 1.2 | % | | $ | 737.8 |
| | $ | 539.1 |
| | $ | 198.7 |
| | 36.9 | % |
| Gross profit | 286.3 |
| | 329.7 |
| | (43.4 | ) | | (13.2 | )% | | 329.7 |
| | 333.9 |
| | (4.2 | ) | | (1.3 | )% | 482.4 |
| | 473.3 |
| | 9.1 |
| | 1.9 | % | | 473.3 |
| | 334.3 |
| | 139.0 |
| | 41.6 | % |
| Gross margin | 64.5 | % | | 65.3 | % | | | | | | 65.3 | % | | 65.9 | % | | | | | 64.6 | % | | 64.2 | % | | | | | | 64.2 | % | | 62.0 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 135.2 |
| | $ | 153.6 |
| | $ | (18.4 | ) | | (12.0 | )% | | $ | 153.6 |
| | $ | 174.3 |
| | $ | (20.7 | ) | | (11.9 | )% | $ | 102.7 |
| | $ | 103.4 |
| | $ | (0.7 | ) | | (0.7 | )% | | $ | 103.4 |
| | $ | 118.5 |
| | $ | (15.1 | ) | | (12.7 | )% |
| Gross profit | 86.2 |
| | 99.4 |
| | (13.2 | ) | | (13.3 | )% | | 99.4 |
| | 119.2 |
| | (19.8 | ) | | (16.6 | )% | 68.8 |
| | 71.0 |
| | (2.2 | ) | | (3.1 | )% | | 71.0 |
| | 82.6 |
| | (11.6 | ) | | (14.0 | )% |
| Gross margin | 63.8 | % | | 64.7 | % | | | | | | 64.7 | % | | 68.4 | % | | | | | 67.0 | % | | 68.7 | % | | | | | | 68.7 | % | | 69.7 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NSE | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 579.2 |
| | $ | 658.2 |
| | $ | (79.0 | ) | | (12.0 | )% | | $ | 658.2 |
| | $ | 681.1 |
| | $ | (22.9 | ) | | (3.4 | )% | $ | 849.4 |
| | $ | 841.2 |
| | $ | 8.2 |
| | 1.0 | % | | $ | 841.2 |
| | $ | 657.6 |
| | $ | 183.6 |
| | 27.9 | % |
| Operating income (loss) | 7.3 |
| | 12.7 |
| | (5.4 | ) | | (42.5 | )% | | 12.7 |
| | (0.1 | ) | | 12.8 |
| | (12,800.0 | )% | |
| Operating income | | 108.8 |
| | 99.6 |
| | 9.2 |
| | 9.2 | % | | 99.6 |
| | 43.6 |
| | 56.0 |
| | 128.4 | % |
| Operating margin | 1.3 | % | | 1.9 | % | | | | | | 1.9 | % | | — | % | | | | | 12.8 | % | | 11.8 | % | | | | | | 11.8 | % | | 6.6 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| OSP | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 232.2 |
| | $ | 248.1 |
| | $ | (15.9 | ) | | (6.4 | )% | | $ | 248.1 |
| | $ | 192.8 |
| | $ | 55.3 |
| | 28.7 | % | $ | 286.9 |
| | $ | 289.1 |
| | $ | (2.2 | ) | | (0.8 | )% | | $ | 289.1 |
| | $ | 218.1 |
| | $ | 71.0 |
| | 32.6 | % |
| Gross profit | | 153.0 |
| | 145.8 |
| | 7.2 |
| | 4.9 | % | | 145.8 |
| | 115.2 |
| | 30.6 |
| | 26.6 | % |
| Gross margin | | 53.3 | % | | 50.4 | % | | | | | | 50.4 | % | | 52.8 | % | | | | |
| Operating income | 100.3 |
| | 102.9 |
| | (2.6 | ) | | (2.5 | )% | | 102.9 |
| | 68.1 |
| | 34.8 |
| | 51.1 | % | 102.1 |
| | 98.0 |
| | 4.1 |
| | 4.2 | % | | 98.0 |
| | 78.2 |
| | 19.8 |
| | 25.3 | % |
| Operating margin | 43.2 | % | | 41.5 | % | | | | | | 41.5 | % | | 35.3 | % | | | | | 35.6 | % | | 33.9 | % | | | | | | 33.9 | % | | 35.9 | % | | | | |
Network Enablement
NE gross margin decreased 0.8 percentage pointsincreased 0.4% during fiscal 20172020 to 64.5%64.6% from 65.3%64.2% in fiscal 2016.2019. This decreaseincrease was primarily due to a decline inhigher revenue volume and gross margin improvement from high margin product lines within our Field Instruments product offerings, resulting in unfavorablefavorable product mix and partially offset by favorable manufacturing costs.in our Lab Instrument products.
NE gross margin decreased 0.6 percentage pointsincreased 2.2% during fiscal 20162019 to 65.3%64.2% from 65.9%62.0% in fiscal 2015.2018. This decreaseincrease was primarily due to unfavorablehigher revenue volume and gross margin improvement from a favorable product mix coupled with a decline in netour Field Instrument and Lab Instrument products driven by both organic revenue as discussed above.growth from our fiber and acquired AW business product offerings.
Service Enablement
SE gross margin decreased 0.9 percentage points1.7% during fiscal 20172020 to 63.8%67.0% from 64.7%68.7% in fiscal 2016.2019. This gross margin decrease was primarily due to unfavorable product mix, primarily as a result of lower revenue levels from the continued run-off of our more mature but higher margin Assurance solutions.
SE gross margin decreased 3.7 percentage points during fiscal 2016 to 64.7% from 68.4% in fiscal 2015. This gross margin erosion was primarily driven by lower revenue levels and unfavorable product mix from the continued run-off of our more mature, but highhigher margin Mature Assurance solutions. This was coupled with
SE gross margin dilution driven by initial acceptances being receiveddecreased 1.0% during fiscal 2019 to 68.7% from 69.7% in fiscal 2018. This decrease was primarily due to lower revenue and an unfavorable product mix from the second halfcontinued run-off of fiscal 2016 for growthhigher margin Mature Assurance solutions resultingand declines in recognition of revenue at lower margin from hardware components included in these solutions.Data Center products.
Network and Service Enablement (“NSE”)
NSE operating margin decreased 0.6 percentage pointsincreased 1.0% during fiscal 20172020 to 1.3%12.8% from 1.9%11.8% in fiscal 2016.2019. The increase in operating margin was primarily driven by continuing efficient cost management including restructuring, cost synergies realized from our acquisitions, lower travel expenses as a result of COVID-19 as well as the benefit of higher operating leverage from increased revenue volumes.
NSE operating margin increased 5.2% during fiscal 2019 to 11.8% from 6.6% in fiscal 2018. The increase in operating margin was primarily driven by continuing efficient cost management, including restructuring, cost synergies realized from the acquisition as well as the benefit of higher operating leverage from increased revenue volume due to the acquired AW business.
Optical Security and Performance Products
OSP gross margin increased by 2.9% during fiscal 2020 to 53.3% from 50.4% in fiscal 2019. This increase was primarily due to operational efficiencies in manufacturing partially offset by unfavorable product mix from decreased revenue contribution from our Anti-Counterfeiting products.
OSP gross margin decreased by 2.4% during fiscal 2019 to 50.4% from 52.8% in fiscal 2018. This decrease was primarily due to an unfavorable product mix from the increasing revenue contribution from 3D Sensing products within our consumer and industrial product portfolio with inherently lower gross margins.
OSP operating margin increased 1.7% during fiscal 2020 to 35.6% from 33.9% in fiscal 2019. The increase in operating margin was primarily due to higher gross margins as discussed above offset by targeted investments in our operating expenses as we expand our 3D sensing products within our Consumer and Industrial product portfolio.
OSP operating margin decreased 2.0% during fiscal 2019 to 33.9% from 35.9% in fiscal 2018. The decrease in operating margin was primarily due to decline in NE and SE revenue andlower gross marginmargins as discussed above partially offset by decreaseand targeted investments in our operating expenses as a percentage of net revenue. The reduction in operating expenses as a percentage of net revenue, which was largely from reductions in research and development spending and helped mitigate the impact from the decline in NE and SE revenue and gross margin, is driven by lower headcount as a result of the strategic restructuring plans initiated in prior and current years andwe expand our ongoing cost reduction initiatives.
NSE operating margin increased 1.9 percentage points during fiscal 2016 compared to a break-even operating margin in fiscal 2015. The increase in operating margin was primarily due to a decrease in operating expenses as a percentage of net revenue,
largely from reductions in general and administrative spending, driven by lower headcount as a result of strategic restructuring plans initiated in current and prior years and3D Sensing products within our ongoing cost reduction initiatives. This was partially offset by a decline in NE and SE gross margin as discussed above.
Optical Security and Performance Products
OSP operating margin increased 1.7 percentage points during fiscal 2017 to 43.2% from 41.5% in fiscal 2016. OSP gross margin remained relatively flat year over year. The increase in operating margin was primarily driven by our ongoing cost reduction initiatives which reduced operating expense as a percentage of revenue.
OSP operating margin increased 6.2 percentage points during fiscal 2016 to 41.5% from 35.3% in fiscal 2015. The increase in operating margin was primarily due to an improvement in gross margin driven by an increase in revenue from our higher margin Anti-Counterfeitingconsumer industrial product line, as discussed above, coupled with a reduction in operating expenses as a percentage of net revenue.portfolio.
Liquidity and Capital Resources
Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors. In general, our investment policy requires that securities purchased be rated A-1/P-1, A/A2 or better. Our policy allows an allocation to securities rated A-2/P-2, BBB/Baa2 or better, so long as such allocation below A-1/P-1, A/A2 but minimum A-2/P-2, BBB/Baa2 does not exceed 10% of any investment portfolio. Securities that are downgraded subsequent to purchase are evaluated and may be sold or held at management’s discretion. No security may have an effective maturity that exceeds 37 months, and the average duration of our holdings may not exceed 18 months. At any time, no more than 5.0% or $5.0 million, whichever is greater, of each of our investment portfolios may be concentrated in a single issuer other than the U.S. or sovereign governments or agencies. Our investments in debt securities and marketable equity securities are primarily classified as available-for-sale investments 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 income (loss) and are reported as a separate component of stockholders’ equity. We did not hold any investments in auction rate securities, mortgage backed securities, collateralized debt obligations, or variable rate demand notes at July 1, 2017 and virtually all debt securities held were minimum BBB/Baa2. As of July 1, 2017, U.S. entities owned approximately 76.0% of our cash and cash equivalents, short-term investments and restricted cash.
As of July 1, 2017, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales. During the year ended July 1, 2017, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts that are with third party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
On March 3, 2017, the Company issued $400 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 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00% payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased. Refer to “Note 10. Debt” for more information.
During fiscal 2017, the Company repurchased $40.0 million aggregate principal amount of the 2033 Notes for $45.4 million in cash. In connection with the repurchase, a loss on extinguishment of $1.1 million was recognized in interest and other income, net in compliance with the authoritative guidance. After giving effect to the repurchase, the total amount of 2033 Notes outstanding as of July 1, 2017 was $610.0 million.
Year Ended July 1, 2017
As of July 1, 2017 our combined balance of cash and cash equivalents, short-term investments and restricted cash increased by $468.0 million to $1,447.8 million from $979.8 million as of July 2, 2016.
Cash provided by operating activities was $80.0 million, consisted of net income of $166.9 million adjusted for non-cash charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount, and loss on extinguishment of debt) which totaled $139.4 million, including changes in deferred tax balances less gain on sales
of investments of $203.1 million, offset by changes in operating assets and liabilities that used $23.2 million. Changes in our operating assets and liabilities related primarily to a decrease in deferred revenue of $27.4 million due to amortization of support agreements and the release of revenue upon customer acceptance, an increase in other current and non-current assets of $17.4 million primarily due to change in forward contract that were effectively closed but not settled at year end and other prepayments, a decrease in accrued payroll and related expenses of $15.4 million due to timing of salary and bonus payments, a decrease in accounts payable of $14.8 million due to higher payment activity and lower overall spend. This was partially offset by cash inflows from an increase in accrued expenses and other current and non-current liabilities of $29.1 million primarily due to customer deposit offset by restructuring payments and a decrease in accounts receivable of $24.5 million primarily driven by timing of collections.
Cash provided by investing activities was $113.7 million, primarily resulting from $831.5 million of proceeds from the sales and maturities of available-for-sale investments and other assets, which included proceeds of $265.0 million from the sale of 7.2 million shares of Lumentum common stock in fiscal 2017, partially offset by $679.4 million of purchases of available-for-sale investments and $38.6 million of cash used for capital expenditures. As of July 1, 2017, the Company has sold all of our ownership of Lumentum common stock.
Cash provided by financing activities was $325.3 million, primarily resulting from $451.1 million net proceeds from issuance of 2024 Notes and $12.4 million in proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan, partially offset by $92.0 million of cash used to repurchase common stock under our share repurchase programs and $45.4 million used for repurchase of our 2033 Notes.
Year Ended July 2, 2016
As of July 2, 2016 our combined balance of cash and cash equivalents, short-term investments and restricted cash increased by $140.4 million to $979.8 million from $839.4 million as of June 27, 2015, including cash and cash equivalents and short-term investments of $13.8 million transferred to Lumentum. Additionally, the cash provided by and used in operating, investing and financing activities below contains activities related to Lumentum through the separation date.
Cash provided by operating activities was $52.9 million, consisted of net loss of $99.2 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation, goodwill impairment) which totaled $239.8 million, including changes in our deferred tax balance less gain on sale of investment of $71.6 million, offset by changes in operating assets and liabilities that used $16.1 million. Our cash provided by operating activities was also impacted by our Separation related activities. Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $25.2 million due to timing of salary and bonus payments, a decrease in accounts payable of $2.1 million due to higher payment activity and a decrease in accrued expenses and other current and non-current liabilities of $10.8 million primarily due to separation related liabilities for both employee severance and third party payments paid after Separation. This was partially offset by cash inflows from a decrease in accounts receivable of $23.4 million primarily driven by timing of collections of Lumentum related accounts receivable prior to the Separation.
Cash provided by investing activities was $244.2 million, primarily resulting from $689.0 million of proceeds from the sales and maturities of available-for-sale investments and other assets, which included proceeds of $109.7 million from the sale of 4.5 million shares of Lumentum common stock in fiscal 2016, and a $14.0 million decrease in restricted cash, partially offset by $422.4 million of purchases of available-for-sale investments and $35.5 million of cash used for capital expenditures.
Cash used in financing activities was $147.7 million, primarily resulting from activities related to the Separation during first quarter of fiscal 2016 and $44.5 million used in share repurchase programs. In accordance with the Contribution Agreement, the Company made cash contributions of $137.6 million Lumentum, which was partially offset by $35.8 million from the sale of Lumentum Series A Preferred Stock to Amada Holdings Co., Ltd. (“Amada”) pursuant to a binding commitment under the Securities Purchase Agreement. Cash used in financing activities also include payment of financing obligations of $5.9 million primarily related to holdback payment related to a 2013 acquisition, partially offset by $4.5 million in proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.
Year Ended June 27, 2015
As of June 27, 2015 our combined balance of cash and cash equivalents, short-term investments and restricted cash decreased by $41.9 million to $839.4 million, which includes $13.8 million which was transferred to Lumentum as part of the Separation, from $881.3 million as of June 28, 2014. Additionally, the cash provided by and used in operating, investing and financing activities during fiscal 2015 below contains activities related to Lumentum.
Cash provided by operating activities was $82.3 million, consisted of net loss of $88.1 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $243.5 million, including changes in our deferred
tax and other tax liabilities balances which are non-cash in nature, partially offset by changes in operating assets and liabilities that used $73.1 million. Our cash provided by operating activities was also impacted by our Separation related activities including our restructuring events. Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $32.4 million due to timing of salary and bonus payments, an increase in accounts receivable of $12.5 million primarily due to collections timing, a decrease in accounts payable of $10.1 million due to higher payment activity and a decrease in accrued expenses and other current and non-current liabilities of $6.8 million.
Cash used in investing activities was $5.8 million, primarily resulting from $562.7 million of purchases of available-for-sale investments and $101.5 million of cash used for capital expenditures, partially offset by $652.4 million of proceeds from the sales and maturities of available-for-sale investments and other assets and a $6.0 million decrease in restricted cash.
Cash used in financing activities was $7.3 million, primarily resulting from holdback payments of $22.2 million related to our acquisitions in fiscal 2015 and $4.8 million of cash used to repurchase our common stock, partially offset by $20.8 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.
Contractual Obligations
The following summarizes our contractual obligations at July 1, 2017, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| Contractual Obligations | | | | | | | | | |
| Asset retirement obligations—expected cash payments | $ | 3.6 |
| | $ | 0.3 |
| | $ | 0.9 |
| | $ | 1.5 |
| | $ | 0.9 |
|
| Long-term debt: | | | | | | | | | |
| 2033 Notes | 610.0 |
| | — |
| | 610.0 |
| | — |
| | — |
|
| 2024 Notes | 460.0 |
| | — |
| | — |
| | — |
| | 460.0 |
|
| Estimated interest payments | 37.9 |
| | 8.4 |
| | 11.1 |
| | 9.2 |
| | 9.2 |
|
| Purchase obligations (1) | 56.8 |
| | 48.0 |
| | 7.0 |
| | 1.8 |
| | — |
|
| Operating lease obligations (1) | 64.4 |
| | 18.8 |
| | 28.9 |
| | 16.2 |
| | 0.5 |
|
| Pension and post-retirement benefit payments (2) | 106.2 |
| | 7.5 |
| | 11.6 |
| | 11.8 |
| | 75.3 |
|
| Total | $ | 1,338.9 |
| | $ | 83.0 |
| | $ | 669.5 |
| | $ | 40.5 |
| | $ | 545.9 |
|
| |
(1) | Refer to “Note 16. Commitments and Contingencies” for more information. |
| |
(2) | Refer to “Note 15. Employee Pension and Other Benefit Plans” for more information. |
As of July 1, 2017, we have accrued on our Consolidated Balance Sheet $3.7 million in connection with restructuring and related activities relating to our operating lease obligations disclosed above, of which $2.0 million was included in other current liabilities and $1.7 million was included in other non-current liabilities.
Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Of the $56.8 million of purchase obligations as of July 1, 2017, $10.1 million are related to inventory and the other $46.7 million are non-inventory items.
As of July 1, 2017, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.
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.
Liquidity and Capital Resources Requirement
We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve months. However, there are a number of factors that could positively or negatively impact our liquidity position, including:
global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
impact of the COVID-19 pandemic on our financial condition;
changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
increase in capital expenditure to support the revenue growth opportunity of our business;
changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;
timing of payments to our suppliers;
factoring or sale of accounts receivable;
volatility in fixed income and credit market which impact the liquidity and valuation of our investment portfolios;
volatility in foreign exchange market which impacts our financial results;
possible investments or acquisitions of complementary businesses, products or technologies;
issuance or repurchase of debt or equity securities, which may include open market purchases of our 20332023 Notes and/or 2024 Notes prior to their maturity or of our common stock;
potential funding of pension liabilities either voluntarily or as required by law or regulation; and
compliance with covenants and other terms and conditions related to our financing arrangements.arrangements;
and the risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K.
Cash Investments
Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors. In general, our investment policy requires that securities purchased be rated A-1/P-1, A/A2 or better. Our policy allows an allocation to securities rated A-2/P-2, BBB/Baa2 or better, so long as such allocation below A-1/P-1, A/A2 but minimum A-2/P-2, BBB/Baa2 does not exceed 10% of any investment portfolio. Securities that are downgraded subsequent to purchase are
evaluated and may be sold or held at management’s discretion. No security may have an effective maturity that exceeds 37 months, and the average duration of our holdings may not exceed 18 months. At any time, no more than 5.0% or $5.0 million, whichever is greater, of each of our investment portfolios may be concentrated in a single issuer other than the U.S. or sovereign governments or agencies. Our investments in debt securities and marketable equity securities are primarily classified as available-for-sale investments 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. We did not hold any investments in auction rate securities, mortgage backed securities, collateralized debt obligations, or variable rate demand notes at June 27, 2020. As of June 27, 2020, U.S. subsidiaries owned approximately 53.8% of our cash and cash equivalents, short-term investments and restricted cash. The recent COVID-19 pandemic has caused disruption in global capital markets and over time may impact our ability to obtain credit and/or negotiate acceptable financing terms.
As of June 27, 2020, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales. During the years ended June 27, 2020, 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.
Revolving Credit Facility
On May 5, 2020, 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 $300 million senior secured revolving credit facility, which matures on March 1, 2023. The Credit Agreement also provides that, under certain circumstances, we may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $200 million plus additional amounts so long as our secured net leverage ratio, determined on a pro forma basis does not exceed 1.50:1.00. 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 our assets.
Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at our election, LIBOR plus a margin of 1.75% to 2.50% per annum, or a specified base rate plus a margin of 0.75% to 1.50%, in each case, depending on our consolidated secured leverage ratio. We are required to pay commitment fee on the unutilized portion of the facility which ranges between 0.30% and 0.40% per annum depending on our consolidated secured leverage ratio. As of June 27, 2020, we had no amounts outstanding under the Credit Agreement. Refer to “Note 11. Debt” for more information.
During fiscal 2019, we fully repurchased and redeemed our 0.625% Senior Convertible Notes. Refer to “Note 11. Debt” for more information.
Employee Equity Incentive PlanYear Ended June 27, 2020
Our stock option and Full Value Award program is a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. As of July 1, 2017, we have availableJune 27, 2020, our combined balance of cash and cash equivalents and restricted cash increased by $17.0 million to $547.4 million from $530.4 million as of June 29, 2019.
Cash provided by operating activities was $135.6 million, consisted of net income of $28.7 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance 15.4cost and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $160.8 million, sharesoffset by changes in operating assets and liabilities that used $53.9 million. Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $52.8 million comprised primarily of a decrease in customer deposit and net payments of lease liability and pension obligations, a decrease in accounts payable of $9.2 million driven by timing of purchases and related payments, a decrease in accrued payroll and related expenses of $7.0 million due to timing of salary and related payments, and an increase in accounts receivable of $5.1 million primarily driven by higher volume of billing. This was partially offset by cash inflows from a decrease in other current and non-current assets of $10.6 million, an increase in deferred revenue of $5.9 million primarily due to the amortization of support agreements and the release of revenue upon customer acceptance, and a decrease in inventories of $3.7 million.
Cash used in investing activities was $29.8 million, primarily related to $31.9 million of cash used for capital expenditures and $2.5 million cash used for acquisitions. This was partially offset by $4.6 million proceeds from sales of assets.
Cash used in financing activities was $71.7 million, primarily resulting from $44.4 million of cash used to repurchase common stock, $21.0 million in withholding tax payment on vesting of restricted stock awards, $6.8 million of cash used to pay acquisition related holdback, $2.7 million in payment of financing obligations, $1.6 million in issuance cost of the credit agreement, and $0.7 million of cash used to pay acquisition related to contingent consideration. This was offset by $5.5 million in proceeds from the exercise of stock options and the issuance of common stock for grant primarily under our Amended and Restated 2003 Equity Incentive1998 Employee Stock Purchase Plan (the “2003 Plan”)ESPP).
Year Ended June 29, 2019
As of June 29, 2019, our combined balance of cash and 2005 Acquisition Equity Incentive Plan (the “2005 Plan”). The exercise pricecash equivalents and restricted cash decreased by $93.9 million to $530.4 million from $624.3 million as of June 30, 2018.
Cash provided by operating activities was $138.8 million, consisted of net income of $5.4 million adjusted for the options is equal to thenon-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount, and discount and net change in fair market value of the underlyingcontingent liabilities) which totaled $172.3 million, including changes in deferred tax balances, offset by changes in operating assets and liabilities that used $38.9 million. Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $22.3 million primarily due to a decrease in customer deposit and other accrued liabilities, an increase in accounts receivable of $17.8 million primarily driven by higher volume of billing and timing of collections, an increase in inventories of $15.4 million due to inventory build-up to support revenue growth for our Wireless, fiber and 3D sensing product offerings, and a decrease in deferred revenue of $3.1 million primarily due to a decrease in current deferred revenue. This was partially offset by cash inflows from an increase in accounts payable of $8.7 million driven by increased inventory purchases and timing of payments, an increase in accrued payroll and related expenses of $5.9 million due to timing of salary and bonus payments, and an increase in income taxes payable of $5.0 million.
Cash provided by investing activities was $80.6 million, primarily related to $167.2 million of net sales and maturities of available-for-sale debt securities and $5.4 million proceeds from sales of assets, offset by $47.0 million cash used for acquisitions and $45.0 million of cash used for capital expenditures.
Cash used in financing activities was $300.4 million, primarily resulting from $276.9 million used for repurchase of our 2033 Notes, $11.2 million of cash used to repurchase common stock, at the date$15.5 million in withholding tax payment on vesting of grant. Options generally become exercisable over a three- or four-year periodrestricted stock awards and if not exercised, expire$2.2 million in payment of financing obligations and issuance costs of our 1.75% senior convertible Notes. This was offset by $5.4 million in proceeds from five to ten years post grant date. Full Value Awards refer to RSUs and performance-based RSUs that are granted with the exercise price equal to zeroof stock options and are converted to shares immediately upon vesting. the issuance of common stock under our Amended and Restated 1998 Employee Stock Purchase Plane (the ESPP).
Contractual Obligations
The performance-based RSUs, or MSUs, have vesting requirements tied tofollowing summarizes our contractual obligations at June 27, 2020, and the performance of the Company’s stock as compared to the NASDAQ telecommunications index, and could vest at a higher or lower rate or not at all, based on this relative performance. Full Value Awardseffect such obligations are expected to vesthave on our liquidity and cash flow over one to four years. The fair value of the time-based Full Value Awards is based on the closing market price of our common stock on the grant date of the award. Refer to “Note 14. Stock-Based Compensation”next five years (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| Asset retirement obligations—expected cash payments | $ | 4.0 |
| | $ | 0.9 |
| | $ | 1.3 |
| | $ | 0.3 |
| | $ | 1.5 |
|
| Debt: | | | | | | | | | |
| 2023 1.75% senior convertible notes | 225.0 |
| | — |
| | 225.0 |
| | — |
| | — |
|
| 2024 1% senior convertible notes | 460.0 |
| | — |
| | — |
| | 460.0 |
| | — |
|
| Short-term debt | 2.8 |
| | 2.8 |
| | — |
| | — |
| | — |
|
| Estimated interest payments | 32.7 |
| | 9.5 |
| | 18.6 |
| | 4.6 |
| | — |
|
Purchase obligations (1) | 99.8 |
| | 87.9 |
| | 11.8 |
| | 0.1 |
| | — |
|
Operating lease obligations (2) | 44.7 |
| | 12.8 |
| | 16.2 |
| | 8.2 |
| | 7.5 |
|
Non-cancelable leaseback obligations (1) | 31.6 |
| | 2.8 |
| | 5.3 |
| | 4.8 |
| | 18.7 |
|
| Royalty payment | 3.9 |
| | 0.7 |
| | 1.7 |
| | 1.2 |
| | 0.3 |
|
Pension and post-retirement benefit payments (2) | 109.9 |
| | 8.6 |
| | 12.7 |
| | 12.0 |
| | 76.6 |
|
| Total | $ | 1,014.4 |
| | $ | 126.0 |
| | $ | 292.6 |
| | $ | 491.2 |
| | $ | 104.6 |
|
| |
| (1) | Refer to “Note 18. Commitments and Contingencies” for more information. |
| |
| (2) | Refer to “Note 12. Leases” for more information. |
| |
| (3) | Refer to “Note 17. Employee Pension and Other Benefit Plans” for more information. |
Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Of the $99.8 million of purchase obligations as of June 27, 2020, $40.9 million are related to inventory and the other $58.9 million are non-inventory items.
As of June 27, 2020, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.
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.
Employee Defined Benefit Plans and Other Post-retirement Benefits
The Company sponsorsWe sponsor significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany. The CompanyWe also isare responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition. Most 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 during fiscal 2010.
The U.K. plan is partially funded and the other plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of July 1, 2017,June 27, 2020, our pension plans were underfunded by $105.1$109.9 million since the PBO exceeded the fair value of plan assets. Similarly, we had a liability of $1.1$0.4 million related to our non-pension post-retirement benefit plan.
We anticipate future annual outlays related to the German plans will approximate estimated future benefit payments. These future benefit payments have been estimated based on the same actuarial assumptions used to measure our projected benefit obligation and currently are forecasted to range between $4.7$4.9 million and $6.8$7.7 million per annum. In addition, we expect to contribute approximately $1.0$1.8 million to the U.K. plan during fiscal 2018.2021.
During fiscal 20172020, we (amounts represented as £ and $ denote GBP and USD, respectively) contributed GBP 0.5£0.5 million or approximately USD 0.6$0.6 million, while in fiscal 2016,2019, we contributed GBP 0.5£0.5 million or approximately USD 0.7$0.6 million to ourits U.K. pension plan. These contributions allowed the Companyus to comply with regulatory funding requirements.
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 basis50-basis point (“BPS”) decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.5$9.1 million based upon data as of July 1, 2017.June 27, 2020.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Risk
We utilizeuse foreign exchange forward contracts to hedge foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables. Our foreign exchange forward contracts are accounted for as derivatives whereby the fair value of the contracts are reflected as other current assets or other current liabilities and the associated gains and losses are reflected in interest and other income, net in the Consolidated Statements of Operations. Our hedging programs reduce, but do not eliminate, the impact of currency exchange rate movements. The gains and losses on those derivatives are expected to be offset by re-measurement gains and losses on the foreign currency denominated monetary assets and liabilities.
As of July 1, 2017, the CompanyJune 27, 2020, we had forward contracts that were effectively closed but not settled with the counterparties by year end. Therefore, theThe fair value of these contracts of $7.3$2.2 million and $1.3$1.5 million is reflected as prepayments and other current assets and other current liabilities in the Consolidated Balance Sheets as of July 1, 2017,June 27, 2020, respectively.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near year end; therefore, the fair value of the contracts is not significant. As of July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, the notional amounts of the forward contracts the Companythat we held to purchase foreign currencies were $134.3$146.4 million and $110.0$117.8 million, respectively, and the notional amounts of forward contracts the Companythat we held to sell foreign currencies were $25.4$22.0 million and $55.2$31.3 million, respectively.
The counterparties to these hedging transactions are creditworthy multinational banks. The risk of counterparty nonperformance associated with these contracts is not considered to be material. Notwithstanding our efforts to mitigate some foreign exchange risks, we do not hedge all of our foreign currency exposures, and there can be no assurances that our mitigating activities related to the exposures that we do hedge will adequately protect us against the risks associated with foreign currency fluctuations.
Investments
We maintain an investment portfolio in a variety of financial instruments, including, but not limited to, U.S. government and agency securities, corporate obligations, money market funds, asset-backed securities, and other investment-grade securities. The majority of these investments pay a fixed rate of interest. The securities in the investment portfolio are subject to market price risk due to changes in interest rates, perceived issuer creditworthiness, marketability, and other factors. These investments are generally classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of Other comprehensive (loss) income.
Investments in both fixed-rate and floating-rate interest earning instruments carry a degree of interest rate risk. The fair market values of our fixed-rate securities decline if interest rates rise, while floating-rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may be less than expectations because of changes in interest rates or we may suffer losses in principal if we sell securities that have experienced a decline in market value because of changes in interest rates. As of July 1, 2017,June 27, 2020, a hypothetical 100 basis point increase or decrease in interest rates would not result in a material change in the fair value of our available-for-sale debt instruments held that are sensitive to changes in interest rates, which includes U.S. treasuries, U.S. agencies, municipals, asset-backed securities and corporate securities.rates.
We seek to mitigate the credit risk of our portfolio of fixed-income securities by holding only high-quality, investment-grade obligations with effective maturities of 37 months or less. We also seek to mitigate marketability risk by holding only highly liquid securities with active secondary or resale markets. However, the investments may decline in value or marketability due to changes in perceived credit quality or changes in market conditions.
Long-term Debt
The fair valuevalues of our 2023 and 2024 and 2033 Notes isare subject to interest rate and market price risk due to the convertible feature of the Notes and other factors. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair value of the Notes may also increase as the market price of Viaviour stock rises and decrease as the market
price of our stock falls. Changes in interest rates and Viaviour stock price affect the fair value of the Notes but does not impact our financial position, cash flows or results of operations. Based on quoted market prices, as of July 1, 2017,June 27, 2020, the fair value of the 2023 Notes was $251.4 million and the fair value of the 2024 Notes was approximately $481.7 million. and the fair value of the 2033 Notes was approximately $676.1$523.3 million. Refer to “Note 10.11. Debt” for more information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Viavi Solutions Inc.
In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Viavi Solutions Inc.and its subsidiaries(the “Company”) as of June 27, 2020and June 29, 2019,and the related consolidated statements of operations, of comprehensive income (loss),loss, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of Viavi Solutions Inc. and its subsidiaries as of July 1, 2017 and July 2, 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 1, 2017June 27, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of June 27, 2020,based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 27, 2020and June 29, 2019, and the results of itsoperations and itscash flows for each of the three years in the period ended June 27, 2020in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 1, 2017,June 27, 2020, based on criteria established in Internal Control - Integrated Framework(2013)issued by the CommitteeCOSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of Sponsoring Organizations of the Treadway Commission (COSO). June 30, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management'sManagement’s Report on Internal Control overFinancialReporting appearing under Item 9A. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Identifying and Evaluating Performance Obligations in Certain Customer Contracts in the Network Enablement and Service Enablement Reportable Segments
As described in Notes 1 and 19 to the consolidated financial statements, the Company had $1,136.3 million of revenue for the year ended June 27, 2020 of which $746.7 million and $102.7 million related to the Network Enablement and Service Enablement segments, respectively. The Company’s revenue recognition is determined by management through the following steps: 1) identification of the contract with a customer; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligations are satisfied. Certain of the Company’s contracts with customers include performance obligations consisting of a variety of products and services and may involve a significant level of integration and interdependency between performance obligations. Identifying and evaluating whether products and services are considered distinct performance obligations may require significant management judgment, particularly in the Network Enablement and Service Enablement reportable segments due to the nature of the products and service offerings.
The principal considerations for our determination that performing procedures relating to revenue recognition - identifying and evaluating performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments is a critical audit matter are the significant judgment by management in identifying and evaluating performance obligations, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence obtained related to whether such performance obligations were appropriately identified and evaluated by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing the effectiveness of internal controls relating to the revenue recognition process, including internal controls related to the identification and evaluation of performance obligations in contracts with customers, and (ii) testing, on a sample basis, the completeness and accuracy of management’s identification and evaluation of performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments.
/s/ PRICEWATERHOUSECOOPERSPricewaterhouseCoopers LLP
San Jose, California
August 29, 201724, 2020
We have served as the Company’s auditor since 2005.
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Revenues: | | | | | | | | | | |
| Product revenue | $ | 726.4 |
| | $ | 808.8 |
| | $ | 771.2 |
| $ | 1,005.2 |
| | $ | 1,004.2 |
| | $ | 772.5 |
|
| Service revenue | 85.0 |
| | 97.5 |
| | 102.7 |
| 131.1 |
| | 126.1 |
| | 103.2 |
|
| Total net revenues | 811.4 |
| | 906.3 |
| | 873.9 |
| |
| Total net revenue | | 1,136.3 |
| | 1,130.3 |
| | 875.7 |
|
| Cost of revenues: | | | | | | | | | | |
| Product cost of revenues | 260.9 |
| | 278.1 |
| | 259.1 |
| |
| Service cost of revenues | 50.2 |
| | 61.2 |
| | 62.8 |
| |
| Product cost of revenue | | 388.5 |
| | 394.8 |
| | 310.6 |
|
| Service cost of revenue | | 49.8 |
| | 49.7 |
| | 50.0 |
|
| Amortization of acquired technologies | 14.3 |
| | 17.3 |
| | 31.9 |
| 32.7 |
| | 34.4 |
| | 26.7 |
|
| Total cost of revenues | 325.4 |
| | 356.6 |
| | 353.8 |
| 471.0 |
| | 478.9 |
| | 387.3 |
|
| Gross profit | 486.0 |
| | 549.7 |
| | 520.1 |
| 665.3 |
| | 651.4 |
| | 488.4 |
|
| Operating expenses: | | | | | | | | | | |
| Research and development | 136.3 |
| | 166.4 |
| | 173.3 |
| 193.6 |
| | 187.0 |
| | 133.3 |
|
| Selling, general and administrative | 300.5 |
| | 351.1 |
| | 376.3 |
| 315.0 |
| | 343.5 |
| | 323.9 |
|
| Impairment of goodwill | — |
| | 91.4 |
| | — |
| |
| Amortization of other intangibles | 14.0 |
| | 14.6 |
| | 19.5 |
| 35.1 |
| | 38.1 |
| | 21.0 |
|
| Restructuring and related charges | 21.6 |
| | 10.5 |
| | 26.8 |
| 3.5 |
| | 15.4 |
| | 8.3 |
|
| Total operating expenses | 472.4 |
| | 634.0 |
| | 595.9 |
| 547.2 |
| | 584.0 |
| | 486.5 |
|
| Income (loss) from operations | 13.6 |
| | (84.3 | ) | | (75.8 | ) | |
| Income from operations | | 118.1 |
| | 67.4 |
| | 1.9 |
|
| Interest and other income, net | 13.1 |
| | 2.5 |
| | 3.7 |
| 9.6 |
| | 6.2 |
| | 9.7 |
|
| Gain on sale of investments | 203.1 |
| | 71.6 |
| | 0.1 |
| |
| Interest expense | (43.2 | ) | | (35.7 | ) | | (33.3 | ) | (33.7 | ) | | (34.3 | ) | | (47.3 | ) |
| Income (loss) from continuing operations before income taxes | 186.6 |
| | (45.9 | ) | | (105.3 | ) | 94.0 |
| | 39.3 |
| | (35.7 | ) |
| Provision for income taxes | 21.3 |
| | 4.5 |
| | 26.1 |
| 65.3 |
| | 31.5 |
| | 12.9 |
|
| Income (loss) from continuing operations, net of taxes | $ | 165.3 |
| | $ | (50.4 | ) | | $ | (131.4 | ) | 28.7 |
| | 7.8 |
| | (48.6 | ) |
| Income (loss) from discontinued operations, net of taxes | 1.6 |
| | (48.8 | ) | | 43.3 |
| |
| Loss from discontinued operations, net of taxes | | — |
| | (2.4 | ) | | — |
|
| Net income (loss) | $ | 166.9 |
| | $ | (99.2 | ) | | $ | (88.1 | ) | $ | 28.7 |
| | $ | 5.4 |
| | $ | (48.6 | ) |
| | | | | | | | | | | |
| Net income (loss) per share from - basic: | | | | | | | | | | |
| Continuing operations | $ | 0.72 |
| | $ | (0.22 | ) | | $ | (0.57 | ) | $ | 0.13 |
| | $ | 0.03 |
| | $ | (0.21 | ) |
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
| — |
| | (0.01 | ) | | — |
|
| Net income (loss) | $ | 0.73 |
| | $ | (0.42 | ) | | $ | (0.38 | ) | $ | 0.13 |
| | $ | 0.02 |
| | $ | (0.21 | ) |
| | | | | | | | | | | |
| Net income (loss) per share from - diluted: | | | | | | | | | | |
| Continuing operations | $ | 0.70 |
| | $ | (0.22 | ) | | $ | (0.57 | ) | $ | 0.12 |
| | $ | 0.03 |
| | $ | (0.21 | ) |
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
| — |
| | (0.01 | ) | | — |
|
| Net income (loss) | $ | 0.71 |
| | $ | (0.42 | ) | | $ | (0.38 | ) | $ | 0.12 |
| | $ | 0.02 |
| | $ | (0.21 | ) |
| | | | | | | | | | | |
| Shares used in per-share calculation - basic | 229.9 |
| | 234.0 |
| | 232.7 |
| |
| Shares used in per-share calculation - diluted | 234.5 |
| | 234.0 |
| | 232.7 |
| |
| Shares used in per-share calculations: | | | | | | |
| Basic | | 229.4 |
| | 228.1 |
| | 227.1 |
|
| Diluted | | 233.7 |
| | 231.2 |
| | 227.1 |
|
See
The accompanying notesNotes to consolidated financialthe Consolidated Financial Statements are an integral part of these statements.
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(in millions)
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Net income (loss) | $ | 166.9 |
| | $ | (99.2 | ) | | $ | (88.1 | ) | $ | 28.7 |
| | $ | 5.4 |
| | $ | (48.6 | ) |
| Other comprehensive (loss) income: | | | | | | |
| Other comprehensive loss: | | | | | | |
| Net change in cumulative translation adjustment, net of tax | 4.8 |
| | (32.0 | ) | | (55.4 | ) | (28.6 | ) | | (27.0 | ) | | (8.5 | ) |
| Net change in available-for-sale investments, net of tax: | | | | | | | | | | |
| Unrealized holding gains (losses) arising during period | 92.1 |
| | 177.3 |
| | (0.4 | ) | (0.1 | ) | | 0.3 |
| | (0.6 | ) |
| Less: reclassification adjustments included in net income (loss) | (201.9 | ) | | (69.6 | ) | | — |
| |
| Less: reclassification adjustments included in net income | | — |
| | 0.5 |
| | 0.1 |
|
| Net change in defined benefit obligation, net of tax: | | | | | | | | | | |
| Unrealized actuarial gains (loss) arising during period | 0.7 |
| | (10.6 | ) | | (3.7 | ) | |
| Unrealized actuarial losses arising during period | | (5.4 | ) | | (7.3 | ) | | (2.8 | ) |
| Amortization of actuarial losses | 1.9 |
| | 0.7 |
| | 0.4 |
| 2.8 |
| | 1.8 |
| | 1.5 |
|
| Net change in accumulated other comprehensive (loss) income | (102.4 | ) | | 65.8 |
| | (59.1 | ) | |
| Comprehensive income (loss) | $ | 64.5 |
| | $ | (33.4 | ) | | $ | (147.2 | ) | |
| Net change in accumulated other comprehensive loss | | (31.3 | ) | | (31.7 | ) | | (10.3 | ) |
| Comprehensive loss | | $ | (2.6 | ) | | $ | (26.3 | ) | | $ | (58.9 | ) |
See
The accompanying notesNotes to consolidated financialthe Consolidated Financial Statements are an integral part of these statements.
VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
| | | | July 1, 2017 | | July 2, 2016 | June 27, 2020 | | June 29, 2019 |
| ASSETS | |
| | |
| |
| | |
|
| Current assets: | |
| | |
| |
| | |
|
| Cash and cash equivalents | $ | 1,004.4 |
| | $ | 482.9 |
| $ | 539.0 |
| | $ | 521.5 |
|
| Short-term investments | 432.2 |
| | 484.7 |
| 1.5 |
| | 1.5 |
|
| Restricted cash | 11.2 |
| | 12.2 |
| 3.5 |
| | 3.5 |
|
| Accounts receivable, net | 120.4 |
| | 148.4 |
| 235.5 |
| | 237.7 |
|
| Inventories, net | 48.0 |
| | 51.4 |
| 83.3 |
| | 102.7 |
|
| Prepayments and other current assets | 50.8 |
| | 32.1 |
| 50.8 |
| | 49.9 |
|
| Total current assets | 1,667.0 |
| | 1,211.7 |
| 913.6 |
| | 916.8 |
|
| Property, plant and equipment, net | 136.9 |
| | 133.0 |
| 172.5 |
| | 179.9 |
|
| Goodwill | 151.6 |
| | 152.1 |
| |
| Goodwill, net | | 381.4 |
| | 381.1 |
|
| Intangibles, net | 31.1 |
| | 59.9 |
| 148.1 |
| | 211.6 |
|
| Deferred income taxes | 109.5 |
| | 108.8 |
| 105.4 |
| | 108.4 |
|
| Other non-current assets | 14.4 |
| | 12.6 |
| 55.3 |
| | 17.3 |
|
| Total assets | $ | 2,110.5 |
| | $ | 1,678.1 |
| $ | 1,776.3 |
| | $ | 1,815.1 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 32.6 |
| | $ | 47.0 |
| $ | 53.0 |
| | $ | 63.4 |
|
| Accrued payroll and related expenses | 43.8 |
| | 44.9 |
| 51.4 |
| | 58.7 |
|
| Deferred revenue | 60.2 |
| | 78.6 |
| 54.6 |
| | 55.3 |
|
| Accrued expenses | 30.8 |
| | 24.9 |
| 22.6 |
| | 34.2 |
|
| Short-term debt | | 2.8 |
| | — |
|
| Other current liabilities | 61.4 |
| | 31.0 |
| 48.4 |
| | 72.4 |
|
| Total current liabilities | 228.8 |
| | 226.4 |
| 232.8 |
| | 284.0 |
|
| Long-term debt | 931.4 |
| | 583.3 |
| 600.9 |
| | 578.8 |
|
| Other non-current liabilities | 163.9 |
| | 179.1 |
| 231.2 |
| | 226.5 |
|
| Commitments and contingencies (Note 16) |
| |
| |
| Commitments and contingencies (Note 18) | |
| |
|
| Stockholders’ equity: | | | | | | |
| Preferred Stock, $0.001 par value; 1 million shares authorized; 1 share at July 1, 2017 and July 2, 2016, issued and outstanding | — |
| | — |
| |
| Common Stock, $0.001 par value; 1 billion shares authorized; 228 million shares at July 1, 2017 and 232 million shares at July 2, 2016, issued and outstanding | 0.2 |
| | 0.2 |
| |
| Preferred stock, $0.001 par value; 1 million shares authorized, no shares issued or outstanding at June 27, 2020 and June 29, 2019. | | — |
| | — |
|
| Common stock, $0.001 par value; 1 billion shares authorized; 228 million shares at June 27, 2020 and 229 million shares at June 29, 2019, issued and outstanding | | 0.2 |
| | 0.2 |
|
| Additional paid-in capital | 70,184.4 |
| | 70,059.8 |
| 70,274.3 |
| | 70,244.7 |
|
| Accumulated deficit | (69,305.8 | ) | | (69,380.7 | ) | (69,397.2 | ) | | (69,384.5 | ) |
| Accumulated other comprehensive (loss) income | (92.4 | ) | | 10.0 |
| |
| Accumulated other comprehensive loss | | (165.9 | ) | | (134.6 | ) |
| Total stockholders’ equity | 786.4 |
| | 689.3 |
| 711.4 |
| | 725.8 |
|
| Total liabilities and stockholders’ equity | $ | 2,110.5 |
| | $ | 1,678.1 |
| $ | 1,776.3 |
| | $ | 1,815.1 |
|
See
The accompanying notesNotes to consolidated financialthe Consolidated Financial Statements are an integral part of these statements.
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| OPERATING ACTIVITIES: | | | | | |
| Net income (loss) | $ | 28.7 |
| | $ | 5.4 |
| | $ | (48.6 | ) |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation expense | 40.0 |
| | 39.7 |
| | 35.7 |
|
| Amortization of acquired technologies and other intangibles | 67.8 |
| | 72.5 |
| | 47.7 |
|
| Stock-based compensation | 44.6 |
| | 38.2 |
| | 30.5 |
|
| Amortization of debt issuance costs and accretion of debt discount | 22.2 |
| | 22.7 |
| | 36.4 |
|
| Amortization of discount and premium on investments, net | — |
| | — |
| | 0.3 |
|
| Net change in fair value of contingent liabilities | (31.5 | ) | | (5.9 | ) | | — |
|
| Loss (Gain) on sales of investments | — |
| | 0.5 |
| | — |
|
| Loss on disposal of long-lived assets | 0.1 |
| | 1.4 |
| | 2.1 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 5.0 |
|
| Other | 5.7 |
| | 5.1 |
| | 2.2 |
|
| Changes in operating assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (5.1 | ) | | (17.8 | ) | | (53.2 | ) |
| Inventories | 3.7 |
| | (15.4 | ) | | (5.5 | ) |
| Other current and non-currents assets | 10.6 |
| | 0.1 |
| | 3.9 |
|
| Accounts payable | (9.2 | ) | | 8.7 |
| | 13.2 |
|
| Income taxes payable | — |
| | 5.0 |
| | 1.1 |
|
| Deferred revenue, current and non-current | 5.9 |
| | (3.1 | ) | | 7.3 |
|
| Deferred taxes, net | 11.9 |
| | (1.9 | ) | | (6.8 | ) |
| Accrued payroll and related expenses | (7.0 | ) | | 5.9 |
| | (3.0 | ) |
| Accrued expenses and other current and non-current liabilities | (52.8 | ) | | (22.3 | ) | | (2.3 | ) |
| Net cash provided by operating activities | 135.6 |
| | 138.8 |
| | 66.0 |
|
| | | | | | |
| INVESTING ACTIVITIES: | | | | | |
| Purchases of available-for-sale investments | — |
| | — |
| | (382.9 | ) |
| Maturities of available-for-sale investments | — |
| | 47.3 |
| | 438.3 |
|
| Sales of available-for-sale investments | — |
| | 119.9 |
| | 204.7 |
|
| Acquisition of businesses, net of cash acquired | (2.5 | ) | | (47.0 | ) | | (509.9 | ) |
| Capital expenditures | (31.9 | ) | | (45.0 | ) | | (42.5 | ) |
| Proceeds from the sale of assets | 4.6 |
| | 5.4 |
| | 5.8 |
|
| Net cash (used in) provided by investing activities | (29.8 | ) | | 80.6 |
| | (286.5 | ) |
| | | | | | |
| FINANCING ACTIVITIES: | | | | | |
| Proceeds from issuance of senior convertible debt | — |
| | — |
| | 225.0 |
|
| Payment of debt issuance costs | (1.6 | ) | | (0.5 | ) | | (1.7 | ) |
| Repurchase and retirement of common stock | (44.4 | ) | | (11.2 | ) | | (40.8 | ) |
| Payment of financing obligations | (2.7 | ) | | (1.7 | ) | | (1.3 | ) |
| Redemption of convertible debt | — |
| | (276.9 | ) | | (353.3 | ) |
| Proceeds from exercise of employee stock options and employee stock purchase plan | 5.5 |
| | 5.4 |
| | 4.9 |
|
| Withholding tax payment on vesting of restricted stock awards | (21.0 | ) | | (15.5 | ) | | (13.3 | ) |
| Payment of acquisition related holdback | (6.8 | ) | | — |
| | — |
|
| Payment of acquisition related contingent consideration | (0.7 | ) | | — |
| | — |
|
| Net cash used in financing activities | (71.7 | ) | | (300.4 | ) | | (180.5 | ) |
| | | | | | |
| Effect of exchange rates on cash, cash equivalents and restricted cash | (17.1 | ) | | (12.9 | ) | | 2.9 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 17.0 |
| | (93.9 | ) | | (398.1 | ) |
Cash, cash equivalents and restricted cash at beginning of period (1) | 530.4 |
| | 624.3 |
| | 1,022.4 |
|
Cash, cash equivalents and restricted cash at end of period (2) | $ | 547.4 |
| | $ | 530.4 |
| | $ | 624.3 |
|
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest | $ | 11.3 |
| | $ | 11.8 |
| | $ | 11.2 |
|
| Cash paid for income taxes | $ | 50.6 |
| | $ | 29.8 |
| | $ | 24.4 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| OPERATING ACTIVITIES: | | | | | |
| Net income (loss) | $ | 166.9 |
| | $ | (99.2 | ) | | $ | (88.1 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Depreciation expense | 29.4 |
| | 38.1 |
| | 80.8 |
|
| Amortization of acquired technologies and other intangibles | 28.3 |
| | 32.5 |
| | 59.2 |
|
| Stock-based compensation | 33.2 |
| | 44.0 |
| | 66.9 |
|
| Amortization of debt issuance costs and accretion of debt discount | 34.6 |
| | 28.8 |
| | 27.3 |
|
| Amortization of discount and premium on investments, net | 0.8 |
| | 0.8 |
| | 3.2 |
|
| Impairment of goodwill | — |
| | 91.4 |
| | — |
|
| Gain on sales of investments | (203.1 | ) | | (71.6 | ) | | (0.1 | ) |
| Loss on disposal of long-lived assets | 5.7 |
| | 1.5 |
| | 1.1 |
|
| Loss on extinguishment of debt | 1.1 |
| | — |
| | — |
|
| Other | 4.8 |
| | 2.1 |
| | 7.1 |
|
| Changes in operating assets and liabilities, net of impact of Lumentum distribution: | | | | | |
| Accounts receivable | 24.5 |
| | 23.4 |
| | (12.5 | ) |
| Inventories | (1.6 | ) | | (2.6 | ) | | (6.0 | ) |
| Other current and non-currents assets | (17.4 | ) | | 5.1 |
| | (9.0 | ) |
| Accounts payable | (14.8 | ) | | (2.1 | ) | | (10.1 | ) |
| Income taxes payable | (0.2 | ) | | (1.5 | ) | | (21.3 | ) |
| Deferred revenue, current and non-current | (27.4 | ) | | (2.4 | ) | | 3.2 |
|
| Deferred taxes, net | 1.5 |
| | 0.6 |
| | 19.8 |
|
| Accrued payroll and related expenses | (15.4 | ) | | (25.2 | ) | | (32.4 | ) |
| Accrued expenses and other current and non-current liabilities | 29.1 |
| | (10.8 | ) | | (6.8 | ) |
| Net cash provided by operating activities | 80.0 |
| | 52.9 |
| | 82.3 |
|
| | | | | | |
| INVESTING ACTIVITIES: | | | | | |
| Purchases of available-for-sale investments | (679.4 | ) | | (422.4 | ) | | (562.7 | ) |
| Maturities of available-for-sale investments | 470.4 |
| | 395.7 |
| | 574.8 |
|
| Sales of available-for-sale investments | 355.2 |
| | 287.3 |
| | 71.4 |
|
| Changes in restricted cash | 0.2 |
| | 14.0 |
| | 6.0 |
|
| Acquisition of businesses, net of cash acquired | — |
| | (0.9 | ) | | — |
|
| Capital expenditures | (38.6 | ) | | (35.5 | ) | | (101.5 | ) |
| Proceeds from the sale of assets | 5.9 |
| | 6.0 |
| | 6.2 |
|
| Net cash provided by (used in) investing activities | 113.7 |
| | 244.2 |
| | (5.8 | ) |
| | | | | | |
| FINANCING ACTIVITIES: | | | | | |
| Proceeds from sale of Lumentum Holdings Inc. Series A Preferred Stock | — |
| | 35.8 |
| | — |
|
| Cash contribution to Lumentum Holdings Inc. | — |
| | (137.6 | ) | | — |
|
| Proceeds from issuance of senior convertible debt | 460.0 |
| | — |
| | — |
|
| Payment of debt issuance costs | (8.9 | ) | | — |
| | — |
|
| Repurchase and retirement of common stock | (92.0 | ) | | (44.5 | ) | | (4.8 | ) |
| Payment of financing obligations | (0.8 | ) | | (5.9 | ) | | (23.3 | ) |
| Redemption of convertible debt | (45.4 | ) | | — |
| | — |
|
| Proceeds from exercise of employee stock options and employee stock purchase plan | 12.4 |
| | 4.5 |
| | 20.8 |
|
| Net cash provided by (used in) financing activities | 325.3 |
| | (147.7 | ) | | (7.3 | ) |
| | | | | | |
| Effect of exchange rates on cash and cash equivalents | 2.5 |
| | (14.4 | ) | | (18.5 | ) |
| Net increase in cash and cash equivalents | 521.5 |
| | 135.0 |
| | 50.7 |
|
| Cash and cash equivalents at beginning of period | 482.9 |
| | 347.9 | * | | 297.2 |
|
| Cash and cash equivalents at end of period | $ | 1,004.4 |
| | 482.9 |
| | $ | 347.9 | * |
| Supplemental disclosure of cash flow information | | | | | |
| Cash paid for interest | $ | 6.7 |
| | $ | 6.6 |
| | $ | 6.5 |
|
| Cash paid for taxes | $ | 23.1 |
| | $ | 31.8 |
| | $ | 23.8 |
|
*Cash(2) These amounts include both current and non-current balances of restricted cash equivalents attotaling $8.4 million, $8.9 million and $12.9 million as of June 27, 2015 included $13.4 million in current assets2020, June 29, 2019 and June 30, 2018, respectively.
The accompanying Notes to the Consolidated Financial Statements are an integral part of the discontinued operations of Lumentum Holdings Inc.these statements.
See accompanying notes to consolidated financial statements.
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
| | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | Shares | | Amount | | Shares | | Amount | |
| Balance at June 28, 2014 | 230.4 |
| | $ | 0.2 |
| | $ | 69,957.0 |
| | $ | (68,780.6 | ) | | $ | 11.1 |
| | $ | 1,187.7 |
| |
| Balance at July 1, 2017 | | 227.6 |
| | $ | 0.2 |
| | $ | 70,184.4 |
| | $ | (69,288.5 | ) | | $ | (92.6 | ) | | $ | 803.5 |
|
| Net loss | — |
| | — |
| | — |
| | (88.1 | ) | | — |
| | (88.1 | ) | — |
| | — |
| | — |
| | (48.6 | ) | | — |
| | (48.6 | ) |
| Comprehensive loss | — |
| | — |
| | — |
| | — |
| | (59.1 | ) | | (59.1 | ) | |
| Shares issued under employee stock plans, net of tax effects | 5.3 |
| | — |
| | (1.2 | ) | | — |
| | — |
| | (1.2 | ) | |
| Stock-based compensation | — |
| | — |
| | 66.9 |
| | — |
| | — |
| | 66.9 |
| |
| Repurchases of common stock | (0.4 | ) | | — |
| | — |
| | (4.8 | ) | | — |
| | (4.8 | ) | |
| Balance at June 27, 2015 | 235.3 |
| | $ | 0.2 |
| | $ | 70,022.7 |
| | $ | (68,873.5 | ) | | $ | (48.0 | ) | | $ | 1,101.4 |
| |
| Net loss | — |
| | — |
| | — |
| | (99.2 | ) | | | | (99.2 | ) | |
| Distribution of Lumentum Holdings Inc. | — |
| | — |
| | — |
| | (363.5 | ) | | (7.8 | ) | | (371.3 | ) | |
| Comprehensive income | — |
| | — |
| | — |
| | — |
| | 65.8 |
| | 65.8 |
| |
| Shares issued under employee stock plans, net of tax effects | 4.5 |
| | — |
| | (6.9 | ) | | — |
| | — |
| | (6.9 | ) | |
| Stock-based compensation | — |
| | — |
| | 44.0 |
| | — |
| | — |
| | 44.0 |
| |
| Repurchases of common stock | (7.3 | ) | | — |
| | — |
| | (44.5 | ) | | — |
| | (44.5 | ) | |
| Balance at July 2, 2016 | 232.5 |
| | $ | 0.2 |
| | $ | 70,059.8 |
| | $ | (69,380.7 | ) | | $ | 10.0 |
| | $ | 689.3 |
| |
| Net income | — |
| | — |
| | — |
| | 166.9 |
| | — |
| | 166.9 |
| |
| Comprehensive loss | — |
| | — |
| | — |
| | — |
| | (102.4 | ) | | (102.4 | ) | |
| Other Comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (10.3 | ) | | (10.3 | ) |
| Shares issued under employee stock plans, net of tax effects | 5.6 |
| | — |
| | (1.9 | ) | | — |
| | — |
| | (1.9 | ) | 3.5 |
| | — |
| | (8.4 | ) | | — |
| | — |
| | (8.4 | ) |
| Stock-based compensation | — |
| | — |
| | 33.2 |
| | — |
| | — |
| | 33.2 |
| — |
| | — |
| | 30.5 |
| | — |
| | — |
| | 30.5 |
|
| Repurchases of common stock | (10.5 | ) | | — |
| | — |
| | (92.0 | ) | | — |
| | (92.0 | ) | (4.4 | ) | | — |
| | — |
| | (40.9 | ) | | — |
| | (40.9 | ) |
| Issuance of senior convertible notes | — |
| | — |
| | 99.9 |
| | — |
| | — |
| | 99.9 |
| — |
| | — |
| | 34.6 |
| | — |
| | — |
| | 34.6 |
|
Cumulative adjustment from adoption of ASU 2016-09 (Topic 718)
| | — |
| | — |
| | 0.6 |
| | (0.6 | ) | | — |
| | — |
|
| Reacquisition of 2033 Notes equity component | — |
| | — |
| | (6.6 | ) | | — |
| | — |
| | (6.6 | ) | — |
| | — |
| | (25.5 | ) | | — |
| | — |
| | (25.5 | ) |
| Balance at July 1, 2017 | 227.6 |
| | $ | 0.2 |
| | $ | 70,184.4 |
| | $ | (69,305.8 | ) | | $ | (92.4 | ) | | $ | 786.4 |
| |
| Balance at June 30, 2018 | | 226.7 |
|
| $ | 0.2 |
|
| $ | 70,216.2 |
|
| $ | (69,378.6 | ) |
| $ | (102.9 | ) |
| $ | 734.9 |
|
| Net income | | — |
| | — |
| | — |
| | 5.4 |
| | — |
| | 5.4 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (31.7 | ) | | (31.7 | ) |
| Shares issued under employee stock plans, net of tax effects | | 3.2 |
| | — |
| | (10.1 | ) | | — |
| | — |
| | (10.1 | ) |
| Stock-based compensation | | — |
| | — |
| | 38.6 |
| | — |
| | — |
| | 38.6 |
|
| Repurchase of common stock | | (1.1 | ) | | — |
| | — |
| | (11.3 | ) | | — |
| | (11.3 | ) |
| Balance at June 29, 2019 | | 228.8 |
|
| $ | 0.2 |
|
| $ | 70,244.7 |
|
| $ | (69,384.5 | ) |
| $ | (134.6 | ) |
| $ | 725.8 |
|
| Cumulative adjustment for adoption of ASU 2016-02 (Topic 842) | | — |
| | — |
| | — |
| | 3.0 |
| | | | 3.0 |
|
| Net income | | — |
| | — |
| | — |
| | 28.7 |
| | — |
| | 28.7 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (31.3 | ) | | (31.3 | ) |
| Shares issued under employee stock plans, net of tax effects | | 3.2 |
| | — |
| | (15.3 | ) | | — |
| | — |
| | (15.3 | ) |
| Stock-based compensation | | — |
| | — |
| | 44.9 |
| | — |
| | — |
| | 44.9 |
|
| Repurchase of common stock | | (3.7 | ) | | — |
| | — |
| | (44.4 | ) | | — |
| | (44.4 | ) |
| Balance at June 27, 2020 | | 228.3 |
| | $ | 0.2 |
| | $ | 70,274.3 |
| | $ | (69,397.2 | ) | | $ | (165.9 | ) | | $ | 711.4 |
|
See
The accompanying notesNotes to consolidated financialthe Consolidated Financial Statements are an integral part of these statements.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 1. Basis of Presentation
Description of Business
Viavi Solutions, Inc. (“Viavi,”(VIAVI, also referred to as “the Company,” “we,” “our,” and “us”), formerly JDS Uniphase Corporation (“JDSU”)the Company), is a global provider of network test, monitoring and assurance solutions to communications service providers, enterprises, network equipment manufacturers, civil government, military and their ecosystems,avionics customers, supported by a worldwide channel community including ViaviVIAVI Velocity Solution Partners. The Company’s Velocity program (“Velocity”)(Velocity) allows the Company to optimize the use of direct or partner sales depending on application and sales volume. Velocity expands the Company’s reach into new market segments as well as expands the Company’s capability to sell and deliver solutions. Viavi’s solutions deliverVIAVI delivers end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. ViaviVIAVI is also a leader in high performance thin film optical coatings, providing light management solutions to anti-counterfeiting, consumer3D sensing, electronics, automotive, defense and industrial, government and healthcare and otherinstrumentation markets.
Lumentum Separation
On August 1, 2015 (the “Separation Date”), Viavi completed the distribution of approximately 80.1% of the outstanding shares of Lumentum Holdings Inc. (“Lumentum”) common stock (the “Distribution”). Concurrent with the Distribution, JDSU was renamed Viavi Solutions Inc. and, at the time of the Distribution, retained ownership of approximately 19.9% of Lumentum’s outstanding shares. Lumentum was formed to hold Viavi’s communications and commercial optical products business segment (“CCOP”) and the WaveReady product line and, as a result of the Distribution, is now an independent public company trading under the symbol “LITE” on The Nasdaq Stock Market (“NASDAQ”). The Distribution was made to Viavi’s stockholders of record as of the close of business on July 27, 2015 (the “Record Date”), who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on the Record Date and not sold prior to August 4, 2015, the ex-dividend date. The historical results of operations and the financial position have been recasted to present the Lumentum business as discontinued operations as described in “Note 3. Discontinued Operations.” Unless noted otherwise, discussion in the Notes to Consolidated Financial Statements pertains to continuing operations.
Fiscal Years
The Company utilizes a 52-53 week52-53-week fiscal year ending on the Saturday closest to June 30th. The Company’s 2020, 2019 and 2018 fiscal 2017 was a 52-week year ending on July 1, 2017. The Company’s fiscal 2016 and 2015years were 53-week and 52-week fiscal years ending on July 2, 2016,June 27, 2020, June 29, 2019 and June 27, 2015,30, 2018, respectively.
Principles of Consolidation
The consolidated financial statementsConsolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)(U.S. GAAP) and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Reclassification of Prior Period Balances
Certain reclassifications have been made to prior period amounts to conform to the current-year presentation. These reclassifications have no effect on the reported net income (loss) for the fiscal years ending on June 27, 2020, June 29, 2019 and June 30, 2018.
Use of Estimates
The preparation of the Company’s consolidated financial statementsConsolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affecteffect 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 estimatesEstimates are based on historical factors, current circumstances and the experience and on various assumptions aboutjudgment of management. Under changed conditions the future 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 orimpacted 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 more readily available information. Actual results may differ from these estimates due to the uncertainty around the magnitude, duration and effects of the COVID-19 pandemic, as well as other factors.
COVID-19
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China by the Chinese government in December 2019, and subsequently declared an international pandemic by the World Health Organization (WHO) in March 2020. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time until the disease is contained. While, the Company expects this to have a negative impact to our sales and our 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 Annual Report on Form 10-K. 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 uncertainty in the current information.economic environment due to the COVID-19.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Cash and Cash Equivalents
The Company considers highly liquid instruments such as treasury bills, commercial paper and other money market instruments with original maturities of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents also include certain term depositdeposits with financial institutions that the Company can liquidate with 30-day30 days’ advance notice without incurring penalty.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
penalties.
Restricted Cash
At July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, the Company’s short-term restricted cash balances were $11.2$3.5 million and $12.2$3.5 million, respectively, and therespectively. The Company’s long-term restricted cash balances, included in other non-current assets in the Company’s consolidated balance sheets, were $6.8$4.9 million and $6.0$5.4 million as of June 27, 2020 and June 29, 2019, respectively. These balances primarily include interest-bearing investments in bank certificates of deposit and money market funds which act as collateral supporting the issuance of letters of credit and performance bonds for the benefit of third parties. Refer to the Company’s “Note 16.18. Commitments and Contingencies” for more information.
Investments
The Company’s investments are primarily investments in debt securities, and marketable equity securities, including the Company’s ownership of Lumentum’s common stock,which are primarily classified as available-for-sale investments or trading securities, and are recorded at fair value. The cost of securities sold is based on the specific identificationidentified method. Unrealized gains and losses resulting from changes in fair value on available-for-sale investments, net of tax, are reported within accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Unrealized gains or losses on trading securities resulting from changes in fair value are recognized in current earnings. The Company’s short-term investments, which are classified as current assets, include certain securities with stated maturities of longer than twelve months as they are highly liquid and available to support current operations..
The Company periodically reviews these debt investments for impairment. If a debt security’s fair value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the Company records an other-than-temporary impairment charge to current earnings for the entire amount of the impairment; ifimpairment. If a debt security’s fair value is below amortized cost and the Company does not expect to recover the entire amortized cost of the security, the Company separates the other-than-temporary impairment into (i) the portion of the loss related to credit factors, or the credit loss portion, and (ii) the portion of the loss that is not related to credit factors, or the non-credit loss portion. The credit loss portion is the difference between the amortized cost of the security and the Company’s best estimate of the present value of the cash flows expected to be collected from the debt security. The non-credit loss portion is the residual amount of the other-than-temporary impairment. The credit loss portion is recorded as a charge to income (loss), and the non-credit loss portion is recorded as a separate component of other comprehensive (loss) income.
The Company’s short-term investments are classified as current assets, include certain securities with stated maturities of longer than twelve months, are highly liquid and available to support its current operations.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, accounts receivable, accounts payable,For assets and deferred compensation liability, approximateliabilities measured at fair value, because of their short maturities. Fairfair 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 measuringWhen determining fair value, that maximizes the use of observable inputsCompany considers the principle or most advantageous market in which it would transact, and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect theCompany considers assumptions about the factors that market participants would use in valuing thewhen pricing asset or liability.liabilities.
The three levels of inputs that may be used to measure fair value are:
| |
| • | Level 1: Quoted market prices for identical instruments in active markets for identical assets or liabilities. |
| |
| • | Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets or model-derived valuations. All significant inputs used in the Company’s valuations, such as discounted cash flows, are observable or derived from or corroborated with observable market data for substantially the full term of the assets or liabilities. |
| |
| • | Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs and valuation models are monitored and reviewed by the Company to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes. |
Estimates of fair value of fixed-income securities are based on third party, market-based pricing sources which the Company believes to be reliable. These estimates represent the third parties’ good faith opinion as to what a buyer in the marketplace would
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
pay for a security in a current sale. For instruments that are not actively traded, estimates may be based on current treasury yields adjusted by an estimated market credit spread for the specific instrument. The fair market value of the Company’s 0.625%1.75% Senior Convertible Notes due 20332023 and 1.00% Senior Convertible Notes due 2024 fluctuates with interest rates and with the market price of the Company’s stock, but does not affect the carrying value of the debt on the balance sheet. Refer toThe fair value of earn-out liabilities are determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the Company’s “Note 10. Debt” for more information.risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
InventoryThe Company’s inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of net realizable value. On a quarterly basis, the Company assesses the value of its inventory and writes down those inventories determined to be obsolete or in excess of its forecasted usage to their market value. The Company assesses the valuation on a quarterly basis and writes down theCompany’s estimates of realizable value for estimated excess and obsolete inventoryare based upon estimates ofmanagement analysis and assumptions including, but not limited to, forecasted sales levels by product, expected product life cycle, product development plans and future demand including warranty requirements. Our inventoriesThe Company’s product line management personnel play a key role in its excess review process by providing updated sales forecasts, managing product transitions and working with manufacturing to minimize excess inventory. Differences between actual market conditions and customer demand to the Company’s forecasts, may create favorable or unfavorable inventory positions, and may result in additional inventory write-downs or higher than expected income from operations. The Company’s inventory amounts include material, labor, and manufacturing overhead costs.
Leases
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Operating ROU assets are included in other non-current assets and lease liabilities are included in other current liabilities and other non-current liabilities in the Company’s consolidated balance sheets. Lease and non-lease components for all leases are accounted for separately. The Company does not recognize ROU assets and lease liabilities for leases with a lease term of twelve months or less.
Property, Plant and Equipment
Property, plant and equipment are stated at cost.cost, net of accumulated depreciation. Depreciation is computed by theusing a straight-line method, over the following estimated useful lives of the assets: building and improvements 10 to 50 years for buildingyears; machinery and improvements,equipment 2 to 20 years for machineryyears; and equipment, and 2 to 5 years for furniture, fixtures, software and office equipment. equipment 2 to 10 years.
Leasehold improvements are amortized byon the straight-line method over the shorterlesser of the estimated useful lives of the assetsasset or the term of the lease. initial lease term.
Demonstration units whichare amortized on the straight-line method and are Company products used for demonstration purposes for customers and/or potential customersexisting and prospective customers. These assets are generally not intended to be sold and have an estimated useful life of 3 to 5 years and are amortized by the straight-line method.years.
Costs related to software acquired, developed or modified solely to meet the Company’s internal requirements and for which there are no substantive plans to market are capitalized in accordance with the authoritative guidance on accounting for the costs of computer software developed or obtained for internal use. Only costs incurred after the preliminary planning stage of the project and after management has authorized and committed funds to the project are eligible for capitalization. Costs capitalized for computer software developed or obtained for internal use are included in property,Property, plant and equipment, net, on the Company’s Consolidated Balance Sheets.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Goodwill
Goodwill represents the excess of the purchase price of an acquired enterprise or assetspaid, over the net fair value of the identifiable assets acquired and liabilities assumed.assumed, to purchase an enterprise or asset. The Company tests goodwill for impairment of goodwill on an annual basis inat the reporting unit level at least annually, during the fourth quarter and at any other time whenof each fiscal year, or more frequently if events occur or changes in circumstances indicate that the carrying amount of goodwillasset may not be recoverable. Referimpaired.
The accounting guidance provides the Company with the option to “Note 8. Goodwill” for more information.
Circumstancesperform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that could trigger an impairment testmight indicate that a reporting unit’s fair value is less than its carry amount. These events and circumstances include, but are not limited to,macro-economic conditions, such as a significant adverse change in the business climateCompany’s operating environment, industry or legal factors, an adverse actionmarket considerations; entity-specific events such as increasing costs, declining financial performance, or assessment by a regulator, change in customers, target market and strategy, unanticipated competition, loss of key personnel,personnel; or other events, such as the likelihood that a reporting unit or significant portionsale of a reporting unit, will be soldadverse regulatory developments or otherwise disposed.a sustained decrease in the Company’s stock price.
An assessment of qualitative factors may be performed to determine whetherIf it is necessary to perform the quantitative goodwill impairment test. If thedetermined, as a result of the qualitative assessment, is that it is more likely than not (i.e., greater than 50% likelihood) that the fair value of a reporting unit is less than its carrying amount, then thea quantitative test is required. Otherwise, no further testing is required.
Under the quantitative test, if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the Consolidated Statements of Operations as “impairmentimpairment of goodwill.” Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: using present value techniques of estimated future cash flows or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.
In the fourth quarter of fiscal 2017, the Company early adopted the new accounting guidance issued by the FASB that eliminated the requirement Refer to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, any impairment charge would be based on the excess of a reporting unit's carrying amount over its fair value.“Note 9. Goodwill” for more information.
Intangible Assets
IntangibleIn connection with the Company’s acquisitions, the Company generally recognize assets consist primarily of purchased intangible assets through acquisitions. Purchased intangible assets primarily includefor customer relationships, acquired developed technologies, (developed and core technology), customer relationships,patents, proprietary know-how, trade secrets, in-process research and development (IPR&D) and trademarks and trade names. IntangibleFinite lived intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. Refer to “Note 9.10. Acquired Developed Technology and Other Intangibles” for more information.
Long-lived Asset Valuation (Property, Plant and Equipment and Intangible Assets Subject to Amortization)
Long-lived assets, heldincluding intangible assets and used
The Company tests long-lived assetsproperty and equipment, are reviewed for recoverability, at the asset group level, whenimpairment whenever events or changes in circumstances indicate that theirthe carrying amount of any asset or asset group may not be recoverable. Circumstances which could trigger a review include, butSuch an evaluation is performed at the lowest identifiable level of cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are not limited to, significant decreases in the market priceless than their carrying amount. Measurement of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset,
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current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset, or current expectation that the asset will more likely than notan impairment loss would be sold or disposed significantly before the end of its estimated useful life.
Recoverability is assessed based on the difference betweenexcess of the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset. An impairment loss is recognized when the carrying amount is not recoverable and exceeds theor asset group over its estimated fair value. Estimates of future cash flow require significant judgment based on anticipated future and operating results, which are subject to variability and change.
Pension and Other Postretirement Benefits
In the fourth quarter of fiscal 2016 the Company early adopted the authoritative guidance issued by the FASB that provides a practical expedient permitting an entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The Company has adopted the month-end date of June 30, which is the closest month-end to the Company’s fiscal year as the measurement date for all of the Company's qualified and the non-qualified pension plans in certain countries beginning in fiscal 2016. Measurement dates for prior periods are not impacted.
The funded status of the Company’s retirement-related benefit plans is recognized on the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal year end, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (“PBO”)(PBO) and for the non-pension postretirement benefit plan the benefit obligation is the accumulated postretirement benefit obligation (“APBO”)(APBO). The PBO represents the actuarial present value of benefits expected to be paid upon its employee’s retirement. The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Unfunded or partially funded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and non-pension postretirement benefit obligation equal to this excess. The current portion of the retirement-related benefit obligation represents the actuarial present value of benefits payable in the next 12 months in excess of the fair value of plan assets, measured on a plan-by-plan basis. This liability is recorded in other current liabilities in the Consolidated Balance Sheets.
Net periodic pension cost is recorded in the Consolidated Statements of Operations and includes service cost, interest cost, expected return on plan assets, amortization of prior service cost (credit), and (gains) losses previously recognized as a component of accumulated other comprehensive income (loss). income. Service cost represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year. Interest cost represents the time value of money cost associated
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with the passage of time. (Gains) losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service cost (credit) represents the cost of benefit improvements attributable to prior service granted in plan amendments. (Gains) losses and prior service cost (credit) not recognized as a component of net periodic pension cost in the Consolidated Statements of Operations as they arise are recognized as a component of accumulated other comprehensive (loss) income (loss) on the Consolidated Balance Sheets, net of tax. Those (gains) losses and prior service cost (credit) are subsequently recognized as a component of net periodic pension cost pursuant to the recognition and amortization provisions of the authoritative guidance.
The measurement of the benefit obligation and net periodic pension cost is based on the Company’s estimates and actuarial valuations provided by third-party actuaries and are approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases and mortality rates. The Company evaluates these assumptions periodically but not less than annually. In estimating the expected return on plan assets, the Company considers historical returns on plan assets, diversification of plan investments, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plan’s invested assets.
The Company measures its benefit obligation and plan assets using the month-end date of June 30, which is closest to the Company’s fiscal year-end.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, restricted cash, trade receivables and foreign currency forward contracts. The Company’s cash and cash equivalents and short-term investments are held in safekeeping by large, creditworthy financial institutions. The Company invests its excess cash primarily in U.S. government and agency bonds securities, corporate securities, money market funds, asset-backed securities, other investment-grade securities and certificates of deposit.
The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain the safety and liquidity of these investments. The Company’s foreign exchange derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to
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meet the terms of the agreements. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading such risk across several major financial institutions. In addition, the potentialPotential risk of loss with any one counterparty resulting from such risk is monitored by the Company on an ongoing basis.
The Company performs credit evaluations of its customers’ financial condition and generally does not require collateral from its customers. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, historical payment, bad debt write-off experience, and financial review of the customer.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. When the Company becomes aware that a specific customer is unable to meet its financial obligations, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. In addition, the Company records additional allowances based on certain percentages of aged receivable balances. These percentages take into accountconsider a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. The Company classifies bad debt expenses as selling, general and administrative (“SG&A”)(SG&A) expense.
The Company is not able to predict changes in the financial stability of its customers. Any material changechanges in the financial status of any one customer or a group of customers could have a material adverse effect on the Company’s results of operations and financial condition. Although such losses have been within management’s expectations to date, there can be no assurance that such allowances will continue to be adequate. The Company has significant trade receivables concentrated in the telecommunications industry. While the Company’s allowance for doubtful accounts balance is based on historical loss experience along with anticipated economic trends, unanticipated financial instability in the telecommunications industry could lead to higher than anticipated losses.
As of July 1, 2017June 27, 2020 and July 2, 2016, oneJune 29, 2019, no customer represented 10% or more of ourthe Company’s total accounts receivable, net.
During fiscal 2017, 20162020, 2019 and 2015, certain customers2018, one customer generated 10% or more of total net revenues. Refer to "Note 17.“Note 19. Operating Segments and Geographic Information"Information” for more information.
The Company relies on a limited number of suppliers and contract manufacturers for a number of key components and sub-assemblies contained in ourthe Company’s products. The Company also relies on a limited number of significant independent contract manufacturers for the production of certain key components and subassemblies contained in our products.
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The Company generally uses a rolling twelve monthtwelve-month forecast based on anticipated product orders, customer forecasts, product order history and backlog to determine its materials requirements.requirements for any one period. Lead times for the parts and components that the Company orders may vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at aany given time. If the forecast does not meet actual demand, the Company may have excesssurplus or shortfallsdearth of some materials and components, as well as excess inventory purchase commitments. The Company could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which would increasemay result in increased costs and could have a material adverse impact on the Company’s results of operations.
Foreign Currency Forward Contracts
The Company conducts its business and sells its products to customers primarily in North America, Europe, Asia and Asia.South America. In the normal course of business, the Company’s financial position is routinely subject to market risks associated with foreign currency rate fluctuations due to balance sheet positions in foreign currencies. The Company evaluates foreign exchange risks and utilizes foreign currency forward contracts to reduce such risks, hedging the gains or losses generated by the re-measurement of significant foreign currency denominated monetary assets and liabilities. The fair value of these contracts is reflected as other current assets or other current liabilities and the change in fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The gain or loss from the change in fair value of these foreign currency forward contracts largely offsets the change in fair value of the foreign currency denominated monetary assets andor liabilities, which is also recorded as a component of interestInterest and other income, net.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded as a component of accumulatedAccumulated other comprehensive income (loss)loss on the Consolidated Balance Sheets. Income and expense accounts are translated at exchange rates from the prior month end, exchange rates, which are deemed to approximate the
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exchange rate when the income and expense areis recognized. Gains and losses from re-measurement of monetary assets and liabilities that are denominated in currencies other than the respective functional currencies are included in the Consolidated Statements of Operations as a component of interestInterest and other income, net.
Revenue Recognition
The Company recognizesderives revenue when it is realized or realizablefrom a diverse portfolio of network solutions and earned. The Company considers revenue realized or realizableoptical technology products and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable and collectibility is reasonably assured. Delivery does not occur until products have been shipped or services, have been provided, risk of loss has transferred and in cases where formal acceptance is required, customer acceptance has been obtained or customer acceptance provisions have lapsed. In situations where a formal acceptance is required but the acceptance only relates to whether the product meets its published specifications, revenue is recognized upon delivery provided that all other revenue recognition criteria are met. Historical return rates are monitored on a product-by-product basis. In addition, some distributor agreements allow for partial return of products and/or price protection under certain conditions within limited time periods. Such return rights are generally limited to contractually defined, short-term stock rotation and defective or damaged product. We maintain reserves for sales returns and price adjustments based on historical experience and other qualitative factors. As new products or distributors are introduced, these historical rates are used to establish initial sales returns reserves and are adjusted as better information becomes available. We also have market development incentive programs for certain distributors whereby rebates are offered based upon exceeding volume goals. Estimated rebates, sales returns and other such allowances are deducted from revenue.follows:
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| • | Products: Network Enablement (NE) and Service Enablement (SE) products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. NE and SE are collectively referred to as Network and Service Enablement (NSE). The Company’s Optical Security and Performance (OSP) products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications. |
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| • | Services: The Company also offers a range of product support and professional services designed to comprehensively address customer requirements. These include repair, calibration, extended warranty, software support, technical assistance, training and consulting services. Implementation services provided in conjunction with hardware or software solution projects include sale of the products along with project management, set-up and installation. |
In addition to the aforementioned general policies, the following are the specific revenue recognition policies for multiple-element arrangements and for each major category of revenue.
Multiple-Element Arrangements
When a sales arrangement contains multiple deliverables, such as sales of products that include services, the multiple deliverables are evaluated to determine whether there are one or more units of accounting. Where there is more than one unit of accounting, then the entire fee from the arrangement is allocated to each unit of accounting based on the relative selling price. Under this approach, the selling price of a unit of accounting is determined by using a selling price hierarchy which requires the use of vendor-specific objective evidence (“VSOE”) of fair value if available, third-party evidence (“TPE”) if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. Revenue is recognized when the revenue recognition criteria for each unit of accounting are met.
The Company establishes VSOE of selling price using the price charged for a deliverable when sold separately and, in remote circumstances, using the price established by management having the relevant authority. TPE of selling price is established by evaluating similar and interchangeable competitor goods or services in sales to similarly situated customers. When VSOE or TPE is not available, the Company then uses BESP. Generally, the Company is not able to determine TPE because its product strategy differs from that of others in our markets, and the extent of customization varies among comparable products or services from its peers. The Company establishes BESP using historical selling price trends and considering multiple factors including, but not limited to geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. When determining BESP, the Company applies significant judgment in establishing pricing strategies and evaluating market conditions and product lifecycles.
To the extent a deliverable(s) in a multiple-element arrangement is subject to specific guidance (for example, software that is subject to the authoritative guidance on software revenue recognition), the Company allocates the fair value of the units of accounting using relative selling price and that unit of accounting is accounted for in accordance with the specific guidance. Some product offerings include hardware that are integrated with or sold with software that delivers the functionality of the equipment. The Company believes this equipment is not considered software-related and would therefore be excluded from the scope of the authoritative guidance on software revenue recognition.
Hardware
Revenue from hardware sales is recognized when the product is shipped to the customer and when there are no unfulfilled obligations from the Company that affect the customer’s final acceptance of the arrangement. Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
Services
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Steps of revenue recognition
The Company accounts for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue:
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| 1. | Identify the contract with a customer: Generally, the Company considers customer purchase orders which, in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before the Company considers an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable; and, (v) the agreement has commercial substance. The Company utilizes judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures implemented by the Company. |
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| 2. | Identify the performance obligations in the contract: The Company assesses whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) the Company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The Company's performance obligations consist of a variety of products and services offerings which include networking equipment; proprietary pigment, optical filters, proprietary software licenses; support and maintenance which includes hardware support that extends beyond the Company's standard warranties, software maintenance, installation, professional and implementation services, and training. |
Identifying and evaluating whether products and services are considered distinct performance obligations may require significant judgment particularly in NSE due to the nature of the product and service offerings. The Company may enter into contracts that involve a significant level of integration and interdependency between a software license and installation services. Judgment may be required to determine whether the software license is considered distinct in the context of the contract and accounted for separately, or not distinct in the context of the contract and accounted for together with the installation service.
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| 3. | Determine the transaction price: Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to the customer. The Company’s contracts may include terms that could cause variability in the transaction price including rebates, sales returns, market incentives and volume discounts. Variable consideration is generally accounted for at the portfolio level and estimated based on historical information. If a contract includes a variable amount, the price adjustments are estimated at contract inception. In both cases, estimates are updated at the end of each reporting period as additional information becomes available. |
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| 4. | Allocate the transaction price to performance obligations in the contract: If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Many of the Company’s contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training. Contracts may also include rights or options to acquire future products and/or services, which are accounted for as separate performance obligations by the Company, only if the right or option provides the customer with a material right that it would not receive without entering into the contract. For contracts with multiple performance obligations, the Company allocates the total transaction value to each distinct performance obligation based on relative standalone selling price (SSP). Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when the Company sells that good or service separately under similar circumstances to similar customers. If a directly observable price is not available, the SSP must be estimated based on multiple factors including, but not limited to, historical pricing practices, internal costs, and profit objectives as well as overall market conditions. |
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| 5. | Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and solution contracts or in instances where software is sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if the Company has evidence that all acceptance provisions will be, or have been, satisfied. For fixed-price support and extended warranty contracts, or certain software arrangements which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services outside of an extended warranty or support contract is recognized at the time of completion of the related service. For other professional services or time-based labor contracts, revenue is recognized as the Company performs the services and the customers receive and/or consume the benefits. |
Revenue policy and practical expedients
The following policy and practical expedient elections have been made by the Company under the revenue standard:
Revenue-based taxes as assessed by governmental authorities have been excluded from the measurement of transaction price(s).
Shipping and handling activities performed after the customer obtains control of the good are treated as activities to fulfill the promise (cost of fulfillment). Therefore, the Company does not evaluate whether the shipping and handling activities are promised services.
Incremental costs of obtaining contracts that would have been recognized within one year or less are recognized as an expense when incurred. These costs are included in SG&A expense. The costs of obtaining contracts where the amortization period for recognition of the expense is beyond a year are capitalized and recognized over the revenue recognition period of the original contract.
The portfolio approach is used for certain types of variable consideration for contracts with similar characteristics. The methodology is used when the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
If at contract inception, the expected period between the transfer of promised goods or services and system maintenancepayment is recognizedwithin one year or less, the Company forgoes adjustment for the impact of significant financing component for the contract.
Disaggregation of Revenue
The Company's revenue is presented on a straight-linedisaggregated basis overon the termConsolidated Statements of Operations and in “Note 19. Operating Segments and Geographic Information”. This information includes revenue from reportable segments and a break-out of products and services for which the nature and timing of the service. Revenue from professional service engagementsrevenue as characterized above is recognized once its delivery obligation is fulfilled. Revenue related to extended warrantygenerally at a point in time and product maintenance contracts is deferred and recognized on a straight-line basis over the delivery period. The Company also generates service revenue from hardware repairs and calibration which is recognized as revenue upon completion of the service.
Software
The Company’s software arrangements generally consist of a perpetual license fee, installation services and Post-Contract Support (“PCS”) as well as other non-software deliverables.
VSOE of fair value for PCS is established based on the renewal rate or the bell curve methodology. Non-software and software-related arrangements are bifurcated based on a relative selling price using BESP. The software related elements are bifurcated into separate units of accounting if VSOE of fair value has been established for the undelivered element(s) and the functionality of the delivered element(s) is not dependent on the undelivered element(s).
Revenue from multiple-element software arrangements that include installation services, is deferred until installation service obligation for the software solution is fulfilled. If VSOE has been established for the undelivered elements, the software, installation services and non-software elements are recognized upon completion of delivery and the PCS is recognized ratably over the remaining support contract term. If VSOE has not been established for the undelivered element, the software related elements are recognized ratably over the remaining support period.time, respectively.
Warranty
The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.
Shipping and Handling Costs
The Company records costs related to shipping and handling of revenue in cost of sales for all periods presented.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising costs totaled $2.1$3.7 million, $2.6 million and $1.7$2.6 million in fiscal 2017, 20162020, 2019 and 2015,2018, respectively.
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Research and Development (“R&D”) Expense
Costs related to R&D,research and development (R&D), which primarily consists of labor and benefits, supplies, facilities, consulting and outside service fees, are charged to expense as incurred. The authoritative guidance allows for capitalization of software development costs incurred after a product’s technological feasibility has been established until the product is available for general release to the public. To date, the period between achieving technological feasibility, which theThe Company has defined asbelieve its software development process is completed concurrent with the establishment of a working model and typically occurs when beta testing commences, and the general availability oftechnological feasibility. As such, software has been very short. Accordingly, software development costs have been expensed as incurred.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date and recognized in expense over the requisite service period based on the fair value of the equity award. The Company recognizes stock-based compensation cost over the award’s requisite service period on a straight-line basis. No compensation cost is recognized for awards forfeited by employees who do not render requisite service.
The fair value of restricted stock units (RSUs) and performance-based restricted stock units (PSUs) that do not contain a market condition, is equal to the time-based Full Value Awards is based on the closing market pricevalue of the Company’s common stock on the grant datedate. The fair value of the award. The Company usesPSUs that contain a market condition (MSU) is estimated using the Monte Carlo simulation option-pricing model. MSUs have vesting requirements tied to estimateeither the fair valueperformance of Full Value Awards with market conditions (“MSUs”).the Company’s stock as compared to the Nasdaq telecommunications index or the performance of the Company’s operating results, and could vest at a higher or lower rate, or not at all, based on relative performance described. The Company estimates the fair value of stock options and employee stockEmployee Stock Purchase Plan (ESPP) purchase plan awards (“ESPP”)rights using the Black-Scholes Merton (“BSM”)(BSM) option-pricing model. This option-pricing model requires the input of assumptions, including the award’s expected life and the price volatility of the underlying stock.
The Company estimates thedoes not apply expected forfeiture rate pursuant to the authoritative guidance, and only recognizes expenseaccounts for those shares expected to vest. When estimating forfeitures the Company considers voluntary termination behavior as well as future workforce reduction programs. Estimated forfeiture is trued up to actual forfeiture as the equity awards vest.they occur. The total fair value
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of the equity awards net of forfeiture, is recorded on a straight-line basis, over the requisite service period of the awards for each separatelyseparate vesting period of the award, except for MSUs which are amortized based upon the graded vesting method.
Income Taxes
In accordance with the authoritative guidance on accounting for income taxes, the Company recognizes income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in itsthe Company’s consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, the Company has determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to its ability to utilize its net operating loss carryforwards before they expire. Accordingly, the Company has established a valuation allowance for such deferred tax assets. If there is a change in the Company’s ability to realize its deferred tax assets for which a valuation allowance has been established, then its tax provision may decrease in the period in which it determines that realization is more likely than not. Likewise, if the Company determines that it is not more likely than not that ourits deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and the Company’s tax provision may increase in the period in which wethe Company make the determination.
The authoritative guidance on accounting for uncertainty in income taxes prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification, and disclosure of tax positions. The Company is subject to income tax audits by the respective tax authorities in all of the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The Company recognizes liabilities based on its estimate of whether, and the extent to which, additional tax liabilities are more likely than not. If the Company ultimately determines that the payment of such a liability is not necessary, then it reverses the liability and recognizes a tax benefit during the period in which the determinationit is made that the liability isdetermined no longer necessary.
The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.
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Restructuring Accrual
In accordance with authoritative guidance on accounting for costs associated with exit or disposal activities, generally costs associated with restructuring activities are recognized when they are incurred. However, in the case of operating and direct financing leases, the expense is estimated and accrued when the property is vacated. Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made from the time the property was vacated, including evaluating real estate market conditions for expected vacancy periods and sub-lease income.
Additionally, aA liability for post-employment benefits for workforce reductions related to restructuring activities is recorded when payment is probable, and the amount is reasonably estimable. The Company continually evaluates the adequacy of the remaining liabilities under its restructuring initiatives. Although the Company believes that these estimates accurately reflect the costs of its restructuring plans, actual results may differ, thereby requiring the Company to record additional liabilities or reverse a portion of existing liabilities.
Loss Contingencies
The Company is subject to the possibility of various potential loss contingencies arising in the ordinary course of business. TheIn determining a loss contingency, the Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in determining loss contingencies.loss. An estimated loss is accrued when it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required.
Contingent liabilities include contingent consideration in connection with the Company’s acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and is remeasured each reporting period with subsequent adjustments recognized in the SG&A expense of the Company’s Consolidated Statements of Operations. Contingent consideration is valued using significant Level 3 inputs, that are not observable in the market pursuant to fair value measurement accounting. While the Company believes the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Asset Retirement Obligations
Asset Retirement Obligations (“ARO”)
ARO(ARO) are legal obligations associated with the retirement of long-lived assets pertaining to leasehold improvements. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the asset carrying amount of the related assetsvalue and ARO by the same amount as the liability.amount. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Company records period-to-period changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Company derecognizes ARO liabilities when the related obligations are settled. As of July 1, 2017June 27, 2020, and July 2, 2016,June 29, 2019, the Consolidated Balance Sheets included ARO of $0.3$0.9 million and $0.2$0.4 million, respectively, in other current liabilities and $3.3$3.1 million and $3.5$3.2 million, respectively, in other non-current liabilities. The activities and balances for ARO are as follows (in millions):
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| | Balance at Beginning of Period | | Liabilities Incurred | | Liabilities Settled | | Accretion Expense | | Revisions to Estimates | | Balance at End of Period |
| Year ended June 27, 2020 | $ | 3.6 |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | 4.0 |
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| Year ended June 29, 2019 | $ | 3.7 |
| | $ | 0.4 |
| | $ | (0.1 | ) | | $ | 0.1 |
| | $ | (0.5 | ) | | $ | 3.6 |
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| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Liabilities Incurred | | Liabilities Settled | | Accretion Expense | | Revisions to Estimates | | Balance at End of Period |
| Year ended July 1, 2017 | $ | 3.7 |
| | 0.1 |
| | (0.1 | ) | | 0.2 |
| | (0.3 | ) | | $ | 3.6 |
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| Year ended July 2, 2016 | $ | 4.4 |
| | 0.4 |
| | (0.9 | ) | | 0.2 |
| | (0.4 | ) | | $ | 3.7 |
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Note 2. Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In May 2017,2016, the Financial Accounting Standards Board (“FASB”)(FASB) issued guidance that clarifieson the typesfinancial reporting requirements for leasing arrangements, ASC 842 - Leases. ASC 842 requires lessees to recognize operating leases with a term greater than one year on their balance sheets as ROU assets and corresponding lease liabilities, measured at the present value of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under the relevant authoritative guidance. The guidance is to be applied prospectively, and is effective for the Company inlease payments. In the first quarter of fiscal 2019. Early adoption is permitted.2020 the Company adopted this standard using the modified retrospective approach. The Company doeselected to apply the optional transition approach of not anticipateadjusting comparative period financial statements for the adoption impact. The Company also elected the package of this guidancepractical expedients to not reassess whether a contract contains a lease, lease classification and accounting for initial direct costs. Adoption of the leasing standard resulted in $35.5 million of ROU assets and $37.0 million of lease liabilities on June 30, 2019. In addition, the Company recorded an adjustment to accumulated deficit, net of taxes, of $3.0 million from the recognition of previously deferred profit under sale-leaseback arrangements and de-recognition of related real estate assets of $7.1 million and financing obligations of $10.1 million. The adoption of the new standard did not have a material impact on its consolidated financial statements, absent any award(s) modified on or after adoption date.the Company’s Consolidated Statements of Operations and Statements of Cash Flows. For additional information refer to “Note 12. Leases.”
In November 2016, the FASB issued guidance that will require that the amounts generally described as restricted cash and restricted cash equivalents would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new guidance also requires certain disclosures to supplement the statement of cash flows. The guidance is effective for the Company in the first quarter of fiscal 2019. Other than changes in the presentation within the statements of cash flows and additional required disclosures, the adoption of this new accounting guidance will not have an impact on the consolidated financial statements.
In October 2016, the FASB issued guidance that requires entities to recognize at the transaction date the income tax consequences of intra-entity transfer of an asset other than inventory. The guidance is effective for the Company in the first quarter of fiscal 2019. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.63
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The guidance is effective for the Company in the first quarter of fiscal 2021 and earlier adoption is permitted. The Company is evaluatingdoes not expect the impactadoption of adopting this new accounting guidancestandard will have a material impact on its consolidated financial statements.Consolidated Financial Statements.
In March 2016,August 2020, the FASB issued guidance which simplifies several aspects ofthe accounting for share-based payment award transactions including income tax consequences, classificationfinancial instruments with characteristics of awards as either equity or liabilities and classificationequity, including convertible instruments and contracts on the statement of cash flows.an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. The guidance is effective for the Company in the first quarter of fiscal 2018.year 2023 and early adoption is permitted. The most significantCompany is evaluating the impact fromof adoption of this guidance upon adoption for the Company relates to the classification of employee tax paid by withholding shares of restricted stock units on the statements of cash flows and excess tax benefit. Upon adoption, the related cash flows will be classified as financing activity, from the current classification as operating activity and all prior periods presented will be retrospectively adjusted to reflect this change. The employee tax paid by withholding shares totaled $14.3 million and $11.4 million in fiscal 2017 and 2016, respectively. In addition, the guidance requires that the excess tax benefits to be recorded on the income statement as opposed to additional paid-in-capital. Due to the Company’s valuation allowancehave on its deferred tax assets, no income tax benefit is expected to be recognized upon adoption. All other aspects of the guidance are not expected to have a material effect on the Company’s consolidated financial statements.Consolidated Financial Statements.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
In February 2016,December 2019, the FASB issued guidance regarding both operatingwhich simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and financing leases, requiring lessees to recognize on their balance sheets “right-of-use assets” and corresponding lease liabilities, measured on a discounted basis over the lease term. Virtually all leases will be subject to this treatment except leases that meet the definition of a “short-term lease.” The guidance requires a modified retrospective transition approach for leases existing at, or entered into after, the beginningclarifies certain aspects of the earliest comparative period presented in the financial statements.current guidance to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal 2020. While theyear 2022 and early adoption is permitted. The Company is not yet in a position to assessevaluating the full impact ofeffects that the application of the new guidance, the Company expects adoption of this guidance will materially increase the assets and liabilities recordedhave on its Consolidated Balance Sheets.
Financial Statements.
In May 2014,August 2018, the FASB issued new authoritative guidance to amend the disclosure requirements related to revenue recognition from contracts with customers. This new guidance will replace current U.S. GAAP guidance on this topicdefined benefit pension and eliminate industry-specific guidance. The new guidance provides a unified model to determine when and how revenue is recognized. The core principleother post-retirement plans. Some of the newchanges include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period, and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This guidance is that a company should recognize revenue to depicteffective for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This new guidance allows for either full retrospective adoption or modified retrospective adoption. The FASB deferred the effective date for this new guidance by one year to December 15, 2017 for annual reporting periods beginning after such date. Earlier application of this new guidance is permitted. The Company currently anticipates adopting the guidance in the first quarter of fiscal 2019 using the full retrospective method, reflecting the application of the new standard in each prior reporting period.
In preparation for the implementation2022 and early adoption of the new guidance, the Company has established a cross-functional team and implementation plan to identify processes, systems and internal controls over financial reporting impacted by the new guidance. The implementation plan includes comparison of the Company’s historical accounting policies and practices to the requirements of the new guidance, and identifying differences from applying the requirements of the new guidance to the Company’s contracts, consolidated financial statements and related disclosures.
While the Company’s assessment of the potential impacts of the new guidance is not yet complete, initially the Company believes the most significant impact on the accounting for contracts with customers will be for certain arrangements that include sales of software solutions bundled with post-contract support (PCS) and/or services, where VSOE has not been established for the PCS and/or the services. Due to lack of VSOE under the current guidance, the Company defers recognition of any revenue attributable to such arrangements until the services lacking VSOE are complete. Such revenue is then recognized ratably over the remaining support term. The requirement to have VSOE for undelivered elements to enable the separation of the revenue for delivered software is eliminated under the new guidance and the Company will be required to allocate total contract revenue to each element (referred to as a distinct performance obligation under the new standard) based on either an established or estimated standalone selling price. Accordingly, a portion of the revenue for these types of contracts with customers will be recognized when the software or software solution is transferred to the customer. Dependent on contract-specific terms, the Company expects the actual revenue recognition treatment and timing will vary under the new guidance for some of these arrangements.permitted. The Company will continue to evaluateis evaluating the impact of adopting this new accounting guidance on its consolidated financial statements and related disclosures.Consolidated Financial Statements.
Note 3. Discontinued Operations
On August 1, 2015, the Company completed the separation of the Lumentum business (the “Separation”) and made a tax-free distribution of approximately 80.1% of the outstanding shares of Lumentum common stock to Viavi shareholders who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on July 27, 2015 (the “Record Date”) and not sold prior to August 4, 2015 (the “ex-dividend date”). In connection with the Separation Viavi agreed to contribute $137.6 million all of which was contributed during fiscal 2016. As of the Distribution, Viavi retained ownership of approximately 19.9%, or 11.7 million shares, of Lumentum’s outstanding common stock. Lumentum was formed to hold Viavi’s CCOP business and the WaveReady product line. As a result of the Distribution, Lumentum is now an independent public company trading under the symbol “LITE” on The Nasdaq Stock Market (“NASDAQ”). The Company agreed not to liquidate the retained shares during the first six months following the Distribution. However, in connection with a private letter ruling from the Internal Revenue Service, the Company committed to liquidate these shares within three years from the Distribution. As of July 1, 2017, the Company had sold all of its ownership of Lumentum’s common stock. Refer to “Note 7. Investments, Forward Contracts and Fair Value Measurements” for more information.
In connection with the Separation, the Company entered into a Contribution Agreement, Separation and Distribution Agreement, a Tax Matters Agreement, Employee Matters Agreement, Securities Purchase Agreement, a Supply Agreement, and an Intellectual Property Matters Agreement with Lumentum and others.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Contribution Agreement identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned and it provides for when and how these transfers, assumptions and assignments will occur.
The Separation and Distribution Agreement governs the separation of the CCOP and WaveReady business, the transfer of assets and other matters related to Viavi’s relationship with Lumentum.
The Tax Matters Agreement governs the respective rights, responsibilities and obligations of Lumentum and Viavi with respect to tax liabilities and benefits, tax attributes, tax contests, tax returns, and certain other tax matters.
The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Lumentum and Viavi, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Lumentum will no longer participate in benefit plans sponsored or maintained by Viavi.
The Securities Purchase Agreement with the Company, Lumentum and Amada Holdings Co., Ltd. (“Amada”) set forth terms whereby the Company received 40,000 shares of Lumentum’s Series A Preferred Stock (“Series A Preferred Stock”) pursuant to a binding commitment to sell the Series A Preferred Stock to Amada following the Separation. Upon Separation, in connection with the agreement, during the first quarter of fiscal 2016 the Company sold 35,805 shares of the Series A Preferred Stock to Amada for $35.8 million and the remaining 4,195 shares of the Series A Preferred Stock were canceled. The $35.8 million is included as a part of financing activities in the Statement of Cash Flows.
The Supply Agreement outlines that Viavi will supply test equipment to Lumentum and Lumentum will supply components related to the Company’s metro, fiber and optical product lines and development services related to smart transceivers. The most significant component of the Supply Agreement is $15.0 million related to the sale of certain optical test equipment to Lumentum from the date of the agreement through July 2, 2016, of which the company recorded $14.1 million of net revenue during the fiscal year ended July 2, 2016.
The Intellectual Property Matters Agreement outlines the intellectual property rights and technology transferred to Lumentum upon the Separation, as well as the intellectual property and technology both companies can license from each other. In addition it outlines non-compete restrictions between Viavi and Lumentum.
As the separation of the Lumentum business represented a strategic shift that had and will have a major effect on the Company’s operations and financial results, the results of operations of the Lumentum business are presented separately as discontinued operations for the years ended July 1, 2017 , July 2, 2016 and June 27, 2015 in accordance with the authoritative guidance.
As of the Separation Date, Lumentum became a stand-alone public company that separately reports its financial results. Due to the difference between the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of Lumentum included within discontinued operations for the Company may not be indicative of actual financial results of Lumentum as a stand-alone company.
In connection with the Separation, $7.8 million of accumulated other comprehensive loss, net of income taxes, related to foreign currency translation adjustments and the pension plan obligation was transferred to Lumentum on the Separation Date.
The Company also transferred deferred tax assets of $29.5 million, deferred tax liabilities of $1.0 million, current income tax payables of $3.3 million, an income tax receivable of $1.3 million and other long-term liabilities related to uncertain tax positions totaling $0.1 million on the Separation date. The Company utilized approximately $1.0 billion of federal net operating losses to offset income recognized as a result of the Separation and the license of Lumentum’s intellectual property to a foreign subsidiary.
The removal of Lumentum’s net assets and equity related adjustments upon the Separation are presented as an increase of Viavi's accumulated deficit in the Consolidated Statements of Stockholders’ Equity and represents a non-cash financing activity, excluding the cash transferred. Refer to “Note 14. Stock-Based Compensation” for information on modifications to stock-based compensation awards as a result of the Distribution.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table summarizes results from discontinued operations of the Lumentum business included in the Consolidated Statement of Operations (in millions):
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| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Net revenues | $ | — |
| �� | $ | 66.5 |
| | $ | 835.2 |
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| Cost of revenues | — |
| | 49.8 |
| | 569.1 |
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| Amortization of acquired technologies | — |
| | 0.6 |
| | 7.5 |
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| Gross profit | — |
| | 16.1 |
| | 258.6 |
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| Operating expenses: | | | | | |
| Research and development | — |
| | 12.5 |
| | 139.9 |
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| Selling, general and administrative | (0.8 | ) | | 24.7 |
| | 87.5 |
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| Restructuring charges | — |
| | 0.1 |
| | 7.7 |
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| Total operating expenses | (0.8 | ) | | 37.3 |
| | 235.1 |
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| Income (loss) from operations | 0.8 |
| | (21.2 | ) | | 23.5 |
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| Interest and other income, net | — |
| | — |
| | (1.1 | ) |
| Income (loss) before income taxes | 0.8 |
| | (21.2 | ) | | 22.4 |
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| (Benefit from) provision for income taxes | (0.8 | ) | | 27.8 |
| | (20.9 | ) |
| Net income (loss) from discontinued operations (1) | $ | 1.6 |
| | $ | (49.0 | ) | | $ | 43.3 |
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(1) No income or expense relating to the Lumentum business was recorded after the Separation Date.
During the fiscal year ended July 1, 2017, the Net income from discontinued operations had a benefit of $0.8 million related to the true up of contractual obligations between the company and Lumentum per the Tax Matters Agreement and the Company recognized a tax benefit of $0.8 million relating to the income taxes incurred as a result of the Separation.
During the fiscal year ended July 2, 2016, the income tax provision for discontinued operations of $27.8 million included approximately $6.2 million cash taxes that are due to federal and state authorities as a result of the Separation. In addition, approximately $19.0 million of the income tax provision for discontinued operations related to the income tax intraperiod tax allocation rules in relation to continuing operations and other comprehensive income.
Net income (loss) from discontinued operations also includes other costs incurred by the Company to separate Lumentum. These costs include transaction charges, advisory and consulting fees, of $16.5 million and $21.4 million for the years ended July 2, 2016 and June 27, 2015, respectively.
The following table presents supplemental cash flow information: depreciation expense, amortization expense, stock-based compensation expense and capital expenditures of the Lumentum business (in millions):
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| | Years Ended |
| | July 2, 2016 | | June 27, 2015 |
| Operating activities: | | | |
| Depreciation expense | $ | 3.7 |
| | $ | 43.4 |
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| Amortization expense | 0.6 |
| | 7.9 |
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| Stock-based compensation expense | 1.6 |
| | 19.4 |
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| Investing activities: | | | |
| Capital expenditures | $ | 5.8 |
| | $ | 55.9 |
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(1) No depreciation expense, amortization expense, stock based compensation expense and capital expenditures relating to the Lumentum business are presented after the Separation Date.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 4.3. Earnings Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding ESPP Full Value Awards,purchase rights, RSUs, PSUs, MSUs and options is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share data):
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| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Numerator: | |
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| Income (loss) from continuing operations, net of taxes | $ | 28.7 |
| | $ | 7.8 |
| | $ | (48.6 | ) |
| Loss from discontinued operations, net of taxes | — |
| | (2.4 | ) | | — |
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| Net income (loss) | $ | 28.7 |
| | $ | 5.4 |
| | $ | (48.6 | ) |
| Denominator: | | | | | |
| Weighted-average shares outstanding: | | | | | |
| Basic | 229.4 |
| | 228.1 |
| | 227.1 |
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Shares issuable assuming conversion of convertible notes (1) | 1.2 |
| | — |
| | — |
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| Effect of dilutive securities from stock-based benefit plans | 3.1 |
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| 3.1 |
| | — |
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| Diluted | 233.7 |
| | 231.2 |
| | 227.1 |
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| Net income (loss) per share from - basic: | | | | | |
| Continuing operations | $ | 0.13 |
| | $ | 0.03 |
| | $ | (0.21 | ) |
| Discontinued operations | — |
| | (0.01 | ) | | — |
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| Net income (loss) | $ | 0.13 |
| | $ | 0.02 |
| | $ | (0.21 | ) |
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| Net income (loss) per share from - diluted: | | | | | |
| Continuing operations | $ | 0.12 |
| | $ | 0.03 |
| | $ | (0.21 | ) |
| Discontinued operations | — |
| | (0.01 | ) | | — |
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| Net income (loss) | $ | 0.12 |
| | $ | 0.02 |
| | $ | (0.21 | ) |
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| (1) | Represents the number of shares that would be issued if the Company’s Senior Convertible Notes had been converted. The par amount of the Company’s convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and the “in-the money” conversion benefit feature above the conversion price is payable in cash, shares of the Company’s common stock or a combination of both, at the Company’s election. |
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| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Numerator: | |
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| Income (loss) from continuing operations, net of taxes | $ | 165.3 |
| | $ | (50.4 | ) | | $ | (131.4 | ) |
| Income (loss) from discontinued operations, net of taxes | 1.6 |
| | (48.8 | ) | | 43.3 |
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| Net income (loss) | $ | 166.9 |
| | $ | (99.2 | ) | | $ | (88.1 | ) |
| Denominator: | | | | | |
| Weighted-average number of common shares outstanding | | | | | |
| Basic | 229.9 |
| | 234.0 |
| | 232.7 |
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| Effect of dilutive securities from stock-based benefit plans | 4.6 |
| | — |
| | — |
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| Diluted | 234.5 |
| | 234.0 |
| | 232.7 |
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| Net income (loss) per share from - basic: | | | | | |
| Continuing operations | $ | 0.72 |
| | $ | (0.22 | ) | | $ | (0.57 | ) |
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
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| Net income (loss) | $ | 0.73 |
| | $ | (0.42 | ) | | $ | (0.38 | ) |
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| Net income (loss) per share from - diluted: | | | | | |
| Continuing operations | $ | 0.70 |
| | $ | (0.22 | ) | | $ | (0.57 | ) |
| Discontinued operations | 0.01 |
| | (0.20 | ) | | 0.19 |
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| Net income (loss) | $ | 0.71 |
| | $ | (0.42 | ) | | $ | (0.38 | ) |
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income (loss) per share because their effect would have been anti-dilutive (in millions):
| | | | Years Ended | Years Ended |
| | July 1, 2017 (2)(3) | | July 2, 2016 (1)(2) | | June 27, 2015 (1)(2) | June 27, 2020 (4) | | June 29, 2019 (2)(3)(4) | | June 30, 2018 (1)(2)(3)(4) |
| Stock options and ESPP | 0.9 |
| | 3.4 |
| | 3.6 |
| — |
| | 0.1 |
| | 1.6 |
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| Full Value Awards | 0.6 |
| | 10.9 |
| | 10.3 |
| 0.2 |
| | 0.4 |
| | 7.3 |
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| Total potentially dilutive securities | 1.5 |
| | 14.3 |
| | 13.9 |
| 0.2 |
| | 0.5 |
| | 8.9 |
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| (1) | As the Company incurred a net loss from continuing operations in the period, potential dilutive securities from employee stock options, employee stock purchase plan (“ESPP”)ESPP, RSUs , PSUs and restricted stock units (“RSUs”)MSUs have been excluded from the diluted net loss per share computations as their effects were deemed anti-dilutive. |
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| (2) | The Company’s 0.625% Senior Convertible Notes due 2033 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $11.28 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. In October 2018, the 2033 Notes were fully redeemed and any potential dilution effect of the Notes was realized upon the Company settling the “in-the-money” conversion benefit feature of the Notes with shares of common stock. Refer to “Note 11. Debt” for more details. |
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
shares of the Company’s common stock or a combination of both at the Company’s election. Refer to “Note 10. Debt” for more details.
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| (3) | The Company’s 1.00% Senior Convertible Notes due 2024 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion |
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
price above $13.22 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. Refer to “Note 11. Debt” for more details.
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| (4) | The Company’s 1.75% Senior Convertible Notes due 2023 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $13.94 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. Refer to “Note 10.11. Debt” for more details. |
Note 5.4. Accumulated Other Comprehensive Income (Loss)Loss
The Company’s accumulated other comprehensive (loss) income (loss) consists of the accumulated net unrealized gains and losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.
At July 1, 2017 and July 2, 2016, the changesChanges in accumulated other comprehensive (loss) income (loss) by component, net of tax, were as follows (in millions):
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| | Unrealized gains (losses) on available-for-sale investments (1) | | Foreign currency translation adjustments | | Change in unrealized components of defined benefit obligations, net of tax (2) | | Total |
| Beginning balance as of July 2, 2016 | $ | 104.5 |
| | $ | (70.1 | ) | | $ | (24.4 | ) | | $ | 10.0 |
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| Other comprehensive income before reclassification | 92.1 |
| | 4.8 |
| | 0.7 |
| | 97.6 |
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| Amounts reclassified from accumulated other comprehensive income (loss) | (201.9 | ) | | — |
| | 1.9 |
| | (200.0 | ) |
| Net current period other comprehensive (loss) income | (109.8 | ) | | 4.8 |
| | 2.6 |
| | (102.4 | ) |
| Ending balance as of July 1, 2017 | $ | (5.3 | ) | | $ | (65.3 | ) | | $ | (21.8 | ) | | $ | (92.4 | ) |
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| | Unrealized gains (losses) on available-for-sale investments (1) | | Foreign currency translation adjustments | | Change in unrealized components of defined benefit obligations, net of tax (2) | | Total |
| Beginning balance as of June 29, 2019 | $ | (5.0 | ) | | $ | (101.0 | ) | | $ | (28.6 | ) | | $ | (134.6 | ) |
| Other comprehensive (loss) income before reclassification | (0.1 | ) | | (28.6 | ) | | (5.4 | ) | | (34.1 | ) |
| Amounts reclassified from accumulated other comprehensive (loss) income | — |
| | — |
| | 2.8 |
| | 2.8 |
|
| Net current period other comprehensive (loss) income | (0.1 | ) | | (28.6 | ) | | (2.6 | ) | | (31.3 | ) |
| Ending balance as of June 27, 2020 | $ | (5.1 | ) | | $ | (129.6 | ) | | $ | (31.2 | ) | | $ | (165.9 | ) |
| |
| (1) | Activity before reclassifications to the Consolidated Statements of Operations during the fiscal year ended July 1, 2017June 27, 2020 primarily relates to a $92.6 million unrealized gain on the marketable equity securities of Lumentum held by Viavi.loss from available-for-sale securities. The amount reclassified out of accumulated other comprehensive (loss) income (loss) represents the gross realized gainloss from available-for-sale securities included as “gain on sale of investments"“Interest and other income, net" in the Consolidated Statement of Operations for the year ended July 1, 2017.June 27, 2020. There was no0 tax impact for the fiscal year 2017.2020. |
| |
| (2) | Activity before reclassifications to the Consolidated Statements of Operations during the fiscal year ended July 1, 2017June 27, 2020 relates to the unrealized actuarial gainloss of $2.1$5.7 million, net of income tax expensebenefit of $1.4$0.3 million. The amount reclassified out of accumulated other comprehensive (loss) income (loss) represents the amortization of actuarial losses included as a component of selling, general and administrative expense (“SG&A”)&A in the Consolidated Statement of Operations for the year ended July 1, 2017.June 27, 2020. Refer to “Note 15.17. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans. |
Note 5. Acquisitions
3Z Telecom, Inc. Acquisition
On May 31, 2019 (3Z Close Date), the Company acquired all of the equity of 3Z Telecom, Inc. (3Z) for approximately $23.2 million in cash and contingent consideration (earn-out) liability of up to $7.0 million in cash based on the achievement of certain net revenue targets over approximately a two year period, subsequent to the 3Z Close Date. The $23.2 million cash consideration is subject to final cash and net working capital adjustments and includes escrow payments of $4.3 million, which are reserved for potential breaches of representations and warranties. The acquisition of 3Z expands the Company’s Field Instrument offerings.
The 3Z 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 not material.
The fair value of consideration transferred for the 3Z acquisition consists of the following (in millions):
|
| | | | |
| Cash consideration paid at closing | | $ | 18.9 |
|
| Escrow payments | | 4.3 |
|
| Fair value of contingent consideration | | 5.5 |
|
| Total purchase consideration | | $ | 28.7 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The fair value of the earn-out payments at the 3Z Close Date was determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs not observable in the market, and therefore represents a Level 3 measurement. The fair value of the Company’s earn-out liabilities is further discussed in “Note 8. Fair Value Measurements.”
The identified tangible and intangible assets acquired, as of the 3Z Close Date, were as follows (in millions):
|
| | | | |
| Tangible assets acquired: | | $ | 4.1 |
|
| Intangible assets acquired: | | |
| Developed technology | | 4.4 |
|
| Customer relationships | | 7.9 |
|
| Customer backlog | | 0.1 |
|
| Goodwill | | 12.2 |
|
| Total consideration transferred | | $ | 28.7 |
|
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the 3Z Close Date, was as follows (in millions):
|
| | | | |
| Cash | | $ | 2.2 |
|
| Total other assets | | 3.6 |
|
| Total liabilities | | (1.7 | ) |
| Net tangible assets acquired | | $ | 4.1 |
|
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives, which range from five to six years. Customer backlog will be fully amortized within one year.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of 3Z. Goodwill has been assigned to the NE segment and is not deductible for tax purposes.
Results of operations of 3Z have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
RPC Photonics, Inc. Acquisition
On October 30, 2018 (RPC Close Date), the Company acquired all of the equity interest of RPC Photonics, Inc. (RPC) for approximately $33.4 million in cash and an additional earn-out of up to $53.0 million in cash based on the achievement of certain gross profit targets over approximately a four year period, subsequent to the RPC Close Date. The $33.4 million cash consideration includes escrow payments of $3.5 million, which are reserved for potential breaches of representations and warranties. The acquisition of RPC expands the Company’s 3D Sensing offerings. The allocation of the purchase price was completed in the fourth quarter of fiscal 2019.
The RPC acquisition met the definition of a business and the acquisition 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 not material.
The fair value of consideration transferred for the RPC acquisition consists of the following (in millions):
|
| | | | |
| Cash consideration paid at closing | | $ | 29.9 |
|
| Escrow payments | | 3.5 |
|
| Fair value of contingent consideration | | 36.2 |
|
| Total purchase consideration | | $ | 69.6 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The fair value of the earn-out payments at the RPC Close Date was determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs that are not observable in the market, and therefore represents a Level 3 measurement. The fair value of this earn-out is discussed further in “Note 8. Fair Value Measurements”.
The identified tangible and intangible assets acquired, as of the RPC Close Date, were as follows (in millions):
|
| | | | |
| Tangible assets acquired: | | $ | 5.7 |
|
| Intangible assets acquired: | | |
| Developed technology | | 15.7 |
|
| Customer relationships | | 14.0 |
|
| Customer backlog | | 0.3 |
|
| Goodwill | | 33.9 |
|
| Total consideration transferred | | $ | 69.6 |
|
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the RPC Close Date, was as follows (in millions):
|
| | | | |
| Cash | | $ | 1.8 |
|
| Other current assets | | 1.8 |
|
| Property and equipment | | 2.6 |
|
| Total liabilities | | (0.5 | ) |
| Net tangible assets acquired | | $ | 5.7 |
|
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives that range from six to seven years. Customer backlog will be fully amortized within one year.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of RPC. Goodwill has been assigned to the OSP segment and is not deductible for tax purposes.
Results of operations of RPC have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
AvComm and Wireless Test and Measurement Acquisition
On March 15, 2018 (AW Close Date), the Company completed the acquisition of the AW Business of Cobham plc. (AW) for $466.8 million in cash. The acquired business has been integrated into the Company’s NE segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date. The allocation of the purchase price was completed in March 2019.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The identified intangible assets acquired, were as follows (in millions):
|
| | | | |
| Tangible assets acquired: | | $ | 59.0 |
|
| Intangible assets acquired: | | |
| Developed technology | | 113.5 |
|
| Customer relationships | | 75.0 |
|
| Trade names | | 28.0 |
|
| In-process research and development | | 9.0 |
|
| Customer backlog | | 6.5 |
|
| Goodwill | | 175.8 |
|
| Total consideration transferred | | $ | 466.8 |
|
The allocation of the purchase price was as follows (in millions):
|
| | | | |
| Cash | | $ | 16.1 |
|
| Accounts receivable | | 43.0 |
|
| Inventory | | 33.5 |
|
| Property and equipment | | 33.5 |
|
| Other assets | | 6.1 |
|
| Accounts payable | | (10.9 | ) |
| Other liabilities | | (28.4 | ) |
| Deferred revenue | | (10.2 | ) |
| Deferred tax liabilities | | (23.7 | ) |
| Net tangible assets acquired | | $ | 59.0 |
|
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair value of acquired developed technology, customer relationships, trade names, acquired IPR&D and order backlog was determined based on the income approach, discounted cash flow method. The intangible assets, except IPR&D, are being amortized over their estimated useful lives that range from three to six years. Order backlog was fully amortized within one year of the AW Close Date.
In accordance with authoritative guidance, the Company recognized an IPR&D asset at fair value as of March 15, 2018. The IPR&D is accounted for as an indefinite-lived intangible asset until project completion or abandonment of the research and development projects. During the three months ended March 30, 2019, the IPR&D activities were completed and transferred to developed technology, with an estimated useful life of 6 years.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of AW. Goodwill has been assigned to the NE segment and is partially deductible for tax purposes.
Trilithic, Inc. Acquisition
On August 9, 2017 (Trilithic Close Date), the Company completed the acquisition of Trilithic Inc. (Trilithic) for $56.4 million in cash. The acquisition has been integrated into the Company’s NE segment.
The Company accounted for the transaction 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. The allocation of the purchase price was completed during the first quarter of fiscal 2019.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The identified intangible assets acquired, were as follows (in millions):
|
| | | | |
| Net tangible assets acquired | | $ | 11.8 |
|
| Intangible assets acquired: | | |
| Developed technology | | 15.5 |
|
| Customer relationships | | 11.0 |
|
| Other | | 0.3 |
|
| Goodwill | | 17.8 |
|
| Total purchase price | | $ | 56.4 |
|
The allocation of the purchase price was as follows (in millions):
|
| | | | |
| Cash | | $ | 0.2 |
|
| Accounts receivable | | 3.2 |
|
| Inventory | | 10.1 |
|
| Property and equipment | | 1.2 |
|
| Accounts payable | | (1.7 | ) |
| Other liabilities, net of other assets | | (1.2 | ) |
| Net tangible assets acquired | | $ | 11.8 |
|
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair value of acquired developed technology, customer relationships, and other intangible assets was determined based on an income approach, discounted cash flow method. The intangible assets are being amortized over their estimated useful lives that range from three to five years for the acquired developed technology and customer relationships.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of Trilithic. Goodwill has been assigned to the NE segment and is not deductible for tax purposes.
Trilithic’s results of operations have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition.
Other Acquisitions:
During the twelve months ended June 27, 2020, the Company completed a business acquisition for total consideration of approximately $10.7 million, of which $5.2 million cash was paid at close and $5.5 million in payments to be made based on the occurrence of future events. The fair value of earn-out liabilities is discussed further in “Note 8. Fair Value Measurements”.
In connection with this acquisition, the Company recorded approximately $6.2 million of developed technology and customer relationships and $1.4 million of deferred tax liability resulting from the acquisitions. The acquired developed technology and customer relationship assets are being amortized over their estimated useful lives of six years.
During the twelve months ended June 29, 2019, the Company completed various asset acquisitions for total consideration of approximately $7.7 million, of which $5.1 million cash was paid at close and $2.6 million in payments to be made based on the occurrence of future events. The fair value of earn-out liabilities is discussed further in “Note 8. Fair Value Measurements”.
These acquisitions were accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset. In connection with these acquisitions, the Company recorded approximately $7.6 million of developed technology and $2.4 million of deferred tax liability resulting from these acquisitions. The acquired developed technology assets are being amortized over their estimated useful lives which range from five to ten years.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 6. Balance Sheet and Other Details
AccountsContract Balances
Unbilled Receivables: The Company records a receivable reserveswhen an unconditional right to consideration exists and allowancestransfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of customer invoicing. Payment terms vary based on product or service offerings and payment is generally required within 30 to 90 days from date of invoicing. Certain performance obligations may require payment before delivery of the service to the customer.
The componentsContract assets: A Contract Asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract Assets include fixed fee professional services, where the transfer of services has occurred in advance of the Company's right to invoice. Contract Assets, included in accounts receivable, reservesnet, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. Contract Asset balances will fluctuate based upon the timing of transfer of services, billings and allowances werecustomers’ acceptance of contractual milestones.
Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of June 27, 2020 and June 29, 2019, the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $3.8 million and $11.5 million, respectively
Deferred revenue: Deferred revenue consists of contract liabilities primarily related to support, solution deployment services, software maintenance, product, professional services, and training when the Company has a right to invoice or payments have been received and transfer of control has not occurred. Revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. Contract liabilities are included in other current liabilities on the consolidated balance sheets.
The Company also has short-term and long-term deferred revenues related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as followsthe Company's performance obligations under the contract are completed and accepted by the customer.
The following tables summarize the activity related to deferred revenue, for the year ended June 27, 2020 (in millions):
|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Allowance for doubtful accounts | $ | 1.6 |
| | $ | 2.2 |
|
| Sales allowance | 3.4 |
| | 2.5 |
|
| Total accounts receivable reserves and allowances | $ | 5.0 |
| | $ | 4.7 |
|
|
| | | |
| | June 27, 2020 |
| Deferred revenue: | |
| Balance at beginning of period | $ | 68.5 |
|
Revenue deferrals for new contracts (1) | 107.5 |
|
Revenue recognized during the period (2) | (101.4 | ) |
| Balance at end of period | $ | 74.6 |
|
| | |
| Short-term deferred revenue | $ | 54.6 |
|
| Long-term deferred revenue | $ | 20.0 |
|
| |
| (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 following period quarter-end deferrals. |
Remaining performance obligations: Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations not delivered or are incomplete, as of June 27, 2020. Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded. The aggregate amount of the transaction price allocated to remaining performance obligations does not include amounts owed under cancelable contracts where there is no substantive termination penalty.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidation, adjustments for revenue that has not materialized, and adjustments for currency.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The value of the transaction price allocated to remaining performance obligations as of June 27, 2020, was $204.6 million. The Company expects to recognize 87% of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.
Accounts Receivable Allowances
The table below presents the activities and balances for allowance for doubtful accounts, are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Charged to Costs and Expenses | | Deduction (1) | | Balance at End of Period |
| Year Ended July 1, 2017 | $ | 2.2 |
| | $ | (0.2 | ) | | $ | (0.4 | ) | | $ | 1.6 |
|
| Year Ended July 2, 2016 | 2.4 |
| | 0.3 |
| | (0.5 | ) | | 2.2 |
|
| Year Ended June 27, 2015 | 2.9 |
| | 0.3 |
| | (0.8 | ) | | 2.4 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance at Beginning of Period | | Acquisitions (1) | | Charged to Costs and Expenses | | Deduction (2) | | Balance at End of Period |
| Year Ended June 27, 2020 | $ | 2.0 |
| | $ | — |
| | $ | 2.0 |
| | $ | (1.0 | ) | | $ | 3.0 |
|
| Year Ended June 29, 2019 | 2.4 |
| | — |
| | 1.4 |
| | (1.8 | ) | | 2.0 |
|
| Year Ended June 30, 2018 | 1.6 |
| | 0.7 |
| | (0.4 | ) | | 0.5 |
| | 2.4 |
|
(1) Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
| |
| (1) | See “Note 5. Acquisitions” of the Notes to Consolidated Financial Statements for detail of acquisition. |
| |
| (2) | Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries. |
Inventories, netNet
The following table presents the components of inventories, net, were as follows (in millions):
|
| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Finished goods | $ | 30.0 |
| | $ | 36.7 |
|
| Work in process | 22.5 |
| | 26.5 |
|
| Raw materials | 30.8 |
| | 39.5 |
|
| Inventories, net | $ | 83.3 |
| | $ | 102.7 |
|
|
| | | | | | | |
| | July 2, 2016 | | July 2, 2016 |
| Finished goods | $ | 24.9 |
| | $ | 29.1 |
|
| Work in process | 10.3 |
| | 7.5 |
|
| Raw materials | 12.8 |
| | 14.8 |
|
| Inventories, net | $ | 48.0 |
| | $ | 51.4 |
|
Prepayments and other current assetsOther Current Assets
The following table presents the components of prepayments and other current assets, were as follows (in millions):
|
| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Prepayments | $ | 10.9 |
| | $ | 14.2 |
|
| Assets held for sale | 2.5 |
| | 2.5 |
|
| Advances to contract manufacturers | 7.3 |
| | 5.1 |
|
| Refundable income taxes | 10.8 |
| | 8.9 |
|
| Transaction tax receivables | 10.6 |
| | 11.8 |
|
| Other current assets | 8.7 |
| | 7.4 |
|
| Prepayments and other current assets | $ | 50.8 |
| | $ | 49.9 |
|
|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Prepayments | $ | 8.3 |
| | $ | 10.4 |
|
| Other current assets | 42.5 |
| | 21.7 |
|
| Prepayments and other current assets | $ | 50.8 |
| | $ | 32.1 |
|
Property, plant and equipment, net
The components of property, plant and equipment, net were as follows (in millions):
|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Land | $ | 14.5 |
| | $ | 14.6 |
|
| Buildings and improvements | 31.4 |
| | 32.4 |
|
| Machinery and equipment | 225.8 |
| | 218.7 |
|
| Furniture, fixtures, software and office equipment | 111.2 |
| | 120.5 |
|
| Leasehold improvements | 58.1 |
| | 54.3 |
|
| Construction in progress | 17.8 |
| | 10.3 |
|
| Property, plant and equipment, gross | 458.8 |
| | 450.8 |
|
| Less: Accumulated depreciation | (321.9 | ) | | (317.8 | ) |
| Property, plant and equipment, net | $ | 136.9 |
| | $ | 133.0 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Property, Plant and Equipment, net
The following table presents the components of property, plant and equipment, net, as follows (in millions):
|
| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Land | $ | 16.8 |
| | $ | 20.8 |
|
| Buildings and improvements | 22.9 |
| | 36.9 |
|
| Machinery and equipment | 298.5 |
| | 280.0 |
|
| Furniture, fixtures, software and office equipment | 74.3 |
| | 103.5 |
|
| Leasehold improvements | 66.8 |
| | 56.8 |
|
| Construction in progress | 15.6 |
| | 31.1 |
|
| Property, plant and equipment, gross | 494.9 |
| | 529.1 |
|
Less: Accumulated depreciation and amortization | (322.4 | ) | | (349.2 | ) |
| Property, plant and equipment, net | $ | 172.5 |
| | $ | 179.9 |
|
Other current liabilities
The following table presents the components of other current liabilities, were as follows (in millions):
|
| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Customer prepayments | $ | 0.5 |
| | $ | 30.2 |
|
| Restructuring accrual | 6.5 |
| | 8.6 |
|
| Income tax payable | 10.7 |
| | 8.5 |
|
| Warranty accrual | 4.6 |
| | 4.7 |
|
| Transaction tax payable | 3.2 |
| | 3.8 |
|
| Operating lease liabilities (Note 12) | 11.7 |
| | — |
|
| Foreign exchange forward contracts liability | 1.5 |
| | 4.0 |
|
| Other | 9.7 |
| | 12.6 |
|
| Other current liabilities | $ | 48.4 |
| | $ | 72.4 |
|
|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Customer prepayments | $ | 35.2 |
| | $ | 0.4 |
|
| Restructuring accrual | 8.8 |
| | 13.3 |
|
| Income tax payable | 3.3 |
| | 3.3 |
|
| Warranty accrual | 2.9 |
| | 2.6 |
|
| VAT liabilities | 2.2 |
| | 2.3 |
|
| Deferred compensation plan | 2.0 |
| | 2.4 |
|
| Other | 7.0 |
| | 6.7 |
|
| Other current liabilities | $ | 61.4 |
| | $ | 31.0 |
|
Other non-current liabilitiesNon-current Liabilities
The following table presents the components of other non-current liabilities, were as follows (in millions):
|
| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Pension and post-employment benefits | $ | 102.7 |
| | $ | 103.2 |
|
| Deferred tax liability | 23.9 |
| | 14.6 |
|
| Financing obligation | 16.2 |
| | 25.5 |
|
Fair value of contingent consideration (1) | 9.4 |
| | 37.7 |
|
| Long-term deferred revenue | 20.0 |
| | 13.2 |
|
| Operating lease liabilities (Note 12) | 28.1 |
| | — |
|
| Uncertain tax position | 11.6 |
| | 13.6 |
|
| Other | 19.3 |
| | 18.7 |
|
| Other non-current liabilities | $ | 231.2 |
| | $ | 226.5 |
|
|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Pension and post-employment benefits | $ | 99.4 |
| | $ | 103.0 |
|
| Financing obligation | 27.8 |
| | 28.7 |
|
| Long-term deferred revenue | 14.0 |
| | 22.7 |
|
| Other | 22.7 |
| | 24.7 |
|
| Other non-current liabilities | $ | 163.9 |
| | $ | 179.1 |
|
Interest and other income, net
The components of interest and other income, net were as follows (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Interest income | $ | 11.1 |
| | 5.9 |
| | $ | 4.6 |
|
| Foreign exchange gains (loss), net | 0.9 |
| | (2.6 | ) | | (3.8 | ) |
| Proceeds from Nortel (1) | — |
| | — |
| | 2.2 |
|
| Loss on extinguishment of debt (2) | (1.1 | ) | | — |
| | — |
|
| Other income (expense), net | 2.2 |
| | (0.8 | ) | | 0.7 |
|
| Interest and other income, net | $ | 13.1 |
| | $ | 2.5 |
| | $ | 3.7 |
|
| |
| (1) | During fiscal 2015, the Company received proceeds of $2.2 million from the Fair Fund established to provide compensation for losses incurred in connection with investments in Nortel Networks Corporation (“Nortel”) securities from the SEC’s claims against Nortel. |
| |
(2) | During fiscal 2017, the Company repurchased $40.0 million aggregate principal amountSee “Note 5. Acquisitions” and “Note 7. Investments and Forward Contracts” of the 2033 Notes for $45.4 million in cash. In connection withto the repurchase, a loss on extinguishment of $1.1 million was recognized. Refer to “Note 10. Debt”Company’s Consolidated Financial Statements for more information.detail. |
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Interest Income and Other Income, net
The following table presents the components of interest income and other income, net, as follows (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Interest income | $ | 7.1 |
| | $ | 8.1 |
| | $ | 16.0 |
|
| Foreign exchange gains (loss), net | 2.1 |
| | (2.9 | ) | | (1.3 | ) |
Loss on extinguishment of debt (1) | — |
| | — |
| | (5.0 | ) |
| Other income, net | 0.5 |
| | 1.5 |
| | 0.1 |
|
| Loss on sale of investments | (0.1 | ) | | (0.5 | ) | | (0.1 | ) |
| Interest income and other income, net | $ | 9.6 |
| | $ | 6.2 |
| | $ | 9.7 |
|
| |
(1) | In connection with the debt extinguishment, a loss of $5.0 million was recognized in fiscal 2018. Refer to “Note 11. Debt” for more information. |
Note 7. Investments and Forward Contracts and Fair Value Measurements
Available-For-Sale Investments
The Company’s investments in marketable debt securities were primarily classified as available-for-sale investments. As of July 1, 2017,following table presents the Company’s available-for-sale securities were as followsof June 27, 2020 (in millions):
|
| | | | | | | | | | | | | | | |
| | Amortized Cost/
Carrying Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Estimated
Fair Value |
| Available-for-sale debt securities: | |
| | |
| | |
| | |
|
| Asset-backed securities | $ | 0.9 |
| | $ | — |
| | $ | (0.4 | ) | | $ | 0.5 |
|
| Total available-for-sale debt securities | $ | 0.9 |
| | $ | — |
| | $ | (0.4 | ) | | $ | 0.5 |
|
|
| | | | | | | | | | | | | | | |
| | Amortized Cost/
Carrying Cost | | Gross Unrealized
Gains | | Gross Unrealized
Losses | | Estimated
Fair Value |
| Available-for-sale securities: | |
| | |
| | |
| | |
|
| U.S. treasuries | $ | 56.8 |
| | $ | — |
| | $ | (0.1 | ) | | $ | 56.7 |
|
| U.S. agencies | 45.0 |
| | — |
| | (0.1 | ) | | 44.9 |
|
| Municipal bonds and sovereign debt instruments | 4.4 |
| | — |
| | — |
| | 4.4 |
|
| Asset-backed securities | 71.5 |
| | — |
| | (0.4 | ) | | 71.1 |
|
| Corporate securities | 326.1 |
| | 0.1 |
| | (0.2 | ) | | 326.0 |
|
| Certificates of deposit | 6.0 |
| | — |
| | — |
| | 6.0 |
|
| Total available-for-sale securities | $ | 509.8 |
| | $ | 0.1 |
| | $ | (0.8 | ) | | $ | 509.1 |
|
The Company generally classifies debt securities as available-for-sale and as cash equivalents, short-term investments, or other non-current assets based on the stated maturities; however, certain securities with stated maturities of longer than twelve months, which are highly liquid and available to support current operations are also classified as short-term investments. As of July 1, 2017, ofJune 27, 2020, the total estimated fair value $78.2 million was classified as cash equivalents, $430.2 million was classified as short-term investments and $0.7of $0.5 million was classified as other non-current assets.
As of July 1, 2017, the Company had sold all of its ownership of Lumentum common stock in connection with the Separation. The Lumentum common stock was previously classified as available-for-sale marketable equity securities. During fiscal 2017, the Company sold 7.2 million Lumentum common shares and recognized gross gains of $203.0 million, reflected in "gain on sale of investments" in the Company’s Consolidated Statements of Operations. The sale resulted in no tax effect. The realized gain is also reflected within the operating activities section of the Consolidated Statements of Cash Flows, while the cash proceeds received are reflected in “sales of available-for-sale investments” within the investing activities section.
In addition to the amounts presented above, as of July 1, 2017, the Company’s short-term investments classified as trading securities related to the deferred compensation plan as of June 27, 2020, were $2.0$1.4 million, of which $0.5$0.3 million was invested in debt securities, $0.3$0.2 million was invested in money market instruments and funds and $1.2$0.9 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
During the yearfiscal years ended July 1, 2017, July 2, 2016June 27, 2020, June 29, 2019 and June 27, 2015,30, 2018, respectively, the Company recorded no0 other-than-temporary impairment charges in each respective period.
As of June 27, 2020, the Company’s total gross unrealized losses on available-for-sale securities, aggregated by type of investment instrument, are as follows (in millions):
|
| | | | | | | | | | | |
| | Less than 12 Months | | Greater than 12 Months | | Total |
| Asset-backed securities | $ | — |
| | $ | (0.4 | ) | | $ | (0.4 | ) |
| Total gross unrealized losses | $ | — |
| | $ | (0.4 | ) | | $ | (0.4 | ) |
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
As of July 1, 2017, the Company’s total gross unrealized losses on available-for-sale securities, aggregated by type of investment instrument, were as follows (in millions):
|
| | | | | | | | | | | |
| | Less than 12 Months | | Greater than 12 Months | | Total |
| U.S. treasuries and agencies | $ | (0.2 | ) | | — |
| | $ | (0.2 | ) |
| Asset-backed securities | (0.1 | ) | | $ | (0.3 | ) | | $ | (0.4 | ) |
| Corporate securities | (0.2 | ) | | — |
| | (0.2 | ) |
| Total gross unrealized losses | $ | (0.5 | ) | | $ | (0.3 | ) | | $ | (0.8 | ) |
As of July 1, 2017, contractual maturities ofJune 27, 2020, the Company’s debt securities classified as available-for-sale securities werewith contractual maturities are as follows (in millions):
|
| | | | | | | |
| | Amortized Cost/Carrying Cost | | Estimated Fair Value |
| Amounts maturing in more than 5 years | $ | 0.9 |
| | $ | 0.5 |
|
| Total debt available-for-sale securities | $ | 0.9 |
| | $ | 0.5 |
|
|
| | | | | | | |
| | Amortized Cost/Carrying Cost | | Estimated Fair Value |
| Amounts maturing in less than 1 year | $ | 365.3 |
| | $ | 365.2 |
|
| Amounts maturing in 1 - 5 years | 143.5 |
| | 143.2 |
|
| Amounts maturing in more than 5 years | 1.0 |
| | 0.7 |
|
| Total debt available-for-sale securities | $ | 509.8 |
| | $ | 509.1 |
|
As of July 2, 2016,June 29, 2019, the Company’s available-for-sale securities wereare as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Amortized Cost/ Carrying Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Available-for-sale securities: | |
| | |
| | |
| | |
|
| Asset-backed securities | $ | 0.9 |
| | $ | — |
| | $ | (0.3 | ) | | $ | 0.6 |
|
| Total available-for-sale securities | $ | 0.9 |
| | $ | — |
| | $ | (0.3 | ) | | $ | 0.6 |
|
|
| | | | | | | | | | | | | | | |
| | Amortized Cost/ Carrying Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value |
| Debt securities: | |
| | |
| | |
| | |
|
| U.S. treasuries | $ | 46.1 |
| | $ | — |
| | $ | — |
| | $ | 46.1 |
|
| U.S. agencies | 24.9 |
| | — |
| | — |
| | 24.9 |
|
| Municipal bonds and sovereign debt instruments | 2.0 |
| | — |
| | — |
| | 2.0 |
|
| Asset-backed securities | 50.4 |
| | 0.1 |
| | (0.3 | ) | | 50.2 |
|
| Corporate securities | 224.5 |
| | 0.2 |
| | (0.1 | ) | | 224.6 |
|
| Total debt securities | 347.9 |
| | 0.3 |
| | (0.4 | ) | | 347.8 |
|
| Marketable equity securities | 62.1 |
| | 109.2 |
| | — |
| | 171.3 |
|
| Total available-for-sale securities | $ | 410.0 |
| | $ | 109.5 |
| | $ | (0.4 | ) | | $ | 519.1 |
|
As of July 2, 2016, ofJune 29, 2019, the total estimated fair value of debt securities, $36.1 million was classified as cash equivalents, $311.1 million was classified as short-term investments and $0.6 million was classified as other non-current assets.
Marketable equity securities consisted of the Company’s ownership of 7.2 million shares of Lumentum common stock remaining as of July 2, 2016 in connection with the Separation. These securities are stated at fair value, with change in unrealized gains and losses reported in other comprehensive income, net of tax and are classified as short-term investments on the Consolidated Balance Sheet as of July 2, 2016 at $171.3 million. The Company sold 4.5 million Lumentum common shares during the third and fourth quarters of fiscal 2016 and recognized gross realized gain of $71.5 million, reflected in "Gain on sale of investments" in the Company’s Consolidated Statements of Operations. The sale resulted in $2.0 million tax effect related to the intraperiod tax allocation rules.
In addition to the amounts presented above, as of July 2, 2016,June 29, 2019, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $2.4$1.5 million, of which $0.3$0.4 million was invested in debt securities, $0.8$0.3 million was invested in money market instruments and funds and $1.3$0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
As of July 2, 2016,June 29, 2019, the Company’s total gross unrealized losses on available-for-sale securities, aggregated by investment type, of investment instrument, wereare as follows (in millions):
|
| | | | | | | | | | | |
| | Less than 12 Months | | Greater than 12 Months | | Total |
| Asset-backed securities | $ | — |
| | $ | (0.3 | ) | | $ | (0.3 | ) |
| Total gross unrealized losses | $ | — |
| | $ | (0.3 | ) | | $ | (0.3 | ) |
|
| | | | | | | | | | | |
| | Less than 12 Months | | Greater than 12 Months | | Total |
| Asset-backed securities | $ | — |
| | $ | (0.3 | ) | | $ | (0.3 | ) |
| Corporate securities | (0.1 | ) | | — |
| | (0.1 | ) |
| Total gross unrealized losses | $ | (0.1 | ) | | $ | (0.3 | ) | | $ | (0.4 | ) |
Fair Value Measurements
Assets measured at fair value as of July 1, 2017 and July 2, 2016 are summarized below (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement as of | | Fair Value Measurement as of |
| | July 1, 2017 | | July 2, 2016 |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
|
| Debt available-for-sale securities: | |
| | |
| | |
| | |
| | |
| | |
|
| U.S. treasuries | $ | 56.7 |
| | $ | 56.7 |
| | $ | — |
| | $ | 46.1 |
| | $ | 46.1 |
| | $ | — |
|
| U.S. agencies | 44.9 |
| | — |
| | 44.9 |
| | 24.9 |
| | — |
| | 24.9 |
|
| Municipal bonds and sovereign debt instruments | 4.4 |
| | — |
| | 4.4 |
| | 2.0 |
| | — |
| | 2.0 |
|
| Asset-backed securities | 71.1 |
| | — |
| | 71.1 |
| | 50.2 |
| | | | 50.2 |
|
| Corporate securities | 326.0 |
| | — |
| | 326.0 |
| | 224.6 |
| | — |
| | 224.6 |
|
| Certificate of deposits | 6.0 |
| | — |
| | 6.0 |
| | — |
| | | | |
| Total debt available-for-sale securities | 509.1 |
| | 56.7 |
| | 452.4 |
| | 347.8 |
| | 46.1 |
| | 301.7 |
|
| Marketable equity securities | — |
| | — |
| | — |
| | 171.3 |
| | 171.3 |
| | — |
|
| Money market funds | 726.4 |
| | 726.4 |
| | — |
| | 274.4 |
| | 274.4 |
| | — |
|
| Trading securities | 2.0 |
| | 2.0 |
| | — |
| | 2.4 |
| | 2.4 |
| | — |
|
| Foreign currency forward contracts | 7.3 |
| | — |
| | 7.3 |
| | — |
| | | | |
| Total assets (1) | $ | 1,244.8 |
| | $ | 785.1 |
| | $ | 459.7 |
| | $ | 795.9 |
| | $ | 494.2 |
| | $ | 301.7 |
|
| | | | | | | | | | | | |
| Liability: | | | | | | | | | | | |
| Foreign currency forward contracts | 1.3 |
| | — |
| | 1.3 |
| | — |
|
| — |
| | — |
|
| Total liabilities (2) | $ | 1.3 |
| | $ | — |
| | $ | 1.3 |
| | $ | — |
|
| $ | — |
|
| $ | — |
|
| |
(1) | $789.2 million in cash and cash equivalents, $432.2 million in short-term investments, $11.0 million in restricted cash, $7.3 million in other current assets, and $5.1 million in other non-current assets on the Company’s Consolidated Balance Sheets as of July 1, 2017. $295.4 million in cash and cash equivalents, $484.7 million in short-term investments, $11.3 million in restricted cash, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of July 2, 2016. |
| |
(2) | $1.3 million in other current liabilities on the Company’s Consolidated Balance Sheets as of July 1, 2017. |
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
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 market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions about the factors that market participants would use in valuing the asset or liability.
The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.
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, and foreign currency forward contracts. 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 on inputs that are unobservable and significant to the overall fair value measurement. As of July 1, 2017 and July 2, 2016, the Company did not hold any Level 3 investment securities.
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 July 1, 2017,June 27, 2020, the Company had forward contracts that were effectively closed but not settled with the counterparties by year end. Therefore, the fair value of these contracts of $7.3$2.2 million and $1.3$1.5 million is reflected as prepayments and other current assets and other current liabilities, inrespectively. As of June 29, 2019, the Consolidated Balance Sheetsfair value of these contracts of $1.2 million and $4.0 million is reflected as of July 1, 2017,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 year end; therefore, the fair value of the contracts is not significant. As of July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, the notional amounts of the forward contracts thethat Company held to purchase foreign currencies were $134.3$146.4 million and $110.0$117.8 million, respectively, and the notional amounts of forward contracts thethat Company held to sell foreign currencies were $25.4$22.0 million and $55.2$31.3 million, respectively.
The change in the fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The cash flows related to the settlement of foreign currency forward contracts are classified as operating activities. The foreign exchange forward contracts earned a gainincurred loss of $3.3$0.8 million and incurred a loss of $9.6$6.9 million for the years ended July 1, 2017June 27, 2020 and July 2, 2016June 29, 2019, respectively.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 8. GoodwillFair Value Measurements
Fair Value Measurements
The Company’s assets and liabilities measured at fair value for the periods presented are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets: | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| Debt available-for-sale securities: | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| Asset-backed securities | $ | 0.5 |
| | $ | — |
| | $ | 0.5 |
| | $ | — |
| | $ | 0.6 |
| | $ | — |
| | $ | 0.6 |
| | $ | — |
|
| Total debt available-for-sale securities | 0.5 |
| | — |
| | 0.5 |
| | — |
| | 0.6 |
| | — |
| | 0.6 |
| | — |
|
| Money market funds | 334.6 |
| | 334.6 |
| | — |
| | — |
| | 322.9 |
| | 322.9 |
| | — |
| | — |
|
| Trading securities | 1.4 |
| | 1.4 |
| | — |
| | — |
| | 1.5 |
| | 1.5 |
| | — |
| | — |
|
Foreign currency forward contracts (1) | 2.2 |
| | — |
| | 2.2 |
| | — |
| | 1.2 |
| | — |
| | 1.2 |
| | — |
|
Total assets (2) | $ | 338.7 |
| | $ | 336.0 |
| | $ | 2.7 |
| | $ | — |
| | $ | 326.2 |
| | $ | 324.4 |
| | $ | 1.8 |
| | $ | — |
|
| | | | | | | | | | | | | | | | |
| Liability: | | | | | | | | | | | | | | | |
Foreign currency forward contracts (3) | $ | 1.5 |
| | $ | — |
| | $ | 1.5 |
| | $ | — |
| | $ | 4.0 |
| | $ | — |
| | $ | 4.0 |
| | $ | — |
|
Contingent consideration (4) | 9.9 |
| | — |
| | — |
| | 9.9 |
| | 38.4 |
| | — |
| | — |
| | 38.4 |
|
| Total liabilities | $ | 11.4 |
| | $ | — |
| | $ | 1.5 |
| | $ | 9.9 |
| | $ | 42.4 |
| | $ | — |
| | $ | 4.0 |
| | $ | 38.4 |
|
| |
(1) | $2.2 million and $1.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019, respectively. |
| |
(2) | Includes as of June 27, 2020, $327.2 million in cash and cash equivalents, $1.4 million in short-term investments, $3.4 million in restricted cash, $2.2 million in prepayments and other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets. Includes as of June 29, 2019, $315.5 million in cash and cash equivalents, $1.5 million in short-term investments, $3.5 million in restricted cash, $1.2 million in prepayments and other current assets and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets. |
| |
(3) | Includes $1.5 million and $4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019, respectively. |
| |
(4) | Includes $9.4 million and $37.7 million in other non-current liabilities and $0.5 million and $0.7 million in other current liabilities as of June 27, 2020 and June 29, 2019, respectively. |
The Company’s Level 3 liabilities as of June 27, 2020, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2020 and 2019. As of June 27, 2020 and June 29, 2019, the aggregate fair value of contingent consideration was $9.9 million and $38.4 million, respectively. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in the Selling, General and Administrative expense of the Consolidated Statements of Operations.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table presents theprovides a reconciliation of changes in goodwill allocated tofair value of the Company’s reportable segments Level 3 liabilities for the year ended June 27, 2020 and June 29, 2019, as follows (in millions)millions):
|
| | | | | | | | | | | | | | | |
| | Network Enablement | | Service Enablement | | Optical Security and Performance Products | | Total |
| Balance as of June 27, 2015 (1) | $ | 154.5 |
| | $ | 92.7 |
| | $ | 8.3 |
| | $ | 255.5 |
|
| Goodwill allocation - WaveReady (3) | (6.0 | ) | | — |
| | — |
| | $ | (6.0 | ) |
| Currency translation and other adjustments | (4.7 | ) | | (1.3 | ) | | — |
| | $ | (6.0 | ) |
| Goodwill impairment charge | — |
| | (91.4 | ) | | — |
| | (91.4 | ) |
| Balance as of July 2, 2016 (2) | $ | 143.8 |
|
| $ | — |
|
| $ | 8.3 |
|
| $ | 152.1 |
|
| Currency translation | (0.5 | ) | | — |
| | — |
| | $ | (0.5 | ) |
| Balance as of July 1, 2017 (4) | $ | 143.3 |
| | $ | — |
| | $ | 8.3 |
| | $ | 151.6 |
|
|
| | | | | | | | | | | |
| | RPC | | Other (1) | | Total |
| Balance: June 30, 2018 | $ | — |
| | $ | — |
| | $ | — |
|
| Additions to Contingent Consideration | 36.2 |
| | 8.1 |
| | 44.3 |
|
| Change in Fair Value measurement | (5.9 | ) | | — |
| | (5.9 | ) |
| Balance: June 29, 2019 | $ | 30.3 |
| | $ | 8.1 |
| | $ | 38.4 |
|
| Additions to Contingent Consideration | — |
| | 3.7 |
| | 3.7 |
|
| Change in Fair Value measurement | (29.6 | ) | | (1.9 | ) | | (31.5 | ) |
| Payments of Contingent Consideration | (0.7 | ) | | — |
| | (0.7 | ) |
| Balance June 27, 2020 | $ | — |
|
| $ | 9.9 |
|
| $ | 9.9 |
|
| |
| (1) | SeeNote 5. Acquisitions and of the Notes to the Company’s Consolidated Financial Statements for more detail. |
In connection with the acquisition of RPC, the Company agreed to pay RPC’s Securityholders up to $53.0 million over the subsequent 4-year period based on subsequent achievement of gross profit targets agreed upon at the time of close. The fair value of earn-out payments at the date of acquisition was $36.2 million.
As of June 27, 2020, the fair value of RPC related earn-out liability was remeasured to $0 million. The decrease in fair value of the earn-out liability of $29.6 million in fiscal 2020 was primarily due to the lower-than-expected rate of adoption by Android customers, which was further compounded by the macroeconomic impact of COVID-19. During fiscal 2020, the Company made a earn-out payment to RPC’s Securityholders in the amount of $0.7 million. As of June 29, 2019, the fair value was remeasured to $30.3 million. The decrease in fair value of the earn-out liability of $5.9 million in fiscal 2019 was primarily due to revised projected forecast of RPC, primarily driven by rate of adoption assumptions.
Note 9. Goodwill
Changes in the carry value of goodwill allocated segment are as follows (in millions):
|
| | | | | | | | | | | | | | | |
| | Network Enablement | | Service Enablement | | Optical Security and Performance Products | | Total |
Balance as of June 30, 2018 (1) | $ | 328.0 |
| | $ | — |
| | $ | 8.3 |
| | $ | 336.3 |
|
Acquisitions (2) | 12.2 |
| | — |
| | 33.9 |
| | 46.1 |
|
| Other | 3.7 |
| | — |
| | — |
| | 3.7 |
|
| Currency translation and other adjustments | (5.0 | ) | | — |
| | — |
| | (5.0 | ) |
Balance as of June 29, 2019 (3) | $ | 338.9 |
|
| $ | — |
|
| $ | 42.2 |
|
| $ | 381.1 |
|
Acquisitions (2) | — |
| | 4.3 |
| | — |
| | 4.3 |
|
| Currency translation and other adjustments | (4.0 | ) | | — |
| | — |
| | $ | (4.0 | ) |
Balance as of June 27, 2020 (4) | $ | 334.9 |
| | $ | 4.3 |
| | $ | 42.2 |
| | $ | 381.4 |
|
| |
| (1) | Gross goodwill balances for NE, SE and OSP were $456.4 million, $273.9 million and $92.8 million, respectively as of June 27, 2015. Accumulated impairment for NE, SE and OSP was $301.9 million, $181.2 million and $84.5 million, respectively as of June 27, 2015. |
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(2) | Gross goodwill balances for NE, SE and OSP were $445.7$629.9 million, $272.6 million and $92.8 million, respectively as of July 2, 2016.June 30, 2018. Accumulated impairment for NE, SE and OSP was $301.9 million, $272.6 million and $84.5 million, respectively as of July 2, 2016.June 30, 2018. |
| |
| (2) | See “Note 5. Acquisitions” of the Notes to Consolidated Financial Statement for additional information related to the Company’s acquisitions. |
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| (3) | Amount represents a release of the relative fair value of goodwill in our NE reporting unit related to the WaveReady products line, which is now a part of Lumentum as of the Separation Date. Refer to “Note 3. Discontinued Operations” for more information about the Separation. |
| |
(4) | Gross goodwill balances for NE, SE and OSP were $445.2$640.8 million, $272.6 million and $92.8$126.7 million, respectively as of July 1, 2017.June 29, 2019. Accumulated impairment for NE, SE and OSP was $301.9 million, $272.6 million and $84.5 million, respectively as of July 1, 2017.June 29, 2019. |
| |
| (4) | Gross goodwill balances for NE, SE and OSP were $636.8 million, $276.9 million and $126.7 million, respectively as of June 27, 2020. Accumulated impairment for NE, SE and OSP was $301.9 million, $272.6 million and $84.5 million, respectively as of June 27, 2020. |
The following table presents gross goodwill and aggregate impairment balances for the fiscal years ended July 1, 2017, and July 2, 2016 (in millions):
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|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
|
| | | | | | | |
| | years ended |
| | July 1, 2017 | | July 2, 2016 |
| Gross goodwill balance | $ | 810.6 |
| | $ | 811.1 |
|
| Accumulated impairment losses | (659.0 | ) | | (659.0 | ) |
| Net goodwill balance | $ | 151.6 |
| | $ | 152.1 |
|
Impairment of Goodwill
The Company reviewstests goodwill at the reporting unit level for impairment annually, during the fourth quarter of theeach fiscal year, or more frequently if events or circumstances indicate that an impairment lossthe asset may have occurred.be impaired. The Company determined that, based on its organizational structure and the financial information that is provided to and reviewed by managementthe Company’s Chief Operating Decision Maker (CODM) during fiscal 20172020, 2019 and 2016,2018 and its reporting units were NE, SE and OSP.
Fiscal 2017
During the fourth quarterNo indications of fiscal 2017, the Company early adopted the new authoritative guidance that eliminated the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, any impairment charge would be based on the excess of a reporting unit's carrying amount over its fair value.
During the fourth quarter of fiscal 2017, the Company performed the quantitative goodwill impairment test in accordance with the authoritative guidance for impairment test of the NE reporting unit. The fair value of NE was determined based on a
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. Based on the first step of the analysis, the Company determined that the fair value of NE is above its carrying amount.
The Company reviewed goodwill of the OSP reporting unit under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of OSP exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of key factors, including changes in industry and competitive environment, market capitalization, earnings multiples, budgeted-to-actual operating performance from prior year, and consolidated company stock price and performance. As such, it was not necessary to perform the first step of the goodwill impairment test at this time.
The Company recorded no impairment charge in accordance with its annual impairment test.
Fiscal 2016
Interim Review
During the first quarter of fiscal 2016, the Company released the relative fair value of goodwill in its NE reporting unit related to the WaveReady products line which became part of Lumentum as of the Separation Date. In connection with this change in the NE reporting unit, the Company performed a goodwill impairment test for its NE reporting unit under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of the NE reporting unit exceeded its carrying amount. There were no events or changes in circumstances which triggered an impairment review for the remaining reporting units.
Annual Review
During the fourth quarter the Company performed the goodwill impairment test for all its reporting units under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance. Other than noted above, there were no other triggering events during the interim periods of fiscal 2016. Thus, the Company reviewed goodwill for impairment during the fourth quarter, in line with the completion of its annual operating planidentified for fiscal 2017.
Under the first step of the authoritative guidance for impairment testing, the fair value of the NEyears ending on June 27, 2020, June 29, 2019 and OSP reporting units was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. The market approach estimates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Due to lack of comparability with its peer companies, the fair value of the SE reporting unit was determined only utilizing the income approach. The Company assumed a cash flow period of 10 years, long-term annual growth rates of 3.0% to 7.0%, discount rates of 14.0% to 17.0% and terminal value growth rates of 3.0% to 5.0%. The Company believes that the assumptions and rates used in the impairment test are reasonable, but they are judgmental, and variations in any of the assumptions or rates could result in materially different calculations of impairment amounts. The determination of the estimated fair value of goodwill required the use of significant unobservable inputs which are considered Level 3 fair value measurements. The sum of the fair values of the reporting units was reconciled to the Company’s current market capitalization plus an estimated control premium. Based on the first step of the authoritative guidance for impairment testing, the Company concluded that the fair value of all reporting units, except SE, were in excess of their carrying value. The fair value of the SE reporting unit was lower than the carrying value based on the completion of its annual operating plan for fiscal 2017 in the fourth quarter which revealed a longer investment cycle being needed for certain growth products within SE, coupled with a decline in the reporting unit’s revenue and operating profitability in fiscal 2016 as compared to fiscal 2015 when goodwill was last tested for impairment.
The second step of the goodwill impairment test involved performing a hypothetical purchase price allocation to determine the implied fair value of the SE reporting unit’s goodwill. This process is complex and required judgment in the development of assumptions that affected the determination of the fair value of the SE reporting unit’s individual assets and liabilities, including previously unrecognized intangible assets. Based on the step two analysis, the Company determined that all of the SE goodwill balance of $91.4 million was impaired and therefore recorded an impairment charge in the fourth quarter of fiscal 2016 in the accompanying Consolidated Statements of Operations. Prior to completing the goodwill impairment test, the Company tested the recoverability of the SE long-lived assets (other than goodwill) and concluded that such assets were not impaired.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Fiscal 2015
Interim Review
As the Company reorganized its NSE segment into two reportable segments, NE and SE, during the first quarter of fiscal 2015, goodwill allocated to the new NE and SE reporting units was reviewed under the two-step quantitative goodwill impairment test in accordance with the authoritative guidance.
The fair value of the new reporting units was determined based on a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on multiples of earnings or revenue, or a similar performance measure. Based on the first step of the analysis, the Company determined that the fair value of each reporting unit is significantly above its carrying amount. As such, the Company was not required to perform step two of the analysis. The Company recorded no impairment charge as a result of the interim period impairment test performed during the three months ended September 27, 2014. There were no events or changes in circumstances which triggered an impairment review for the remaining reporting units.
Annual Review
During the fourth quarter, the Company reviewed the goodwill of all its reporting units under the qualitative assessment of the authoritative guidance for impairment testing. The Company concluded that it was more likely than not that the fair value of the reporting units with goodwill exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of key factors, including changes in industry and competitive environment, budgeted-to-actual operating performance from prior year, and consolidated company stock price and performance. As such, it was not necessary to perform the two-step goodwill impairment test at that time and the Company recorded no impairment charge as a result of its annual impairment test.June 30, 2018.
Note 9.10. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles as of June 27, 2020, and June 29, 2019, (in millions):
|
| | | | | | | | | | | | | |
| As of June 27, 2020 | Weighted-Average Remaining Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Acquired developed technology | 3.7 years | | $ | 437.1 |
| | $ | (341.6 | ) | | $ | 95.5 |
|
| Customer relationships | 2.6 years | | 194.7 |
| | (154.1 | ) | | 40.6 |
|
Other (1) | 2.0 years | | 35.7 |
| | (23.7 | ) | | 12.0 |
|
| Total intangibles | | | $ | 667.5 |
| | $ | (519.4 | ) | | $ | 148.1 |
|
|
| | | | | | | | | | | |
| As of July 1, 2017 | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Acquired developed technology | $ | 369.3 |
| | $ | (352.0 | ) | | $ | 17.3 |
|
| Customer relationships | 94.9 |
| | (81.3 | ) | | 13.6 |
|
| Other (1) | 9.9 |
| | (9.7 | ) | | 0.2 |
|
| Total intangibles | $ | 474.1 |
| | $ | (443.0 | ) | | $ | 31.1 |
|
|
| | | | | | | | | | | | | |
| As of June 29, 2019 | Weighted-Average Remaining Useful Life | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Acquired developed technology | 4.7 years | | $ | 437.0 |
| | $ | (311.1 | ) | | $ | 125.9 |
|
| Customer relationships | 3.1 years | | 193.7 |
| | (126.3 | ) | | 67.4 |
|
Other (1) | 3.3 years | | 36.1 |
| | (17.8 | ) | | 18.3 |
|
| Total intangibles | | | $ | 666.8 |
| | $ | (455.2 | ) | | $ | 211.6 |
|
|
| | | | | | | | | | | |
| As of July 2, 2016 | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Acquired developed technology | $ | 369.3 |
| | $ | (337.3 | ) | | $ | 32.0 |
|
| Customer relationships | 95.6 |
| | (68.0 | ) | | 27.6 |
|
| Other (1) | 10.8 |
| | (10.5 | ) | | 0.3 |
|
| Total intangibles | 475.7 |
| | (415.8 | ) | | 59.9 |
|
| |
| (1) | Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names. |
Fiscal 2016
In connection with the AW acquisition, the Company recorded an IPR&D asset, at its fair value and subsequently accounts for it as an indefinite-lived asset until completion or abandonment of the associated research and development projects. During the firstthird quarter of fiscal 2016,2019 the CompanyIPR&D activities were completed its in-process research and development (“IPR&D”) project relatedtransferred to the fiscal 2014 acquisition of Trendium. Accordingly, $1.8 million was transferred from indefinite life intangible assets to acquired developed technology, intangible assets with aan estimated useful life of thirty-six months.6 years. Refer to “Note 5. Acquisitions” for more information related to acquisitions.
Fiscal 2015
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
During fiscal 2015, the Company completed its IPR&D project related to the fiscal 2014 acquisition of Network Instruments. Accordingly, $1.7 million was transferred from indefinite life intangible assets to acquired developed technology intangible assets2020, 2019 and the Company began amortizing over its useful life of fifty-two months. Also during fiscal 2015,2018, the Company recorded a $3.6$67.8 million, IPR&D impairment charge for an ongoing project related to the fiscal 2014 acquisition of Trendium in accordance with the authoritative accounting guidance. The charge was recorded to Research and development (“R&D”) expense in the Consolidated Statements of Operations.
During fiscal 2017, 2016 and 2015, the Company recorded $28.3 million, $31.9 $72.5 million and $51.4$47.7 million, respectively, of amortization related to acquired developed technology and other intangibles. The following table presents details of the Company’s amortization (in millions):
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| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Cost of revenues | $ | 32.7 |
| | $ | 34.4 |
| | $ | 26.7 |
|
| Operating expense | 35.1 |
| | 38.1 |
| | 21.0 |
|
| Total | $ | 67.8 |
| | $ | 72.5 |
| | $ | 47.7 |
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|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
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| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Cost of revenues | $ | 14.3 |
| | $ | 17.3 |
| | $ | 31.9 |
|
| Operating expense | 14.0 |
| | 14.6 |
| | 19.5 |
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| Total | $ | 28.3 |
| | $ | 31.9 |
| | $ | 51.4 |
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Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of July 1, 2017,June 27, 2020, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
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| | | |
| Fiscal Years | |
| 2021 | $ | 63.9 |
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| 2022 | 37.8 |
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| 2023 | 24.1 |
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| 2024 | 10.2 |
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| 2025 | 6.6 |
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| Thereafter | 5.5 |
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| Total amortization | $ | 148.1 |
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| | | |
| Fiscal Years | |
| 2018 | $ | 20.1 |
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| 2019 | 9.3 |
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| 2020 | 1.4 |
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| 2021 | 0.3 |
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| Total amortization | $ | 31.1 |
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Note 10.11. Debt
As of July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component, net of unamortized debt discounts and issuance cost, of the Senior Convertible Notes as discussed below. The following table presents the carrying amounts of the liability and equity components (in millions):
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| | | | | | | |
| | June 27, 2020 | | June 29, 2019 |
| Principal amount of 1.00% Senior Convertible Notes | $ | 460.0 |
| | $ | 460.0 |
|
| Principal amount of 1.75% Senior Convertible Notes | 225.0 |
| | 225.0 |
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| Unamortized discount of Senior Convertible Notes liability component | (79.1 | ) | | (99.8 | ) |
| Unamortized Senior Convertible Notes debt issuance cost | (5.0 | ) | | (6.4 | ) |
| Carrying amount of Senior Convertible Notes liability component | $ | 600.9 |
| | $ | 578.8 |
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| | | | |
Carrying amount of Senior Convertible Notes equity component (1) | $ | 136.8 |
| | $ | 136.8 |
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|
| | | | | | | |
| | July 1, 2017 | | July 2, 2016 |
| Principal amount of 0.625% Senior Convertible Notes | $ | 610.0 |
| | $ | 650.0 |
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| Principal amount of 1.00% Senior Convertible Notes | 460.0 |
| | — |
|
| Unamortized discount of liability component | (129.4 | ) | | (61.7 | ) |
| Unamortized debt issuance cost (1) | (9.2 | ) | | (5.0 | ) |
| Carrying amount of liability component | $ | 931.4 |
| | $ | 583.3 |
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| | | | |
| Carrying amount of equity component (2) | $ | 229.7 |
| | $ | 134.4 |
|
| |
| (1) | In April 2015, the Financial Accounting Standards Board ("FASB") issued new authoritative guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding liability, consistent with debt discounts or premiums. This guidance was effective for the Company in the first quarter of fiscal 2017 for its convertible debt, and was applied retrospectively for all periods reported. |
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(2) | Included in additional paid-in-capital on the Consolidated Balance Sheets. |
Revolving Credit Facility
On May 5, 2020, 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 Company wasCredit Agreement provides for a $300 million senior secured revolving credit facility, which matures on March 1, 2023. The Credit Agreement also provides that, under certain circumstances, we may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $200 million plus additional amounts so long as our secured net leverage ratio, determined on a pro forma basis does not exceed 1.50:1.00. 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 our assets.
Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at our election, LIBOR plus a margin of 1.75% to 2.50% per annum, or a specified base rate plus a margin of 0.75% to 1.50%, in compliance with all debt covenantseach case, depending on our consolidated secured leverage ratio. We are required to pay commitment fee on the unutilized portion of the facility which ranges between 0.30% and held no short term debt as0.40% per annum depending on our consolidated secured leverage ratio. As of July 1, 2017 and July 2, 2016.June 27, 2020, we had 0 amounts outstanding under the Credit Agreement.
1.00% Senior Convertible Notes (“2024 Notes”)
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Short-term Debt
As of June 27, 2020, the Company had short-term debt in the amount of $2.8 million, assumed as part of an acquisition completed during the period.
1.75% Senior Convertible Notes (2023 Notes)
On May 29, 2018, the Company issued $225.0 million aggregate principal amount of 1.75% Senior Convertible Notes due 2023 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $155.5 million aggregate principal of the 2023 Notes to certain holders of the 2033 Notes in exchange for $151.5 million principal of the 2033 Notes ( the Exchange Transaction) and issued and sold $69.5 million aggregate principal amount of the 2023 Notes in a private placement to accredited institutional buyers (the Private Placement). The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.3% based on the 5-year swap rate plus credit spread as of the issuance date. As of June 27, 2020, the expected remaining term of the 2023 Notes is 2.9 years.
The proceeds from the 2023 Notes Private Placement amounted to $67.3 million after issuance costs. The 2023 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.75% payable in cash semi-annually in arrears on June 1st and December 1st of each year, beginning December 1, 2018. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.
Under certain circumstances and during certain periods, the 2023 Notes may be converted at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The initial conversion price is $13.94 per share, representing a 37.5% premium to the closing sale price of the Company’s common stock on the pricing date, May 22, 2018, which will be subject to customary anti-dilution adjustments. Holders may convert the 2023 Notes at any time on or prior to the close of business on the business day immediately preceding March 1, 2023 in multiples of $1,000 principal amount, under the following circumstances:
on any date during any calendar quarter beginning after September 30, 2018 (and only during such calendar quarter) if the closing price of the Company’s common stock was more than 130% of the then current conversion price for at least 20 trading days during the 30 consecutive trading-day period ending the last trading day of the previous calendar quarter;
upon the occurrence of specified corporate events;
if the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the indenture of the 2023 Notes); or
during the 5 consecutive business-day period immediately following any 10 consecutive trading-day period in which the trading price per $1,000 principal amount of the 2023 Notes for each day of such 10 consecutive trading-day period was less than 98% of the product of the closing sale price of the Company’s common stock and the applicable conversion rate on such date.
During the periods from, and including, March 1, 2023, until the close of business on the business day immediately preceding June 1, 2023, holders may convert the 2023 Notes at any time, regardless of the foregoing circumstances.
Holders of the 2023 Notes may require the Company to purchase all or a portion of the 2023 Notes upon the occurrence of a fundamental change at a price equal to 100% of the principal amount of the 2023 Notes to be purchased, plus accrued and unpaid interest to, but excluding the fundamental repurchase date. The Company may redeem all or a portion of the 2023 Notes for cash at any time on or after June 1, 2021, at a redemption price equal to 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date under certain conditions.
In accordance with the authoritative accounting guidance, the Company separated the 2023 Notes into liability and equity components. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2023 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.3% over the period from the issuance date through June 1, 2023 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $190.1 million, and the equity component, or debt discount, of the 2023 Notes was determined to be $34.9 million.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
In connection with the issuance of the 2023 Notes, the Company incurred $2.2 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $1.9 million and the equity issuance costs, attributable to the equity component of $0.3 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through June 1, 2023. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of June 27, 2020, the unamortized portion of the debt issuance costs related to the 2023 Notes was $1.1 million, which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
Based on quoted market prices as of June 27, 2020 and June 29, 2019, the fair value of the 2023 Notes was approximately $251.4 million and $261.3 million, respectively. The 2023 Notes are classified within Level 2 as they are not actively traded in markets.
1.00% Senior Convertible Notes (2024 Notes)
On March 3, 2017, the Company issued $400 million aggregate principal amount of 1.00% Senior Convertible Notes due 2024 (the “2024 Notes”) 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 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00% payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased.
Under certain circumstances and during certain periods, the 2024 Notes may be converted at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The initial conversion price is $13.22 per share, representing a 32.5% premium to the closing sale price of the Company’s common stock on the pricing date, February 27, 2017, which will be subject to customary anti-dilution adjustments.
The 2024 Notes may be converted at any time on or prior to the close of business on the business day immediately preceding December 1, 2023, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances: (i) on any date during any calendar quarter beginning after June 30, 2017 (and only during such calendar quarter) if the closing price of Viavi’sVIAVI’s common stock was more than 130% of the then current conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period ending on the last trading day of the previous calendar quarter, (ii)if the Company distributes to all or substantially all holders of ourits common stock rights or warrants (other than pursuant to a stockholder rights plan) entitling them to purchase, for a period of 45 calendar days or less, shares of ourVIAVI’s common stock at a price less than the average closing sale price of ourVIAVI’s common stock for the ten10 trading days preceding the declaration date for such distribution, (iii) if the Company distributes to all or substantially all holders of ourits common stock, cash or other assets, debt securities or rights to purchase our securities (other than pursuant to a stockholder rights plan), at a per share value exceeding 10% of the closing sale price of ourVIAVI’s common stock on the trading day preceding the declaration date for such distribution, (iv) if the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the Indenture), or (v) during the five5 consecutive business-day period immediately following any 10 consecutive trading-day period in which the trading price per $1,000 principal amount of the Notes for each day during such 10 consecutive trading-day period was less than 98% of the product of the closing sale price of Viavi’sVIAVI’s common stock and the applicable conversion rate on such date. During the periods from, and including, December 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders of the Notes may convert the Notes regardless of the circumstances described in the immediately preceding sentence.
Holders of the 2024 Notes may require ViaviVIAVI to repurchase for cash all or a portion of the Notes upon the occurrence of a fundamental change (as defined in the Indenture) at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture provides for customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable, subject to certain conditions set forth in the Indenture. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
In accordance with the authoritative accounting guidance, the Company separated the 2024 Notes into liability and equity components. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 4.8% based on the 7-year swap rate plus credit spread as of the issuance date. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2024 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 4.8% over the period from the issuance date through March 1, 2024 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $358.1 million, and the equity component, or debt discount, of the 2024 Notes was determined to be $101.9 million. As of July 1, 2017,June 27, 2020, the expected remaining term of the 2024 Notes is 6.73.7 years.
In connection with the issuance of the 2024 Notes, the Company incurred $8.9 million of issuance costs, which were bifurcated into the debt issuance costs (attributable to the liability component) of $6.9 million and the equity issuance costs (attributable to the equity component) of $2.0 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through March 1, 2024. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of July 1, 2017,June 27, 2020, the unamortized
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
portion of the debt issuance costs related to the 2024 Notes was $6.6$3.9 million, which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
Based on quoted market prices as of July 1, 2017,June 27, 2020 and June 29, 2019, the fair value of the 2024 Notes was approximately $481.7 million.$523.3 million and $540.8 million, respectively. The 2024 Notes are classified within Level 2 as they are not actively traded in markets.
0.625% Senior Convertible Notes (“2033 Notes”)
On August 21, 2013, the Company issued $650.0 million aggregate principal amount of 0.625% Senior Convertible Notes due 2033 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the 2033 Notes amounted to $636.3 million after issuance costs. The 2033 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 0.625% payable in cash semi-annually in arrears on February 15 and August 15 of each year. The 2033 Notes mature on August 15, 2033 unless earlier converted, redeemed or repurchased.
Under certain circumstances and during certain periods, the 2033 Notes may be converted at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The initial conversion price is $18.83 per share, representing a 40.0% premium to the closing sale price of the Company’s common stock on the pricing date, August 15, 2013, which will be subject to customary anti-dilution adjustments. Holders may convert the 2033 Notes at any time on or prior to the close of business on the business day immediately preceding February 15, 2033, and other than during the period from, and including, February 15, 2018 until the close of business on the business day immediately preceding August 20, 2018, in multiples of $1,000 principal amount, under the following circumstances:
on any date during any calendar quarter beginning after December 31, 2013 (and only during such calendar quarter) if the closing price of the Company’s common stock was more than 130% of the then current conversion price for at least 20 trading days during the 30 consecutive trading-day period ending the last trading day of the previous calendar quarter;
if the 2033 Notes are called for redemption;
upon the occurrence of specified corporate events;
if the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the indenture of the 2033 Notes); or
during the five consecutive business-day period immediately following any 10 consecutive trading-day period in which the trading price per $1,000 principal amount of the 2033 Notes for each day of such 10 consecutive trading-day period was less than 98% of the product of the closing sale price of the Company’s common stock and the applicable conversion rate on such date.
During the periods from, and including, February 15, 2018 until the close of business on the business day immediately preceding August 20, 2018 and from, and including, February 15, 2033 until the close of business on the business day immediately preceding the maturity date, holders may convert the 2033 Notes at any time, regardless of the foregoing circumstances.
In the fourth quarter of fiscal 2015, holders of the 2033 Notes were given notice of the planned separation of the Lumentum business and the right to convert any debentures they own from the date of notice through the end of the business day preceding the ex-dividend date. No holders of the 2033 Notes exercised the conversion right before it expired.
Following the separation of the Lumentum business on August 1, 2015, the conversion price per share was adjusted pursuant to the terms of the 2033 Notes relating to the occurrence of a spin-off event. Effective as of the end of the business day on August 17, 2015, the initial conversion price per share was adjusted to $11.28 per share of the Company’s common stock traded on NASDAQ under the ticker symbol “VIAV.”
Holders of the 2033 Notes may require the Company to purchase all or a portion of the 2033 Notes on each of August 15, 2018, August 15, 2023 and August 15, 2028, or upon the occurrence of a fundamental change, in each case, at a price equal to 100% of the principal amount of the 2033 Notes to be purchased, plus accrued and unpaid interest to, but excluding the purchase date. The Company may redeem all or a portion of the 2033 Notes for cash at any time on or after August 20, 2018, at a redemption price equal to 100% of the principal amount of the 2033 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
In accordance with the authoritative accounting guidance, the Company separated the 2033 Notes into liability and equity components. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.4% based on the 5-year swap rate plus credit spread as of the issuance date. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2033 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.4% over the period from the issuance date through August 15, 2018 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $515.6 million, and the equity component, or debt discount, of the 2033 Notes was determined to be $134.4 million. As of July 1, 2017, the expected remaining term of the 2033 Notes is 1.1 years.
In connection with the issuance of the 2033 Notes, the Company incurred $13.7 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $10.9 million and the equity issuance costs, attributable to the equity component of $2.8 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through August 15, 2018. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of July 1, 2017, the unamortized portion of the debt issuance costs related to the 2033 Notes was $2.6 million, which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
During fiscal 2017, the Company repurchased $40.0 million aggregate principal amount of the notes for $45.4 million in cash. In connection with the repurchase, a loss on extinguishment of $1.1 million was recognized in interest and other income, net in compliance with the authoritative guidance. After giving effect to the repurchase, the total amount of 0.625% Senior Convertible Notes outstandingall debt covenants as of July 1, 2017 was $610.0 million.
Based on quoted market prices as of July 1, 2017June 27, 2020 and July 2, 2016, the fair value of the 2033 Notes was approximately $676.1 million and $633.0 million. The 2033 Notes are classified within Level 2 as they are not actively traded in markets.June 29, 2019.
Interest Expense
The following table presents the interest expense for contractual interest, amortization of debt issuance cost and accretion of debt discount (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Interest expense-contractual interest | $ | 8.5 |
| | $ | 8.8 |
| | $ | 7.7 |
|
| Amortization of debt issuance cost | 1.4 |
| | 1.4 |
| | 2.6 |
|
| Accretion of debt discount | 20.8 |
| | 21.3 |
| | 33.8 |
|
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 composed of operating leases with various expiration dates through March 31, 2030. The Company's leases do not contain any material residual value guarantees.
During the fiscal year ending on June 27, 2020, the total operating lease costs was $13.5 million. Total variable lease costs were immaterial During the fiscal year ending on June 27, 2020. The total operating costs were included in cost of revenues, research and development, and selling, general and administrative in the Company’s Consolidated Statements of Operations.
As of June 27, 2020, the weighted-average remaining lease term was 5.2 years, and the weighted-average discount rate was 4.7%.
During the fiscal year ending on June 27, 2020, cash paid for amounts included in the measurement of operating lease liabilities was $15.7 million; and operating ROU assets obtained in exchange of new operating lease liabilities was $17.3 million.
|
| | | | | | | |
| | Years ended |
| | July 1, 2017 | | July 2, 2016 |
| Interest expense-contractual interest | $ | 5.5 |
| | $ | 4.1 |
|
| Amortization of debt issuance cost | 2.5 |
| | 2.1 |
|
| Accretion of debt discount | 32.1 |
| | 26.7 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The balance sheet information related to our operating leases is as follows (in millions):
|
| | | | |
| | | June 27, 2020 |
| Other non-current assets | | $ | 40.5 |
|
| Total operating ROU assets | | $ | 40.5 |
|
| | | |
| Other current liabilities | | $ | 11.7 |
|
| Other non-current liabilities | | 28.1 |
|
| Total operating lease liabilities | | $ | 39.8 |
|
Future minimum operating lease payments as of June 27, 2020 are as follows (in millions):
|
| | | | |
| | | Operating Leases |
| Fiscal 2021 | | $ | 12.8 |
|
| Fiscal 2022 | | 10.2 |
|
| Fiscal 2023 | | 6.0 |
|
| Fiscal 2024 | | 4.6 |
|
| Fiscal 2025 | | 3.6 |
|
| Thereafter | | 7.5 |
|
| Total lease payments | | $ | 44.7 |
|
| Less: Interest | | (4.9 | ) |
| Present value of lease liabilities | | $ | 39.8 |
|
Prior to the adoption of the new lease standard, future minimum undiscounted operating lease payments as of June 29, 2019, excluding non-lease components, were as follows (in millions):
|
| | | | |
| | | Operating Leases |
| Fiscal 2020 | | $ | 11.7 |
|
| Fiscal 2021 | | 10.8 |
|
| Fiscal 2022 | | 7.4 |
|
| Fiscal 2023 | | 3.9 |
|
| Fiscal 2024 | | 2.5 |
|
| Thereafter | | 5.3 |
|
| Less: sublease income | | (0.1 | ) |
| Total lease payments | | $ | 41.5 |
|
Note 11.13. Restructuring and Related Charges
The Company has initiated various strategic restructuring events primarily intended to reduce its costs, consolidate its operations, rationalize thestreamline product manufacturing of its products and align its businesses in response toaddress market conditions. As of July 1, 2017 and July 2, 2016, the Company’s total restructuring accrual was $11.0 million and $18.0 million, respectively. During fiscal years 2017, 2016 and 2015 the Company recorded restructuring and related charges of $21.6 million, $10.5 million and $26.8 million, respectively. The Company’s restructuring charges canprimarily include severance and benefit costs to eliminate a specifiedspecific number of positions, facilities and equipment costs to vacate facilities and consolidate operations and lease termination costs. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.
As of June 27, 2020 and June 29, 2019, the Company’s total restructuring accrual was $6.5 million and $8.8 million, respectively. During fiscal years 2020, 2019 and 2018, the Company recorded restructuring and related charges of $3.5 million, $15.4 million and $8.3 million, respectively.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Summary of Restructuring Plans
The adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the fiscal yearyears ended July 1, 2017June 27, 2020 were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Balance as of June 29, 2019 | | Fiscal Year 2020 Charges | | Cash Settlements | | Non-cash Settlements and Other Adjustments (2) | | Balance as of June 27, 2020 |
| Fiscal 2019 Plan | | | | | | | | | |
NSE, including AW (1) | $ | 8.7 |
| | $ | 3.5 |
| | $ | (5.2 | ) | | $ | (0.5 | ) | | $ | 6.5 |
|
| Plans Prior to Fiscal 2019 | | | | | | | | | |
Other Plans (1) | 0.1 |
| | — |
| | — |
| | (0.1 | ) | | — |
|
Total (3) | $ | 8.8 |
| | $ | 3.5 |
| | $ | (5.2 | ) | | $ | (0.6 | ) | | $ | 6.5 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Balance as of July 2, 2016 | | Fiscal Year 2017 Charges (Releases) | | Cash Settlements | | Non-cash Settlements and Other Adjustments | | Balance as of July 1, 2017 |
| Fiscal 2017 Plan | | | | | | | | | |
| OSP Restructuring Plan (1) | $ | — |
| | $ | 0.8 |
| | $ | — |
| | $ | — |
| | $ | 0.8 |
|
| Focused NSE Restructuring Plan (1) (2) | — |
| | 21.3 |
| | (16.5 | ) | | 0.1 |
| | 4.9 |
|
| Other Plans (2) | — |
| | 0.4 |
| | (0.4 | ) | | — |
| | — |
|
| Fiscal 2016 Plan | | | | | | | | | |
| NE, SE and Shared Services Agile Restructuring Plan (1) (2) | 8.6 |
| | (0.7 | ) | | (7.7 | ) | | — |
| | 0.2 |
|
| NE and SE Agile Restructuring Plan (1) | 0.8 |
| | (0.1 | ) | | (0.3 | ) | | — |
| | 0.4 |
|
| Fiscal 2015 Plan | |
| | |
| | |
| | |
| | |
|
| NE, SE and Shared Service Separation Restructuring Plan (1) (2) | 1.4 |
| | (0.2 | ) | | (1.1 | ) | | — |
| | 0.1 |
|
| Plans Prior to Fiscal 2015 |
|
| |
|
| |
|
| |
|
| |
|
|
| NE Product Strategy Restructuring Plan (1) | 1.5 |
| | — |
| | (0.5 | ) | | (0.1 | ) | | 0.9 |
|
| NE Lease Restructuring Plan (2) | 4.0 |
| | 0.1 |
| | (1.5 | ) | | — |
| | 2.6 |
|
| Other Plans (1) (2) | 1.7 |
| | — |
| | (0.6 | ) | | — |
| | 1.1 |
|
| Total | $ | 18.0 |
| | $ | 21.6 |
| | $ | (28.6 | ) | | $ | — |
| | $ | 11.0 |
|
| |
(1) | Plan type includes workforce reduction cost. |
| |
(2) | Plan type includesOther adjustments including $0.2 million lease exit cost.liability reclassification to Operating lease liability upon ASC 842 adoption. |
| |
(3) | $6.5 million and $8.6 million in other current liabilities on the Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019, respectively. $0.2 million in other non-current liabilities on the Consolidated Balance Sheets as of June 29, 2019. |
As of July 1, 2017 and July 2, 2016, $2.2 million and $4.7 million, respectively, of our restructuring liability was long-term in nature and included as a component of Other non-current liabilities, with the remaining short-term portion included as a component of Other current liabilities on the Consolidated Balance Sheets.
Fiscal 20172019 Plans
OSPNSE, including AW Restructuring Plan
During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within its NSE business segment, including actions related to the recently acquired AW business. These actions further drive the Company’s strategy for organizational alignment and consolidation as part of its continued commitment to a more cost effective and agile organization and to improve overall profitability in the Company’s NSE business. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment. The plan was re-approved in the third quarter of fiscal 2019 and the fourth quarter of fiscal 2020 to include additional headcount.
During the fourth quarter of fiscal 2017, Management approved a2020, we updated the plan within the OSP business segment to realign its operations and exit from the printed security product portfolio.include additional headcount to further drive operational improvement. As a result, a net restructuring charge of $0.8$3.5 million, was recorded for severance and employee benefits for approximately 3060 employees primarily in manufacturingR&D and SG&A functions located in North America, Europe and Asia was recorded in the United States.year ended June 27, 2020. Payments related to the severance and benefits accrual are expected to be paid by the end of the thirdfourth quarter of fiscal 2018.2021.
Focused NSE Restructuring PlanNote 14. Income Taxes
The Company’s income (loss) before income taxes consisted of the following (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Domestic | $ | (35.1 | ) | | $ | (66.9 | ) | | $ | (112.5 | ) |
| Foreign | 129.2 |
| | 106.2 |
| | 76.8 |
|
| Income (loss) before income taxes | $ | 94.1 |
| | $ | 39.3 |
| | $ | (35.7 | ) |
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
During the third and second quarters of fiscal 2017, Management approved a plan within the NE and SE business segments as part of Viavi’s continued strategy to improve profitability in the Company’s Network and Service Enablement (NSE) business by narrowing the scope of the Service Enablement business and reducing costs by streamlining NSE operations. As a result, a restructuring charge of $21.0 million was recorded for severance and employee benefits for approximately 300 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia. Payments related to the severance and benefits accrual are expected to be paid in the second quarter of fiscal 2018.
Fiscal 2016 Plans
NE, SE and Shared Service Agile Restructuring Plan
During the fourth quarter of fiscal 2016, Management approved a plan within the NE and SE business segment and Shared Services function for organizational alignment and consolidation as part of the Company’s continued commitment for a more cost effective organization. As a result, approximately 170 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the first quarter of fiscal 2018.
NE and SE Agile Restructuring Plan
During the second quarter of fiscal 2016, Management approved a plan primarily impacting the NE and SE business segments as part of Company’s ongoing commitment for an agile and more efficient operating structure. As a result, approximately 40 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the second quarter of fiscal 2018.
Fiscal 2015 Plans
NE, SE and Shared Service Separation Restructuring Plan
During the second, third and fourth quarters of fiscal 2015, Management approved a plan to eliminate certain positions in its shared services functions in connection with the Company’s plan to split into two separate public companies. Further, Management consolidated its operations, sales and R&D organizations and eliminated positions within the NE and SE segments to align to the Company’s product market strategy and lower manufacturing costs in connection with the Separation. As a result, approximately 330 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the third quarter of fiscal 2018. During the fourth quarter of fiscal 2015, Management also approved a plan in the NE and SE segment to exit the space in Roanoke, Virginia. As of July 2, 2016, the Company exited the workspace in Roanoke under the plan and all payment were paid by the end of the fourth quarter of fiscal 2017.
Plans Prior to Fiscal 2015
NE Product Strategy Restructuring Plan
During the third quarter of fiscal 2014, Management approved a NE plan to realign its services, support and product resources in response to market conditions in the mobile assurance market and to increase focus on software products and next generation solutions through acquisitions and R&D. As a result, approximately 60 employees primarily in SG&A and manufacturing functions located in North America, Latin America, Asia and Europe were impacted. Payments related to the remaining severance and benefits accrual are expected to be paid by the end of the first quarter of fiscal 2020.
NE Lease Restructuring Plan
During the second quarter of fiscal 2014, Management approved a NE plan to exit the remaining space in Germantown, Maryland. As of June 28, 2014, the Company exited the space in Germantown under the plan. The fair value of the remaining contractual obligations, net of sublease income, as of July 1, 2017 was $2.6 million. Payments related to the Germantown lease costs are expected to be paid by the end of the second quarter of fiscal 2019.
As of July 1, 2017, the restructuring accrual for other plans that commenced prior to fiscal year 2015 was $1.1 million, which consists of immaterial accruals from various restructuring plans.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 12. Income Taxes
The Company’s income (loss) before income taxes consisted of the following (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Domestic | $ | 94.7 |
| | $ | (110.9 | ) | | $ | (173.1 | ) |
| Foreign | 91.9 |
| | 65.0 |
| | 67.8 |
|
| Income (loss) before income taxes | $ | 186.6 |
| | $ | (45.9 | ) | | $ | (105.3 | ) |
The Company’s income tax expense (benefit) consisted of the following (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Federal: | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | (4.5 | ) |
| Deferred | — |
| | — |
| | (1.7 | ) |
| Total federal income tax (benefit) | — |
| | — |
| | (6.2 | ) |
| State: | | | | | |
| Current | 2.7 |
| | 0.1 |
| | — |
|
| Deferred | — |
| | — |
| | (0.1 | ) |
| Total state income tax (benefit) expense | 2.7 |
| | 0.1 |
| | (0.1 | ) |
| Foreign: | | | | | |
| Current | 50.1 |
| | 33.3 |
| | 22.0 |
|
| Deferred | 12.5 |
| | (1.9 | ) | | (2.8 | ) |
| Total foreign income tax (benefit) expense | 62.6 |
| | 31.4 |
| | 19.2 |
|
| Total income tax expense | $ | 65.3 |
| | $ | 31.5 |
| | $ | 12.9 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Federal: | | | | | |
| Current | $ | — |
| | $ | — |
| | $ | 0.1 |
|
| Deferred | 1.0 |
| | (26.2 | ) | | 2.3 |
|
| | 1.0 |
| | (26.2 | ) | | 2.4 |
|
| State: | | | | | |
| Current | 0.2 |
| | — |
| | (0.1 | ) |
| Deferred | — |
| | (1.5 | ) | | 0.1 |
|
| | 0.2 |
| | (1.5 | ) | | — |
|
| Foreign: | | | | | |
| Current | 18.0 |
| | 21.3 |
| | 17.9 |
|
| Deferred | 2.1 |
| | 10.9 |
| | 5.8 |
|
| | 20.1 |
| | 32.2 |
| | 23.7 |
|
| Total income tax expense | $ | 21.3 |
| | $ | 4.5 |
| | $ | 26.1 |
|
The federal deferred tax expense primarily relates to the amortization of tax deductible goodwill. The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions.jurisdictions and withholding tax paid on the repatriation of foreign earnings during the year. The foreign deferred tax benefit expense primarily relates to the useaccrual of deferredwithholding tax assets in profitableon unrepatriated foreign jurisdictions.earnings.
There was no material tax benefit associated with exercise of stock options for the fiscal years ended July 1, 2017, July 2, 2016 and June 27, 2015.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
A reconciliation of the Company’s income tax expense (benefit) at the federal statutory rate to the income tax expense at the effective tax rate is as follows (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Income tax (benefit) expense computed at federal statutory rate | $ | 19.8 |
| | $ | 8.3 |
| | $ | (10.0 | ) |
| Withholding Taxes | 34.2 |
| | 1.5 |
| | 0.7 |
|
| US Inclusion of foreign earnings | 12.8 |
| | 16.0 |
| | 1.0 |
|
| Tax Reform E&P Inclusion | — |
| | — |
| | 14.3 |
|
| Valuation allowance | 0.7 |
| | 1.0 |
| | 13.0 |
|
| Foreign rate differential | 4.5 |
| | 4.8 |
| | (1.1 | ) |
| Reserves | 2.3 |
| | 3.5 |
| | 0.4 |
|
| AMT Tax Repeal | — |
| | — |
| | (4.5 | ) |
| Permanent items | (0.3 | ) | | (1.4 | ) | | 0.7 |
|
| Fair value change of the earn-out liability | (6.6 | ) | | (1.3 | ) | | — |
|
| Reversal of previously accrued taxes | (3.7 | ) | | (1.2 | ) | | (1.2 | ) |
| Research and experimentation benefits and other tax credits | (0.2 | ) | | — |
| | (0.7 | ) |
| State taxes | 2.1 |
| | 0.1 |
| | — |
|
| Other | (0.3 | ) | | 0.2 |
| | 0.3 |
|
| Income tax expense | $ | 65.3 |
| | $ | 31.5 |
| | $ | 12.9 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Income tax expense (benefit) computed at federal statutory rate | $ | 65.3 |
| | $ | (16.1 | ) | | $ | (36.8 | ) |
| Goodwill impairment | — |
| | 19.4 |
| | — |
|
| Intraperiod allocation | — |
| | (20.7 | ) | | — |
|
| Foreign rate differential | (6.6 | ) | | (2.0 | ) | | (2.3 | ) |
| Valuation allowance | (27.4 | ) | | 18.2 |
| | 56.7 |
|
| Research and experimentation benefits and other tax credits | (1.4 | ) | | (1.1 | ) | | (0.9 | ) |
| Reversal of previously accrued taxes | (0.2 | ) | | — |
| | (0.8 | ) |
| Permanent items | (9.1 | ) | | 6.7 |
| | 8.0 |
|
| Other | 0.7 |
| | 0.1 |
| | 2.2 |
|
| Income tax expense | $ | 21.3 |
| | $ | 4.5 |
| | $ | 26.1 |
|
The components of the Company’s net deferred taxes consisted of the following (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Gross deferred tax assets: | | | | | |
| Tax credit carryforwards | $ | 150.6 |
| | $ | 141.0 |
| | $ | 131.4 |
|
| Net operating loss carryforwards | 1,875.4 |
| | 1,846.3 |
| | 2,226.1 |
|
| Capital loss carryforwards | 102.4 |
| | 145.9 |
| | 4.1 |
|
| Inventories | 5.4 |
| | 6.1 |
| | 6.7 |
|
| Accruals and reserves | 30.3 |
| | 27.4 |
| | 30.2 |
|
| Investments | 0.7 |
| | 34.4 |
| | 0.7 |
|
| Other | 51.9 |
| | 60.3 |
| | 55.5 |
|
| Acquisition-related items | 55.5 |
| | 65.2 |
| | 59.9 |
|
| Gross deferred tax assets | 2,272.2 |
| | 2,326.6 |
| | 2,514.6 |
|
| Valuation allowance | (2,097.8 | ) | | (2,174.3 | ) | | (2,334.5 | ) |
| Deferred tax assets | 174.4 |
| | 152.3 |
| | 180.1 |
|
| Gross deferred tax liabilities: | | | | | |
| Acquisition-related items | (6.5 | ) | | (13.2 | ) | | (20.9 | ) |
| Undistributed foreign earnings | (3.0 | ) | | — |
| | (4.7 | ) |
| Other | (57.3 | ) | | (31.1 | ) | | (44.5 | ) |
| Deferred tax liabilities | (66.8 | ) | | (44.3 | ) | | (70.1 | ) |
| Total net deferred tax assets | $ | 107.6 |
| | $ | 108.0 |
| | $ | 110.0 |
|
As of July 1, 2017, the Company had federal, state and foreign tax net operating loss carryforwards of $5,115.1 million, $762.2 million and $624.0 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $103.9 million, $40.7 million and $1.4 million, respectively. Under current guidance, approximately $117.7 million of the net operating losses when realized, would have been credited to additional paid-in capital. The Company’s policy is to account for the utilization of tax attributes under a with-and-without approach. Upon the Company’s adoption of the new guidance on share-based payment awards in fiscal 2018, we expect our deferred tax assets related to the $117.7 million net operating losses to increase which will
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
be offset by a corresponding increase The components of the Company’s net deferred taxes consisted of the following (in our valuation allowance.millions):
|
| | | | | | | | | | | |
| | Balance as of |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Gross deferred tax assets: | | | | | |
| Tax credit carryforwards | $ | 159.5 |
| | $ | 164.3 |
| | $ | 158.8 |
|
| Net operating loss carryforwards | 1,118.6 |
| | 1,206.9 |
| | 1,219.0 |
|
| Capital loss carryforwards | 63.9 |
| | 63.9 |
| | 63.9 |
|
| Inventories | 20.3 |
| | 9.6 |
| | 4.2 |
|
| Accruals and reserves | 61.6 |
| | 55.6 |
| | 20.5 |
|
| Acquisition-related items | 45.1 |
| | 42.1 |
| | 31.5 |
|
| Capitalized research costs | 72.0 |
| | — |
| | — |
|
| Other | 44.6 |
| | 43.1 |
| | 43.8 |
|
| Gross deferred tax assets | 1,585.6 |
| | 1,585.5 |
| | 1,541.7 |
|
| Valuation allowance | (1,405.5 | ) | | (1,405.3 | ) | | (1,382.1 | ) |
| Deferred tax assets | 180.1 |
| | 180.2 |
| | 159.6 |
|
| Gross deferred tax liabilities: | | | | | |
| Acquisition-related items | (31.8 | ) | | (33.5 | ) | | (26.8 | ) |
| Tax on unrepatriated earnings | (15.6 | ) | | (1.8 | ) | | (1.6 | ) |
Foreign branch taxes
| (21.4 | ) | | (22.0 | ) | | — |
|
| Other | (29.8 | ) | | (29.1 | ) | | (37.4 | ) |
| Deferred tax liabilities | (98.6 | ) | | (86.4 | ) | | (65.8 | ) |
| Total net deferred tax assets | $ | 81.5 |
| | $ | 93.8 |
| | $ | 93.8 |
|
As of June 27, 2020, the Company had federal, state and foreign tax net operating loss carryforwards of $4,752.2 million, $575.8 million and $590.2 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $105.8 million, $52.6 million and $0.9 million, respectively. The tax net operating loss, tax credit and capital loss carryforwards will start to expire in calendar 20182021 and at various other dates through 20372038 if not utilized. In addition, a portion of the foreign tax net operating loss, tax credit and capital loss carryforwards have an indefinite carryforward period. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses. During the preparation of the fiscal 2019 US tax return, the Company elected to capitalize research and development costs as a result there is true-up adjustment to our estimated beginning of year capitalized research costs deferred tax asset of $37.5 million with an offsetting decrease in the beginning net operating loss carryforward deferred tax asset.
U.S. income and foreignForeign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $373.3$9.3 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $21.5$1.2 million of U.S. income or foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.
During fiscal year 2020, in light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considers a majority of its earnings to be permanently reinvested resulting in a $32.5 million charge for withholding taxes expected to be paid on the repatriation of $324.0 million of foreign earnings that the Company does not consider to be permanently reinvested. During the third quarter of fiscal 2020, which included changing the Company’s intent with regard to the indefinite reinvestment of such foreign earnings, the Company initially accrued $31.6 million for withholding taxes expected to be paid on the repatriation of $316.4 million of accumulated foreign earnings that it no longer considers to be permanently reinvested as of the third quarter. During the Fiscal year 2020, the Company paid $19.5 million withholding income tax on the repatriation of foreign earnings. The repatriation of these earnings increases available cash in the U.S. and provides greater U.S. financial flexibility to assist the Company in navigating the expected downturn in the economy.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The foreign earnings are being repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense.
On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The provisions of the legislation did not have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
During fiscal year 2018, the U.S. Tax Cuts and Jobs Act was enacted. Income tax effects resulting from changes in tax laws were accounted for by the Company in accordance with the authoritative guidance, which required that these tax effects be recognized in the period in which the law was enacted, and the effects were recorded as a component of the provision for income taxes from continuing operations. The law had significantly changed the way the U.S. taxes corporations. The Act repealed the alternative minimum tax (AMT) for corporations and provided that the existing AMT credit carryforwards would be fully refunded in 2022 if not utilized. As a result, the Company recognized a benefit of $4.5 million for the year ended June 30, 2018 for the release of the valuation allowance previously maintained against the AMT credit deferred tax asset. As a result, the Company’s deferred tax liability associated with indefinite-lived intangible assets offset these indefinite-lived deferred tax assets, resulting in a benefit of $2.0 million for the year ended June 30, 2018 due to release of valuation allowance.
The Act imposed a deemed repatriation of the Company’s foreign subsidiaries’ post-1986 earnings and profits (E&P) which had previously been deferred from US income tax. This deemed repatriation was reported in the Company’s fiscal 2018 U.S. tax return. The Company completed the calculation of the total post-1986 foreign E&P for all foreign subsidiaries during the quarter ended December 29, 2018. The change in estimate did not materially impact the Company’s financial statements.
The Act reduced the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. The Company remeasured its US deferred tax assets and liabilities which resulted in a net reduction of $734.9 million of our net deferred tax assets and an equal and offsetting reduction to the valuation allowance against these deferred tax assets.
Upon adoption of the new guidance on share-based payment awards in fiscal 2018, the Company had $117.7 million of net operating loss carryforwards resulting from excess tax benefit deductions. The deferred tax asset recorded for these net operating loss carryforwards was fully offset by a corresponding increase in valuation allowance, resulting in no impact to opening accumulated deficit. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits for the year ended June 30, 2018.
The valuation allowance decreasedincreased by $76.5$0.2 million in fiscal 2017, decreased2020, increased by $160.2$23.2 million in fiscal 2016,2019, and increaseddecreased by $12.7$712.9 million in fiscal 2015.2018. The decreaseincrease during fiscal 2017 2020was primarily due to the utilizationbusiness acquired during the year. The increase during fiscal 2019 was primarily due to the net increase of deferred tax assets andresulting from the increase in deferred tax liabilities as resultinclusion of the issuanceCompany’s foreign subsidiaries in the U.S. tax return as a consequence of convertible debt.the U.S. Tax Cuts and Jobs Act. The decrease during fiscal 20162018 was primarily relateddue to the Lumentum transaction. The increase during fiscal 2015 was primarily related to an increase inrevaluation of the U.S. deferred tax assets and intangible amortization.as a result of the Act. The following table provides information about the activity of our deferred tax valuation allowance (in millions):
|
| | | | | | | | | | | | | | | | |
| Deferred Tax Valuation Allowance | | Balance at
Beginning
of Period | | Additions Charged to Expenses or
Other Accounts(1) | | Deductions Credited to Expenses or Other Accounts(2) | | Balance at
End of
Period |
| Year Ended July 1, 2017 | | $ | 2,174.3 |
| | $ | 44.7 |
| | $ | (121.2 | ) | | $ | 2,097.8 |
|
| Year Ended July 2, 2016 | | $ | 2,334.5 |
| | $ | 227.5 |
| | $ | (387.7 | ) | | $ | 2,174.3 |
|
| Year Ended June 27, 2015 | | $ | 2,321.8 |
| | $ | 39.5 |
| | $ | (26.8 | ) | | $ | 2,334.5 |
|
|
| | | | | | | | | | | | | | | | |
| Deferred Tax Valuation Allowance | | Balance at
Beginning
of Period | | Additions Charged to Expenses or
Other Accounts (1) | | Deductions Credited to Expenses or Other Accounts (2) | | Balance at
End of
Period |
| Year Ended June 27, 2020 | | $ | 1,405.3 |
| | $ | 95.1 |
| | $ | (94.9 | ) | | $ | 1,405.5 |
|
| Year Ended June 29, 2019 | | $ | 1,382.1 |
| | $ | 72.8 |
| | $ | (49.6 | ) | | $ | 1,405.3 |
|
| Year Ended June 30, 2018 | | $ | 2,095.0 |
| | $ | 31.7 |
| | $ | (744.6 | ) | | $ | 1,382.1 |
|
| |
| (1) | Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, other adjustments. |
| |
| (2) | Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and increases in deferred tax liabilities. |
Under current guidance, approximately $514.7 million of the valuation allowance as of July 1, 2017 was attributable to pre-fiscal 2006 windfall stock option deductions, the benefit of which would have been credited to paid-in-capital if and when realized through a reduction in income tax payable. Beginning with fiscal 2006, the Company began to track the windfall stock option deductions off-balance sheet. If and when realized, the tax benefit associated with those deductions would have been credited to additional paid-in-capital. Upon the Company’s adoption of the new guidance on share-based payment awards in fiscal 2018, the benefit if realized will no longer be credited to additional paid-in capital.
During fiscal 2016, the Company recognized a tax expense of $8.9 million related to a one-time increase in valuation allowance associated with deferred tax assets transferred to Lumentum in connection with the Separation. The tax expense was partially offset by a deferred tax benefit of $9.5 million related to the write off of tax deductible goodwill and a tax benefit of $20.7 million related to the income tax intraperiod tax allocation rules for discontinued operations and other comprehensive income.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
A reconciliation of unrecognized tax benefits between June 28, 2014 and July 1, 2017 and June 27, 2020 is as follows (in millions):
|
| | | |
| Balance at July 1, 2017 | $ | 38.9 |
|
| Additions based on tax positions related to current year | 4.4 |
|
| Additions based on tax positions related to prior year | 5.6 |
|
| Reductions for lapse of statute of limitations | (0.3 | ) |
| Balance at June 30, 2018 | 48.6 |
|
| Additions based on tax positions related to current year | 1.7 |
|
| Additions based on tax positions related to prior year | 7.3 |
|
| Reduction based on tax positions related to prior year | (2.8 | ) |
| Reductions for lapse of statute of limitations | (0.6 | ) |
| Balance at June 29, 2019 | 54.2 |
|
| Additions based on tax positions related to current year | 2.2 |
|
| Additions based on tax positions related to prior year | 0.3 |
|
Reduction based on tax positions related to prior year
| (3.8 | ) |
| Reduction related to settlement | (0.4 | ) |
| Reductions for lapse of statute of limitations | (0.5 | ) |
| Balance at June 27, 2020 | $ | 52.0 |
|
|
| | | |
| Balance at June 28, 2014 | $ | 38.3 |
|
| Additions based on tax positions related to current year | 1.9 |
|
| Reductions for lapse of statute of limitations | (3.3 | ) |
| Reductions due to foreign currency rate fluctuations | (0.1 | ) |
| Balance at June 27, 2015 | 36.8 |
|
| Additions based on tax positions related to current year | 5.1 |
|
| Reductions for lapse of statute of limitations | (0.2 | ) |
| Balance at July 2, 2016 | 41.7 |
|
| Additions based on tax positions related to current year | 1.6 |
|
| Additions based on tax positions related to prior year | 0.9 |
|
| Reduction based on tax positions related to prior year | (3.5 | ) |
| Reductions for lapse of statute of limitations | (1.8 | ) |
| Balance at July 1, 2017 | $ | 38.9 |
|
The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at July 1, 2017June 27, 2020 are $3.0$8.5 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at July 1, 2017June 27, 2020 are $36.0$39.9 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance and are included in deferred taxes and other non-current tax liabilities, net in the Consolidated Balance Sheets.allowance.
The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within thethe income tax provision. The amount of interest and penalties accrued as of July 1, 2017June 27, 2020, June 29, 2019 and July 2, 2016June 30, 2018 was approximately $1.8$2.7 million, $3.7 million, and $1.7$1.9 million, respectively. During fiscal 2017,2020, the Company’s accrued interest and penalties increaseddecreased by $0.1 million primarily relating to$0.9 million. The timing and resolution of income tax examinations is uncertain, and the lapseamounts ultimately paid, if any, upon resolution of statute in a non-US jurisdiction. Theissues 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 that may be recognized duringwill change materially in the next twelve12 months, is approximately $0.1 million.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.
The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.
The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of July 1, 2017:June 27, 2020:
|
| |
| Tax Jurisdictions | Tax Years |
United StatesStates* | 20142001 and onward |
| Canada | 20162019 and onward |
| China | 20122015 and onward |
| France | 20142017 and onward |
| Germany | 20142015 and onward |
| Korea | 20122015 and onward |
| United Kingdom | 20162019 and onward |
*Although the Company is generally subject to a three-year statute of limitations in the U.S., tax authorities maintain the ability to adjust tax attribute carryforwards generated in earlier years.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 13.15. Stockholders' Equity
Repurchase of Common Stock
Fiscal 2017
In September 2016,As of June 27, 2020, the Board of Directors increased the Company’s previously authorized a stock repurchase program from $100 million to $150 million. Under the revised repurchase authorization, the Company may repurchaseof up to $150$200 million of
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
the Company’s common stock from time to time at the discretion of the Company’s management. This stock repurchase authorization expires on December 31, 2017.
During fiscal 2017, the Company repurchased approximately 10.5 million shares of common stock inthrough open market purchases at an average price of $8.75 peror private transactions before September 30, 2021.
The following table summarizes share underrepurchase activity related to the Company’s stock repurchase program authorized on February 1, 2016. (in millions, except per share amounts):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Total number of shares repurchased | 3.7 |
| | 1.1 |
| | 4.4 |
|
| Average price per share | $ | 11.99 |
| | $ | 10.14 |
| | $ | 9.25 |
|
| Total purchase price | $ | 44.4 |
| | $ | 11.3 |
| | $ | 40.9 |
|
Remaining authorization at end of period
| $ | 155.6 |
| | $ | 51.4 |
| | $ | 62.7 |
|
The total purchase price of these repurchases under the stock repurchase program of $92.0 million was reflected as a decrease to common stock based on the stated par value per share with the remainder charged to accumulated deficit.
Fiscal 2016
In November 2015, the Company entered into a $40.0 million accelerated share repurchase agreement (the “ASR”) with a financial institution that was completed during the third quarter of fiscal 2016. Upon making the upfront payment of $40.0 million, the Company received an initial delivery of 5.3 million shares from the financial institution during the second quarter of fiscal 2016, which were retired and recorded as a $32.0 million reduction to stockholder’s equity on the Consolidated Balance Sheet. During the third quarter of fiscal 2016 the ASR was completed and an additional 1.3 million shares were delivered from the financial institution, based on the final settlement price of $6.05 per share, which were retired and recorded as an $8.0 million reduction to stockholder’s equity on the Consolidated Balance Sheet. The Company reflects the repurchase of common stock under the ASR in the period the shares are delivered for the purposes of calculating earnings per share.
On February 1, 2016, the Company’s Board of Directors authorized a stock repurchase program under which the Company may purchase shares of its common stock worth up to an aggregate purchase price of $100.0 million through open market or private transactions between February 1, 2016 and February 1, 2017. During the fourth quarter of fiscal 2016, the Company repurchased approximately 0.7 million shares of common stock in open market purchases at an average price of $6.60 per share under the stock repurchase program authorized on February 1, 2016. The total purchase price of these repurchases under the stock repurchase program of $4.5 million was reflected as a decrease to common stock based on the stated par value per share with the remainder charged to accumulated deficit.
Fiscal 2015
During the first quarter of fiscal 2015, the Company repurchased approximately 0.4 million shares of common stock in open market purchases at an average price of $11.93 per share under the stock repurchase program authorized on May 21, 2014. The total purchase price of these repurchases under the stock repurchase program of $60.0 million was reflected as a decrease to common stock based on the stated par value per share with the remainder charged to accumulated deficit.
All common shares repurchased during fiscal 2017, 20162020, 2019 and 2015 under this program2018 have been canceled and retired.
Preferred Stock
The Company’s Board of Directors has authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without the consent of the Company’s stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock. Subsequent issuance of any preferred stock by the Company’s Board of Directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.
Note 14.16. Stock-Based Compensation
Stock-Based Benefit Plans
Stock Option Plans
On November 13, 2019, the Company's stockholders approved the amendment and restatement of the Company’s Amended and Restated 2003 Equity Incentive Plan (the 2003 Plan, as most recently amended and restated, the Amended and Restated 2003 Plan). An additional 10.5 million shares were authorized under the re-approved 2003 plan effective as of November 13, 2019. The Amended and Restated 2003 Plan provides for the granting of stock options, stock appreciation rights (SARs), dividend equivalent rights, restricted stocks, restricted stock units, performance units and performance shares, the vesting of which may be time-based or upon satisfaction of performance criteria or other conditions.
As of July 1, 2017,June 27, 2020, the Company had 8.87.2 million shares subject to (i) stock options and Full Value Awards (defined below) issued and outstanding under the Amended and Restated 2003 Plan, (ii) inducement grants made in connection with the appointment of new CEO in fiscal 2016 and (iii) stock options and Full Value Awards issued and outstanding to employees and directors under the Restated 2005 Acquisition Equity Incentive Plan (“the 2005 Plan”), Restated 2003 Equity Incentive Plan (“the 2003 Plan”), inducement grants in connection with the appointment of our new CEO in fiscal 2016 and various other plans the Company assumed through acquisitions. The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. The Company issues new shares of common stock upon exercise of stock options. Options generally become exercisable over a three- or four-year period and, if not exercised, expire from five to ten years after the date of grant.
As of June 27, 2020, 17.8 million shares of common stock, primarily under Amended and Restated 2003 Plan, were available for grant.
|
|
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
On November 14, 2012, the Company’s shareholders approved two amendments to the 2003 Plan. The first amendment increased the number of shares that may be issued under this plan by 10,000,000 shares. The second amendment extended the 2003 Plan’s terms for an additional ten year period after the date of approval of the amendment. On December 5, 2014, the Company’s shareholders approved another amendment to the 2003 Plan to increase the number of shares that may be issued under the plan by 9,000,000 shares. On August 1, 2015, following the Separation, the number of shares available for grant and all outstanding awards were automatically adjusted pursuant to the terms of the 2003 Plan and the 2005 Plan.
As of July 1, 2017, 15.4 million shares of common stock, primarily under the 2003 Plan and the 2005 Plan, were available for grant.
Employee Stock Purchase Plans
In June 1998, the Company adopted the 1998 Employee Stock Purchase Plan, as amended (the “1998 Purchase Plan”). The 1998 Purchase Plan,ESPP, which became effective August 1, 1998 and provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a discounted purchase price as well as a look-back period. The 1998 Purchase PlanESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. However, the 1998 Purchase Plan is not intended to be a qualified pension, profit sharing or stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986 and is not subject to the provisions of the Employee Retirement Income Security Act of 1974. The 1998 Purchase PlanESPP will terminate upon the earlier of August 1, 2018November 15, 2027 or the date on which all shares available for issuance have been sold. On August 1, 2015, following the Separation, the number of shares available for issuance was automatically adjusted pursuant to the terms of the 1998 Purchase Plan. As of July 1, 2017, 4.8June 27, 2020, 2.9 million shares remained available for issuance. The 1998 Purchase Plan providesESPP as adopted provided for a 5% discount and a six monthmonths look-back period. In May 2019, the ESPP was amended to provide for a 15% discount.
Full Value Awards
Full Value Awards refer to RSUs, (time-based, non-performance shares)MSUs and MSUs (market-based, performance shares)PSUs that are granted with thewithout an exercise price equal to zero and are converted to shares immediately upon vesting. These Full Value Awards are time-based, performance-based with market conditions time-based or a combination of bothother performance conditions and are expected to vest over one to four years. The fair value of the time-based Full Value AwardsRSUs is based on the closing market price of the Company’s common stock on the date of award.the award is granted.
Stock-Based Compensation
The impact on the Company’s results of operations of recording stock-based compensation expense by function for fiscal 2017, 20162020, 2019 and 20152018 was as follows (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Cost of revenue | $ | 4.3 |
| | $ | 3.8 |
| | $ | 3.3 |
|
| Research and development | 7.7 |
| | 6.1 |
| | 4.9 |
|
| Selling, general and administrative | 32.6 |
| | 28.3 |
| | 22.3 |
|
| Total stock-based compensation expense | $ | 44.6 |
| | $ | 38.2 |
| | $ | 30.5 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Cost of revenue | $ | 3.6 |
| | $ | 4.8 |
| | $ | 4.2 |
|
| Research and development | 5.7 |
| | 8.4 |
| | 8.1 |
|
| Selling, general and administrative | 23.9 |
| | 29.2 |
| | 35.2 |
|
| Total stock-based compensation expense | $ | 33.2 |
| | $ | 42.4 |
| | $ | 47.5 |
|
Approximately $0.7$1.2 million of stock-based compensation expense was capitalized to inventory at July 1, 2017.June 27, 2020.
Impact on Stock-based Compensation Due to SeparationStock Option Activity
In connection with the separationThe following is a summary of the Lumentum business on August 1, 2015 and stock option activities (in accordance with the Employee Matters Agreement, the Company made certain adjustments to the exercise price and numbermillions, except per share amounts):
|
| | | | | | |
| | Options Outstanding |
| | Number of Shares | | Weighted-Average Exercise Price |
| Balance as of July 1, 2017 | 1.5 |
| | $ | 6.16 |
|
| Exercised | (0.2 | ) | | 4.53 |
|
| Balance as of June 30, 2018 | 1.3 |
| | 6.42 |
|
| Exercised | (0.1 | ) | | 10.54 |
|
| Balance as of June 29, 2019 | 1.2 |
|
| 5.95 |
|
| Exercised | — |
| | — |
|
| Balance as of June 27, 2020 | 1.2 |
| | $ | 5.95 |
|
| | | | |
| Expected to vest | 1.2 |
| | $ | 5.95 |
|
As of shares underlyingJune 27, 2020, stock-based compensation awards with the intention of preserving the economic value of the awards for Viavi employees. These adjustments resulted in a modification of equity awards with total incremental stock-based compensation of $13.6 million,expense related to bestock options have been fully amortized over the remaining service periods of the underlying awards.and recognized.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Unless otherwise noted, share amounts and grant-date fair values for periods prior to the Separation Date represent the Company’s historical information and have not been adjusted to remove grants made to employees who transferred to Lumentum as part of the Separation. Refer to “Note 3. Discontinued Operations” for more information about the Separation.
Impact on Stock-based Compensation Due to Amendments in the Change of Control Benefits Plan
During the year ended June 27, 2015, the Company amended its Change of Control Benefits Plan (the “Plan”) to add a spin-off of certain Company assets to the circumstances that could trigger benefits under the Plan, as well as other revisions. The Chief Executive Officer of the Company and the Chairman of the Compensation Committee approved the separation of certain executives in the current fiscal year. Pursuant to the Plan, upon termination, all unvested equity awards that have been granted or issued to certain terminated executives become immediately vested and stock options shall become fully exercisable with an extended exercise period of two years from the termination date.
The amendments resulted in a modification of equity awards for six executives and total incremental stock-based compensation of $6.3 million, which was amortized over the period between the modification date and the termination dates of the executives.
Stock Option Activity
The following is a summary of stock option activities (amount in millions except per share amounts):
|
| | | | | | |
| | Options Outstanding |
| | Number of Shares | | Weighted-Average Exercise Price (1) |
| Balance as of June 28, 2014 | 3.5 |
| | $ | 10.13 |
|
| Exercised | (0.9 | ) | | 7.58 |
|
| Canceled | (0.1 | ) | | 14.54 |
|
| Balance as of June 27, 2015 | 2.5 |
| | 10.84 |
|
| Granted | 1.2 |
| | 5.95 |
|
| Exercised | (0.7 | ) | | 4.74 |
|
| Canceled | (0.4 | ) | | 10.52 |
|
| Net adjustment due to the separation | 0.5 |
| | |
| Balance as of July 2, 2016 | 3.1 |
|
| 5.91 |
|
| Granted | — |
| | — |
|
| Exercised | (1.6 | ) | | 5.66 |
|
| Canceled | — |
| | — |
|
| Balance as of July 1, 2017 | 1.5 |
| | $ | 6.16 |
|
| | | | |
| Expected to vest | 1.4 |
| | $ | 6.18 |
|
(1) Weighted average exercise price is calculated using exercise prices prior to the Separation and after the Separation.
The total intrinsic value of options exercised during the year ended July 1, 2017 was $5.9 million. In connection with these exercises, the tax benefit realized by the Company was immaterial due to the fact that the Company has no material benefit in foreign jurisdictions and a full valuation allowance on its domestic deferred tax assets. As of July 1, 2017, $1.5 million of unrecognized stock-based compensation expense related to stock options remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.6 years.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table summarizes significant ranges of outstanding and exercisable options as of July 1, 2017, adjusted to reflect the impact of the Lumentum separation.June 27, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Exercise Price | | Number of Shares | | Weighted Average Remaining Contractual Term (years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (millions) | | Number of Shares | | Weighted Average Remaining Contractual Term (years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (millions) |
| $5.95 | | 1,180,257 |
| | 3.64 | | 5.95 |
| | $ | 7.7 |
| | 1,180,257 |
| | 3.64 | | 5.95 |
| | $ | 7.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number of Shares | | Weighted Average Remaining Contractual Term (in years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in millions) | | Number of Shares | | Weighted Average Remaining Contractual Term (in years) | | Weighted Average Exercise Price | | Aggregate Intrinsic Value (in millions) |
| $3.28 - $3.28 | | 104,352 |
| | 0.12 | | $ | 3.28 |
| |
| | 104,352 |
| | 0.12 | | $ | 3.28 |
| |
|
| $5.74 - $5.74 | | 132,544 |
| | 0.92 | | 5.74 |
| |
| | 132,544 |
| | 0.92 | | 5.74 |
| |
|
| $5.95 - $5.95 | | 1,180,257 |
| | 6.62 | | 5.95 |
| |
| | 295,065 |
| | 6.62 | | 5.95 |
| |
|
| $11.82 - $11.82 | | 107,412 |
| | 1.87 | | 11.82 |
| |
| | 107,412 |
| | 1.87 | | 11.82 |
| |
|
| | | 1,524,565 |
| | 5.35 | | $ | 6.16 |
| | $ | 6.8 |
| | 639,373 |
| | 3.58 | | $ | 6.46 |
| | $ | 2.7 |
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $10.53$12.50 as of July 1, 2017,June 27, 2020, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of July 1, 2017June 27, 2020 was 0.51.2 million.
Employee Stock Purchase Plan Activity
The expense related to the planESPP is recorded on a straight-line basis over the relevant subscription period.
The following summarizes the shares issuedpurchased and the fair market value at purchase date,issued, pursuant to the Company’s ESPP during the year ended July��1, 2017:June 27, 2020 and the fair value market value of the shares at the purchase date:
|
| | | | | | | |
| Purchase date | July 31, 2019 | | January 31, 2020 |
| Shares issued | 222,956 |
| | 261,303 |
|
| Fair market value at purchase date | $ | 10.98 |
| | $ | 14.45 |
|
|
| | | | | | |
| Purchase date | July 29, 2016 |
| January 31, 2017 |
|
| Shares issued | 410,737 |
| 269,102 |
|
| Fair market value at purchase date | $ | 4.76 |
| $ | 6.77 |
|
As of July 1, 2017,June 27, 2020, there was $0.1$0.2 million of unrecognized stock-based compensation cost related to the ESPP that remains to be amortized. The cost will be recognized in the first quarter of fiscal 2018.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
2021.
Full Value Awards Activity
A summary of the status of the Company’s non-vested Full Value Awards as of July 1, 2017June 27, 2020 and changes during the same period is presented below (amount in millions, except per share amounts):
| | | | Full Value Awards | Full Value Awards |
| | Performance Shares (1) | | Non-Performance Shares | | Total Number of Shares | | Weighted-average grant-dated fair value | Performance Shares (1) | | Non-Performance Shares | | Total Number of Shares | | Weighted-average Grant-dated Fair Value |
| Non-vested at June 28, 2014 | 1.1 |
|
| 8.3 |
|
| 9.4 |
| | $ | 13.19 |
| |
| Non-vested at July 1, 2017 | | 1.0 |
| | 6.3 |
| | 7.3 |
| | $ | 7.17 |
|
| Awards granted | 0.7 |
| | 5.3 |
| | 6.0 |
| | 11.78 |
| 0.8 |
| | 3.3 |
| | 4.1 |
| | $ | 10.01 |
|
| Awards vested | (0.8 | ) | | (4.4 | ) | | (5.2 | ) | | 12.96 |
| (0.6 | ) | | (3.6 | ) | | (4.2 | ) | | $ | 7.10 |
|
| Awards forfeited | — |
| | (1.4 | ) | | (1.4 | ) | | 13.10 |
| (0.1 | ) | | (0.7 | ) | | (0.8 | ) | | $ | 8.01 |
|
| Non-vested at June 27, 2015 | 1.0 |
|
| 7.8 |
|
| 8.8 |
| | 12.36 |
| |
| Non-vested at June 30, 2018 | | 1.1 |
| | 5.3 |
| | 6.4 |
| | $ | 8.93 |
|
| Awards granted | 0.7 |
| | 6.1 |
| | 6.8 |
| | 5.75 |
| 0.5 |
| | 3.9 |
| | 4.4 |
| | $ | 11.52 |
|
| Awards vested | (0.7 | ) | | (4.8 | ) | | (5.5 | ) | | 6.01 |
| (0.6 | ) | | (3.2 | ) | | (3.8 | ) | | $ | 8.61 |
|
| Awards forfeited | (0.4 | ) | | (1.8 | ) | | (2.2 | ) | | 7.89 |
| — |
| | (0.3 | ) | | (0.3 | ) | | $ | 9.63 |
|
| Net adjustment due to the separation | 0.4 |
| | 1.1 |
| | 1.5 |
| | | |
| Non-vested at July 2, 2016 | 1.0 |
| | 8.4 |
| | 9.4 |
| | 6.55 |
| |
| Non-vested June 29, 2019 | | 1.0 |
| | 5.7 |
| | 6.7 |
| | $ | 10.81 |
|
| Awards granted | 0.6 |
| | 3.7 |
| | 4.3 |
| | 7.86 |
| 0.7 |
| | 3.2 |
| | 3.9 |
| | $ | 13.76 |
|
| Awards vested | (0.6 | ) | | (4.5 | ) | | (5.1 | ) | | 6.66 |
| (0.7 | ) | | (3.4 | ) | | (4.1 | ) | | $ | 10.40 |
|
| Awards forfeited | — |
| | (1.3 | ) | | (1.3 | ) | | 6.83 |
| — |
| | (0.4 | ) | | (0.4 | ) | | $ | 11.44 |
|
| Non-vested at July 1, 2017 | 1.0 |
| | 6.3 |
| | 7.3 |
| | $ | 7.17 |
| |
| Non-vested June 27, 2020 | | 1.0 |
| | 5.1 |
| | 6.1 |
| | $ | 12.97 |
|
| |
| (1) | Performance Shares refer to the Company’s MSU and PSU awards, where the actual number of shares awarded upon vesting may be higher or lower than the target amount depending on the achievement of the relevant market conditions.conditions and performance goal achievement. The majority of MSUs vest in equal annual installments over three to four years based on the attainment |
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
in equal annual installments over three to four years based on the attainment of certain total shareholder performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs granted during fiscal 2020, 2019 and 2018 was estimated to be $7.7 million, $6.2 million and $4.7 million, respectively, and was calculated using a Monte Carlo simulation. The Company did 0t grant any PSU awards in fiscal 2020 and 2019. The fair value of the PSUs granted in fiscal 2018 was $1.4 million. PSU awards vest based on the attainment of certain performance measures and the employee’s continued service through the vest date.
As of July 1, 2017, $31.4June 27, 2020, $54.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 1.751.7 years.
Full Value Awards are 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. During fiscal 2017, 2016 and 2015, the Company paid $14.3 million, $11.4 million and $22.1 million, respectively, and classified the payments as operating cash outflows in the Consolidated Statements of Cash Flows.
Valuation Assumptions
The Company estimates the fair value of the MSUs on the date of grant using a Monte Carlo simulation with the following assumptions:
| | | | Years Ended | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Volatility of common stock | 33.2 | % | | 33.8 | % | | 40.8 | % | 30.4 | % | | 28.9 | % | | 30.1 | % |
| Average volatility of peer companies | 36.9 | % | | 52.9 | % | | 53.4 | % | 52.5 | % | | 31.0 | % | | 32.6 | % |
| Average correlation coefficient of peer companies | 0.1856 |
| | 0.1103 |
| | 0.2156 |
| 0.1842 |
| | 0.1383 |
| | 0.1618 |
|
| Risk-free interest rate | 0.7 | % | | 0.8 | % | | 0.6 | % | 1.5 | % | | 2.6 | % | | 1.4 | % |
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Company did 0t issue stock option grants during the fiscal years ended June 27, 2020, June 29, 2019 and June 30, 2018. The Company estimates the fair value of Stock Options and ESPP purchase rights using a BSM valuation model. The fair value is estimated on the date of grant using the BSM option valuation model with the following weighted-average assumptions:
|
| | | | | | | | |
| | Employee Stock Purchase Plans |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Expected term (in years) | 0.5 |
| | 0.5 |
| | 0.5 |
|
| Expected volatility | 27.6 | % | | 33.2 | % | | 28.0 | % |
| Risk-free interest rate | 1.8 | % | | 2.3 | % | | 1.4 | % |
|
| | | | | | | | | | | |
| | Stock Options | | Employee Stock Purchase Plans |
| | July 2, 2016 | | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Expected term (in years) | 5.2 |
| | 0.5 |
| | 0.5 |
| | 0.5 |
|
| Expected volatility | 42.3 | % | | 33.4 | % | | 45.7 | % | | 37.9 | % |
| Risk-free interest rate | 1.2 | % | | 0.5 | % | | 0.4 | % | | 0.1 | % |
Expected Term: The Company's expected term for stock options was calculated utilizing the simplified method in accordance with the authoritative guidance. The Company used the simplified method as the Company does not have sufficient historical share option exercise data due to the limited number of shares granted as well as changes in the Company's business following the Separation, rendering existing historical experience less reliable in formulating expectations for current grants. The Company’s expected term for ESPP purchase rights is in line with the six month look-back period of itsmonths offerings periods provided for under the ESPP.
Expected Volatility: The Company has limited trading history following the Separation; therefore, the expected volatility for stock options was based on the historical volatility of the Company's common stock and its peers. For grants prior to the Separation andThe expected volatility for ESPP grants,purchase rights was based on the Company determined that a combination of the implied volatility of its traded options and historical volatility of its stock price based on thewith similar expected term of the equity instrument most appropriately reflects market expectation of future volatility. Implied volatility is based on traded options of the Company’s common stock with a remaining maturity of four and a half months or greater.term.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the BSM valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend: The BSM valuation model calls for a single expected dividend yield as an input. The Company has not paid and does not anticipate paying any dividends in the near future.
Note 15.17. Employee Pension and Other Benefit Plans
Employee 401(k) Plans
The Company sponsors the Viavi Solutions 401(k) Plan (the “401(k) Plan”)401(k) Plan), a Defined Contribution Plandefined contribution plan under ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 50% of their annual compensation, with contributions limited to $18,000$19,500 in calendar year 20172020 as set by the Internal Revenue Service.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
For all eligible participants who have completed 180 days of service with Viavi,employees, the Company offers a 401(k) Plan provided forthat provides a 100% match of employees’ contributions up to the first 3% of annual compensation and 50% match on the next 2% of compensation. All matching contributions are made in cash and vest immediately. The Company’s matching contributions to the 401(k) Plan were $4.1$4.9 million, $4.7$4.9 million and $4.8$4.2 million in fiscal 2017, 20162020, 2019 and 2015,2018, respectively.
Deferred Compensation Plan
The Company also provides for the benefit of certain eligible employees in the U.S. a non-qualified retirement plan. This plan is designed to permit employee deferral of a portion of salaries in excess of certain tax limits and deferral of bonuses. This plan’s assets are designated as trading securities on the Company’s Consolidated Balance Sheets. Refer to “Note 7. Investments, Forward Contracts and Fair Value Measurements” for more information. Effective January 1, 2011, the Company suspended all employee contributions into the plan.
Employee Defined Benefit Plans
The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany.Germany including the plan assumed from AW acquisition. The Company also is responsible for the non-pension post-retirementpostretirement benefit obligation assumed from a past acquisition. In connection with the Separation, the Company transferred the liabilities and assets of the Switzerland defined benefit pension plans to Lumentum in the amount of $6.7 million and $4.6 million, respectively.
|
|
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
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 during fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service. As of July 1, 2017,June 27, 2020, the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the post-retirementpostretirement benefits when due. Future estimated benefit payments are summarized below. NoNaN other required contributions are expected in fiscal 2018,2021, but the Company, at its discretion, can make contributions to one or more of the defined benefit plans.
The Company accounts for its obligations under these pension plans in accordance with the authoritative guidance which requires the Company to record its obligation to the participants, as well as the corresponding net periodic cost. The Company determines its obligation to the participants and its net periodic cost principally using actuarial valuations provided by third-party actuaries. The obligation the Company records on its Consolidated Balance Sheets is reflective of the total PBO and the fair value of plan assets.
The following table presents the components of the net periodic benefit cost for the pension and benefits plans (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Service cost | $ | 0.3 |
| | $ | 0.2 |
| | $ | 0.2 |
|
| Interest cost | 1.9 |
| | 2.5 |
| | 2.7 |
|
| Expected return on plan assets | (1.5 | ) | | (1.6 | ) | | (1.5 | ) |
| Recognized net actuarial losses | 2.8 |
| | 1.8 |
| | 1.5 |
|
| Net periodic cost | $ | 3.5 |
| | $ | 2.9 |
| | $ | 2.9 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| Pension Benefits | 2017 | | 2016 | | 2015 |
| Service cost | $ | 0.3 |
| | $ | 0.2 |
| | $ | 0.2 |
|
| Interest cost | 2.1 |
| | 3.0 |
| | 3.7 |
|
| Expected return on plan assets | (1.1 | ) | | (1.5 | ) | | (1.6 | ) |
| Recognized net actuarial losses | 1.9 |
| | 0.7 |
| | 0.4 |
|
| Provision for legal proceeding | — |
| | 8.4 |
| | — |
|
| Net periodic cost | $ | 3.2 |
| | $ | 10.8 |
| | $ | 2.7 |
|
The Company’s accumulated other comprehensive income includes unrealized net actuarial (gains)/losses. The amount expected to be recognized in net periodic benefit cost during fiscal 20182021 is $1.4$2.1 million. Refer to “Note 16.18. Commitments and Contingencies” for further information on the provision for legal proceeding. The changes in the benefit obligations and plan assets of the pension and benefits plans were (in millions):
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The changes in the benefit obligations and plan assets of the pension and benefits plans were (in millions):
|
| | | | | | | |
| | Pension Benefit Plans |
| | June 27, 2020 | | June 29, 2019 |
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 140.0 |
| | $ | 136.7 |
|
| Service cost | 0.3 |
| | 0.2 |
|
| Interest cost | 1.9 |
| | 2.5 |
|
| Actuarial (gains) losses | 4.6 |
| | 10.0 |
|
| Benefits paid | (5.1 | ) | | (5.4 | ) |
| Assumed benefit obligation from acquisition | — |
| | — |
|
| Foreign exchange impact | (2.8 | ) | | (4.0 | ) |
| Benefit obligation at end of year | $ | 138.9 |
| | $ | 140.0 |
|
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 29.9 |
| | $ | 30.0 |
|
| Actual return on plan assets | 0.2 |
| | 1.4 |
|
| Employer contributions | 4.8 |
| | 5.1 |
|
| Benefits paid | (5.0 | ) | | (5.4 | ) |
| Foreign exchange impact | (0.9 | ) | | (1.2 | ) |
| Fair value of plan assets at end of year | $ | 29.0 |
| | $ | 29.9 |
|
| Funded status | $ | (109.9 | ) | | $ | (110.1 | ) |
| Accumulated benefit obligation | $ | 138.6 |
| | $ | 139.7 |
|
|
| | | | | | | |
| | Pension Benefit Plans |
| | 2017 | | 2016 |
| Change in benefit obligation | | | |
| Benefit obligation at beginning of year | $ | 134.6 |
| | $ | 121.2 |
|
| Service cost | 0.3 |
| | 0.2 |
|
| Interest cost | 2.1 |
| | 3.0 |
|
| Actuarial (gains) losses | (1.2 | ) | | 14.5 |
|
| Benefits paid | (4.2 | ) | | (4.7 | ) |
| Provision for legal proceeding | — |
| | 8.4 |
|
| Foreign exchange impact | 1.8 |
| | (8.0 | ) |
| Benefit obligation at end of year | $ | 133.4 |
| | $ | 134.6 |
|
| Change in plan assets | | | |
| Fair value of plan assets at beginning of year | $ | 27.2 |
| | $ | 30.2 |
|
| Actual return on plan assets | 2.0 |
| | 1.8 |
|
| Employer contributions | 4.0 |
| | 4.6 |
|
| Benefits paid | (4.2 | ) | | (4.7 | ) |
| Foreign exchange impact | (0.7 | ) | | (4.7 | ) |
| Fair value of plan assets at end of year | $ | 28.3 |
| | $ | 27.2 |
|
| Funded status | $ | (105.1 | ) | | $ | (107.4 | ) |
| Accumulated benefit obligation | $ | 133.0 |
| | $ | 133.9 |
|
|
| | | | | | | |
| | Pension Benefit Plans |
| | June 27, 2020 | | June 29, 2019 |
| Amount recognized in the Consolidated Balance Sheets at end of year: | | | |
| Current liabilities | $ | 7.6 |
| | $ | 7.3 |
|
| Non-current liabilities | 102.3 |
| | 102.8 |
|
| Net amount recognized at end of year | $ | 109.9 |
|
| $ | 110.1 |
|
| Amount recognized in accumulated other comprehensive (loss) income at end of year: | | | |
| Actuarial losses, net of tax | $ | (31.2 | ) | | $ | (28.6 | ) |
| Net amount recognized at end of year | $ | (31.2 | ) |
| $ | (28.6 | ) |
| Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income: | | | |
| Net actuarial gain (loss) | $ | (5.4 | ) | | $ | (7.3 | ) |
| Amortization of accumulated net actuarial losses | 2.8 |
| | 1.8 |
|
| Total recognized in other comprehensive (loss) income | $ | (2.6 | ) |
| $ | (5.5 | ) |
|
| | | | | | | |
| | Pension Benefit Plans |
| | 2017 | | 2016 |
| Amount recognized in the Consolidated Balance Sheets at end of year: | | | |
| Current liabilities | $ | 6.8 |
| | $ | 5.5 |
|
| Non-current liabilities | 98.3 |
| | 101.9 |
|
| Net amount recognized at end of year | $ | 105.1 |
|
| $ | 107.4 |
|
| Amount recognized in accumulated other comprehensive income (loss) at end of year: | | | |
| Actuarial losses, net of tax | $ | (21.8 | ) | | $ | (24.4 | ) |
| Net amount recognized at end of year | $ | (21.8 | ) |
| $ | (24.4 | ) |
| Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): | | | |
| Net actuarial gain (loss) | $ | 0.7 |
| | $ | (10.6 | ) |
| Amortization of accumulated net actuarial losses | 1.9 |
| | 0.7 |
|
| Total recognized in other comprehensive income (loss) | $ | 2.6 |
|
| $ | (9.9 | ) |
As of July 1, 2017June 27, 2020 and July 2, 2016,June 29, 2019, the liability balances related to the post retirement benefit plan were $1.1$0.4 million and $1.1$0.4 million, respectively. The liability balances were included in other non-current liabilities on the Consolidated Balance Sheets.
During fiscal 2017,2020, the Company (amounts represented as £ and $ denote GBP and USD, respectively) contributed GBP 0.5£0.5 million or approximately USD 0.6$0.6 million, while in fiscal 2016,2019, the Company contributed GBP 0.5£0.5 million or approximately USD 0.7$0.6 million to its U.K. pension plan. These contributions allowed the Company to comply with regulatory funding requirements.
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Assumptions
Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, the Company considered the yield available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme’s liabilities as well as a yield curve model developed by the Company’s actuaries.
The expected return on assets was estimated by using the weighted average of the real expected long termlong-term return (net of inflation) on the relevant classes of assets based on the target asset mix and adding the chosen inflation assumption.
The following table summarizes the weighted average assumptions used to determine net periodic cost and benefit obligation for the Company’s U.K. and German pension plans:
|
| | | | | | | | |
| | Pension Benefit Plans |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Used to determine net period cost at end of year: | | | | | |
| Discount rate | 1.1 | % | | 1.4 | % | | 1.9 | % |
| Expected long-term return on plan assets | 5.6 |
| | 5.6 |
| | 5.7 |
|
| Rate of pension increase | 2.3 |
| | 2.3 |
| | 2.3 |
|
| | | | | | |
| Used to determine benefit obligation at end of year: | | | | | |
| Discount rate | 1.0 | % | | 1.4 | % | | 1.9 | % |
| Rate of pension increase | 2.2 |
| | 2.3 |
| | 2.3 |
|
|
| | | | | | | | |
| | Pension Benefit Plans |
| | 2017 | | 2016 | | 2015 |
| Weighted-average assumptions used to determine net period cost: | | | | | |
| Discount rate | 2.1 | % | | 2.1 | % | | 3.0 | % |
| Expected long-term return on plan assets | 4.8 |
| | 5.3 |
| | 5.8 |
|
| Rate of pension increase | 2.2 |
| | 2.3 |
| | 2.3 |
|
| | | | | | |
| Weighted-average assumptions used to determine benefit obligation at end of year: | | | | | |
| Discount rate | 2.0 | % | | 1.7 | % | | 2.6 | % |
| Rate of pension increase | 2.3 |
| | 2.1 |
| | 2.2 |
|
Investment Policies and Strategies
The Company’s investment objectives for its funded pension plan are to ensure that there are sufficient assets available to pay out members’ benefits as and when they arise and that, should the plan be discontinued at any point in time, there would be sufficient assets to meet the discontinuance liabilities.
To achieve thethese objectives, the trustees of the U.K. pension plan are responsible for regularly monitoring the funding position and managing the risk by investing in assets expected to outperform the increase in value of the liabilities in the long term and by investing in a diversified portfolio of assets in order to minimize volatility in the funding position. The trustees invest in a range of frequently traded funds (“pooled funds”)(pooled funds) rather than direct holdings in individual securities to maintain liquidity, achieve diversification and reduce the potential for risk concentration. The funded plan assets are managed by professional third-party investment managers.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Fair Value Measurement of Plan Assets
The following table sets forth the U.K. plan assets at fair value and the percentage of assets allocations as of July 1, 2017June 27, 2020 (in millions, except percentage data):
| | | | | | | | | | Fair value measurement as of | | | | | | | Fair value measurement as of |
| | | | | | | | July 1, 2017 | | | | | | | June 27, 2020 |
| | Target Allocation | | Total | | Percentage of Plan Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | Target Allocation | | Total | | Percentage of Plan Assets | | Level 1 | | Level 2 |
| Assets: | | | | | | | | | | | | | | | | | | |
| Global equity | 40 | % | | $ | 11.7 |
| | 41.3 | % | | $ | — |
| | $ | 11.7 |
| 40 | % | | $ | 11.6 |
| | 40.0 | % | | $ | — |
| | $ | 11.6 |
|
| Fixed income | 40 | % | | 10.7 |
| | 37.8 | % | | — |
| | 10.7 |
| 40 | % | | 10.9 |
| | 37.6 | % | | — |
| | 10.9 |
|
| Other | 20 | % | | 5.8 |
| | 20.5 | % | | — |
| | 5.8 |
| 20 | % | | 6.4 |
| | 22.1 | % | | — |
| | 6.4 |
|
| Cash | | | 0.1 |
| | 0.4 | % | | 0.1 |
| | — |
| | | 0.1 |
| | 0.3 | % | | 0.1 |
| | — |
|
| Total assets | | | $ | 28.3 |
| | 100.0 | % | | $ | 0.1 |
| | $ | 28.2 |
| | | $ | 29.0 |
| | 100.0 | % | | $ | 0.1 |
| | $ | 28.9 |
|
The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of July 2, 2016June 29, 2019 (in millions, except percentage data).
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Fair value measurement as of |
| | | | | | | | June 29, 2019 |
| | Target Allocation | | Total | | Percentage of Plan Assets | | Level 1 | | Level 2 |
| Assets: | | | | | | | | | |
| Global equity | 40 | % | | $ | 11.6 |
| | 38.8 | % | | $ | — |
| | $ | 11.6 |
|
| Fixed income | 40 | % | | 11.5 |
| | 38.5 | % | | — |
| | 11.5 |
|
| Other | 20 | % | | 6.7 |
| | 22.4 | % | | — |
| | 6.7 |
|
| Cash | | | 0.1 |
| | 0.3 | % | | 0.1 |
| | — |
|
| Total assets | | | $ | 29.9 |
| | 100.0 | % | | $ | 0.1 |
| | $ | 29.8 |
|
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Fair value measurement as of |
| | | | | | | | July 2, 2016 |
| | Target Allocation | | Total | | Percentage of Plan Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) |
| Assets: | | | | | | | | | |
| Global equity | 40 | % | | $ | 10.5 |
| | 38.6 | % | | $ | — |
| | $ | 10.5 |
|
| Fixed income | 40 | % | | 10.7 |
| | 39.3 | % | | — |
| | 10.7 |
|
| Other | 20 | % | | 5.4 |
| | 19.9 | % | | — |
| | 5.4 |
|
| Cash | | | 0.6 |
| | 2.2 | % | | 0.6 |
| | — |
|
| Total assets | | | $ | 27.2 |
| | 100.0 | % | | $ | 0.6 |
| | $ | 26.6 |
|
The Company’s pension assets consist of multiple institutional funds (“pension funds”)(pension funds) of which the fair values are based on the quoted prices of the underlying funds. Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets.
Global equity consists of several index funds that invest primarily in U.K. equities and other overseas equities.
Fixed income consists of several funds that invest primarily in index-linked Gilts (over 5 year), sterling-denominated investment grade corporate bonds, and overseas government bonds.
Other consists of several funds that primarily invest in global equities, bonds, private equity, global real estate and infrastructure funds.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Future Benefit Payments
The following table reflects the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the Company’s PBO at fiscal year end and include benefits attributable to estimated future compensation increases.increases (in millions).
|
| | | |
| | Pension Benefit Plans |
| 2021 | $ | 8.6 |
|
| 2022 | 6.0 |
|
| 2023 | 6.7 |
|
| 2024 | 6.1 |
|
| 2025 | 5.9 |
|
| 2026 - 2030 | 26.5 |
|
| Thereafter | 50.1 |
|
| Total | $ | 109.9 |
|
|
| | | |
| (in millions) | Pension Benefit Plans |
| 2018 | $ | 7.5 |
|
| 2019 | 6.1 |
|
| 2020 | 5.5 |
|
| 2021 | 5.7 |
|
| 2022 | 6.1 |
|
| 2023 - 2027 | 29.7 |
|
| Thereafter | 44.5 |
|
| Total | $ | 105.1 |
|
Timing of the payment relating to the legal proceeding, which is included in the above table under “Thereafter,” is not yet determined. Refer to “Note 16.18. Commitments and Contingencies” for further information.
Note 16.18. Commitments and Contingencies
Operating LeasesRoyalty payment
The Company leases certain real and personal property from unrelated third parties under non-cancelable operating leases that expire at various dates through fiscal 2023. Certain leases require the Company to pay property taxes, insurance and routine maintenance, and include escalation clauses. As of July 1, 2017, future minimum annual lease payments under non-cancelable operating leases were as follows (in millions):
|
| | | |
| 2018 | $ | 18.8 |
|
| 2019 | 16.7 |
|
| 2020 | 12.2 |
|
| 2021 | 10.1 |
|
| 2022 | 6.1 |
|
| Thereafter | 0.5 |
|
| Total minimum operating lease payments | $ | 64.4 |
|
Included in the future minimum lease payments table above is $3.7 million related to lease commitments inIn connection with the Company’s restructuring and related activities. ReferAW acquisition, the Company is obligated to “Note 11. Restructuring and Related Charges” for more information.
The aggregatemake future minimum rentals to be received under non-cancelable subleases totaled $2.9royalty payments of $2.3 million measured as of July 1, 2017. Rental expense relating to buildingJune 27, 2020 for the use of certain licensed technologies. Future minimum quarterly payments are scheduled at approximately $0.2 million through the second quarter of fiscal 2023 and equipment was $12.1$0.1 million $13.8 million and $14.3 million inthereafter until approximately the fourth quarter of fiscal 2017, 2016 and 2015, respectively.2026.
Purchase Obligations
Purchase obligations of $56.8$99.8 million as of July 1, 2017,June 27, 2020, represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on the Company’s business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.
The Company depends on a limited number of contract manufacturers, subcontractors, and suppliers for raw materials, packages and standard components. The Company generally purchases these single or limited source products through standard
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
purchase orders or one-year supply agreements and has no0 significant long-term guaranteed supply agreements with such vendors. While the Company seeks to maintain a sufficient safety stock of such products and maintains on-going communications with its suppliers to guard against interruptions or cessation of supply, the Company’s business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of such supplies, or the Company’s inability to obtain reduced pricing from its suppliers in response to competitive pressures.
Financing Obligations - Eningen and Santa Rosa
Eningen
On December 16, 2011, the Company executed and closed the sale and leaseback transaction of certain buildings and land in Eningen, Germany (the “Eningen Transactions”). The Company sold approximately 394,217 square feet of land, nine buildings with approximately 386,132 rentable square feet, and parking areas. The Company leased back approximately 158,154 rentable square feet comprised of two buildings and a portion of a basement of another building (the “Leased Premises”). The lease term is 10 years with the right to cancel a certain portion of the lease after 5 years.
Concurrent with the sale and lease back, the Company has provided collateral in case of a default by the Company relative to future lease payments for the Leased Premises. Due to this continuing involvement, the related portion of the cash proceeds and transaction costs, associated with the Leased Premises and other buildings which the Company continues to occupy, was recorded under the financing method in accordance with the authoritative guidance on leases and sales of real estate. Accordingly, the carrying value of these buildings and associated land will remain on the Company’s books and the buildings will continue to be depreciated over their remaining useful lives. The portion of the proceeds received have been recorded as a financing obligation, a portion of the lease payments are recorded as a decrease to the financing obligation and a portion is recognized as interest expense. Imputed rental income from the buildings sold but not leased back and currently being occupied is recorded as a reduction in the financing obligation.
As of July 1, 2017, of the total financing obligation related to the Eningen Transactions, $0.1 million was included in Other current liabilities, and $3.9 million was included in Other non-current liabilities. As of July 2, 2016, of the total financing obligation related to the Eningen Transactions, $0.1 million was included in Other current liabilities, and $4.0 million was included in Other non-current liabilities.
Santa Rosa
On August 21, 2007, the Company entered into a sale and lease backlease-back of certain buildings and land in Santa Rosa, California (the “SantaSanta Rosa Transactions”). The Company sold approximately 45 acres of land, 13 buildings with approximately 492,000 rentable square feet, a building pad, and parking areas. The CompanyTransactions), under which we leased back 7 buildings with approximately 286,000 rentable square feet.certain buildings. The net cash proceeds received from the transaction were $32.2 million. The lease terms range from a one-yearone year lease with multiple renewal options to a ten-yearten years lease with two five-year2 five years renewal options.
The Company has an ongoing obligation to remediate environmental matters, impacting the entire site, as required by the North Coast Regional Water Quality Control Board which existed at the time of sale. Concurrent with the These buildings did not qualify for sale and lease back the Company has issued an irrevocable letter of credit for $3.8 million as security for the remediation of the environmental matter that remains in effect until the issuance of a notice of no further action letter from the North Coast Regional Water Quality Control Board. In addition, the lease agreement for one building included an optionaccounting due to purchase at fair market value, at the end of the lease term. Due to these various forms of continuing involvement the transaction was recorded under the financing method in accordance with the authoritative guidance on leases and sales of real estate.
Accordingly, the value of the buildings and land will remain on the Company’s books and the buildings will continue to be depreciated over their remaining useful lives. The proceeds received have been recorded as a result, they were accounted for as financing obligation, a portiontransactions.
In August 2012 and May 2019, the Company entered into 2 lease amendments to extend the term of the lease payments are recorded asto August 31, 2032 with a decrease to10 years renewal option. In the financing obligation andfirst quarter of fiscal 2020, the Company reassessed whether a portion is recognized as interest expense. Imputed rental income from the buildings sold but not leased back is recorded as a reduction in the financing obligation.sale would have occurred
As of July 1, 2017, $0.8 million was included in Other current liabilities, and $23.9 million was included in Other non-current liabilities. As of July 2, 2016, $0.8 million was included in Other current liabilities, and $24.7 million was included in Other non-current liabilities.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Theon the date of adoption of ASC 842 and at which time, concluded that the buildings did not qualify for sale and lease back accounting in accordance with ASC 842. As a result, they were continuously accounted for as financing transactions.
As of June 27, 2020, $0.1 million was included in Other current liabilities, and $16.2 million was included in Other non-current liabilities. As of June 29, 2019, $1.1 million was included in Other current liabilities, and $21.8 million was included in Other non-current liabilities.
As of June 27, 2020, future minimum annual lease payments due under the agreement reset to fair market rental rates upon the Company’s execution of the renewal options.Santa Rosa’s non-cancelable leaseback agreements were as follows (in millions):
|
| | | |
| 2020 | $ | 2.8 |
|
| 2021 | 2.9 |
|
| 2022 | 2.4 |
|
| 2023 | 2.4 |
|
| 2024 | 2.4 |
|
| Thereafter | 18.7 |
|
| Total minimum leaseback payments | $ | 31.6 |
|
Guarantees
In accordance with authoritative guidance which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no0 liabilities have been recorded for these obligations on the Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019.
Pursuant to the Separation and Distribution Agreement dated as of July 1, 201731, 2015 between the Company and Lumentum Holdings Inc. (Lumentum) and the Tax Matter Agreement dated as of July 2, 2016.31, 2015 between the Company and Lumentum, the Company is required to indemnify Lumentum and its subsidiaries for certain specified tax liabilities. During the second quarter of fiscal 2019, the Ontario Ministry of Finance denied the Company’s appeal of an assessment of the applicable tax liabilities at which time the Company recorded a charge of $2.4 million to its discontinued operations.
Outstanding Letters of Credit and Performance Bonds
As of July 1, 2017,June 27, 2020, the Company had standby letters of credit of $15.3$7.4 million and performance bonds of $2.7$1.0 million collateralized by restricted cash.
Product Warranties
In general, the Company offers a three-year warranty for most of its products. The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. TheIn general, the Company offers its customers warranties up to three years and has accrued a reserve for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products.arise. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The following table presents the changes in the Company’s warranty reserve during fiscal years 20172020 and 20162019 (in millions):
|
| | | | | | | |
| | Year Ended |
| | June 27, 2020 | | June 29, 2019 |
| Balance as of beginning of period | $ | 8.7 |
| | $ | 8.2 |
|
| Provision for warranty | 3.1 |
| | 4.0 |
|
| Utilization of reserve | (3.4 | ) | | (5.2 | ) |
| Adjustments related to pre-existing warranties (including changes in estimates) | 1.0 |
| | 1.7 |
|
| Balance as of end of period | $ | 9.4 |
|
| $ | 8.7 |
|
|
| | | | | | | |
| | Year Ended |
| | July 1, 2017 | | July 2, 2016 |
| Balance as of beginning of period | $ | 4.9 |
| | $ | 3.7 |
|
| Provision for warranty | 4.2 |
| | 3.9 |
|
| Utilization of reserve | (3.8 | ) | | (3.3 | ) |
| Adjustments related to pre-existing warranties (including changes in estimates) | 0.5 |
| | 0.6 |
|
| Balance as of end of period | $ | 5.8 |
|
| $ | 4.9 |
|
Contingent liabilities include contingent consideration in connection with the Company’s acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and is remeasured each reporting period with subsequent adjustments recognized in the consolidated statements of income. See “Note 5. Acquisitions” for additional information related to the Company’s acquisitions. The Company discounts the contingent purchase consideration to present value using a risk adjusted interest rate at each reporting period. Contingent consideration is valued using significant Level 3 inputs, that are not observable in the market pursuant to fair value measurement accounting. While the Company believes the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
The Company’s Level 3 liabilities as of June 27, 2020, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2020 and 2019. As June 27, 2020 and June 29, 2019, the aggregate fair value of contingent consideration was $9.9 million and $38.4 million, respectively. The fair value of earn-out liabilities were 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. See “Note 8. Fair Value Measurements” for additional information related to the Company’s earn-outs.
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. PriorThe Company estimated the liability to this decision, the Company, in consultation with outside legal counsel, believed that the pension deed of trust document was invalid or, alternatively, that the subsequent rectification should be applied retroactively. Under both scenarios, the Company believed that the likelihood of an increase in plan benefits was remote. While the Company is pursuing other legal arguments in this matter, suchrange from (amounts represented as appealing the court decision and pursuing a claim against the U.K. law firm responsible for the error, the£ denote GBP) £5.7 million to £8.4 million. The Company determined that the likelihood of loss to be probable and accrued £5.7 millionas of July 2, 2016 and July 1, 2017 and estimated the increase in liability to range from GBP 5.7 million
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
(USD 7.4 million) to GBP 8.4 million (USD 10.9 million). The Company accrued GBP 5.7 million (USD 7.4 million), in accordance with authoritative guidance on contingencies. The accrual is included as a component of selling, general and administrative expense and included in pension and post-employment benefits, which is a component of other non-current liabilities, in the Company’s Consolidated Statement of Operations and Consolidated Balance Sheets, respectively.
The Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company is pursuing a deed of rectification claim and continues to pursue a claim against the U.K. law firm responsible for the error. As of June 27, 2020, the related accrued pension liability was £7.5 million or $9.2 million.
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of ourits 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.
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 17.19. Operating Segments and Geographic Information
The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”) pursuant(CODM), uses operating segment financial information to the guidance. The CODM allocates resourcesevaluate segment performance and to the segments based on their business prospects, competitive factors, net revenue and operating results.allocate resources.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
The Company’s reportable segments are:
(i) Network Enablement (“NE”):Enablement:
NE provides testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. The companyCompany also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for ourits products. NE’s avionics products provide test and measuring solutions for aviation, aerospace, government, defense, communications and public safety.
(ii) Service Enablement (“SE”):Enablement:
SE solutions are embedded systems that yield network, service and application performance data. These solutions—including instruments, microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.
(iii) Optical Security and Performance Products (“OSP”):Products:
OSP provides innovative, precision, high performance optical products for anti-counterfeiting, consumer and industrial, government, automotive, industrial automotive and consumer electronic markets, including 3D sensing applications.other markets.
Changes to Segment Reporting
Following the Separation in the first quarter of fiscal 2016, the Company made changes to its segment measures to reflect how the CODM manages the business post-separation as described below.
The CODM manages the Company in two2 broad business categories: NetworkNSE and Service Enablement ("NSE") and OSP. NSE operates in two segments, NE and SE, whereas OSP operates as a single segment. The CODM evaluates segment performance of the NSE business based on NE and SEthe combined segment gross margin and NSE operating margin as a whole.margins. Operating expenses associated with the NSE business are not allocated to the NE and SEindividual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on OSP segment operating margin. In addition, prior to the first quarter of fiscal 2016, theThe Company did not allocate certain corporate-level operating expenses associated with its shared-service function to its segment results. Beginning in the first quarter of fiscal 2016, the Company has allocated theseallocates corporate-level operating expenses to its segment results, with the exception ofexcept 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 Managementmanagement does not include this information in its measurement of the performance of the operating segments. These items are presented as “Reconciling“Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.
As a result of the Separation, the Company excluded the results of the Lumentum business which historically consisted of the CCOP segment and the WaveReady product line within the NE segment for all periods presented. Refer to “Note 3. Discontinued Operations” for more information on the Separation. Additionally, the Company’s Video Assurance product line was moved out of its NE segment and into its SE segment during the first quarter of fiscal 2016.
The segment information for all periods presented has been revised to be comparable with the changes implemented in the first quarter of fiscal 2016 in the Company’s segment reporting measures.
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| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Information on the Company’s reportable segments is as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended June 27, 2020 |
| | Network and Service Enablement | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and Service Enablement | | Optical Security and Performance Products | | Other Items | | Consolidated GAAP Measures |
| Product revenue | $ | 669.1 |
| | $ | 49.9 |
| | $ | 719.0 |
| | $ | 286.2 |
| | $ | — |
| | $ | 1,005.2 |
|
| Service revenue | 77.6 |
| | 52.8 |
| | 130.4 |
| | 0.7 |
| | — |
| | 131.1 |
|
| Net revenue | $ | 746.7 |
| | $ | 102.7 |
| | $ | 849.4 |
| | $ | 286.9 |
| | $ | — |
| | $ | 1,136.3 |
|
| | | | | | | | | | | | |
| Gross profit | 482.4 |
| | 68.8 |
| | 551.2 |
| | 153.0 |
| | (38.9 | ) | | 665.3 |
|
| Gross margin | 64.6 | % | | 67.0 | % | | 64.9 | % | | 53.3 | % | | | | 58.5 | % |
| | | | | | | | | | | | |
| Operating income | | | | | 108.8 |
| | 102.1 |
| | (92.8 | ) | | 118.1 |
|
| Operating margin | | | | | 12.8 | % | | 35.6 | % | | | | 10.4 | % |
| | | | | | | | | | | | |
| | Year Ended June 29, 2019 |
| | Network and Service Enablement | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and
Service
Enablement | | Optical Security and Performance Products | | Other Items | | Consolidated GAAP Measures |
| Product revenue | $ | 666.2 |
| | $ | 49.7 |
| | $ | 715.9 |
| | $ | 288.3 |
| | $ | — |
| | $ | 1,004.2 |
|
| Service revenue | 71.6 |
| | 53.7 |
| | 125.3 |
| | 0.8 |
| | — |
| | 126.1 |
|
| Net revenue | $ | 737.8 |
| | $ | 103.4 |
| | $ | 841.2 |
| | $ | 289.1 |
| | $ | — |
| | $ | 1,130.3 |
|
| | | | | | | | | | | | |
| Gross profit | 473.3 |
| | 71.0 |
| | 544.3 |
| | 145.8 |
| | (38.7 | ) | | 651.4 |
|
| Gross margin | 64.2 | % | | 68.7 | % | | 64.7 | % | | 50.4 | % | | | | 57.6 | % |
| | | | | | | | | | | | |
| Operating income | | | | | 99.6 |
| | 98.0 |
| | (130.2 | ) | | 67.4 |
|
| Operating margin | | | | | 11.8 | % | | 33.9 | % | | | | 6.0 | % |
| | | | | | | | | | | | |
| | Year Ended June 30, 2018 |
| | Network and Service Enablement | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and
Service
Enablement | | Optical Security and Performance Products | | Other Items | | Consolidated GAAP Measures |
| Product revenue | $ | 497.1 |
| | $ | 59.3 |
| | $ | 556.4 |
| | $ | 216.0 |
| | $ | — |
| | $ | 772.5 |
|
| Service revenue | 42.0 |
| | 59.2 |
| | 101.2 |
| | 2.1 |
| | — |
| | 103.2 |
|
| Net revenue | $ | 539.1 |
| | $ | 118.5 |
| | $ | 657.6 |
| | $ | 218.1 |
| | $ | — |
| | $ | 875.7 |
|
| | | | | | | | | | | | |
| Gross profit | 334.3 |
| | 82.6 |
| | 416.9 |
| | 115.2 |
| | (43.7 | ) | | 488.4 |
|
| Gross margin | 62.0 | % | | 69.7 | % | | 63.4 | % | | 52.8 | % | | | | 55.8 | % |
| | | | | | | | | | | | |
| Operating income | | | | | 43.6 |
| | 78.2 |
| | (119.9 | ) | | 1.9 |
|
| Operating margin | | | | | 6.6 | % | | 35.9 | % | | | | 0.2 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended July 1, 2017 |
| | Network and Service Enablement | | | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and Service Enablement | | Optical Security and Performance Products | | Total Segment Measures | | Reconciling Items | | Consolidated GAAP Measures |
| Net revenue | $ | 444.0 |
| | $ | 135.2 |
| | $ | 579.2 |
| | $ | 232.2 |
| | $ | 811.4 |
| | $ | — |
| | $ | 811.4 |
|
| | | | | | | | | | | | | | |
| Gross profit | 286.3 |
| | 86.2 |
| | 372.5 |
| | 133.8 |
| | 506.3 |
| | (20.3 | ) | | 486.0 |
|
| Gross margin | 64.5 | % | | 63.8 | % | | 64.3 | % | | 57.6 | % | | 62.4 | % | | | | 59.9 | % |
| | | | | | | | | | | | | | |
| Operating income | | | | | 7.3 |
| | 100.3 |
| | 107.6 |
| | (94.0 | ) | | 13.6 |
|
| Operating margin | | | | | 1.3 | % | | 43.2 | % | | 13.3 | % | | | | 1.7 | % |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Year Ended July 2, 2016 |
| | Network and Service Enablement | | | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and
Service
Enablement | | Optical Security and Performance Products | | Total Segment Measures | | Reconciling Items | | Consolidated GAAP Measures |
| Net revenue | $ | 504.6 |
| | $ | 153.6 |
| | $ | 658.2 |
| | $ | 248.1 |
| | $ | 906.3 |
| | $ | — |
| | $ | 906.3 |
|
| | | | | | | | | | | | | | |
| Gross profit | 329.7 |
| | 99.4 |
| | 429.1 |
| | 143.1 |
| | 572.2 |
| | (22.5 | ) | | 549.7 |
|
| Gross margin | 65.3 | % | | 64.7 | % | | 65.2 | % | | 57.7 | % | | 63.1 | % | | | | 60.7 | % |
| | | | | | | | | | | | | | |
| Operating income (loss) | | | | | 12.7 |
| | 102.9 |
| | 115.6 |
| | (199.9 | ) | | (84.3 | ) |
| Operating margin | | | | | 1.9 | % | | 41.5 | % | | 12.8 | % | | | | (9.3 | )% |
| | | | | | | | | | | | | | |
| | Year Ended June 27, 2015 |
| | Network and Service Enablement | | | | | | | | | | |
| | Network Enablement | | Service Enablement | | Network and
Service
Enablement | | Optical Security and Performance Products | | Total Segment Measures | | Reconciling Items | | Consolidated GAAP Measures |
| Net revenue | $ | 506.8 |
| | $ | 174.3 |
| | $ | 681.1 |
| | $ | 192.8 |
| | $ | 873.9 |
| | $ | — |
| | $ | 873.9 |
|
| | | | | | | | | | | | | | |
| Gross profit | 333.9 |
| | 119.2 |
| | 453.1 |
| | 104.3 |
| | 557.4 |
| | (37.3 | ) | | 520.1 |
|
| Gross margin | 65.9 | % | | 68.4 | % | | 66.5 | % | | 54.1 | % | | 63.8 | % | | | | 59.5 | % |
| | | | | | | | | | | | | | |
| Operating income (loss) | | | | | (0.1 | ) | | 68.1 |
| | 68.0 |
| | (143.8 | ) | | (75.8 | ) |
| Operating margin | | | | | — | % | | 35.3 | % | | 7.8 | % | | | | (8.7 | )% |
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| Corporate reconciling items impacting gross profit: | | | | | |
| Total segment gross profit | $ | 704.2 |
| | $ | 690.1 |
| | $ | 532.1 |
|
| Stock-based compensation | (4.3 | ) | | (3.8 | ) | | (3.3 | ) |
| Amortization of intangibles | (32.7 | ) | | (34.4 | ) | | (26.7 | ) |
| Other charges unrelated to core operating performance | (1.9 | ) | | (0.5 | ) | | (13.7 | ) |
| GAAP gross profit | $ | 665.3 |
| | $ | 651.4 |
| | $ | 488.4 |
|
| | | | | | |
| Corporate reconciling items impacting operating income: | | | | | |
| Total segment operating income | $ | 210.9 |
| | $ | 197.6 |
| | $ | 121.8 |
|
| Stock-based compensation | (44.6 | ) | | (38.2 | ) | | (30.5 | ) |
| Amortization of intangibles | (67.8 | ) | | (72.5 | ) | | (47.7 | ) |
Change in fair value of contingent liability (4) | 31.5 |
| | 5.9 |
| | — |
|
Other charges unrelated to core operating performance (1)(2)(3) | (8.4 | ) | | (10.0 | ) | | (33.4 | ) |
| Restructuring and related charges | (3.5 | ) | | (15.4 | ) | | (8.3 | ) |
GAAP operating income from continuing operations
| $ | 118.1 |
| | $ | 67.4 |
| | $ | 1.9 |
|
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Corporate reconciling items impacting gross profit: | | | | | |
| Total segment gross profit | $ | 506.3 |
| | $ | 572.2 |
| | $ | 557.4 |
|
| Stock-based compensation | (3.6 | ) | | (4.8 | ) | | (4.2 | ) |
| Amortization of intangibles | (14.3 | ) | | (17.3 | ) | | (31.9 | ) |
| Other charges unrelated to core operating performance | (2.4 | ) | | (0.4 | ) | | (1.2 | ) |
| GAAP gross profit | $ | 486.0 |
| | $ | 549.7 |
| | $ | 520.1 |
|
| | | | | | |
| Corporate reconciling items impacting operating income: | | | | | |
| Total segment operating income | $ | 107.6 |
| | $ | 115.6 |
| | $ | 68.0 |
|
| Stock-based compensation | (33.2 | ) | | (42.4 | ) | | (47.5 | ) |
| Amortization of intangibles | (28.3 | ) | | (31.9 | ) | | (51.4 | ) |
| Impairment of goodwill | — |
| | (91.4 | ) | | — |
|
| Other charges unrelated to core operating performance (1)(2)(3) | (10.9 | ) | | (23.7 | ) | | (18.1 | ) |
| Restructuring and related charges | (21.6 | ) | | (10.5 | ) | | (26.8 | ) |
| GAAP operating income (loss) from continuing operations | $ | 13.6 |
| | $ | (84.3 | ) | | $ | (75.8 | ) |
| |
| (1) | During the yearyears ended July 1, 2017,June 27, 2020, other charges unrelated to core operating performance primarily consisted of $5.7$1.4 million loss on disposal of long-lived assets and $1.5 million of Viavi-specific chargesin acquisition related to the Separation.costs. |
| |
| (2) | During the yearyears ended July 2, 2016,June 29, 2019, other charges unrelated to core operating performance primarily consisted of (a) an $8.4 million charge related to a litigation ruling impacting our U.K. pension obligation, (b) $5.0 million of Viavi-specific chargesin acquisition related to the Separation and (c) $3.5 million of non-recurring incremental severance and related costs upon the exit of a key executive.costs. |
| |
| (3) | During the yearyears endedJune 27, 2015,30, 2018, other charges unrelated to core operating performance primarily consisted of $9.8a $12.7 million in acquisition related costs and $12.4 million in amortization of Viavi-specific charges related to the Separation and $3.6 million IPR&D impairment charge for an ongoing project related to the fiscal 2014 acquisition of Trendium as discussed in “Note 9. Acquired Developed Technology and Other Intangibles.” inventory step-up. |
| |
| (4) |
|
VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Refer to “Note 8. Fair Value Measurements” for further detail. |
The Company operates primarily in three3 geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (“EMEA”)(EMEA). Net revenue is assigned to the geographic region and country where ourthe Company’s 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 three3 geographic regions we operatethe Company operates in and net revenue from countries that exceeded 10% of ourthe Company’s total net revenue (dollars in millions):
| | | | | | | | | | | | | | | | Years Ended |
| | Years Ended | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 | Product Revenue | | Service Revenue | | Total | | Product Revenue | | Service Revenue | | Total | | Product Revenue | | Service Revenue | | Total |
| Americas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States | $ | 307.3 |
| | 37.9 | % | | $ | 396.6 |
| | 43.8 | % | | $ | 424.3 |
| | 48.5 | % | $ | 288.3 |
| | $ | 53.3 |
| | $ | 341.6 |
| | $ | 287.1 |
| | $ | 55.0 |
| | $ | 342.1 |
| | $ | 282.6 |
| | $ | 52.9 |
| | $ | 335.5 |
|
| Other Americas | 71.3 |
| | 8.8 | % | | $ | 66.0 |
| | 7.3 | % | | $ | 62.5 |
| | 7.2 | % | 57.8 |
| | 15.4 |
| | 73.2 |
| | 69.4 |
| | 14.8 |
| | 84.2 |
| | 64.2 |
| | 16.8 |
| | 81.0 |
|
| Total Americas | $ | 378.6 |
| | 46.7 | % | | $ | 462.6 |
| | 51.1 | % | | $ | 486.8 |
| | 55.7 | % | $ | 346.1 |
| | $ | 68.7 |
| | $ | 414.8 |
| | $ | 356.5 |
| | $ | 69.8 |
| | $ | 426.3 |
| | $ | 346.8 |
| | $ | 69.7 |
| | $ | 416.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asia-Pacific | | | | | | | | | | | | |
| Asia-Pacific: | | | | | | | | | | | | | | | | | | |
| Greater China | $ | 100.8 |
| | 12.4 | % | | $ | 103.2 |
| | 11.3 | % | | $ | 83.1 |
| | 9.5 | % | $ | 238.2 |
| | $ | 7.5 |
| | $ | 245.7 |
| | $ | 209.4 |
| | $ | 7.2 |
| | $ | 216.6 |
| | $ | 126.6 |
| | $ | 2.0 |
| | $ | 128.6 |
|
| Other Asia | 72.4 |
| | 8.9 | % | | 63.1 |
| | 7.0 | % | | 61.4 |
| | 7.0 | % | 108.0 |
| | 14.5 |
| | 122.5 |
| | 142.3 |
| | 13.3 |
| | 155.6 |
| | 78.3 |
| | 6.9 |
| | 85.2 |
|
| Total Asia-Pacific | $ | 173.2 |
| | 21.3 | % | | $ | 166.3 |
| | 18.3 | % | | $ | 144.5 |
| | 16.5 | % | $ | 346.2 |
| | $ | 22.0 |
| | $ | 368.2 |
| | $ | 351.7 |
| | $ | 20.5 |
| | $ | 372.2 |
| | $ | 204.9 |
| | $ | 8.9 |
| | $ | 213.8 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| EMEA: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Switzerland | $ | 124.0 |
| | 15.3 | % | | $ | 135.6 |
| | 15.0 | % | | $ | 97.7 |
| | 11.2 | % | $ | 64.5 |
| | $ | 0.1 |
| | $ | 64.6 |
| | $ | 97.0 |
| | $ | — |
| | $ | 97.0 |
| | $ | 75.2 |
| | $ | 0.1 |
| | $ | 75.3 |
|
| Other EMEA | 135.6 |
| | 16.7 | % | | 141.8 |
| | 15.6 | % | | 144.9 |
| | 16.6 | % | 248.4 |
| | 40.3 |
| | 288.7 |
| | 199.0 |
| | 35.8 |
| | 234.8 |
| | 145.6 |
| | 24.5 |
| | 170.1 |
|
| Total EMEA | $ | 259.6 |
| | 32.0 | % | | $ | 277.4 |
| | 30.6 | % | | $ | 242.6 |
| | 27.8 | % | $ | 312.9 |
| | $ | 40.4 |
| | $ | 353.3 |
| | $ | 296.0 |
| | $ | 35.8 |
| | $ | 331.8 |
| | $ | 220.8 |
| | $ | 24.6 |
| | $ | 245.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total net revenue | $ | 811.4 |
| | 100.0 | % | | $ | 906.3 |
| | 100.0 | % | | $ | 873.9 |
| | 100.0 | % | $ | 1,005.2 |
| | $ | 131.1 |
| | $ | 1,136.3 |
| | $ | 1,004.2 |
| | $ | 126.1 |
| | $ | 1,130.3 |
| | $ | 772.5 |
| | $ | 103.2 |
| | $ | 875.7 |
|
Following the separation from Lumentum, one customer served by our OSP segment generated 10% or more of Viavi net revenue from continuing operations during fiscal 2017, 2016 and 2015 as summarized below (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 | | June 27, 2015 |
| Customer A - OSP customer | $ | 166.8 |
| | $ | 190.1 |
| | $ | 143.0 |
|
Property, plant and equipment, net were identified based on the operations in the corresponding geographic areas (in millions):
|
| | | | | | | |
| | Years Ended |
| | July 1, 2017 | | July 2, 2016 |
| United States | $ | 76.0 |
| | $ | 85.6 |
|
| Other Americas | 4.4 |
| | 4.3 |
|
| China | 41.1 |
| | 27.3 |
|
| Other Asia-Pacific | 5.0 |
| | 4.8 |
|
| Germany | 7.9 |
| | 7.9 |
|
| Other EMEA | 2.5 |
| | 3.1 |
|
| Total property, plant and equipment, net | $ | 136.9 |
| | $ | 133.0 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
SICPA Holding SA Company (SICPA), served by the Company’s OSP segment, generated more than 10% of VIAVI net revenue from continuing operations during fiscal 2020, 2019 and 2018 as summarized below (in millions):
|
| | | | | | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 | | June 30, 2018 |
| SICPA - OSP customer | $ | 139.9 |
| | $ | 161.1 |
| | $ | 129.3 |
|
Property, plant and equipment, net was identified based on the operations in the corresponding geographic areas (in millions):
|
| | | | | | | |
| | Years Ended |
| | June 27, 2020 | | June 29, 2019 |
| United States | $ | 85.0 |
| | $ | 89.4 |
|
| Other Americas | 1.6 |
| | 1.6 |
|
| China | 43.8 |
| | 49.0 |
|
| Other Asia-Pacific | 5.8 |
| | 5.6 |
|
| United Kingdom | 30.1 |
| | 23.8 |
|
| Other EMEA | 6.2 |
| | 10.5 |
|
| Total property, plant and equipment, net | $ | 172.5 |
| | $ | 179.9 |
|
|
|
|
| VIAVI SOLUTIONS INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Note 18.20. Selected Quarterly Financial Information (unaudited)
The following table presents the Company’s selected quarterly financial information from the Consolidated Statements of Operations for fiscal 20172020 and 20162019 (in millions, except per share data):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 27, 2020 | | March 28, 2020 | | December 28, 2019 | | September 28, 2019 | | June 29, 2019 | | March 30, 2019 | | December 29, 2018 | | September 29, 2018 |
| | | | | | | | | | | | | | | | |
| Net revenue | $ | 266.6 |
| | $ | 256.2 |
| | $ | 313.7 |
| | $ | 299.8 |
| | $ | 289.7 |
| | $ | 265.2 |
| | $ | 306.9 |
| | $ | 268.5 |
|
| Gross profit | 154.6 |
| | 146.8 |
| | 189.5 |
| | 174.4 |
| | 169.5 |
| | 153.5 |
| | 178.0 |
| | 150.4 |
|
| Net income (loss) from continuing operations, net of tax | 26.7 |
| | (32.8 | ) | | 28.0 |
| | 6.8 |
| | 12.5 |
| | (4.8 | ) | | 15.4 |
| | (15.3 | ) |
| Net income (loss) from discontinued operations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2.4 | ) | | — |
|
| Net income (loss) | $ | 26.7 |
| | $ | (32.8 | ) | | $ | 28.0 |
| | $ | 6.8 |
| | $ | 12.5 |
| | $ | (4.8 | ) | | $ | 13.0 |
| | $ | (15.3 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share from - basic: | | | | | | | | | | | | | | | |
Continuing operations (1) | $ | 0.12 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.03 |
| | $ | 0.05 |
| | $ | (0.02 | ) | | $ | 0.07 |
| | $ | (0.07 | ) |
Discontinued operations (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.01 | ) | | — |
|
Net income (loss) (1) | $ | 0.12 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.03 |
| | $ | 0.05 |
| | $ | (0.02 | ) | | $ | 0.06 |
| | $ | (0.07 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share from - diluted: | | | | | | | | | | | | | | | |
Continuing operations (1) | $ | 0.12 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.03 |
| | $ | 0.05 |
| | $ | (0.02 | ) | | $ | 0.07 |
| | $ | (0.07 | ) |
Discontinued operations (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.01 | ) | | — |
|
Net income (loss) (1) | $ | 0.12 |
| | $ | (0.14 | ) | | $ | 0.12 |
| | $ | 0.03 |
| | $ | 0.05 |
| | $ | (0.02 | ) | | $ | 0.06 |
| | $ | (0.07 | ) |
| | | | | | | | | | | | | | | | |
| Shares used in per-share calculation: | | | | | | | | | | | | | | | |
| Basic | 228.1 |
| | 230.0 |
| | 230.0 |
| | 229.4 |
| | 228.7 |
| | 228.3 |
| | 228.3 |
| | 227.2 |
|
| Diluted | 230.3 |
| | 230.0 |
| | 238.3 |
| | 236.4 |
| | 232.5 |
| | 228.3 |
| | 230.4 |
| | 227.2 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | July 1, 2017 | | April 1, 2017 | | December 31, 2016 | | October 1, 2016 | | July 2, 2016 | | April 2, 2016 | | January 2, 2016 | | October 3, 2015 |
| | (1) (2) | | (2) | | (2) | | (2) | | (1)(2)(3) | | (1)(2) | | (1) | | (1) |
| Net revenue | $ | 198.1 |
| | $ | 196.0 |
| | $ | 206.5 |
| | $ | 210.8 |
| | $ | 224.1 |
| | $ | 220.4 |
| | $ | 232.1 |
| | $ | 229.7 |
|
| Gross profit | 119.2 |
| | 117.0 |
| | 124.7 |
| | 125.1 |
| | 136.1 |
| | 131.3 |
| | 141.8 |
| | 140.5 |
|
| Net income(loss) from continuing operations, net of tax | 12.1 |
| | 26.0 |
| | 49.2 |
| | 78.0 |
| | (64.5 | ) | | 28.8 |
| | 1.0 |
| | (15.7 | ) |
| Net income (loss) from discontinued operations, net of tax | 1.6 |
| | — |
| | — |
| | — |
| | (3.4 | ) | | 5.0 |
| | 3.0 |
| | (53.4 | ) |
| Net income (loss) | $ | 13.7 |
| | $ | 26.0 |
| | $ | 49.2 |
| | $ | 78.0 |
| | $ | (67.9 | ) | | $ | 33.8 |
| | $ | 4.0 |
| | $ | (69.1 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share from - basic: | | | | | | | | | | | | | | | |
| Continuing operations (4) | $ | 0.05 |
| | $ | 0.11 |
| | $ | 0.21 |
| | $ | 0.34 |
| | $ | (0.28 | ) | | $ | 0.13 |
| | $ | 0.01 |
| | $ | (0.07 | ) |
| Discontinued operations (4) | 0.01 |
| | — |
| | — |
| | — |
| | (0.01 | ) | | 0.02 |
| | 0.01 |
| | (0.22 | ) |
| Net income (loss) (4) | $ | 0.06 |
| | $ | 0.11 |
| | $ | 0.21 |
| | $ | 0.34 |
| | $ | (0.29 | ) | | $ | 0.15 |
| | $ | 0.02 |
| | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | |
| Net income (loss) per share from - diluted: | | | | | | | | | | | | | | | |
| Continuing operations (4) | $ | 0.05 |
| | $ | 0.11 |
| | $ | 0.21 |
| | $ | 0.33 |
| | $ | (0.28 | ) | | $ | 0.12 |
| | $ | 0.01 |
| | $ | (0.07 | ) |
| Discontinued operations (4) | 0.01 |
| | — |
| | — |
| | — |
| | (0.01 | ) | | 0.02 |
| | 0.01 |
| | (0.22 | ) |
| Net income (loss) (4) | $ | 0.06 |
| | $ | 0.11 |
| | $ | 0.21 |
| | $ | 0.33 |
| | $ | (0.29 | ) | | $ | 0.14 |
| | $ | 0.02 |
| | $ | (0.29 | ) |
| | | | | | | | | | | | | | | | |
| Shares used in per-share calculation (basic) | 227.3 |
| | 229.4 |
| | 230.5 |
| | 232.4 |
| | 232.7 |
| | 232.0 |
| | 234.9 |
| | 236.0 |
|
| Shares used in per-share calculation (diluted) | 232.5 |
| | 234.6 |
| | 234.2 |
| | 236.8 |
| | 232.7 |
| | 234.6 |
| | 237.1 |
| | 236.0 |
|
| |
| (1) | During the first quarter of fiscal 2016, we completed the Separation. As a result, the operations of the Lumentum business have been presented as discontinued operations in all periods of the Company’s Consolidated Statement of Operations. |
| |
(2) | During fiscal year ended 2017 and 2016, the Company recorded $203.0 million and $71.5 million, respectively, gain on sale of Lumentum common stock which was retained as part of the Separation of Lumentum. Refer to “Note 7. Investments, Forward Contracts and Fair Value Measurements”for more information.
|
| |
(3) | During the fourth quarter of fiscal 2016, the Company recorded a $91.4 million goodwill impairment charge related to the SE reporting unit. |
| |
(4) | Net income (loss) per share is computed independently for each of the fiscal quarters presented. Therefore, the sum of the quarterly basic and diluted net income (loss) per share amounts may not equal the annual basic and diluted net income (loss) per share amount for the full fiscal years. |
Note 19. Subsequent Events
Repurchase of Common Stock
Subsequent to our fiscal year ended July 1, 2017, the Company repurchased approximately 0.3 million shares of common stock purchases at an average price of $10.58 per share under the stock repurchase program authorized on February 1, 2016. All common shares repurchased have been canceled and retired.
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|
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VIAVI SOLUTIONS INC. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) |
Repurchase of 2033 Notes
Subsequent to our fiscal year ended July 1, 2017, the Company repurchased $146.5 million of our 2033 Notes for $162.0 million in cash.
Acquisition of Trilithic, Inc.
On August 9, 2017, the Company acquired Trilithic, Inc. (“Trilithic”), a privately-held provider of electronic test and measurement equipment for telecommunications service providers and will be part of NE operating segment. The Company acquired Trilithic for $55.0 million in cash, net of cash acquired, subject to working capital adjustments. The acquisition will be accounted for as a business combination in accordance with the authoritative guidance.
Due to the closing of this acquisition subsequent to the period end, the Company is currently determining the fair value of assets acquired and liabilities assumed necessary to develop the purchase price allocation. Therefore, disclosure of the purchase price allocation to the tangible and intangible assets acquired and liabilities assumed is not practicable.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROL AND PROCEDURES
Our management is responsible for establishing and maintaining disclosureThe SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) for our Companythat are designed to ensure that the information required to be disclosed by us in the reports that we fileit files or submitsubmits under the Exchange Act was (i)is recorded, processed, summarized, and reported, within the time periods specified in the SEC'sSEC’s rules and formsforms. “Disclosure controls and (ii)procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act of 1934, as amended, is accumulated and communicated to ourthe issuer’s management, including ourits principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our management under(with the supervision and with participation of our chief executive officer (“CEO”Chief Executive Officer (CEO) and Chief Financial Officer (CFO)) and chief financial officer (“CFO”), evaluatedhas conducted an evaluation of the effectiveness of our disclosure controls and procedures.procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act). Based on such evaluation, our CEO and our CFO have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of July 1, 2017.June 27, 2020.
(b) MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act). Our management, including our CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO). Based on its evaluation under the framework in the Internal Control-Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of July 1, 2017.June 27, 2020.
The effectiveness of the Company’s internal control over financial reporting as of July 1, 2017June 27, 2020 has been audited by PricewaterhouseCoopers LLP, anour independent registered public accounting firm PricewaterhouseCoopers LLP, as stated in their report which appears in this Annual Report on Form 10-K under Item 8.8 Financial Statements and Supplementary Information.
(c) REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
As described in Item 9A. Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended July 2, 2016 and Item 4 of our fiscal 2017 Form 10-Qs, we identified a material weakness related to the design of certain internal controls related to the accounting for the interim income tax provision. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
During fiscal 2017, in response to the material weakness identified, management has evaluated the design and operating effectiveness of internal controls related to the interim income tax provision and has implemented additional controls related to the preparation and review of the interim income tax provision.
During fiscal 2017, management tested the remedial controls related to the material weakness described above for a sufficient period of time and management has concluded, through testing, that by the end of the fourth quarter of fiscal 2017, these controls were operating effectively. Therefore, we have concluded that the material weakness previously identified in the Company’s internal control over financial reporting has been remediated as of July 1, 2017.
(d) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have beenwere no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f) that occurred, during our most recently completed fiscalthe quarter ended June 27, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(d) LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or 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 system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, 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 and our internal controls provide reasonable assurance of achieving their objectives.
ITEM 9B. OTHER INFORMATION
On August 25, 2017, the Compensation Committee of the Board of Directors approved the grant of 90,000 performance-based RSUs (“PSUs”) to Mr. Khaykin and 45,000 PSUs to Mr. Maletira, in each case, effective as of August 28, 2017, pursuant to the Company’s 2003 Plan. The PSUs will vest upon achievement of a Network and Service Enablement ("NSE") operating income margin rate target (the “Achievement Metric”) for two consecutive quarters within the period commencing on the first day of the second quarter of fiscal year 2018 and ending on the last day of the third quarter of fiscal year 2019 (the “Measurement Period”). If the Achievement Metric is determined by the Compensation Committee to have been satisfied, 50% of each executive officer’s PSUs will vest on such determination date; 25% of each executive officer’s PSUs will vest 24 months from the first day of the Measurement Period; and 25% of each executive officer’s PSUs will vest 36 months from the first day of the Measurement Period. The vested PSUs will be settled for shares of Company common stock as soon as practicable following the date on which PSUs vest. The vesting and settlement of the PSUs is subject to the executive officer being continually employed through each vesting date.None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the Company’s executive officers and directors required by this Item is incorporated by reference to the section entitled “Proposal One—Elections of Directors” in the Company’s Definitive Proxy Statement in connection with the 20172020 Annual Meeting of Stockholders (the “Proxy Statement”)Proxy Statement), which will be filed with the Securities and Exchange Commission within 120 days of the fiscal year ended July 1, 2017.June 27, 2020. Information required by Item 405 of Regulation S-K is incorporated by reference to the section entitled “Beneficial Ownership Reporting Compliance” in the Proxy Statement.
The Company has adopted the “Viavi Code of Business Conduct” as its code of ethics, which is applicable to all employees, officers and directors of the Company. The full text of the Viavi Code of Business Conduct is available under Corporate Governance Information which can be found under the Investors tab on the Company’s website at www.viavisolutions.com.www.viavisolutions.com.
We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding amendment to, or waiver from, a provision of our Code of Business Conduct by posting such information on our investor relations website under the heading “Governance-Governance Documents” at http://investor.viavisolutions.com/corporate-governance/default.aspx.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the sections entitled “Executive Compensation,” “Director Compensation,” “Compensation Program Risk Assessment,” “Corporate Governance—Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.
Information regarding the Company’s stockholder approved and non-approved equity compensation plans is incorporated by reference to the section entitled “Equity Compensation Plans” in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item is incorporated by reference to the sections entitled “Certain Relationships and Related Person Transactions,” and “Code of Ethics,” “Director Independence,” and “Board Committees and Meetings” under the “Corporate Governance” heading in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is incorporated by reference to the section entitled “Audit and Non-Audit Fees” in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
| (a) | The following items are filed as part of this Annual Report on Form 10-K: |
| |
| (2) | Financial Statement Schedules: All financial statement schedules have been omitted because the required information is not present in amounts sufficient to require submission of the schedule, not applicable, or because the required information is included in the Consolidated Financial Statements or Notes thereto. |
All financial statement schedules have been omitted because the required information is not present in amounts sufficient to require submission of the schedule, not applicable, or because the required information is included in the Consolidated Financial Statements or Notes thereto.
See Item 15(b)
(b) Exhibits:
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.
| | | | | | | Incorporated by Reference | | Filed | | | | Incorporated by Reference | | Filed | Furnished |
| Exhibit No. | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Herewith | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Herewith | Not Filed |
| 2.1 | | Agreement and Plan of Merger, dated December 6, 2013, by and among NI Holdings I, Inc., a Delaware corporation, the Company, Jade Acquisition I, Inc., a Delaware corporation and wholly owned subsidiary of the Company, Thoma Bravo, LLC, a Delaware limited liability company, solely in its capacity as Representative for NI Holdings’ stockholders, Thoma Bravo Fund X, L.P., a Delaware limited partnership, and Thoma Bravo Fund X-A., L.P., a Delaware limited partnership. | | 8-K | | 2.1 | | 12/11/2013 | | |
| | 8-K | | 2.1 | | 2/2/2018 | |
| 2.2 | | Contribution Agreement by and between JDS Uniphase Corporation and Lumentum Operations LLC | | 8-K | | 2.1 | | 8/5/2015 | | | | | 8-K | | 2.3 | | 8/5/2015 | |
| 2.3 | | Membership Interest Transfer Agreement by and between JDS Uniphase Corporation and Lumentum Inc. | | 8-K | | 2.2 | | 8/5/2015 | | |
| 2.4 | | Separation and Distribution Agreement by and between JDS Uniphase Corporation, Lumentum Holdings Inc. and Lumentum Operations LLC | | 8-K | | 2.3 | | 8/5/2015 | | |
| 3.1 | | Restated Certificate of Incorporation | | 8-K | | 3.1 | | 11/18/2013 | | | | | 8-K | | 3.1 | | 11/20/2018 | |
| 3.2 | | Certificate of Amendment to Restated Certificate of Incorporation | | 8-K | | 3.1 | | 8/5/2015 | | | | | 10-Q | | 3.1 | | 2/7/2018 | | | |
| 3.5 | | Amended and Restated Bylaws of Viavi Solutions Inc. | | 8-K | | 3.1 | | 6/1/2016 | | | |
| 4.1 | | Indenture, dated as of August 21, 2013, between JDS Uniphase Corporation and Wells Fargo Bank, National Association, as Trustee | | 8-K | | 4.1 | | 8/21/2013 | | | | | 8-K | | 4.1 | | 8/5/2015 | |
| 4.2 | | Form of 0.625% Senior Convertible Debentures due 2033 | | 8-K | | 4.2 | | 8/21/2013 | | | | | 8-K | | 4.1 | | 3/6/2017 | |
| 4.3 | | Stockholder’s and Registration Rights Agreement by and between JDS Uniphase Corporation and Lumentum Holdings Inc. | | 8-K | | 4.1 | | 8/5/2015 | | | | | 8-K | | 4.2 (Incl. in 4.1) | | 3/6/2017 | |
| 4.4 | | Indenture, dated as of March 3, 2017 between Viavi Solutions Inc. and Wells Fargo Bank, National Association as Trustee | | 8-K | | 4.1 | | 3/6/2017 | | | | | 8-K | | 4.1 | | 5/29/2018 | |
| | | | | 8-K | | 4.2 (Incl. in 4.1) | | 5/29/2018 | |
| | | | | X | |
| | | 4.5 | | Form of 1.00% Senior Convertible Notes due 2024 | | 8-K | | 4.2 | | 3/6/2017 | | |
| 10.1 | | Employment Agreement between Oleg Khaykin and Viavi Solutions Inc. effective as of February 3, 2016 | | 8-K | | 10.1 | | 2/2/2016 | | | | | 8-K | | 10.1 | | 2/2/2016 | |
| 10.2 | | Amended and Restated 1993 Flexible Stock Incentive Plan (Amended and Restated as of November 9, 2001) | | 10-Q | | 10.1 | | 2/11/2002 | | | | | 8-K | | 10.1 | | 8/6/2015 | |
| 10.3 | | Restated 1998 Employee Stock Purchase Plan | | 10-K | | 10.3 | | 8/25/2015 | | | | | 10-K | | 10.3 | | 8/27/2019 | |
| 10.4 | | Amended and Restated 1999 Canadian Employee Stock Purchase Plan (Amended and Restated as of July 31, 2002) | | 10-K | | 10.4 | | 9/17/2002 | | | | | 8-K | | 10.9 | | 4/20/2015 | |
| 10.5 | | Restated 2005 Acquisition Equity Incentive Plan | | 10-K | | 10.5 | | 8/25/2015 | | | | | 10-Q | | 10.1 | | 2/6/2020 | |
| 10.6 | | 2005 Acquisition Equity Incentive Plan Form of Stock Option Award Agreement | | 10-K | | 10.6 | | 9/30/2005 | | | | | 10-Q | | 10.1 | | 2/6/2019 | |
| 10.7 | | 2005 Acquisition Equity Incentive Plan Form of Restricted Stock Unit Award Agreement | | 10-K | | 10.7 | | 9/30/2005 | | | | | 8-K | | 10.1 | | 8/5/2015 | |
| | | | | 8-K | | 10.1 | | 6/22/2020 | |
| 10.9 | | Form of Indemnification Agreement | | 8-K | | 10.9 | | 4/20/2015 | | |
| | S-8 | | 99.1 | | 2/11/2016 | |
| 10.10 | | Restated 2003 Equity Incentive Plan | | 10-K | | 10.10 | | 8/25/2015 | | | | | 8-K | | 10.2 | | 6/22/2020 | |
| 10.11 | | Separation Agreement and General Release between Viavi Solutions Inc. and Thomas Waechter dated August 13, 2015 | | 8-K | | 10.1 | | 8/19/2015 | | | | | 8-K | | 10.1 | | 10/19/2015 | |
| 10.12 | | Employment Agreement between Viavi Solutions Inc. and Richard Belluzzo dated August 19, 2015 | | 8-K | | 10.2 | | 8/19/2015 | | |
| | 8-K | | 10.1 | | 5/6/2020 | |
| 10.13 | | Tax Matters Agreement by and between JDS Uniphase Corporation and Lumentum Holdings Inc. | | 8-K | | 10.1 | | 8/5/2015 | | | | | 8-K | | 10.1 | | 5/29/2018 | |
| 10.14 | | Employee Matters Agreement by and between JDS Uniphase Corporation, Lumentum Holdings Inc. and Lumentum Operations LLC | | 8-K | | 10.2 | | 8/5/2015 | | | | | 8-K | | 10.2 | | 5/29/2018 | |
| 10.15 | | Intellectual Property Matters Agreement by and between JDS Uniphase Corporation and Lumentum Operations LLC | | 8-K | | 10.3 | | 8/5/2015 | | |
| 10.16 | | Viavi Solutions Inc. 2015 Change of Control Benefits Plan, effective June 20, 2017 | | 8-K | | 10.1 | | 12/17/2015 | | |
| 10.17 | | 2003 Equity Incentive Plan Form of Stock Option Award Agreement (for the U.S) | | 10-K | | 10.20 | | 8/31/2010 | | |
| 10.18 | | 2003 Equity Incentive Plan Form of Restricted Stock Unit Award Agreement (for the U.S) | | 10-K | | 10.24 | | 8/31/2010 | | |
| 10.19 | | Viavi Solutions Inc. Executive Severance and Retention Plan | | 8-K | | 10.1 | | 10/19/2015 | | |
| 10.20 | | Settlement Agreement, dated September 30, 2015 by and among
Viavi Solutions Inc. and each of the signatories identified therein | | 8-K | | 10.1 | | 10/1/2015 | | |
| 10.21 | | Viavi Solutions Inc. 2016 MSU Policy Summary | | 8-K | | 10.1 | | 8/24/2015 | | |
| 21.1 | | Subsidiaries of Viavi Solutions Inc. | | X | | | | X | |
| 23.1 | | Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) | | X | | | | X | |
| 24.1 | | | Power of Attorney (included on the signature page to the Report) | |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | 3 | | X | | | | | | | | 3 | | X | |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X | | | | | | | | | | X | |
| 32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X | | | | | | | | | | X |
| 32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | | | | | X | | | | | | | | | | X |
| 101.INS | | XBRL Instance | | | | | | | | X | |
| 101.SCH | | XBRL Taxonomy Extension Schema | | | | | | | | X | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | 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.CAL101.PRE | | Inline XBRL Taxonomy Extension Calculation | | | | | | | | X |
101.DEF | | XBRL Taxonomy Extension DefinitionPresentation Linkbase Document | | | | | | | | X | |
101.LAB104 | | XBRL Taxonomy Extension Label LinkbaseThe cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2020, formatted in Inline XBRL. | | | | | | | | X |
101.PRE | | XBRL Taxonomy Extension Presentation | | | | | | | | X |
ITEM 16. 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | |
Date: August 29, 201724, 2020 | VIAVI SOLUTIONS INC. |
| | |
| | By: | /s/ AMAR MALETIRA |
| | Name: | Amar Maletira |
| | Title: | Executive Vice President and Chief Financial Officer |
| | | (Duly Authorized Officer and Principal Financial and Accounting Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Oleg Khaykin and Amar Maletira, and each of them individually, as his or her attorney-in-fact, each with full power of substitution, for him or her in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same with, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his or her substitute, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| | |
| Signature | Title | Date |
| /s/ OLEG KHAYKIN | President and Chief Executive Officer | August 29, 201724, 2020 |
| Oleg Khaykin | (Principal Executive Officer) | |
| | | |
| /s/ AMAR MALETIRA | Executive Vice President and Chief Financial Officer | August 29, 201724, 2020 |
| Amar Maletira | (Duly Authorized Officer and Principal Financial and Accounting Officer) | |
| | | |
| /s/ RICHARD BELLUZZO | Chairman | August 29, 201724, 2020 |
| Richard Belluzzo | | |
| | | |
| /s/ KEITH BARNES | Director | August 29, 201724, 2020 |
| Keith Barnes | | |
| | | |
| /s/ TOR BRAHAM | Director | August 29, 201724, 2020 |
| Tor Braham | | |
| | | |
| /s/ TIMOTHY E. CAMPOS | Director | August 29, 201724, 2020 |
| Timothy E. Campos | | |
| | | |
| /s/ DONALD COLVIN | Director | August 29, 201724, 2020 |
| Donald Colvin | | |
| | | |
| /s/ MASOOD JABBAR | Director | August 29, 201724, 2020 |
| Masood Jabbar | | |
| | | |
/s/ PAMELA STRAYERLAURA BLACK | Director | August 29, 201724, 2020 |
Pamela StrayerLaura Black | | |
| | |
| /s/ GLENDA DORCHAK | Director | August 24, 2020 |
Glenda Dorchak
| | |