UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 28,~~October 3, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from				to

Commission File Number 000-22874

Viavi Solutions Inc.

(Exact name of Registrant as specified in its charter)



Delaware		94-2579683
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6001 America Center Drive, San Jose, California 95002

(Address of principal executive offices including Zip code)

(408) 404-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of the exchange on which registered
Common Stock, par value of $0.001 per share	VIAV	The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐	Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.									☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~April 25,~~October 31, 2020, the Registrant had ~~227,973,099~~228,993,740 shares of common stock outstanding.




TABLE OF CONTENTS			Page
PART I - FINANCIAL INFORMATION			2
	Item 1.	Financial Statements (Unaudited)	2
		Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019	2
		Consolidated Statements of Comprehensive Income (Loss) for the Three ~~and Nine~~ Months Ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019	3
		Consolidated Balance Sheets as of ~~March 28,~~October 3, 2020 and June ~~29, 2019~~27, 2020	4
		Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019	5
		Consolidated Statements of Stockholders’ Equity for the Three ~~and Nine~~ Months Ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019	6
		Notes to Consolidated Financial Statements	87
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3428
	Item 3.	Quantitative and Qualitative Disclosure About Market Risks	4739
	Item 4.	Controls and Procedures	4739

PART II - OTHER INFORMATION			4841
	Item 1.	Legal Proceedings	4841
	Item 1A.	Risk Factors	4841
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4954
	Item 3.	Defaults Upon Senior Securities	4954
	Item 4.	Mine Safety Disclosures	4954
	Item 5.	Other Information	4954
	Item 6.	Exhibits	5054

SIGNATURES			5155

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)


	Three Months Ended						Nine Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019			October 3, 2020			September 28, 2019
Revenues:
Product revenue	$	223.8		$	232.1		$	770.5		$	746.0		$	247.9		$	264.8
Service revenue	32.4			33.1			99.2			94.6			36.8			35.0
Total net revenue	256.2			265.2			869.7			840.6			284.7			299.8
Cost of revenues:
Product cost of revenue	89.2			91.6			297.2			295.5			93.6			104.3
Service cost of revenue	12.2			12.2			37.0			37.4			13.5			12.7
Amortization of acquired technologies	8.0			7.9			24.8			25.8			8.2			8.4
Total cost of revenues	109.4			111.7			359.0			358.7			115.3			125.4
Gross profit	146.8			153.5			510.7			481.9			169.4			174.4
Operating expenses:
Research and development	46.8			48.7			148.6			137.2			48.8			51.5
Selling, general and administrative	83.6			86.8			263.1			259.7			81.4			93.2
Amortization of other intangibles	8.9			9.2			26.4			29.4			8.5			8.7
Restructuring and related (benefits) charges	(1.6		)	0.9			(2.2		)	16.0			(0.6		)	0.3
Total operating expenses	137.7			145.6			435.9			442.3			138.1			153.7
Income from operations	9.1			7.9			74.8			39.6			31.3			20.7
Interest income and other income, net	5.3			0.9			9.3			4.1			0.6			2.7
Interest expense	(8.4		)	(8.0		)	(25.1		)	(26.2		)	(9.0		)	(8.3		)
Income before taxes	6.0			0.8			59.0			17.5			22.9			15.1
Provision for income taxes	38.8			5.6			57.0			22.2			8.6			8.3
(Loss) income from continuing operations	(32.8		)	(4.8		)	2.0			(4.7		)
Loss from discontinued operations, net of taxes	—			—			—			(2.4		)
Net (loss) income	$	(32.8	)	$	(4.8	)	$	2.0		$	(7.1	)
Net income													$	14.3		$	6.8

(Loss) income per share - basic:
Continuing operations	$	(0.14	)	$	(0.02	)	$	0.01		$	(0.02	)
Discontinued operations	—			—			—			(0.01		)
Net (loss) income per share - basic	$	(0.14	)	$	(0.02	)	$	0.01		$	(0.03	)

(Loss) income per share - diluted:
Continuing operations	$	(0.14	)	$	(0.02	)	$	0.01		$	(0.02	)
Discontinued operations	—			—			—			(0.01		)
Net (loss) income per share - diluted	$	(0.14	)	$	(0.02	)	$	0.01		$	(0.03	)
Net income per share:
Basic													$	0.06		$	0.03
Diluted													$	0.06		$	0.03

Shares used in per-share calculations:
Basic	230.0			228.3			229.8			227.9			228.8			229.4
Diluted	230.0			228.3			236.3			227.9			231.8			236.4

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(unaudited)

Three Months Ended Nine Months Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019
Net (loss) income $ (32.8 ) $ (4.8 ) $ 2.0
$ (7.1 )
Other comprehensive income (loss):
Net change in cumulative translation adjustment, net of tax (33.7 ) 11.6
(33.1 ) (14.5 )
Net change in available-for-sale investments, net of tax:
Unrealized holding gain arising during period (0.1 ) 0.1
(0.1 ) 0.3
Plus: reclassification adjustments included in net loss —
—
—
0.4
Net change in defined benefit obligation, net of tax:
Amortization of actuarial losses 0.7
0.5
2.2
1.5
Net change in accumulated other comprehensive (loss) income (33.1 ) 12.2
(31.0 ) (12.3 )
Comprehensive (loss) income $ (65.9 ) $ 7.4
$ (29.0 )
$ (19.4 )



	Three Months Ended
	October 3, 2020		September 28, 2019
Net income	$	14.3	$	6.8
Other comprehensive income (loss):
Net change in cumulative translation adjustment, net of tax	27.6		(27.4		)
Amortization of actuarial income (losses)	0.8		0.7
Net change in accumulated other comprehensive income (loss)	28.4		(26.7		)
Comprehensive income (loss)	$	42.7	$	(19.9	)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

VIAVI SOLUTIONS INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share and par value data)

(unaudited)


	March 28, 2020			June 29, 2019			October 3, 2020			June 27, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	532.5		$	521.5		$	590.8		$	539.0
Short-term investments	1.3			1.5			1.5			1.5
Restricted cash	3.5			3.5			3.2			3.5
Accounts receivable, net	235.4			237.7			220.1			235.5
Inventories, net	87.0			102.7			87.3			83.3
Prepayments and other current assets	54.3			49.9			58.7			50.8
Total current assets	914.0			916.8			961.6			913.6
Property, plant and equipment, net	171.1			179.9			175.4			172.5
Goodwill, net	376.2			381.1			387.9			381.4
Intangibles, net	157.7			211.6			134.4			148.1
Deferred income taxes	104.5			108.4			110.2			105.4
Other non-current assets	54.7			17.3			54.9			55.3
Total assets	$	1,778.2		$	1,815.1		$	1,824.4		$	1,776.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	45.2		$	63.4		$	45.2		$	53.0
Accrued payroll and related expenses	46.5			58.7			51.2			51.4
Deferred revenue	55.2			55.3			60.1			54.6
Accrued expenses	29.4			34.2			21.4			22.6
Current portion of long-term debt							0			2.8
Other current liabilities	62.8			72.4			49.6			48.4
Total current liabilities	239.1			284.0			227.5			232.8
Long-term debt	595.3			578.8			606.6			600.9
Other non-current liabilities	266.9			226.5			236.5			231.2
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, $0.001 par value; 1 billion shares authorized; 228 million shares at March 28, 2020 and 229 million shares at June 29, 2019, issued and outstanding	0.2			0.2
Common stock, $0.001 par value; 1 billion shares authorized; 229 million shares at October 3, 2020 and 229 million shares at June 27, 2020, issued and outstanding							0.2			0.2
Additional paid-in capital	70,265.5			70,244.7			70,280.7			70,274.3
Accumulated deficit	(69,423.2		)	(69,384.5		)	(69,389.6		)	(69,397.2		)
Accumulated other comprehensive loss	(165.6		)	(134.6		)	(137.5		)	(165.9		)
Total stockholders’ equity	676.9			725.8			753.8			711.4
Total liabilities and stockholders’ equity	$	1,778.2		$	1,815.1		$	1,824.4		$	1,776.3

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)


	Nine Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			October 3, 2020			September 28, 2019
OPERATING ACTIVITIES:
Net income (loss)	$	2.0		$	(7.1	)
Net income							$	14.3		$	6.8
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	30.0			29.7			8.8			9.8
Amortization of acquired technologies and other intangibles	51.2			55.2			16.7			17.1
Stock-based compensation	33.3			28.5			12.5			10.3
Amortization of debt issuance costs and accretion of debt discount	16.5			17.2			5.9			5.5
Amortization of discount and premium on investments, net	—			(0.3		)
Net change in fair value of contingent liabilities	(4.3		)	—			0			1.7
Loss on disposal of long-lived assets	—			1.0
Other	4.9			4.1			0.6			0.6
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(6.6		)	(7.9		)	19.7			0.5
Inventories	3.6			(5.1		)	(3.4		)	(3.4		)
Other current and non-currents assets	1.9			(0.4		)	(3.2		)	(1.7		)
Accounts payable	(16.0		)	(0.4		)	(8.5		)	(1.6		)
Income taxes payable	8.6			4.4			2.5			2.0
Deferred revenue, current and non-current	7.4			2.4			4.0			(4.1		)
Deferred taxes, net	27.8			(6.0		)	(1.0		)	(1.3		)
Accrued payroll and related expenses	(10.3		)	0.2			(1.4		)	3.8
Accrued expenses and other current and non-current liabilities	(41.6		)	(5.2		)	(3.6		)	(14.7		)
Net cash provided by operating activities	$	108.4		$	110.3		$	63.9		$	31.3

INVESTING ACTIVITIES:
Maturities of available-for-sale investments	$	—		$	45.1
Sales of available-for-sale investments	—			97.1
Capital expenditures	(23.6		)	(34.7		)	$	(8.0	)	$	(7.1	)
Proceeds from the sale of assets	4.0			4.2			0.5			1.2
Acquisitions, net of cash acquired	(0.5		)	(29.7		)
Net cash (used in) provided by investing activities	$	(20.1	)	$	82.0
Net cash used in investing activities							$	(7.5	)	$	(5.9	)

FINANCING ACTIVITIES:
Payment of debt issuance costs	$	—		$	(0.5	)	$	(0.1	)	$	0
Repurchase and retirement of common stock	(43.8		)	(9.0		)	(6.7		)	(1.5		)
Withholding tax payment on vesting of restricted stock awards	(18.4		)	(11.9		)	(9.3		)	(7.6		)
Repurchase and redemption of convertible debt	—			(276.9		)
Payment of financing obligations	(2.1		)	(0.7		)	(0.4		)	(1.0		)
Proceeds from employee stock purchase plan	5.5			5.4			3.5			2.3
Payment of debt							(2.8		)	0
Net cash used in financing activities	(58.8		)	(293.6		)	$	(15.8	)	$	(7.8	)

Effect of exchange rates on cash, cash equivalents and restricted cash	(19.0		)	(7.2		)	$	11.2		$	(14.4	)
Net increase (decrease) in cash, cash equivalents and restricted cash	10.5			(108.5		)	51.8			3.2
Cash, cash equivalents and restricted cash at the beginning of the period ⁽¹⁾	530.4			624.3			547.4			530.4
Cash, cash equivalents and restricted cash at the end of the period ⁽²⁾	$	540.9		$	515.8		$	599.2		$	533.6

⁽¹⁾ These amounts include both current and non-current balances of restricted cash totaling ~~$8.9~~$8.4 million and ~~$12.9~~$8.9 million as of June ~~29, 2019~~27, 2020 and June ~~30, 2018,~~29, 2019, respectively.

⁽²⁾ These amounts include both current and non-current balances of restricted cash totaling $8.4 million ~~and$13.1~~and $8.3 million as of ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, respectively.

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

(unaudited)

Three Months Ended March 28, 2020
Common Stock
Shares Amount Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total
Balance at December 28, 2019 230.2
$ 0.2
$ 70,254.0
$ (69,357.4 ) $ (132.5 ) $ 764.3
Net loss —
—
—
(32.8 ) —
(32.8 )
Other comprehensive loss —
—
—
—
(33.1 ) (33.1 )
Shares issued under employee stock plans, net of tax 0.6
—
(0.1 ) —
—
(0.1 )
Stock-based compensation —
—
11.6
—
—
11.6
Repurchase of common stock (2.8 ) —
—
(33.1 ) —
(33.1 )
Other —
—
—
0.1
—
0.1
Balance at March 28, 2020 228.0
$ 0.2
$ 70,265.5
$ (69,423.2 ) $ (165.6 ) $ 676.9



Three Months Ended October 3, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 27, 2020	228.3		$	0.2	$	70,274.3		$	(69,397.2	)	$	(165.9	)	$	711.4
Net income	—		—		—			14.3			—			14.3
Other comprehensive income	—		—		—			—			28.4			28.4
Shares issued under employee stock plans, net of tax	1.6		—		(6.1		)	—			—			(6.1		)
Stock-based compensation	—		—		12.5			—			—			12.5
Repurchase of common stock	(0.6	)	—		—			(6.7		)	—			(6.7		)
Balance at October 3, 2020	229.3		$	0.2	$	70,280.7		$	(69,389.6	)	$	(137.5	)	$	753.8

Three Months Ended March 30, 2019
Common Stock
Shares Amount Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total
Balance at December 29, 2018 228.0
$ 0.2
$ 70,226.8
$ (69,389.5 ) $ (127.4 ) $ 710.1
Net loss —
—
—
(4.8 ) —
(4.8 )
Other comprehensive income —
—
—
—
12.2
12.2
Shares issued under employee stock plans, net of tax 0.7
—
0.4
—
—
0.4
Stock-based compensation —
—
10.8
—
—
10.8
Repurchase of common stock —
—
—
(0.4 ) —
(0.4 )
Balance at March 30, 2019 228.7
$ 0.2
$ 70,238.0
$ (69,394.7 ) $ (115.2 ) $ 728.3

Nine Months Ended March 28, 2020
Common Stock
Shares Amount Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total
Balance at June 29, 2019 228.8
$ 0.2
$ 70,244.7
$ (69,384.5 ) $ (134.6 ) $ 725.8
Cumulative adjustment for adoption of ASC 842 —
—
—
3.0
—
3.0
Net income —
—
—
2.0
—
2.0
Other comprehensive loss —
—
—
—
(31.0 ) (31.0 )
Shares issued under employee stock plans, net of tax 2.8
—
(12.7 ) —
—
(12.7 )
Stock-based compensation —
—
33.5
—
—
33.5
Repurchase of common stock (3.6 ) —
—
(43.8 ) —
(43.8 )
Other —
—
—
0.1
—
0.1
Balance at March 28, 2020 228.0
$ 0.2
$ 70,265.5
$ (69,423.2 ) $ (165.6 ) $ 676.9

Nine Months Ended March 30, 2019
Common Stock
Shares Amount Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total
Balance at June 30, 2018 226.7
$ 0.2
$ 70,216.2
$ (69,378.6 ) $ (102.9 ) $ 734.9
Net loss —
—
—
(7.1 ) —
(7.1 )
Other comprehensive loss —
—
—
—
(12.3 ) (12.3 )
Shares issued under employee stock plans, net of tax 2.9
—
(7.1 ) —
—
(7.1 )
Stock-based compensation —
—
28.7
—
—
28.7
Repurchase of common stock (0.9 ) —
—
(9.0 ) —
(9.0 )
Other —
—
0.2
—
—
0.2
Balance at March 30, 2019 228.7
$ 0.2
$ 70,238.0
$ (69,394.7 ) $ (115.2 ) $ 728.3



Three Months Ended September 28, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 29, 2019	228.8		$	0.2	$	70,244.7		$	(69,384.5	)	$	(134.6	)	$	725.8
Cumulative adjustment for adoption of ASC 842	—		—		—			3.0			—			3.0
Net income	—		—		—			6.8			—			6.8
Other comprehensive loss	—		—		—			—			(26.7		)	(26.7		)
Shares issued under employee stock plans, net of tax	1.7		—		(9.7		)	—			—			(9.7		)
Stock-based compensation	—		—		10.4			—			—			10.4
Repurchase of common stock	(0.1	)	—		—			(1.5		)	—			(1.5		)
Balance at September 28, 2019	230.4		$	0.2	$	70,245.4		$	(69,376.2	)	$	(161.3	)	$	708.1

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The financial information for Viavi Solutions Inc. (“VIAVI” also referred to as “the Company”) for the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 is unaudited, and includes all normal and recurring adjustments Company management considers necessary for a fair statement of the financial information set forth herein. The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America ~~(“U.S. GAAP”)~~(U.S. GAAP) for interim financial information and rules and regulations of the Securities and Exchange Commission ~~(“SEC”)~~(SEC). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual consolidated financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended June ~~29, 2019.~~27, 2020.

~~Other than updates to the Company’s lease accounting policy under Accounting Standards Codification (“ASC”) 842 -~~ ~~Leases, as disclosed in “Note 2. Recently Issued Accounting Pronouncements” and “Note 12. Leases”, there~~There have been no material changes to the Company’s accounting policies during the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020, as compared to the significant accounting policies presented in “Note 1. Basis of Presentation” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report for the year ended June ~~29, 2019~~27, 2020 on Form 10-K, filed with the SEC on August ~~27, 2019.~~24, 2020.

The balance sheet as of June ~~29, 2019~~27, 2020 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 may not be indicative of results for the fiscal year ending ~~June 27, 2020~~July 3, 2021 or any future periods.

Fiscal Years

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th. The Company’s fiscal 2021 is a 53-week year ending on July 3, 2021. The Company’s fiscal 2020 iswas a 52-week year ending on June 27, 2020. The Company’s first quarter of fiscal ~~2019~~year 2021 was a ~~52-week year ending on June 29, 2019.~~14-week quarter compared to the standard 13-week quarters.

Principles of Consolidation

The consolidated financial statements include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. The Company bases estimates on historical experience and assumptions about future periods that are believed to be reasonable based on available information. The Company’s reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect readily available current information.

A novel strain of coronavirus ~~(“COVID-19”)~~(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”)~~(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 Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates assumptions or conditions.

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2. Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements Adopted

In June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial assets will be estimated based on ~~the financial 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 Right-of-Use (“ROU”) assets and corresponding lease liabilities, measured at the present value of the lease payments.expected losses. In the first quarter of fiscal ~~2020~~2021 the Company adopted ~~this~~the accounting standard using the modified retrospective approach. The Company elected to apply the optional transition approach of not adjusting comparative period financial statements for the adoption impact. The Company also elected the package of practical 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 the Company’s Consolidated ~~Statements of Operations and Statements of Cash Flows. For additional information refer to “Note 12. Leases.”~~Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

~~In December 2019, the FASB issued guidance which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740,~~ ~~Income Taxes~~, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal year 2022 and early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued guidance to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes 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 effective for the Company in the first quarter of fiscal ~~2021~~2022 and early adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.

In ~~June 2016,~~December 2019, the FASB issued guidance ~~that changes~~which simplifies the accounting for ~~recognizing impairments~~income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of ~~financial assets. Under~~ the ~~new~~current 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.to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal ~~2021~~year 2022 and ~~earlier~~early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In August 2020, the FASB issued guidance which simplifies the accounting for financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on 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 year 2023 and early adoption is permitted. The Company is evaluating the impact of ~~adopting~~adoption of this ~~new accounting~~ guidance will have on its Consolidated Financial Statements.

~~Note 3. Revenue~~

The Company accounts for revenue in accordance with ASC 606, which was adopted in fiscal 2019 using the retrospective transition method. The Company’s revenue is derived from a diverse portfolio of network solutions and optical technology products and services, as follows:

•

~~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. 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.

•

~~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.

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Balance sheet and other details~~

~~Unbilled Receivables:~~ The Company records a receivable when an unconditional right to consideration exists and transfer 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.

~~Contract 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, net, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. The prior year’s Consolidated Balance Sheets and Statements of Cash Flows have been updated to conform to the current period’s presentation. Contract asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.

Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of March 28, 2020 and June 29, 2019, the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $3.6 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 deferred revenue and non-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 the Company's performance obligations under the contract are completed and accepted by the customer.

~~The following tables summarize the activity related to deferred revenue (in millions~~):

March 28, 2020
Three Months Ended Nine Months Ended
Deferred revenue:
Balance at beginning of period $ 71.9
$ 68.5
Revenue deferrals for new contracts ⁽¹⁾
26.2
78.7
Revenue recognized during the period (24.2 ) (73.3 )
Balance at end of period $ 73.9
$ 73.9

Short-term deferred revenue $ 55.2
$ 55.2
Long-term deferred revenue $ 18.7
$ 18.7

⁽¹⁾ ~~Included in these amounts is the impact from foreign currency exchange rate fluctuations.~~

~~Remaining Performance Obligations:~~ Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations that are not delivered or incomplete, as of March 28, 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.

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The value of the transaction price allocated to remaining performance obligations as of March 28, 2020, was $205.5 million. The Company expects to recognize approximately88% of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.~~

~~Disaggregation of revenue~~

The Company's revenue is presented on a disaggregated basis on the Consolidated 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 revenue as characterized above is generally at a point in time and over time, respectively.

Note 4.3. Earnings Per Share

The following table sets forth the computation of basic and diluted net ~~loss~~income per share (in millions, except per share data):

Three Months Ended Nine Months Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019
Numerator:

(Loss) Income from continuing operations $ (32.8 ) $ (4.8 ) $ 2.0
$ (4.7 )
Loss from discontinued operations, net of taxes —
—
—
(2.4 )
Net (loss) income $ (32.8 ) $ (4.8 ) $ 2.0
$ (7.1 )
Denominator:
Weighted-average shares outstanding:
Basic 230.0
228.3
229.8
227.9
Shares issuable assuming conversion of convertible notes ⁽¹⁾
—
—
3.0
—
Effect of dilutive securities from stock-based benefit plans —
—
3.5
—
Diluted 230.0
228.3
236.3
227.9

Net (loss) income per share - basic:
Continuing operations $ (0.14 ) $ (0.02 ) $ 0.01
$ (0.02 )
Discontinued operations —
—
—
(0.01 )
Net (loss) income per share $ (0.14 ) $ (0.02 ) $ 0.01
$ (0.03 )

Net (loss) income per share - diluted:
Continuing operations $ (0.14 ) $ (0.02 ) $ 0.01
$ (0.02 )
Discontinued operations —
—
—
(0.01 )
Net (loss) income per share $ (0.14 ) $ (0.02 ) $ 0.01
$ (0.03 )



	Three Months Ended
	October 3, 2020		September 28, 2019
Numerator:
Net income	$	14.3	$	6.8
Denominator:
Weighted-average shares outstanding:
Basic	228.8		229.4
Shares issuable assuming conversion of convertible notes ⁽¹⁾	0		2.8
Effect of dilutive securities from stock-based benefit plans	3.0		4.2
Diluted	231.8		236.4

Net income per share:
Basic	$	0.06	$	0.03
Diluted	$	0.06	$	0.03

⁽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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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net ~~loss~~income per share because their effect would have been anti-dilutive (in millions):

Three Months Ended Nine Months Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019

^{(1) (3)}

^{(1) (2) (3)}

^{(1) (2) (3)}
Restricted stock units 7.3
7.9
0.2
7.7
Stock options and ESPP 1.2
1.5
—
1.5
Shares issuable assuming Convertible Notes 1.3
—
—
—
Total potentially dilutive securities 9.8
9.4
0.2
9.2



	Three Months Ended
	October 3, 2020	September 28, 2019
	^{(2) (3)}
Restricted stock units	1.0	0.1


⁽¹⁾	As the Company incurred a loss from continuing operations in the period, potential securities from employee stock options, ESPP, RSUs and PSUs have been excluded from the dilutive net loss per share computations as their effects were deemed anti-dilutive.

⁽²⁾

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 price above $13.22 per share payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. The Company’s average stock price for the period presented did not exceed the conversion price of $13.22. Refer to “Note 11. Debt” for more details.

⁽³⁾

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 payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. The Company’s average stock price for the period presented did not exceed the conversion price of $13.94. Refer to “Note 11. Debt” for more details.

Note 5.4. Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive loss consists of the accumulated net unrealized gains or losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.

For the ~~nine~~three months ended ~~March 28,~~October 3, 2020, the changes in accumulated other comprehensive loss, net of tax, by component were as follows (in millions):

Unrealized losses on available-for sale investments
Foreign
currency translation adjustments

Change in unrealized components of defined benefit obligations ⁽¹⁾
Total
Beginning balance as of June 29, 2019 $ (5.0 ) $ (101.0 ) $ (28.6 ) $ (134.6 )
Other comprehensive loss before reclassification (0.1 ) (33.1 ) —
(33.2 )
Amounts reclassified to accumulated other comprehensive loss —
—
2.2
2.2
Net current-period other comprehensive (loss) income (0.1 ) (33.1 ) 2.2
(31.0 )
Ending balance as of March 28, 2020 $ (5.1 ) $ (134.1 ) $ (26.4 ) $ (165.6 )



	Unrealized losses on available-for sale investments			Foreign currency translation adjustments			Change in unrealized components of defined benefit obligations ⁽¹⁾			Total
Beginning balance as of June 27, 2020	$	(5.1	)	$	(129.6	)	$	(31.2	)	$	(165.9	)
Other comprehensive income before reclassification	0			27.6			0			27.6
Amounts reclassified to accumulated other comprehensive loss	0			0			0.8			0.8
Net current-period other comprehensive income	0			27.6			0.8			28.4
Ending balance as of October 3, 2020	$	(5.1	)	$	(102.0	)	$	(30.4	)	$	(137.5	)

⁽¹⁾The amount reclassified out of accumulated other comprehensive loss represents the amortization of actuarial losses included as a component of cost of revenues, research and development (“R&D”) and selling, general and administrative (“SG&A”) in the Consolidated Statement of Operations for the ~~nine~~three months ended ~~March 28,~~October 3, 2020. There was 0 tax impact for the ~~nine~~three months ended ~~March 28,~~October 3, 2020. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.

Note 5. Acquisitions

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.

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Note 6. 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 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

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. Investments, Forward Contracts and 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.~~

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

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 years period, subsequent to the RPC Close Date. The achievement or distributions of earn-out payments are not limited in any one period. The acquisition of RPC expands the Company’s 3D Sensing offerings.

The Company accounted for the transaction in accordance with the authoritative guidance on business combination; therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date.

~~The fair value of consideration transferred for the RPC Close Date, were as follows~~ ~~(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

The fair value of the earn-out payments at the RPC Close Date were 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. Investments, Forward Contracts and 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, were 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

The allocation of the purchase price was based upon a valuation performed. 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.

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~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.

Note 7.6. Balance Sheet and Other Details

Contract Balances

Unbilled Receivables: The Company records a receivable when an unconditional right to consideration exists and transfer 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.

Contract 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, net, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. The prior year’s Consolidated Balance Sheets and Statements of Cash Flows have been updated to conform to the current period’s presentation. Contract asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.

Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of October 3, 2020 and June 27, 2020, the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $5.1 million and $3.8 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 deferred revenue and non-current liabilities on the Consolidated Balance Sheets.

The following tables summarize the activity related to deferred revenue (in millions):



	October 3, 2020
		Three Months Ended
Deferred revenue:
Balance at beginning of period		$	74.6
Revenue deferrals for new contracts ⁽¹⁾		29.8
Revenue recognized during the period		(24.3		)
Balance at end of period		$	80.1

Short-term deferred revenue		$	60.1
Long-term deferred revenue		$	20.0

Remaining Performance Obligations: Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations that are not delivered or incomplete, as of October 3, 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.

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The value of the transaction price allocated to remaining performance obligations as of October 3, 2020, was $205.5 million. The Company expects to recognize approximately88% of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.

Disaggregation of revenue

Accounts receivable allowance

The following table presents the activities and balances for allowance for doubtful accounts (in millions):

June 29, 2019 Charged to Costs and Expenses
Deductions ⁽¹⁾
March 28, 2020
Allowance for doubtful accounts $ 2.0
$ 1.9
$ (0.5 ) $ 3.4



	June 27, 2020		Charged to Costs and Expenses		Deductions ⁽¹⁾			October 3, 2020
Allowance for doubtful accounts	$	3.0	$	0.1	$	(0.4	)	$	2.7

⁽¹⁾Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.

Inventories, net

The following table presents the components of inventories, net (in millions):


	March 28, 2020		June 29, 2019		October 3, 2020		June 27, 2020
Finished goods	$	29.1	$	36.7	$	30.8	$	30.0
Work in process	24.4		26.5		13.6		22.5
Raw materials	33.5		39.5		42.9		30.8
Inventories, net	$	87.0	$	102.7	$	87.3	$	83.3

Prepayments and other current assets

The following table presents the components of prepayments and other current assets (in millions):


	March 28, 2020		June 29, 2019		October 3, 2020		June 27, 2020
Prepayments	$	11.0	$	14.2	$	11.8	$	10.9
Asset held for sale	2.5		2.5		2.5		2.5
Advances to contract manufacturers	7.3		5.1		7.0		7.3
Refundable income taxes	13.0		8.9		12.3		10.8
Transaction tax receivables	9.0		11.8		9.7		10.6
Other current assets	11.5		7.4		15.4		8.7
Prepayments and other current assets	$	54.3	$	49.9	$	58.7	$	50.8

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other current liabilities

The following table presents the components of other current liabilities (in millions):


	March 28, 2020		June 29, 2019		October 3, 2020		June 27, 2020
Customer prepayments	$	0.8	$	30.2	$	0.4	$	0.5
Restructuring accrual	1.3		8.6		4.0		6.5
Income tax payable	16.8		8.5		13.1		10.7
Warranty accrual	4.4		4.7		4.6		4.6
Transaction tax payable	5.4		3.8		4.2		3.2
Operating lease liabilities (Note 12)	11.8		—		12.0		11.7
Foreign exchange forward contracts liability	9.7		4.0		1.5		1.5
Other	12.6		12.6		9.8		9.7
Other current liabilities	$	62.8	$	72.4	$	49.6	$	48.4

Other non-current liabilities

The following table presents components of other non-current liabilities (in millions):


	March 28, 2020		June 29, 2019		October 3, 2020		June 27, 2020
Pension and post-employment benefits	$	98.4	$	103.2	$	106.2	$	102.7
Financing obligation	16.2		25.5		16.2		16.2
Deferred tax liability	41.8		14.6		23.6		23.9
Long-term deferred revenue	18.7		13.2		20.0		20.0
Fair value of contingent consideration ⁽¹⁾	33.3		37.7		8.9		9.4
Operating lease liabilities (Note 12)	29.0		—		26.3		28.1
Uncertain tax position	13.1		13.6		11.9		11.6
Other	16.4		18.7		23.4		19.3
Other non-current liabilities	$	266.9	$	226.5	$	236.5	$	231.2

⁽¹⁾ See “Note 8. ~~Investments, Forward Contracts and~~ Fair Value Measurements” of the Notes to our Consolidated Financial Statements for more detail.

Note 8.7. Investments and Forward Contracts ~~and Fair Value Measurements~~

Available-For-Sale Investments

The following table presents the Company’s available-for-sale securities as of ~~March 28,~~October 3, 2020 (in millions):


	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale debt securities:
Asset-backed securities	$	0.9	$	—	$	(0.4	)	$	0.5	$	0.9	$	0	$	(0.4	)	$	0.5
Total available-for-sale debt securities	$	0.9	$	—	$	(0.4	)	$	0.5	$	0.9	$	0	$	(0.4	)	$	0.5

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 ~~March 28,~~October 3, 2020, the total estimated fair value of $0.5 million was classified as other non-current assets.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In addition to the amounts presented above, the Company’s short-term investments classified as trading securities related to the deferred compensation plan as of ~~March 28,~~October 3, 2020, were ~~$1.3~~$1.5 million, of which $0.4 million was invested in debt securities, ~~$0.3~~$0.2 million was invested in money market instruments and funds and ~~$0.6~~$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 three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, the Company recorded 0 other-than-temporary impairment charges in each respective period.

The following table presents contractual maturities of the Company’s debt securities classified as available-for-sale as of ~~March 28,~~October 3, 2020, (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

The following table presents the Company’s available-for-sale securities as of June ~~29, 2019,~~27, 2020, (in millions):


	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Asset-backed securities	$	0.9	$	—	$	(0.3	)	$	0.6	$	0.9	$	0	$	(0.4	)	$	0.5
Total available-for-sale securities	$	0.9	$	—	$	(0.3	)	$	0.6	$	0.9	$	0	$	(0.4	)	$	0.5

As of June ~~29, 2019,~~27, 2020, the estimated fair value of ~~$0.6~~$0.5 million was classified as other non-current assets.

In addition to the amounts presented above, as of June ~~29, 2019,~~27, 2020, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were ~~$1.5~~$1.4 million, of which ~~$0.4~~$0.3 million was invested in debt securities, ~~$0.3~~$0.2 million was invested in money market instruments and funds and ~~$0.8~~$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.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are, inputs which market participants would use in valuing an asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs which reflect the assumptions market participants would use in valuing an asset or liability.

The 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.~~

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 inputs, that are unobservable and significant to the overall fair value measurement. As of March 28, 2020 and June 29, 2019, the Company did not hold any Level 3 investment securities. The fair value of the Company’s contingent liabilities was determined using Level 3 inputs, as discussed below.

~~Fair Value Measurements~~

~~The following table presents assets and liabilities measured at fair value as of March 28, 2020 and June 29, 2019, (in millions~~):

March 28, 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 332.3
332.3
—
—
322.9
322.9
—
—
Trading securities 1.3
1.3
—
—
1.5
1.5
—
—
Foreign currency forward contract ⁽¹⁾
5.7
—
5.7
—
1.2
—
1.2
—
Total assets ⁽²⁾
$ 339.8
$ 333.6
$ 6.2
$ —
$ 326.2
$ 324.4
$ 1.8
$ —

Liability:
Foreign currency forward contract ⁽³⁾
$ 9.7
$ —
$ 9.7
$ —
$ 4.0
$ —
$ 4.0
$ —
Contingent consideration ⁽⁴⁾
34.1
—
—
34.1
38.4
—
—
38.4
Total liabilities $ 43.8
$ —
$ 9.7

$ 34.1
$ 42.4
$ —
$ 4.0
$ 38.4


•	⁽¹⁾	~~$5.7 million~~Level 3: includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and ~~$1.2 million in prepayments and other current assets on~~significant to the ~~Company’s Consolidated Balance Sheets as~~overall fair value measurement. As of ~~March 28,~~October 3, 2020 and June ~~29, 2019, respectively.~~

⁽²⁾

$324.9 million in cash and cash equivalents, $1.3 million in short-term investments, $3.4 million in restricted cash, $5.7 million in prepayments and other current assets, and $4.5 million in other non-current assets on27, 2020, the Company did not hold any Level 3 investment securities. The fair value of the Company’s ~~Consolidated Balance Sheets~~contingent liabilities was determined using Level 3 inputs, as ~~of March 28, 2020. $315.5 million~~discussed further in cash and cash equivalents, $1.5 million in short-term investments, $3.5 million in restricted cash, $1.2 million in other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of June 29, 2019.“Note 8. Fair Value Measurements”.


⁽³⁾	~~$9.7 million and $4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019, respectively.~~


⁽⁴⁾	$0.8 million and $0.7 million in other current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019, respectively. $33.3 million and $37.7 million in other non-current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019, respectively.

The Company’s Level 3 liabilities as of March 28, 2020, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its acquisitions. The earn-out liabilities represent future payments by the Company of up to $63.0 million over three years, that are contingent on the achievement of certain revenue and gross profit targets. As of March 28, 2020, the aggregate fair value of our contingent consideration was $34.1 million. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the 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 input on the date of remeasurement, with the change in fair value recognized in SG&A expense of the Consolidated Statements of Operations.

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~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The following table provides a reconciliation of changes in fair value of the Company’s Level 3 liabilities for the three and nine months ended March 28, 2020 (in millions~~):

Three Months Ended Nine Months Ended
March 28, 2020 March 30, 2019 March 28, 2020 March 30, 2019
Beginning period balance $ 34.1
$ 36.2
$ 38.4
$ —
Additions: To Level 3 contingent consideration liabilities
—
—
—
36.2
Fair value adjustment of contingent consideration liabilities —
—
(4.3 ) —
Ending period balance $ 34.1
$ 36.2
$ 34.1
$ 36.2

~~NaN payments were made in connection with the Company’s contingent earn-out liabilities during the three and nine months ended March 28, 2020 and March 30, 2019.~~

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 ~~March 28,~~October 3, 2020, the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end. Therefore, the fair value of these contracts of ~~$5.7~~$8.0 million and ~~$9.7~~$1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of June ~~29, 2019,~~27, 2020, the fair value of these contracts of ~~$1.2~~$2.2 million and ~~$4.0~~$1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively.

The forward contracts outstanding and not effectively closed, with a term of less than ~~130~~120 days, were transacted near quarter end; therefore, the fair value of the contracts is not significant. As of ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, the notional amounts of the forward contracts the Company held to purchase foreign currencies were ~~$96.7~~$129.3 million and ~~$117.8~~$146.4 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were ~~$195.8~~$19.8 million and ~~$31.3~~$22.0 million, respectively.

The change in the fair value of 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 incurred a ~~loss of $4.0 million and $1.8 million for the three and nine months ended March 28, 2020, respectively. The foreign exchange forward contracts incurred a~~ gain of ~~$1.7~~$6.5 million and a loss of ~~$4.1~~$2.6 million for the three ~~and nine~~ months ended ~~March 30,~~October 3, 2020 and September 28, 2019, respectively.

Note 8. Fair Value Measurements

3Z Telecom, Inc. Acquisition

RPC Photonics, Inc. Acquisition

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

The Company’s assets and liabilities measured at fair value for the periods presented are as follows (in millions):



	October 3, 2020								June 27, 2020
	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	$	0.5	$	0	$	0.5	$	0	$	0.5	$	0
Total debt available-for-sale securities	0.5		0		0.5		0		0.5		0		0.5		0
Money market funds	347.7		347.7		0		0		334.6		334.6		0		0
Trading securities	1.5		1.5		0		0		1.4		1.4		0		0
Foreign currency forward contracts ⁽¹⁾	8.0		0		8.0		0		2.2		0		2.2		0
Total assets ⁽²⁾	$	357.7	$	349.2	$	8.5	$	0	$	338.7	$	336.0	$	2.7	$	0

Liability:
Foreign currency forward contracts ⁽³⁾	$	1.5	$	0	$	1.5	$	0	$	1.5	$	0	$	1.5	$	0
Contingent consideration⁽⁴⁾	9.9		0		0		9.9		9.9		0		0		9.9
Total liabilities	$	11.4	$	0	$	1.5	$	9.9	$	11.4	$	0	$	1.5	$	9.9

(1)$8.0 million and $2.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of October 3, 2020 and June 27, 2020, respectively.

(2)Includes as of October 3, 2020, $340.2 million in cash and cash equivalents, $1.5 million in short-term investments, $3.2 million in restricted cash, $8.0 million in prepayments and other current assets and $4.8 million in other non-current assets on the Company’s Consolidated Balance Sheets. 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.

(3)Includes $1.5 million and $1.5 million in other current liabilities on the Company’s Consolidated Balance Sheets as of October 3, 2020 and June 27, 2020, respectively.

(4)Includes $8.9 million and $9.4 million in other non-current liabilities and $1.0 million and $0.5 million in other current liabilities as of October 3, 2020 and June 27, 2020, respectively.

The Company’s Level 3 liabilities as of October 3, 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 October 3, 2020 and June 27, 2020 and, the aggregate fair value of contingent consideration was $9.9 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.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides a reconciliation of changes in fair value of the Company’s Level 3 liabilities for the three months ended October 3, 2020 (in millions):



	Three Months Ended
	October 3, 2020
Balance as of June 27, 2020	$	9.9
Fair value adjustment of contingent consideration liabilities	0
Balance as of October 3, 2020	$	9.9

NaN payments were made in connection with the Company’s contingent earn-out liabilities during the three months ended October 3, 2020 and September 28, 2019.

Note 9. Goodwill

The following table presents changes in goodwill allocated to the Company’s reportable segments (in millions):

Network Enablement Service Enablement
Optical Security
and Performance
Products
Total
Balance as of June 29, 2019 $ 338.9
$ —
$ 42.2
$ 381.1
Currency translation adjustments (4.9 ) —
—
(4.9 )
Balance as of March 28, 2020 $ 334.0
$ —
$ 42.2
$ 376.2



	Network Enablement		Service Enablement		Optical Security and Performance Products		Total
Balance as of June 27, 2020	$	334.9	$	4.3	$	42.2	$	381.4
Currency translation adjustments	6.5		0		0		6.5
Balance as of October 3, 2020	$	341.4	$	4.3	$	42.2	$	387.9

The Company tests goodwill for impairment at the reporting unit level annually during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired. In the fourth quarter of fiscal ~~2019,~~2020, the Company reviewed goodwill under the qualitative assessment of the authoritative guidance and concluded that it was more likely than not that the fair value of each reporting unit exceeded its carrying amount and that no indication of impairment existed.

There were no events or changes in circumstances which triggered an impairment review during the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020.

Note 10. Acquired Developed Technology and Other Intangibles

The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles (in millions):


As of March 28, 2020	Gross Carrying Amount		Accumulated Amortization			Net
As of October 3, 2020								Gross Carrying Amount		Accumulated Amortization			Net
Acquired developed technology	$	432.7	$	(333.5	)	$	99.2	$	441.9	$	(352.8	)	$	89.1
Customer relationships	191.8		(146.7		)	45.1		197.3		(163.0		)	34.3
Other ⁽¹⁾	35.5		(22.1		)	13.4		36.6		(25.6		)	11.0
Total intangibles	$	660.0	$	(502.3	)	$	157.7	$	675.8	$	(541.4	)	$	134.4


As of June 29, 2019	Gross Carrying Amount		Accumulated Amortization			Net
As of June 27, 2020								Gross Carrying Amount		Accumulated Amortization			Net
Acquired developed technology	$	437.0	$	(311.1	)	$	125.9	$	437.1	$	(341.6	)	$	95.5
Customer relationships	193.7		(126.3		)	67.4		194.7		(154.1		)	40.6
Other ⁽¹⁾	36.1		(17.8		)	18.3		35.7		(23.7		)	12.0
Total intangibles	$	666.8	$	(455.2	)	$	211.6	$	667.5	$	(519.4	)	$	148.1


⁽¹⁾	~~Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.~~

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


⁽¹⁾	Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.

The following table presents the amortization recorded relating to acquired developed technology, customer relationships and other intangibles (in millions):


	Three Months Ended				Nine Months Ended				Three Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019		October 3, 2020		September 28, 2019
Cost of revenues	$	8.0	$	7.9	$	24.8	$	25.8	$	8.2	$	8.4
Operating expenses	8.9		9.2		26.4		29.4		8.5		8.7
Total amortization of intangible assets	$	16.9	$	17.1	$	51.2	$	55.2	$	16.7	$	17.1

Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of ~~March 28,~~October 3, 2020, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):


Fiscal Years
Remainder of 2020	$	16.5
2021	62.5
Remainder of 2021			$	48.4
2022	36.7		38.6
2023	23.0		24.7
2024	9.1		10.2
2025			5.6
Thereafter	9.9		6.9
Total amortization	$	157.7	$	134.4

The acquired developed technology, customer relationships and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.

Note 11. Debt

As of ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the Senior Convertible Notes, net of unamortized debt discounts and issuance costs.

The following table presents the carrying amounts of the liability and equity components of our debt (in millions):


	March 28, 2020			June 29, 2019			October 3, 2020			June 27, 2020
Principal amount of 1.00% Senior Convertible Notes	$	460.0		$	460.0		$	460.0		$	460.0
Principal amount of 1.75% Senior Convertible Notes	225.0			225.0			225.0			225.0
Unamortized discount of liability component	(84.3		)	(99.8		)	(73.7		)	(79.1		)
Unamortized debt issuance cost	(5.4		)	(6.4		)	(4.7		)	(5.0		)
Carrying amount of liability component	$	595.3		$	578.8		$	606.6		$	600.9

Carrying amount of equity component ⁽¹⁾	$	136.8		$	136.8		$	136.8		$	136.8


⁽¹⁾	Included in additional paid-in-capital on the Consolidated Balance Sheets.

The Company was in compliance with all debt covenants as of ~~March 28,~~October 3, 2020 and June ~~29, 2019.~~27, 2020.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 October 3, 2020 and June 27, 2020, we had 0 amounts outstanding under the Credit Agreement.

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 ~~March 28,~~October 3, 2020, the expected remaining term of the 2023 Notes is ~~3.2~~2.7 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.

Based on quoted market prices as of ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, the fair value of the 2023 Notes was approximately ~~$231.4~~$250.9 million and ~~$261.3~~$251.4 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 $400.0 million aggregate principal amount of 1.00% Senior Convertible Notes due 2024 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On March 22, 2017, the Company issued an additional $60.0 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00% payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased. 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. As of ~~March 28,~~October 3, 2020, the expected remaining term of the 2024 Notes is ~~3.9~~3.4 years.

Based on quoted market prices as of ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, the fair value of the 2024 Notes was approximately ~~$485.5~~$524.8 million and ~~$540.8~~$523.3 million, respectively. The 2024 Notes are classified within Level 2 as they are not actively traded in markets.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest Expense

The following table presents the interest expense for contractual interest, amortization of debt issuance costs and accretion of debt discount (in millions):


	Three Months Ended				Nine Months Ended				Three Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019		October 3, 2020		September 28, 2019
Interest expense-contractual interest	$	2.1	$	2.1	$	6.4	$	6.6	$	2.1	$	2.1
Amortization of debt issuance cost	0.3		0.3		1.0		1.1		0.5		0.3
Accretion of debt discount	5.2		4.8		15.5		16.3		5.4		5.1

Note 12. Leases

The Company is a lessee in several operating leases, primarily real estate facilities for office space. The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for our operating leases, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. Operating ROU assets are

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~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

recognized at commencement based on the amount of the initial measurement of the lease liability. Operating ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

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.

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.

For the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, ~~2020,~~2019, the total operating lease costs were ~~$3.6~~$3.4 million and ~~$10.2~~$3.3 million, respectively. Total variable lease costs were immaterial during the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, ~~2020.~~2019. 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 ~~March 28,~~October 3, 2020, the weighted-average remaining lease term was ~~5.3~~5.1 years, and the weighted-average discount rate was ~~4.6%~~4.7%.

For the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, ~~2020,~~2019, cash paid for amounts included in the measurement of operating lease liabilities were ~~$3.7~~$4.4 million and ~~$12.9~~$3.4 million, respectively; and operating ROU assets obtained in exchange of new operating lease liabilities were ~~$0.6~~$1.6 million and ~~$15.1~~$1.9 million, respectively.

The balance sheet information related to our operating leases is as follows (in millions):

March 28, 2020
Other non-current assets $ 41.9
Total operating ROU assets $ 41.9

Other current liabilities $ 11.8
Other non-current liabilities 29.0
Total operating lease liabilities $ 40.8

~~Future minimum operating lease payments as of March 28, 2020 are as follows (in millions~~):

Operating Leases
Remainder of 2020 $ 2.4
2021 12.8
2022 9.8
2023 5.7
2024 4.3
Thereafter 10.8
Total lease payments $ 45.8
Less: Interest (5.0 )
Present value of lease liabilities $ 40.8



	October 3, 2020
Other non-current assets	$	40.2
Total operating ROU assets	$	40.2

Other current liabilities	$	12.0
Other non-current liabilities	26.3
Total operating lease liabilities	$	38.3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

~~Prior to the adoption~~Future minimum operating lease payments as of ~~the new lease standard, future~~October 3, 2020 are as follows (in millions):



	Operating Leases
Remainder of 2021	$	9.1
2022	11.0
2023	6.6
2024	4.8
2025	3.9
Thereafter	7.7
Total lease payments	$	43.1
Less: Interest	(4.8		)
Present value of lease liabilities	$	38.3

Future minimum ~~undiscounted~~ operating lease payments as of June ~~29, 2019, excluding non-lease components,~~27, 2020, were as follows (in millions):


	Operating Leases			Operating Leases
Fiscal 2020	$	11.7
Fiscal 2021	10.8			$	12.8
Fiscal 2022	7.4			10.2
Fiscal 2023	3.9			6.0
Fiscal 2024	2.5			4.6
Fiscal 2025				3.6
Thereafter	5.3			7.5
Less: sublease income	(0.1		)
Total lease payments	$	41.5		$	44.7
Less: Interest				(4.9		)
Present value of lease liabilities				$	39.8

Note 13. Restructuring and Related Charges

The Company has initiated restructuring events primarily intended to reduce its costs, consolidate its operations, integrate various acquisitions, streamline product manufacturing and align its business to address market conditions. The Company’s restructuring charges primarily include severance and benefit costs to eliminate a specific 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 ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, the Company’s total restructuring accrual was ~~$1.3~~$4.0 million and ~~$8.8~~$6.5 million, respectively. During the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020, the Company recorded restructuring and related benefits charges of ~~$1.6 million and $2.2 million, respectively.~~$0.6 million. During the three ~~and nine~~ months ended ~~March 30,~~September 28, 2019, the Company recorded restructuring and related charges of ~~$0.9 million and $16.0 million, respectively.~~$0.3 million.

~~Summary of Restructuring Plans~~

The following table presents the adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three and nine months ended March 28, 2020 ~~(in millions)~~:

Balance June 29, 2019 Nine Months Ended March 28, 2020 Benefits
Cash
Settlements

Non-cash Settlements
and Other Adjustments⁽²⁾
Balance March 28, 2020 Three Months Ended March 28, 2020 Benefits
Fiscal 2019 Plan
NSE, including AW ⁽¹⁾
$ 8.7
$ (2.2 ) $ (4.7 ) $ (0.5 ) $ 1.3
$ (1.6 )
Plans Prior to Fiscal 2017

Other Plans ⁽¹⁾
0.1
—
—
(0.1 ) —
—
Total ⁽³⁾
$ 8.8
$ (2.2 ) $ (4.7 ) $ (0.6 ) $ 1.3
$ (1.6 )


⁽¹⁾	~~Plan type includes workforce reduction cost.~~


⁽²⁾	~~Other adjustments including $0.2 million lease liability reclassification to Operating lease liability upon ASC 842 adoption.~~


⁽³⁾	~~$1.3 million and $8.6 million in other current liabilities on the Consolidated Balance Sheets as of March 28, 2020and June 29, 2019, respectively. $0.2 million in other non-current liabilities on the Consolidated Balance Sheets as of June 29, 2019.~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Restructuring Plans

The following table presents the adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three months ended October 3, 2020 (in millions):



	Balance June 27, 2020		Three Months Ended October 3, 2020 Benefits			Cash Settlements			Non-cash Settlements and Other Adjustments⁽²⁾		Balance October 3, 2020
Fiscal 2019 Plan
NSE, including AW ⁽¹⁾	$	6.5	$	(0.6	)	$	(2.0	)	$	0.1	$	4.0
Total ⁽³⁾	$	6.5	$	(0.6	)	$	(2.0	)	$	0.1	$	4.0


⁽¹⁾	Plan type includes workforce reduction cost.


⁽²⁾	Other adjustments represents the effect of currency translation adjustments.


⁽³⁾	$4.0 million and $6.5 million in other current liabilities on the Consolidated Balance Sheets as of October 3, 2020and June 27, 2020, respectively.

Fiscal 2019 Plans

NSE, including AW Restructuring Plan

During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within its Network Service and Enablement (“NSE”) business, 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. ~~During~~The plan was re-approved in the third quarter of fiscal 2019 and the ~~Company has updated the plan~~fourth quarter of fiscal 2020 to include additional headcount ~~primarily~~and to ~~transfer a portion~~further drive operational improvement.

During the first quarter of ~~the manufacturing operations related to the recently acquired AW business to a contract manufacturer. A~~fiscal 2021 restructuring benefits of ~~$2.2~~$0.6 million was recorded in the ~~nine~~three months ended ~~March 28,~~October 3, 2020 for adjustments to severance and employee benefits. Payments related to the severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal ~~2020.~~2021.

Note 14. Income Taxes

The Company recorded an income tax provision of ~~$38.8~~$8.6 million and ~~$57.0~~$8.3 million for the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, ~~2020, respectively. The Company recorded an income tax provision of $5.6 million and $22.2 million for the three and nine months ended March 30,~~ 2019, respectively.

The income tax provision for the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, 2020 primarily relates to a $31.6 million charge for withholding taxes expected to be paid on the repatriation of $316.4 million of foreign earnings that the Company no longer considers to be permanently reinvested. In light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considers these earnings to be permanently reinvested. The repatriation of these earnings will increase available cash in the U.S. and provide greater U.S. financial flexibility to assist the Company in navigating the expected downturn in the economy. The foreign earnings can be repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense. In addition, the income tax provision for the period includes the income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.~~The income tax provision for the three and nine months ended March 30,~~ 2019 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to the Company’s income from continuing operations before taxes primarily due to the ~~withholding taxes accrued on foreign earnings and the~~ changes in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign income (loss) from continuing operations.

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. We do not expect the provisions of the legislation to have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.

As of ~~March 28,~~October 3, 2020, and June ~~29, 2019,~~27, 2020, the Company’s unrecognized tax benefits totaled ~~$50.6~~$48.3 million and ~~$50.9~~$48.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had ~~$3.5~~$3.6 million accrued for the payment of interest and penalties at ~~March 28,~~October 3, 2020. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although the Company does not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, the Company is unable to estimate the full range of possible adjustments to this balance.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15. Stockholders' Equity

Repurchase of Common Stock

In September 2019, the Board of Directors authorized a stock repurchase program of up to $200 million of the Company’s common stock through open market or private transactions before September 30, 2021. The new stock repurchase program replaces the previous $200 million stock repurchase program that was set to expire on September 30, 2019. Under the new repurchase program, the Company may repurchase its common stock from time to time at the discretion of the Company’s management.

During the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020, the Company repurchased ~~2.8 million and 3.6 million~~565 thousand shares of its common stock for ~~$33.1 million and $43.8 million, respectively.~~$6.7 million. As of ~~March 28,~~October 3, 2020, the Company had remaining authorization of ~~$156.2~~$148.8 million for future share repurchases. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including business and financial market conditions.

Note 16. Stock-Based Compensation

Overview

The impact on the Company’s results of operations of recording stock-based compensation by function for the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, as follows (in millions):


	Three Months Ended				Nine Months Ended				Three Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019		October 3, 2020		September 28, 2019
Cost of revenues	$	1.2	$	1.1	$	3.2	$	2.8	$	1.2	$	1.0
Research and development	2.0		1.6		5.7		4.4		2.2		1.7
Selling, general and administrative	8.5		8.1		24.4		21.3		9.1		7.6
Total stock-based compensation expense	$	11.7	$	10.8	$	33.3	$	28.5	$	12.5	$	10.3

Approximately ~~$1.1~~$1.2 million and $1.0 million of stock-based compensation expense was capitalized to inventory as of ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, respectively.

Full Value Awards

Full Value Awards refer to restricted stock units that are granted without an exercise price and are converted to shares immediately upon vesting. Performance-based awards are performance-based with market conditions, performance conditions, time-based or a combination, and are expected to vest over one to four years. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, the Company granted ~~3.2~~2.5 million and ~~3.8~~2.9 million time-based awards, respectively. The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award. ~~The majority of these~~These time-based awards granted to eligible employees generally vest in annual or quarterly installments over a period of three years, ~~with 33% vesting after one year~~are subject to the employees’ continuing service to the Company and ~~the balance vesting quarterly over the remaining two years.~~do not have an expiration date.

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, the Company granted ~~0.5~~0.6 million and 0.5 million, performance-based awards, respectively. These performance-based shares represent the target amount of grants, and the actual number of shares awarded upon vesting may vary depending upon the achievement of the relevant performance conditions. The shares attained over target upon vesting are reflected as awards granted during the period. Accordingly, during the ~~nine~~three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, the Company granted an additional ~~0.2~~0.1 million and 0.1 million shares due to performance-based shares attained over target. The aggregate grant-date fair value of performance-based awards granted during the ~~nine~~three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 were estimated to be ~~$7.7~~$8.9 million and $6.2 million, respectively. The majority of performance-based awards vest in equal annual installments over three years based on the attainment of certain performance ~~measures~~

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

measures and the employee’s continued service through the vest date. The performance-based awards with market conditions were valued using a Monte Carlo simulation.

As of ~~March 28,~~October 3, 2020, ~~$65.7~~$75.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized.

Note 17. Employee Pension and Other Benefit Plans

The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. The Company also is responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition.

Most of the plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service.

As of ~~March 28,~~October 3, 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-retirement benefits when due. During the ~~nine~~three months ended ~~March 28,~~October 3, 2020, the Company contributed ~~$0.6~~$1.0 million to the U.K. plan and ~~$3.6~~$0.8 million to the other plans. The funded plan assets consist primarily of managed investments.

The following table presents the components of net periodic cost for the pension and benefits plans (in millions):


	Three Months Ended						Nine Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019			October 3, 2020			September 28, 2019
Service cost	$	—		$	—		$	0.2		$	0.1		$	0.1		$	0.1
Interest cost	0.5			0.6			1.4			1.8			0.3			0.4
Expected return on plan assets	(0.4		)	(0.4		)	(1.2		)	(1.2		)	(0.4		)	(0.4		)
Amortization of net actuarial losses	0.7			0.5			2.2			1.5			0.8			0.7
Net periodic benefit cost	$	0.8		$	0.7		$	2.6		$	2.2		$	0.8		$	0.8

Both the calculation of the projected benefit obligation and net periodic cost are based upon actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.

The Company expects to incur cash outlays of approximately ~~$7.8~~$10.0 million related to its defined benefit pension plans during fiscal ~~2020~~2021 to make current benefit payments and fund future obligations. As of ~~March 28,~~October 3, 2020, approximately ~~$4.2~~$1.8 million had been incurred. These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at June ~~29, 2019.~~27, 2020.

Note 18. Commitments and Contingencies

Legal Proceedings

In June 2016, the Company received a court decision regarding the validity of an amendment to a pension deed of trust related to one of its foreign subsidiaries which the Company contends contained an error requiring the Company to increase the pension plan’s benefit. The Company had subsequently further amended the deed to rectify the error. The court ruled that the amendment increasing the pension plan benefit was valid until the subsequent amendment. The Company estimated the liability to range from (amounts represented as £ denote GBP) £5.7 million to £8.4 million. The Company determined the likelihood of loss to be probable and accrued £5.7 million as of July 2, 2016 in accordance with authoritative guidance on contingencies. The accrual is included in pension and post-employment benefits, which is a component of other non-current liabilities in the Company’s Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 ~~March 28,~~October 3, 2020, the related accrued pension liability was £6.5 million or ~~$8.0~~$8.4 million.

The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.

Guarantees

The Company follows 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 0 liabilities have been recorded for these obligations on the Consolidated Balance Sheets as of ~~March 28,~~October 3, 2020 and June ~~29, 2019.~~27, 2020.

Outstanding Letters of Credit and Performance Bonds

As of ~~March 28,~~October 3, 2020, the Company had standby letters of credit of ~~$7.4~~$7.5 million and performance bonds of ~~$1.0~~$0.9 million collateralized by restricted cash.

Product Warranties

The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. In 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. From time to time, specific warranty accruals may be made if unforeseen technical problems arise. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the changes in the Company’s warranty reserve during the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, (in millions):


	Three Months Ended						Nine Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019			October 3, 2020			September 28, 2019
Balance as of beginning of period	$	9.2		$	9.2		$	8.7		$	8.2		$	9.4		$	8.7
Provision for warranty	0.6			1.7			1.9			3.1			0.4			0.4
Utilization of reserve	(0.6		)	(1.7		)	(2.4		)	(4.4		)	(0.2		)	(1.0		)
Adjustments related to pre-existing warranties (including changes in estimates)	—			(0.6		)	1.0			1.7
Adjustments to pre-existing warranties (includes changes in estimates)													0			0.7
Balance as of end of period	$	9.2		$	8.6		$	9.2		$	8.6		$	9.6		$	8.8

Note 19. Operating Segments and Geographic Information

The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”). The Company's reportable segments reflect the way the Company's ~~CODM~~(CODM) reviews and assesses performance of the business.

The Company’s reportable segments are:

(i) Network 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 Company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for our products.

(ii) Service 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 provides innovative, precision, high performance optical products for anti-counterfeiting, government, industrial, automotive and consumer electronic markets, including 3D Sensing applications.

The CODM manages the Company in 2 broad business categories: NSE and OSP. The CODM evaluates segment performance of the NSE business based on the combined segment gross and operating margins. Operating expenses associated with the NSE business are not allocated to the individual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on segment operating margin. The Company allocates corporate-level operating expenses to its segment results, except for certain non-core operating and non-operating activities as discussed below.

The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related (benefits) charges, impairment of goodwill, changes in fair value of contingent consideration liabilities, non-operating income and expenses, or other charges unrelated to core operating performance to its segments because management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables presents information on the Company’s reportable segments for the three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 (in millions):


	Three Months Ended March 28, 2020																		Three Months Ended October 3, 2020
	Network and Service Enablement																		Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures			Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures
Product revenue	$	146.0		$	8.6		$	154.6		$	69.2		$	—		$	223.8		$	139.2		$	7.7		$	146.9		$	101.0		$	0		$	247.9
Service revenue	17.9			14.5			32.4			—			—			32.4			22.9			13.7			36.6			0.2			0			36.8
Net revenue	$	163.9		$	23.1		$	187.0		$	69.2		$	—		$	256.2		$	162.1		$	21.4		$	183.5		$	101.2		$	0		$	284.7

Gross profit	$	104.3		$	16.0		$	120.3		$	36.4		$	(9.9	)	$	146.8		$	103.5		$	14.3		$	117.8		$	61.0		$	(9.4	)	$	169.4
Gross margin	63.6		%	69.3		%	64.3		%	52.6		%				57.3		%	63.8		%	66.8		%	64.2		%	60.3		%				59.5		%

Operating income							$	13.8		$	24.2		$	(28.9	)	$	9.1								$	13.3		$	47.3		$	(29.3	)	$	31.3
Operating margin							7.4		%	35.0		%				3.6		%							7.2		%	46.7		%				11.0		%


	Three Months Ended March 30, 2019																		Three Months Ended September 28, 2019
	Network and Service Enablement																		Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures			Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures
Product revenue	$	160.8		$	11.6		$	172.4		$	59.7		$	—		$	232.1		$	177.3		$	7.7		$	185.0		$	79.8		$	0		$	264.8
Service revenue	19.7			13.3			33.0			0.1			—			33.1			21.6			13.2			34.8			0.2			0			35.0
Net revenue	$	180.5		$	24.9		$	205.4		$	59.8		$	—		$	265.2		$	198.9		$	20.9		$	219.8		$	80.0		$	0		$	299.8

Gross profit	$	115.8		$	15.9		$	131.7		$	30.8		$	(9.0	)	$	153.5		$	128.0		$	12.6		$	140.6		$	43.3		$	(9.5	)	$	174.4
Gross margin	64.2		%	63.9		%	64.1		%	51.5		%				57.9		%	64.4		%	60.3		%	64.0		%	54.1		%				58.2		%

Operating income							$	20.7		$	18.3		$	(31.1	)	$	7.9								$	22.3		$	30.4		$	(32.0	)	$	20.7
Operating margin							10.1		%	30.6		%				3.0		%							10.1		%	38.0		%				6.9		%


	Three Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			October 3, 2020			September 28, 2019
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	156.7		$	162.5		$	178.8		$	183.9
Stock-based compensation	(1.2		)	(1.1		)	(1.2		)	(1.0		)
Amortization of intangibles	(8.0		)	(7.9		)	(8.2		)	(8.4		)
Other charges unrelated to core operating performance ⁽¹⁾	(0.7		)	—			0			(0.1		)
GAAP gross profit	$	146.8		$	153.5		$	169.4		$	174.4

Corporate reconciling items impacting operating income:
Total segment operating income	$	38.0		$	39.0		$	60.6		$	52.7
Stock-based compensation	(11.7		)	(10.8		)	(12.5		)	(10.3		)
Amortization of intangibles	(16.9		)	(17.1		)	(16.7		)	(17.1		)
Change in fair value of contingent liability							0			(1.7		)
Other charges unrelated to core operating performance ⁽¹⁾	(1.9		)	(2.3		)	(0.7		)	(2.6		)
Restructuring and related (benefits) charges	1.6			(0.9		)	0.6			(0.3		)
GAAP operating income from continuing operations	$	9.1		$	7.9		$	31.3		$	20.7

Table of Contents

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


⁽¹⁾	During the three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019, other charges unrelated to core operating performance primarily consisted of certain acquisition and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~The following tables presents information on the Company’s reportable segments for the~~ ~~nine months ended~~ ~~March 28, 2020 and March 30, 2019 (in millions~~):

Nine Months Ended March 28, 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 $ 507.2
$ 34.9
$ 542.1
$ 228.4
$ —
$ 770.5
Service revenue 58.6
40.3
98.9
0.3
—
99.2
Net revenue $ 565.8
$ 75.2
$ 641.0
$ 228.7
$ —
$ 869.7

Gross profit $ 367.1
$ 49.4
$ 416.5
$ 123.3
$ (29.1 ) $ 510.7
Gross margin 64.9 % 65.7 % 65.0 % 53.9 % 58.7 %

Operating income $ 73.6
$ 85.0
$ (83.8 ) $ 74.8
Operating margin 11.5 % 37.2 % 8.6 %

Nine Months Ended March 30, 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 $ 486.7
$ 39.0
$ 525.7
$ 220.3
$ —
$ 746.0
Service revenue 53.8
40.3
94.1
0.5
—
94.6
Net revenue $ 540.5
$ 79.3
$ 619.8
$ 220.8
$ —
$ 840.6

Gross profit $ 344.4
$ 54.5
$ 398.9
$ 112.0
$ (29.0 ) $ 481.9
Gross margin 63.7 % 68.7 % 64.4 % 50.7 % 57.3 %

Operating income $ 69.9
$ 76.8
$ (107.1 ) $ 39.6
Operating margin 11.3 % 34.8 % 4.7 %

Nine Months Ended
March 28, 2020 March 30, 2019
Corporate reconciling items impacting gross profit:
Total segment gross profit $ 539.8
$ 510.9
Stock-based compensation (3.2 ) (2.8 )
Amortization of intangibles (24.8 ) (25.8 )
Other charges unrelated to core operating performance ⁽¹⁾
(1.1 ) (0.4 )
GAAP gross profit $ 510.7
$ 481.9

Corporate reconciling items impacting operating income:
Total segment operating income $ 158.6
$ 146.7
Stock-based compensation (33.3 ) (28.5 )
Amortization of intangibles (51.2 ) (55.2 )
Change in fair value of contingent liability 4.3
—
Other charges unrelated to core operating performance ⁽¹⁾
(5.8 ) (7.4 )
Restructuring and related (benefits) charges 2.2
(16.0 )
GAAP operating income from continuing operations

$ 74.8
$ 39.6


⁽¹⁾	~~During the~~ ~~nine months ended~~ March 28, 2020 and March 30, 2019, other charges unrelated to core operating performance primarily consisted of certain acquisition and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

The Company operates primarily in 3 geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following tables present net revenue by the 3 geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue for the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 (in millions):


	Three Months Ended												Three Months Ended
	March 28, 2020						March 30, 2019						October 3, 2020						September 28, 2019
	Product Revenue		Service Revenue		Total		Product Revenue		Service Revenue		Total		Product Revenue		Service Revenue		Total		Product Revenue		Service Revenue		Total
Americas:
United States	$	58.5	$	13.3	$	71.8	$	63.4	$	13.7	$	77.1	$	63.7	$	14.1	$	77.8	$	71.4	$	13.6	$	85.0
Other Americas	12.0		5.0		17.0		14.4		3.7		18.1		14.3		3.3		17.6		16.6		4.1		20.7
Total Americas	$	70.5	$	18.3	$	88.8	$	77.8	$	17.4	$	95.2	$	78.0	$	17.4	$	95.4	$	88.0	$	17.7	$	105.7

Asia-Pacific:
Greater China	$	39.8	$	1.5	$	41.3	$	36.5	$	2.9	$	39.4	$	77.3	$	1.7	$	79.0	$	70.5	$	1.4	$	71.9
Other Asia-Pacific	29.6		3.4		33.0		41.0		2.9		43.9		25.4		3.8		29.2		31.3		4.0		35.3
Total Asia-Pacific	$	69.4	$	4.9	$	74.3	$	77.5	$	5.8	$	83.3	$	102.7	$	5.5	$	108.2	$	101.8	$	5.4	$	107.2

EMEA:
Switzerland	$	27.8	$	—	$	27.8	$	23.9	$	—	$	23.9	$	17.9	$	0.1	$	18.0	$	12.2	$	0	$	12.2
Other EMEA	56.1		9.2		65.3		52.9		9.9		62.8		49.3		13.8		63.1		62.8		11.9		74.7
Total EMEA	$	83.9	$	9.2	$	93.1	$	76.8	$	9.9	$	86.7	$	67.2	$	13.9	$	81.1	$	75.0	$	11.9	$	86.9

Total net revenue	$	223.8	$	32.4	$	256.2	$	232.1	$	33.1	$	265.2	$	247.9	$	36.8	$	284.7	$	264.8	$	35.0	$	299.8

Nine Months Ended
March 28, 2020 March 30, 2019
Product Revenue Service Revenue Total Product Revenue Service Revenue Total
Americas:
United States $ 213.0
$ 40.0
$ 253.0
$ 213.3
$ 40.7
$ 254.0
Other Americas 45.8
12.5
58.3
49.6
10.8
60.4
Total Americas $ 258.8
$ 52.5
$ 311.3
$ 262.9
$ 51.5
$ 314.4

Asia-Pacific:
Greater China $ 188.7
$ 5.0
$ 193.7
$ 160.0
$ 5.2
$ 165.2
Other Asia-Pacific 89.6
11.2
100.8
107.4
10.0
117.4
Total Asia-Pacific $ 278.3
$ 16.2
$ 294.5
$ 267.4
$ 15.2
$ 282.6

EMEA:
Switzerland $ 53.4
$ 0.1
$ 53.5
$ 72.6
$ —
$ 72.6
Other EMEA 180.0
30.4
210.4
143.1
27.9
171.0
Total EMEA $ 233.4
$ 30.5
$ 263.9
$ 215.7
$ 27.9
$ 243.6

Total net revenue $ 770.5
$ 99.2
$ 869.7
$ 746.0
$ 94.6
$ 840.6

~~Table of Contents~~

~~VIAVI SOLUTIONS INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)~~

~~Note 20. Subsequent Events~~

On May 5, 2020, the Company 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, the Company 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 the Company’s 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 the assets of the Company.

Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s 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 the Company’s consolidated secured leverage ratio. The Company is required to pay commitment fee on the unutilized portion of the facility which ranges between 0.30% and 0.40% per annum depending on the Company’s consolidated secured leverage ratio. As of May 7, 2020, the Company had 0 amounts outstanding under its revolving credit facility.

Item 2.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements contained in this Quarterly report on Form 10-Q, which we also refer to as the Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipates,” “believes,” “can,” “can impact,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “ongoing,” “plans,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as:

Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition and results of operations;

Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;

Our plans for growth and innovation opportunities;

Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;

Our plans for continued development, use and protection of our intellectual property;

Our strategies for achieving our current business objectives, including related risks and uncertainties;

Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;


•	Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;

Our research and development plans and the expected impact of such plans on our financial performance; and

Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.

Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S. Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

In addition, Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June ~~29, 2019.~~27, 2020.

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors” and “Forward-Looking Statements.”

OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS

Viavi Solutions Inc. (“VIAVI” also referred to as “the Company”, “we”, “our” and “us”), is a global provider of network test, monitoring and assurance solutions tofor communications service providers, ~~(“CSPs”),~~ enterprises, network equipment manufacturers, government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to ~~command~~Command the network. VIAVI is also a leader in light management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, government, automotive, and defense applications.

To serve our markets we ~~operate in~~operated the following business segments:

Network Enablement ~~(“NE”)~~(NE);

Service Enablement ~~(“SE”)~~(SE), and;

Optical Security and Performance Products ~~(“OSP”)~~(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 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 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.

We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.

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 América Móvil, AT&T Inc., Lumen Technologies (formerly CenturyLink Inc.), Cisco Systems, Inc., ~~Comcast Corporation,~~ Nokia Solutions and Networks and Verizon Communications, Inc.

Our NE products and associated services including acquired business are described below:

Field Instruments: Primarily consisting of (a) ~~Cable~~Access and ~~Access~~Cable products; (b) Avionics products; (c) Fiber Instrument products; ~~(c)~~(d) Metro products; ~~(d)~~(e) RF Test products; ~~(e)~~(f) Radio Test ~~products; and (f) Avionics~~ 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, ~~deliver insights to optimize performance, detect security threats,~~ and identify opportunities for new revenue ~~streams.~~streams and network optimization.

Our portfolio of SE solutions ~~portfolio delivers~~addresses the same lab and production environments, field deployment and service assurance for operational ~~wireless~~ and fixed communications networks, ~~also addressed by~~including storage networks, as our NE portfolio, ~~primarily supporting CSPs. Additionally, our SE portfolio supports~~.

Our solutions let carriers remotely monitor performance and quality of network, service and applications performance ~~monitoring for enterprises and cloud operators. As service providers and enterprises shift their networks to a hybrid physical-cloud state,~~throughout the ~~SE portfolio~~entire network. This provides our customers with ~~dynamic and remote~~enhanced network management, control, and ~~optimization. They can~~optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, ~~reduce mean time~~help to ~~repair~~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 ~~products.~~tools.

Assurance: Primarily consisting of our (a) Growth Products ~~(Core~~(Location Intelligence and ~~Edge Assurance~~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, ~~healthcare~~automotive industrial and other markets.

Our ~~security~~anti-counterfeiting offerings for the currency market include, ~~Optically Variable Pigment (“OVP®”)~~OVP and ~~Optically Variable Magnetic Pigment (“OVMP®”).~~OVMP. 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. ~~OVMP is an advanced product version of OVP with the added magnetic property feature.~~

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 and Engineered Diffusers^TM.

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, ~~L-3 Communications,~~SICPA Holding SA Company (SICPA), STMicroelectronics N.V., Lockheed Martin Corporation and Seiko Epson ~~SICPA and STMicroelectronics.~~Corporation.

COVID-19 Pandemic Update

The ~~full extent~~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 ofon 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 our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Item 1A: “Risk Factors” for additional details. In an effort to protectprotecting the health and safety of all those we serve, - our employees, customers, suppliers, and ~~partners,~~communities, including implementing early and regular updates

to our ~~global workforce is largely working from home~~health and ~~business travel has been severely curtailed.~~safety policies and procedures. We have shut down, slowed, or modified business operations and activities in certain ~~locations,~~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. 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 ~~some~~and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively ~~impacted~~impact our sales and operating results. WeIn addition, we have ~~also~~ experienced ~~some~~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. ~~In locations where~~Additionally, NSE has experienced some impact to customer demand including for Field Instruments. Customer demand will be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.

While COVID-19 has brought unprecedented challenges, we ~~are conducting essential business activities,~~believe that we have ~~taken certain~~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 ~~measures, including enhanced sanitation, health checks~~of our employees, partners and ~~social distancing.~~

suppliers.

Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and ~~it is possible~~on June 8, 2020, the National Bureau of Economic Research announced that ~~it could cause~~the U.S. was in a ~~sustained local and/or global economic~~ 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 ~~refer~~but have not drawn on this facility to ~~the “Liquidity and Capital Resources” section for further information.~~date. Under a prolonged ~~economic slowdown or~~ global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all. ~~The~~

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 ~~government health and safety measures such as “shelter-in-place” orders and restrictions~~continue to execute on our ability to travel and access our customers or temporary closures of our facilities or the facilities of our suppliers and contract manufacturers, may significantly impact our sales and our ability to ship our products or the ability of our customers to take delivery of our products and may lead to higher than normal inventory levels.long-term value creation strategy.

~~RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS~~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~~Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (U.S. GAAP),which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, and liabilities, net ~~revenues~~revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal ~~2019~~2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission ~~(“SEC”)~~(SEC). There have been no material changes to our critical accounting policies and ~~estimates, except with respect to financial reporting of leasing arrangements from the adoption of ASC 842 -~~ ~~Leases. Refer to “Note 12. Leases” for more details.~~estimates.

RESULTS OF OPERATIONS

The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages):


	Three Months Ended											Nine Months Ended											Three Months Ended
	March 28, 2020			March 30, 2019			Change			Percent Change		March 28, 2020			March 30, 2019			Change			Percent Change		October 3, 2020			September 28, 2019			Change			Percent Change
Segment net revenue:
NE	$	163.9		$	180.5		$	(16.6	)	(9.2	)%	$	565.8		$	540.5		$	25.3		4.7	%	$	162.1		$	198.9		$	(36.8	)	(18.5	)%
SE	23.1			24.9			(1.8		)	(7.2	)%	75.2			79.3			(4.1		)	(5.2	)%	21.4			20.9			0.5			2.4	%
OSP	69.2			59.8			9.4			15.7	%	228.7			220.8			7.9			3.6	%	101.2			80.0			21.2			26.5	%
Total net revenue	$	256.2		$	265.2		$	(9.0	)	(3.4	)%	$	869.7		$	840.6		$	29.1		3.5	%	$	284.7		$	299.8		$	(15.1	)	(5.0	)%

Gross profit	$	146.8		$	153.5		$	(6.7	)	(4.4	)%	$	510.7		$	481.9		$	28.8		6.0	%	$	169.4		$	174.4		$	(5.0	)	(2.9	)%
Gross margin	57.3		%	57.9		%						58.7		%	57.3		%						59.5		%	58.2		%

Research and development	$	46.8		$	48.7		$	(1.9	)	(3.9	)%	$	148.6		$	137.2		$	11.4		8.3	%	$	48.8		$	51.5		$	(2.7	)	(5.2	)%
Percentage of net revenue	18.3		%	18.4		%						17.1		%	16.3		%						17.1		%	17.2		%

Selling, general and administrative	$	83.6		$	86.8		$	(3.2	)	(3.7	)%	$	263.1		$	259.7		$	3.4		1.3	%	$	81.4		$	93.2		$	(11.8	)	(12.7	)%
Percentage of net revenue	32.6		%	32.7		%						30.3		%	30.9		%						28.6		%	31.1		%

Restructuring and related (benefits) charges	$	(1.6	)	$	0.9		$	(2.5	)	(277.8	)%	$	(2.2	)	$	16.0		$	(18.2	)	(113.8	)%	$	(0.6	)	$	0.3		$	(0.9	)	(300.0	)%
Percentage of net revenue	(0.6		)%	0.3		%						(0.3		)%	1.9		%						(0.2		)%	0.1		%

Interest and other income, net	$	5.3		$	0.9		$	4.4		488.9	%	$	9.3		$	4.1		$	5.2		126.8	%	$	0.6		$	2.7		$	(2.1	)	(77.8	)%
Percentage of net revenue	2.1		%	0.3		%						1.1		%	0.5		%						0.2		%	0.9		%

Interest expense	$	(8.4	)	$	(8.0	)	$	0.4		5.0	%	$	(25.1	)	$	(26.2	)	$	(1.1	)	(4.2	)%	$	(9.0	)	$	(8.3	)	$	0.7		8.4	%
Percentage of net revenue	3.3		%	3.0		%						2.9		%	3.1		%						3.2		%	2.8		%

Provision for income taxes	$	38.8		$	5.6		$	33.2		592.9	%	$	57.0		$	22.2		$	34.8		156.8	%	$	8.6		$	8.3		$	0.3		3.6	%
Percentage of net revenue	15.1		%	2.1		%						6.6		%	2.6		%						3.0		%	2.8		%

Net Revenue

Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, training, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.

COVID-19

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our

operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the

ultimate impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, if the COVID-19 pandemic is prolonged and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.

Three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019

Net revenue decreased by ~~$9.0~~$15.1 million, or ~~3.4%~~5.0%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This decrease was due to revenue decrease from our NE ~~and SE segments,~~segment, partially offset by revenue increase in our OSP ~~segment.~~and SE segments as discussed below.

Product revenues decreased by ~~$8.3~~$16.9 million, or ~~3.6%~~6.4%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ~~ago,~~ago. This decrease was primarily due to revenue ~~decrease~~declines from our NE and SE segments, partially offset by ~~revenue increase in~~increased revenues from our OSP segment as discussed below.

Service revenues ~~decreased~~increased by ~~$0.7~~$1.8 million, or ~~2.1%~~5.1%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ~~ago~~ago. This increase was primarily due to ~~revenue decreased~~increased revenues from our NE and SE segments.

NE net revenue decreased by ~~$16.6~~$36.8 million, or ~~9.2%~~18.5%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This decrease was driven ~~primarily~~ by the impact to our business from the COVID-19 lockdown ~~and~~primarily in our Field Instruments, such as Cable, Access and Access. The COVID-19 lockdown has resulted in certain customer operation and logistic shutdowns, that resulted in shipment or acceptance delays, which resulted in a demand slowdown in our Field Instruments with orders pushed out into prospective periods.AvComm products.

SE net revenue ~~decreased~~increased by ~~$1.8~~$0.5 million, or ~~7.2%~~2.4%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This ~~decrease~~increase is primarily driven by ~~the effects of COVID-19, as customers under lockdown were unable to provide on-site verification and acceptance and~~increased revenue from ~~the continued runoff of Mature~~our Growth Assurance products.

OSP net revenue increased by ~~$9.4~~$21.2 million, or ~~15.7%~~26.5%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This increase is primarily driven by growth in revenue inacross all product lines which include our Anti-Counterfeiting, ~~products.~~

~~Nine Months Ended March 28, 2020~~3D Sensing, and ~~March 30, 2019~~

Net revenue increased by $29.1 million, or 3.5%, during the nine months ended March 28, 2020 compared to the same period a year ago due to revenue increase from our NE and OSP segments, partially offset by our SE segment discussed below.

~~Product revenues increased by $24.5 million, or 3.3% during the nine months ended March 28, 2020 compared to the same period a year ago, primarily from our NE and OSP segments as discussed below.~~

Service revenues increased by $4.6 million, or 4.9%, during the nine months ended March 28, 2020 compared to the same period a year ago primarily due to increased support revenue from the NE segment, partially offset by a decline in support contract renewals for the SE segment as discussed below.

NE net revenue increased by $25.3 million, or 4.7%, during the nine months ended March 28, 2020 compared to the same period a year ago. This increase was driven by 5G wireless secular growth trends, higher fiber demand from Field Instruments due to the 400Gb upgrade cycle and cable demand strength of DOCSIS 3.1. The increase in revenue was partially offset by the effect of COVID-19.

SE net revenue decreased by $4.1 million, or 5.2%, during the nine months ended March 28, 2020 compared to the same period a year ago. This decrease was primarily driven by the effect of COVID-19 and continued run-off of our Mature Assurance portfolio solutions, partially offset by an increase in revenues from our Growth Assurance products.

OSP net revenue increased by $7.9 million, or 3.6%, during the nine months ended March 28, 2020 compared to the same period a year ago. This increase is primarily driven by an increased demand from our 3D SensingAerospace & Defense products.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period over period variability in our financial ~~measures. For example, while the majority of our net revenue~~measures and ~~expenses are denominated in U.S. dollars, a portion of our international operations~~

~~are denominated in~~present foreign ~~currencies. The strengthening of the U.S. dollar relative to foreign currencies could negatively impact reported revenue.~~exchange rate risks.

Additionally, we have seen demand for our NE and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) the impact of ongoing global trade policies, tariffs and sanctions; and (f) regulatory or economic developments and/or technology challenges that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms.

Revenue by Region

We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (in millions):


	Three Months Ended								Nine Months Ended								Three Months Ended
	March 28, 2020				March 30, 2019				March 28, 2020				March 30, 2019				October 3, 2020				September 28, 2019
Americas:
United States	$	71.8	28.1	%	$	77.1	29.1	%	$	253.0	29.1	%	$	254.0	30.2	%	$	77.8	27.3	%	$	85.0	28.4	%
Other Americas	17.0		6.6	%	18.1		6.8	%	58.3		6.7	%	60.4		7.2	%	17.6		6.2	%	20.7		6.9	%
Total Americas	$	88.8	34.7	%	$	95.2	35.9	%	$	311.3	35.8	%	$	314.4	37.4	%	$	95.4	33.5	%	$	105.7	35.3	%

Asia-Pacific:
Greater China	$	41.3	16.1	%	$	39.4	14.9	%	$	193.7	22.3	%	$	165.2	19.7	%	$	79.1	27.8	%	$	71.9	24.0	%
Other Asia-Pacific	33.0		12.9	%	43.9		16.5	%	100.8		11.6	%	117.4		13.9	%	29.1		10.2	%	35.3		11.8	%
Total Asia-Pacific	$	74.3	29.0	%	$	83.3	31.4	%	$	294.5	33.9	%	$	282.6	33.6	%	$	108.2	38.0	%	$	107.2	35.8	%

EMEA:
Switzerland	$	27.8	10.8	%	$	23.9	9.0	%	$	53.5	6.1	%	$	72.6	8.6	%	$	17.9	6.3	%	$	12.2	4.0	%
Other EMEA	65.3		25.5	%	62.8		23.7	%	210.4		24.2	%	171.0		20.4	%	63.2		22.2	%	74.7		24.9	%
Total EMEA	$	93.1	36.3	%	$	86.7	32.7	%	$	263.9	30.3	%	$	243.6	29.0	%	$	81.1	28.5	%	$	86.9	28.9	%

Total net revenue	$	256.2	100.0	%	$	265.2	100.0	%	$	869.7	100.0	%	$	840.6	100.0	%	$	284.7	100.0	%	$	299.8	100.0	%

Net revenue from customers outside the Americas during the three months ended ~~March 28,~~October 3, 2020 and ~~March 30,~~September 28, 2019 represented ~~65.3%~~66.5% and ~~64.1%~~64.7% of net revenue, respectively.

~~Net revenue from customers outside the Americas during the nine months ended March 28, 2020 and March 30, 2019 represented~~ ~~64.2%~~ ~~and~~ ~~62.6%~~ ~~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 ~~decreased~~increased by ~~0.6~~1.3 percentage points during the three months ended ~~March 28,~~October 3, 2020 from ~~57.9%~~58.2% in the same period a year ago to ~~57.3% in the current period. This decrease was primarily driven by lower revenue~~

~~volume in our NE segment. The decrease was partially offset by gross margin improvement in our SE and OSP segments as discussed below in the Operating Segment Information section.~~

~~Gross margin increased by 1.4 percentage points during the nine months ended March 28, 2020 from 57.3% in the same period a year ago to 58.7%~~59.5% in the current period. This increase was primarily driven by ~~higher revenue volume and~~ favorable product mix within our ~~NE segment and gross margin improvement in our~~ OSP segment. ~~This increase was partially offset by gross margin reduction in our SE segment as discussed below in the Operating Segment Information section.~~

As discussed in more detail under “Net Revenue” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.

Research and Development

R&D expense decreased by ~~$1.9~~$2.7 million, or ~~3.9%~~5.2%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This decrease was primarily driven by variable expense reductions and cost efficiencies during the period. As a percentage of net revenue, R&D ~~decreased by~~remained relatively flat, declining 0.1 percentage points during the three months ended ~~March 28, 2020 compared to the same period a year ago.~~

R&D expense increased by $11.4 million, or 8.3%, during the nine months ended March 28, 2020 compared to the same period a year ago. This increase was primarily driven by targeted investments to support increased demand for our key product lines and additional R&D costs incurred from our acquired businesses. As a percentage of net revenue R&D increased by 0.8 percentage points during the nine months ended March 28,October 3, 2020 compared to the same period a year ago.

We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.

Selling, General and Administrative

SG&A expense decreased by ~~$3.2~~$11.8 million or ~~3.7%~~12.7%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This decrease was primarily due to decreased spend on sales commissions, travel and ~~lower travel~~entertainment expenses in the current period. As a percentage of net revenue, SG&A decreased ~~0.1~~2.5 percentage points during the three months ended ~~March 28, 2020 compared to the same period a year ago.~~

SG&A expense increased by $3.4 million, or 1.3%, during the nine months ended March 28, 2020 compared to the same period a year ago. This increase is primarily due to ongoing investments including upgrading our ERP and related systems, targeted investments to support increased demand for our Wireless, Fiber and 3D Sensing products and additional SG&A costs incurred from our acquired businesses. It is partially offset by the change in fair value of contingent consideration. As a percentage of net revenue, SG&A decreased 0.6 percentage points during the nine months ended March 28,October 3, 2020 compared to the same period a year ago.

We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue. However, we may experience in the future, certain charges unrelated to our core operating performance, such as mergers and acquisitions-related expenses, litigation expenses and charges from changes in the fair value measurement of our contingent consideration liabilities, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.

Restructuring and Related Charges

From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, integrate various acquisitions, rationalize the manufacturing of our products and align our businesses to address market conditions.

As of ~~March 28,~~October 3, 2020, our total restructuring accrual was ~~$1.3~~$4.0 million. During the three ~~and nine~~ months ended ~~March 28,~~October 3, 2020, we recorded restructuring and ~~related~~ benefits charges of ~~$1.6 million and $2.2 million respectively, in restructuring and related charges.~~$0.6 million. During the three ~~and nine~~ months ended ~~March 30,~~September 28, 2019, wethe Company recorded restructuring and related charges of ~~$0.9 million and $16.0 million, respectively.~~$0.3 million. Refer to “Note 13. Restructuring and Related Charges” for more information.

Interest and Other Income, Net

Interest and other income, net, was ~~$5.3~~$0.6 million during the three months ended ~~March 28,~~October 3, 2020 compared to ~~$0.9~~$2.7 million the same period a year ago. This ~~$4.4~~$2.1 million ~~increase~~decrease was primarily driven by ~~$4.1~~a $1.3 million ~~favorable~~decrease in interest income due to lower yields on money market funds in which we invest excess cash during the current period and a $1.1 million unfavorable 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.~~

Interest and other income, net, was $9.3 million during the nine months ended March 28, 2020 compared to $4.1 million the same period a year ago. This $5.2 million increase was driven by $5.4 million favorable foreign exchange impact as the balance sheet hedging program provided a moreless favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest Expense

Interest expense increased by ~~$0.4~~$0.7 million, or ~~5.0%~~8.4%, during the three months ended ~~March 28,~~October 3, 2020 compared to the same period a year ago. This increase was primarily due to the commitment fee on unutilized portion of the revolving credit facility, the amortization of issuance costs related to the revolving credit facility as well as an increase in debt discount accretion of the 2023 Notes and 2024 Notes during the current period.

~~Interest expense decreased by $1.1 million, or 4.2%, during the nine months ended March 28, 2020 compared to the same period a year ago.~~ ~~This decrease was primarily due to a decrease in debt discount accretion of the 2033 Notes during the current period as the notes were fully redeemed or converted in the second quarter of fiscal 2019.~~

Provision for Income Taxes

We recorded an income tax provision of ~~$38.8~~$8.6 million and ~~$57.0~~$8.3 million for the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, ~~2020, respectively. We recorded an income tax provision of $5.6 million and $22.2 million for the three and nine months ended March 30,~~ 2019, respectively.

The income tax provision for the three ~~and nine~~ months ended ~~March~~October 3, 2020 and September 28, 2020 primarily relates to a $31.6 million charge for withholding taxes expected to be paid on the repatriation of $316.4 million of foreign earnings that we no longer considers to be permanently reinvested. In light of the economic uncertainty caused by COVID-19, we reevaluated its historic assertion on foreign earnings and no longer considers these earnings to be permanently reinvested. The repatriation of these earnings will increase available cash in U.S and provide greater U.S. financial flexibility to assist us in navigating the expected downturn in the economy. The foreign earning can be repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense. In addition, the income tax provision for the period includes the income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.~~The income tax provision for the three and nine months ended March 30,~~ 2019 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due ~~to the withholding taxes accrued on foreign earnings and~~ the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income (loss) from continuing operations.

As of ~~March 28,~~October 3, 2020, and June ~~29, 2019,~~27, 2020, our unrecognized tax benefits totaled ~~$50.6~~$48.3 million and ~~$50.9~~$48.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. We had ~~$3.5~~$3.6 million accrued for the payment of interest and penalties at ~~March 28,~~October 3, 2020. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

Operating Segment Information

Information related to our operating segments were as follows, (in millions):


	Three Months Ended											Nine Months Ended											Three Months Ended
	March 28, 2020			March 30, 2019			Change			Percentage Change		March 28, 2020			March 30, 2019			Change			Percentage Change		October 3, 2020			September 28, 2019			Change			Percentage Change
Network Enablement
Net revenue	$	163.9		$	180.5		$	(16.6	)	(9.2	)%	$	565.8		$	540.5		$	25.3		4.7	%	$	162.1		$	198.9		$	(36.8	)	(18.5	)%
Gross profit	104.3			115.8			(11.5		)	(9.9	)%	367.1			344.4			22.7			6.6	%	103.5			128.0			(24.5		)	(19.1	)%
Gross margin	63.6		%	64.2		%						64.9		%	63.7		%						63.8		%	64.4		%

Service Enablement
Net revenue	$	23.1		$	24.9		$	(1.8	)	(7.2	)%	$	75.2		$	79.3		$	(4.1	)	(5.2	)%	$	21.4		$	20.9		$	0.5		2.4	%
Gross profit	16.0			15.9			0.1			0.6	%	49.4			54.5			(5.1		)	(9.4	)%	14.3			12.6			1.7			13.5	%
Gross margin	69.3		%	63.9		%						65.7		%	68.7		%						66.8		%	60.3		%

Network and Service Enablement
Net revenue	$	187.0		$	205.4		$	(18.4	)	(9.0	)%	$	641.0		$	619.8		$	21.2		3.4	%	$	183.5		$	219.8		$	(36.3	)	(16.5	)%
Operating income	13.8			20.7			(6.9		)	(33.3	)%	73.6			69.9			3.7			5.3	%	13.3			22.3			(9.0		)	(40.4	)%
Operating margin	7.4		%	10.1		%						11.5		%	11.3		%						7.2		%	10.1		%

Optical Security and Performance
Net revenue	$	69.2		$	59.8		$	9.4		15.7	%	$	228.7		$	220.8		$	7.9		3.6	%	$	101.2		$	80.0		$	21.2		26.5	%
Gross profit	36.4			30.8			5.6			18.2	%	123.3			112.0			11.3			10.1	%	61.0			43.3			17.7			40.9	%
Gross margin	52.6		%	51.5		%						53.9		%	50.7		%						60.3		%	54.1		%
Operating income	24.2			18.3			5.9			32.2	%	85.0			76.8			8.2			10.7	%	47.3			30.4			16.9			55.6	%
Operating margin	35.0		%	30.6		%						37.2		%	34.8		%						46.7		%	38.0		%

Network Enablement

During the three months ended ~~March 28,~~October 3, 2020, NE gross margin decreased by 0.6 percentage points from ~~64.2%~~64.4% in the same period a year ago to ~~63.6%~~63.8% in the current ~~period. Reflecting~~period reflecting lower revenue volumes due to the impact of ~~COVID-19 and unfavorable product mix.~~COVID-19.

Service Enablement

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020, NESE gross margin increased by ~~1.2~~6.5 percentage points from ~~63.7%~~60.3% in the same period a year ago to ~~64.9% in the current period. This increase was primarily due to higher revenue volumes and gross margin improvement from favorable product mix.~~

~~Service Enablement~~

~~During the three months ended March 28, 2020, SE gross margin increased by 5.4 percentage points from 63.9% in the same period a year ago to 69.3%~~66.8% in the current period. This increase was primarily due to favorable product mix ~~from~~in our ~~Datacenter and~~ Assurance growth ~~products.~~

During the nine months ended March 28, 2020, SE gross margin decreased by 3.0 percentage points from 68.7% in the same period a year ago to 65.7% in the current period, due to runoff of higher margin Mature Assurance products.

Network and Service Enablement (“NSE”)

During the three months ended ~~March 28,~~October 3, 2020, NSE operating margin decreased by ~~2.7~~2.9 percentage points from 10.1% in the same period a year ago to ~~7.4%~~7.2% in the current period. This decrease in operating margin was primarily driven by lower revenue volume ~~as discussed above~~and gross profit margin in NE ~~segment.~~

~~During the nine months ended March 28, 2020, NSE operating margin increased~~segment and offset by ~~0.2 percentage points from 11.3% in the same period~~ a ~~year ago to 11.5% in the current period. This increase~~reduction in operating ~~margin was primarily driven by increase in revenue~~expenses reflecting disciplined expense management and ~~gross margin~~ongoing efficiency programs and lower variable expenses such as ~~discussed above, partially offset by targeted investments~~commissions, events travel and entertainment due to ~~support our growth initiatives for our Wireless products.~~the pandemic.

Optical Security and Performance Products

During the three months ended ~~March 28,~~October 3, 2020 OSP gross margin increased by ~~1.1~~6.2 percentage points from ~~51.5%~~54.1% in the same period a year ago to ~~52.6%~~60.3% in the current period. This increase was primarily due to ~~gross margin improvement in our Consumer~~higher volume and ~~Industrial products, and favorable product mix due to higher revenue from Anti-Counterfeiting products.~~better manufacturing cost absorption.

~~During the nine months ended March 28, 2020,~~

OSP ~~gross~~operating margin increased by ~~3.2~~8.7 percentage points during the three months ended October 3, 2020 from ~~50.7%~~38.0% in the same period a year ago to 53.9% in the current period. This increase was primarily due to gross margin improvement in our Consumer and Industrial products, partially offset by unfavorable product mix due to lower revenue from Anti-Counterfeiting products.

OSP operating margin increased by 4.4 percentage points during the three months ended March 28, 2020 from 30.6% in the same period a year ago to 35.0% in the current period. The increase in operating margin was primarily due to higher gross margins as discussed above and good operating expense management.

~~OSP operating margin increased by 2.4 percentage points during the nine months ended March 28, 2020 from 34.8% in the same period a year ago to 37.2%~~46.7% in the current period. The increase in operating margin was primarily due to higher gross margins as discussed above.

Liquidity and Capital Resources

As of ~~March 28,~~October 3, 2020 and June ~~29, 2019,~~27, 2020, we had assets classified as cash and cash equivalents, as well as short-term investments and ~~short term~~short-term restricted cash, in an aggregate amount of ~~$537.3~~$595.5 million and ~~$526.5~~$544.0 million, respectively.

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our 10-K. As of ~~March 28,~~October 3, 2020, U.S. entities owned approximately ~~18.9%~~50.9% of our cash and cash equivalents, short-term investments and short-term restricted cash. The recent COVID-19 pandemic has caused disruption in global capital markets and ~~overtime~~over time may impact our ability to obtain credit and/or negotiate acceptable financing terms.

As of ~~March 28,~~October 3, 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 three months ended ~~March 28,~~October 3, 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.

On August 15, 2018, certain holders of the 2033 Notes issued in August 2013 exercised the put option and an aggregate principal amount of $134.3 million of the 2033 Notes was validly surrendered for repurchase. The Company accepted all such notes for payment with available cash. On September 5, 2018, the Company elected to exercise its optional redemption right to redeem all $142.7 million aggregate principal amount of its outstanding 2033 Notes. The date fixed for the redemption of the Notes was ~~October 10, 2018~~ (Redemption Date). In connection with the redemption, holders of $112.0 million aggregate principal amount of Notes converted their Notes in accordance with the terms and conditions of the Notes. Note holders who converted their notes received an aggregate payout of $111.8 million in cash and were issued 231,795 shares of the Company’s common stock. The Company redeemed the remaining $30.7 million aggregate principal amount of outstanding Notes in accordance with its notice of redemption dated September 5, 2018. The Company paid to the registered holders of the Notes that were redeemed an aggregate amount of approximately $30.8 million, including accrued and unpaid interest up to, but excluding, the Redemption Date. As of March 28, 2020, none of the 2033 Notes remain outstanding. For additional information related to our debt refer to “Note 11. Debt.”

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 a 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 ~~May 7,~~October 3, 2020, we had no amounts outstanding under the Credit Agreement.

~~Nine~~Three Months Ended ~~March 28,~~October 3, 2020

As of ~~March 28,~~October 3, 2020, our combined balance of cash and cash equivalents and restricted cash increased by ~~$10.5~~$51.8 million to ~~$540.9~~$599.2 million from ~~$530.4~~$547.4 million as of June ~~29, 2019.~~27, 2020.

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020, Cash provided by operating activities was ~~$108.4~~$63.9 million, consisting of net income of ~~$2.0~~$14.3 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based ~~compensation and change in fair value of contingent liabilities)~~compensation) which totaled ~~$159.4~~$43.5 million, including changes in deferred tax balances, ~~offset by~~and changes in operating assets and liabilities that ~~used $53.0~~provided $6.1 million. Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $19.7 million driven by strong collections in the quarter, an increase in deferred revenue of $4.0 million, an increase in income taxed payable of $2.5 million. These were partially offset by a decrease in accounts payable of $8.5 million due to the timing of payment in the quarter, an increase in other current and non-current assets of $3.2 million, an increase in inventory of $3.4 million, a decrease in accrued expenses and other current and non-current liabilities of ~~$41.6~~$3.6 million, ~~mainly driven by a decrease in customer deposit, a decrease in accounts payable of $16.0 million primarily driven by timing of purchases~~ and ~~related payments,~~ a decrease in accrued payroll and related expenses of $10.3 million due to the timing of salary and related payments, and an increase in accounts receivable of $6.6 million due to the higher billings. These changes were partially offset by an increase in income taxes payable and other tax liabilities of $8.6 million, a decrease in inventories of $3.6 million, an increase in deferred revenue of $7.4 million due to the amortization of support agreements and the release of revenue upon customer acceptance, and a decrease in other current and non-current assets of $1.9$1.4 million.

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020, Cash used in investing activities was ~~$20.1~~$7.5 million, primarily related to ~~$23.6~~$8.0 million of cash used for capital expenditures, offset by ~~$4.0~~$0.5 million proceeds from sales of assets.

During the ~~nine~~three months ended ~~March 28,~~October 3, 2020, Cash used in financing activities was ~~$58.8~~$15.8 million, primarily resulting from ~~$43.8~~$9.3 million in withholding tax payments on the vesting of restricted stock awards, $6.7 million in cash paid to repurchase common stock under our share repurchase program, ~~$18.4~~$2.8 million cash paid to settle assumed debt from an acquisition in ~~withholding tax payments on the vesting of restricted stock awards,~~fiscal year 2020 and ~~$2.1~~$0.4 million payments on financing obligations; offset by ~~$5.5~~$3.5 million in proceeds from the issuance of common stock under our employee stock purchase plan.

~~Nine~~Three Months Ended ~~March 30,~~September 28, 2019

As of ~~March 30,~~September 28, 2019, our combined balance of cash and cash equivalents and restricted cash decreased by ~~$108.5~~$3.2 million to ~~$515.8 million~~$533.6 from ~~$624.3~~$530.4 million as of June ~~30, 2018.~~29, 2019.

During the ~~nine~~three months ended ~~March 30,~~September 28, 2019, Cash provided by operating activities was ~~$110.3~~$31.3 million, consisting of net ~~loss~~income of ~~$7.1~~$6.8 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled ~~$129.4~~$43.7 million, including changes in deferred tax balance, and changes in operating assets and liabilities that used ~~$12.0~~$19.2 million. Changes in our operating assets and liabilities related primarily to an increase in ~~accounts receivable of $7.9 million primarily driven by higher volume of billing, an increase in~~ inventories of ~~$5.1~~$3.4 million, a decrease in deferred revenue of $4.1 million, an increase in other current and non-current assets of ~~$0.4~~$1.7 million, a decrease in accounts payable of $1.6 million, and ana decrease in accrued expenses and other current and non-current liabilities of ~~$5.2~~$14.7 million. These changes were partially offset by an increase in accrued payroll and related expenses of $3.8 million, an increase in income taxes payable of ~~$4.4~~$2.0 million, and ~~an increase~~a decrease in ~~deferred revenue~~accounts receivable of ~~$2.4 million.~~$0.5 million

During the ~~nine~~three months ended ~~March 30,~~September 28, 2019, Cash ~~provided by~~used in investing activities was ~~$82.0~~$5.9 million, primarily related to ~~$142.2 million in sales and maturities of available-for-sale debt securities and $4.2 million proceeds from~~

~~sales of assets; offset by $34.7~~$7.1 million of cash used for capital expenditures, ~~and $29.7~~offset by $1.2 million ~~used for acquisitions~~proceeds from sales of ~~businesses, net of cash acquired.~~assets.

During the ~~nine~~three months ended ~~March 30,~~September 28, 2019, Cash used in financing activities was ~~$293.6~~$7.8 million, primarily ~~resulting from $276.9 million used for redemption and conversion of our 2033 Notes, $11.9~~due to $7.6 million in withholding tax payments on vesting of restricted stock awards, ~~$9.0~~$1.5 million in cash paid to repurchase common stock under our share repurchase program, and ~~$1.2~~$1.0 million in payment of financing obligations; offset by ~~$5.4~~$2.3 million in proceeds from the issuance of common stock under our employee stock purchase plan.

We believe that our existing cash balances and investments ~~as well as availability under the $300 million revolving credit facility~~ 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 2023 Notes and/or 2024 Notes prior to their maturity or of our common stock; and

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.~~regulation.

Contractual Obligations

There were no material changes to our existing contractual commitments during the ~~third~~first quarter of fiscal ~~2020.~~2021.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in “Note 18. Commitments and Contingencies.”

Employee Equity Incentive Plan

Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. Refer to “Note 16. Stock-Based Compensation” for more details.

Pension and Other ~~Post-retirement~~Post-Retirement Benefits

We sponsor significant pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. We are also responsible for the non-pension post-retirement benefit obligation (“PBO”) assumed from a past acquisition. All of these plans have been closed to new participants and no additional service costs are being accrued,

except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010. The U.K. plan is partially funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of ~~March 28,~~October 3, 2020, our pension plans were under funded by ~~$102.9~~$113.2 million since the PBO exceeded the fair value of plan assets. Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of ~~March 28,~~October 3, 2020, the fair value of plan assets had decreased approximately ~~8.8%~~2.4% since June ~~29, 2019,~~27, 2020, our most recent fiscal year end.

A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a ~~50 basis~~50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.2 million based upon data as of June ~~29, 2019.~~27, 2020.

In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to “~~Note~~“Note 17. Employee Pension and Other Benefit ~~Plans~~”Plans” for more details.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

The Company’s market risk has not changed materially from the foreign exchange and interest rate risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended June ~~29, 2019.~~27, 2020.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of ~~March 28,~~October 3, 2020.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems will be achieved. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objective.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. If an unfavorable final outcome were to occur, it may have a material adverse impact on our financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.

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 ~~material~~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 $28.7 million and $5.4 million in fiscal 2020 and fiscal 2019, respectively. In fiscal 2018 we incurred a net loss of $48.6 million. Historically, we operated as a portfolio company comprised of many product lines, with diverse operating metrics and markets. As a result, our profitability in a particular period was impacted by revenue, product mix and operational costs that varied significantly across our product portfolio and business segments.

These transitions are costly and may impair our profit 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) expenses;

cyclical demand for our currency 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 ~~risk factors previously disclosed in Part I, Item 1A~~COVID-19 pandemic;

financial stability of our ~~Annual Report~~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 ~~fiscal year ended June 29,~~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.

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.

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, 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.

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.

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, ~~except as noted below.~~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.

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”)~~(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.

Certain of our products are subject to governmental and industry regulations, certifications and approvals.

The commercialization of certain of the products we design, manufacture and distribute through our OSP segment may be more costly due to required government approval and industry acceptance processes. Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the U.S. Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years. If we change a product for any reason, including technological changes or changes in the manufacturing process, prior approvals or certifications may be invalid and we may need to go through the approval process again. If we are unable to obtain these or other government or industry certifications in a timely manner, or at all, our operating results could be adversely affected.

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 loss of goodwill, any of which could have a material adverse effect on our operations, financial performance, and business.

We face risks related to ~~health pandemics~~our international operations and revenue.

Our customers are located throughout the world. In addition, we have significant operations outside North America, including product development, manufacturing, sales and customer support operations.

Our international presence exposes us to certain risks, including the following:

fluctuations in exchange rates between the U.S. dollar and among the currencies of the countries in which we do business may adversely affect our operating results by negatively impacting our revenues or increasing our expenses;

our ability to comply with a wide variety of laws and regulations of the countries in which we do business, including, among other things, customs, import/export, anti-bribery, anti-competition, tax and data privacy laws, which may be subject to sudden and unexpected changes;

difficulties in establishing and enforcing our intellectual property rights;

tariffs and other ~~widespread outbreaks of contagious disease,~~trade barriers;

political, legal and economic instability in foreign markets, particularly in those markets in which ~~could significantly disrupt our operations~~we maintain manufacturing and ~~impact our operations~~product development facilities;

strained or worsening relations between the United States and ~~financial results.~~China or other countries;

~~Significant outbreaks of contagious diseases,~~

difficulties in staffing and ~~other adverse public health developments, could have a material impact on our~~management;

language and cultural barriers;

seasonal reductions in business ~~operations and operating results. In December 2019, a strain of novel coronavirus causing respiratory illness emerged~~activities in the ~~city~~countries where our international customers are located;

integration of ~~Wuhan~~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 ~~Hubei province~~manufacturing and shipment of ~~China which~~goods globally. For example, while the Chinese government has ~~subsequently~~lifted certain restrictions on movement of people and goods to limit the spread ~~globally and been declared a global pandemic by the World Health Organization in March 2020. In response to the~~of 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. 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. The majority of our global workforceit is working from home. The immediate impacts of the pandemic to our business include a decline in revenues and some decrease in demand as customers delayed purchase decisions or placed orders on hold. Further, we have experienced shipping and logistics challenges as customers operating in lockdown mode were not onsitecontinuing to take ~~delivery of product.~~

~~We operate facilities around~~control measures and recently imposed certain restrictions to limit the world, all of which could be adversely affected by the prolonged impacts of the pandemic, including disruptions to our supply chain, production, transportation and delivery of our products. Demand for our products could be significantly and adversely affected. 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~~COVID-19 in Beijing. Further, most other countries have imposed or are imposing certain restrictions ~~have been lifted by governmental authorities, there could be additional waves or spikes in infection, again causing widespread social, economic~~on the movement of people and ~~operational impacts.~~

~~The COVID-19 pandemic has adversely affected,~~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 ~~affect, the economies and financial markets in~~impact our business. Worldwide travel restrictions have been imposed by many countries, ~~which may result~~including air travel and transport, that have caused and are likely to continue to cause delays in ~~regional or global economic slowdowns or recessions that could further curtail or delay spending by our customers and decrease demand for~~shipment of our products as well as ~~cause an~~ increased ~~risk~~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 63.5%, 62.3% and 52.4% of ~~customer defaults or delays~~our total net revenue, for fiscal 2020, 2019 and 2018, 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 ~~payment. Current economic conditions have already led to a tightening~~Europe and some other overseas markets may materially and adversely affect our business. In addition, the revenues we derive from many of ~~credit markets. We entered into a $300 million dollar secured credit facility in May 2020, refer~~our customers depend on international sales and further expose us to the ~~Liquidity~~risks associated with such international sales.

Economic conditions and ~~Capital Resources section~~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 ~~Management Discussion~~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 ~~Analysis for further information. If there is a long-term economic downturn or a prolonged recession as a result~~currency exchange rate fluctuations that resulted in the strengthening of the ~~pandemic,~~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 ~~face additional liquidity needs~~significantly disrupt the free movement of goods, services, and ~~challenges. There can be no assurance that we will be able to obtain financing on favorable terms or at all.~~

~~Due to~~people between the ~~evolving~~U.K. and ~~highly uncertain nature~~the E.U., and result in increased legal and regulatory complexities, as well as potential higher costs of ~~this event,~~conducting business in Europe. Given the lack of comparable precedent, it is ~~currently~~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 ~~possible to estimate the ultimate direct or indirect impacts the COVID-19 pandemic may have~~experienced any material financial impact from Brexit on our business ~~however,~~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 ~~prolonged disruption~~additional tariffs or other trade actions that may be implemented, may increase the cost of ~~manufacturing~~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.

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 ~~products, commerce~~outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and ~~related activity caused~~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 ~~pandemic~~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 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 significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and are based upon specific assumptions with respect to future business decisions, some of which will change. 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 suggested ranges. The principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. 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 some or all of the assumptions underlying the guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date of release. Actual results may vary from our guidance and the variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment decision regarding our common stock.

Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set forth in this “Risk Factors” section in this Annual Report on Form 10-K could result in the actual operating results being different from our guidance, and the differences may be adverse and material.

Failure to maintain effective internal controls may adversely affect our stock price.

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We are required to annually evaluate the effectiveness of the design and operation of our internal controls over financial reporting. Based on these evaluations, we may conclude that enhancements, modifications, or changes to internal controls are necessary or desirable. In addition, our independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting. While management evaluates the effectiveness of our internal controls on a regular basis, these controls may not always be effective. A material weakness in our internal controls has been identified in the past, and we cannot assure you that we or our independent registered public accounting firm will not identify a material weakness in our internal controls in the future. A material weakness in our internal controls over financial reporting would require management and our independent registered public accounting firm to evaluate our internal controls as ineffective. If our internal controls over financial reporting are not considered effective, we may experience a loss of public confidence, which could have an adverse effect on our business, financial condition and the market price of our common stock and other securities.

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 March 2017, we issued $460.0 million of 1.00% Senior Convertible Notes due 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 $460.0 million of indebtedness in March 2017 in the form of 1.00% Senior Convertible Notes due 2024 (the 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 2024 Notes, the Notes). The issuance of the Notes substantially increased our principal payment obligations. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. In addition, the holders of the 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.

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.

Our ability to use our net operating loss carryforwards to offset future taxable income may be subject to certain limitations.

As of June 27, 2020, we had U.S. federal and state net operating losses, or NOLs, of $4,752.2 million and $575.8 million, respectively, and U.S. federal and state tax credit carryforwards of $105.8 million and $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.

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.

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 anti-counterfeiting pigments that are used to, among other things, provide security features for banknotes. Under a license and supply agreement, we rely exclusively on SICPA to market and sell one of these product lines, Optical Variable Pigment (OVP®) and Optical

Variable Magnetic Pigment (OVMP®), for document authentication applications worldwide. The agreement requires SICPA to purchase minimum quantities of these pigments over the term of the agreement. If SICPA fails to purchase these quantities, as and when required by the agreement, our business and operating results (including, among other things, our revenue and gross margin) will be harmed as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves.

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

We rely upon the capacity, reliability and security of our information technology infrastructure and our ability to expand and continually update this infrastructure in response to our changing needs. In some cases, we rely upon third party hosting and support services to meet these needs. The growing and evolving cyber-risk environment means that individuals, companies, and organizations of all sizes, including ourselves and our hosting and support partners, are increasingly vulnerable to the threat of intrusions and disruptions on their networks and systems by a wide range of actors on an ongoing and regular basis. We also design and manage IT systems and products that contain IT systems for various customers, and generally face the same threats for these systems as for our own internal systems.

We maintain information security staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats. Our network security 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 systems. Despite our implementation of these and other security measures and those of our third-party vendors, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions and intrusions that continue to emerge and evolve. Any system failure, accident or security breach could result in disruptions to our business processes, network degradation, and system down time, along with the potential that a third party will 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 disruption, 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 adversely impact us and our clients, potentially resulting in, among other things, financial ~~conditions. As~~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.

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; 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 on Form 10-K.

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.

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.

Management transitions and talent retention create uncertainties and could harm our business.

Oleg Khaykin became our President and Chief Executive Officer in February 2016 and Amar Maletira became our Chief Financial Officer in September 2015. Mr. Maletira recently announced his resignation to pursue a new opportunity effective November 20, 2020 and the Company appointed an interim CFO while commencing a formal search for Mr. Maletira’s successor. Management changes could adversely impact our results of operations and our customer relationships and may make recruiting for future management positions more difficult. Moreover, we are headquartered in the San Francisco Bay Area and have a significant employee population located there and in other high expense locations. 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 ~~fluid~~regulated locations outside of the U.S. and ~~uncertain nature~~the failure to meet operational targets due to the loss of key employees. In addition, our ability to achieve the anticipated cost savings and other benefits from these actions within the expected timeframe is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected.

We 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 ~~event,~~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 ~~suspended~~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 ~~guidance~~business strategy as we expected or we may overpay for, or otherwise not realize the ~~fourth quarter~~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 ~~fiscal year 2020.~~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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed as Exhibits to this report:

Incorporated by Reference Filed Furnished
Exhibit No. Exhibit Description Form Exhibit Filing Date Herewith Not Filed
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
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
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
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
10.1

Credit Agreement, dated May 5, 2020 by Viavi Solutions Inc., the lenders party thereto and Wells Fargo N.A. as administrative agent

8-K 10.1 5/6/2020
101.SCH Inline XBRL Taxonomy Extension Schema X
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X
104
Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

X

Incorporated by Reference

Filed

Furnished

Exhibit No.

Exhibit Description

Form

Exhibit

Filing Date

Herewith

Not Filed

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

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.

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.

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.

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: ~~May 7,~~November 10, 2020	VIAVI SOLUTIONS INC.
	(Registrant)
	By:	/s/ AMAR MALETIRA
	Name:	Amar Maletira
	Title:	Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)

5155



Nine Months Ended March 28, 2020
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 29, 2019	228.8		$	0.2	$	70,244.7		$	(69,384.5	)	$	(134.6	)	$	725.8
Cumulative adjustment for adoption of ASC 842	—		—		—			3.0			—			3.0
Net income	—		—		—			2.0			—			2.0
Other comprehensive loss	—		—		—			—			(31.0		)	(31.0		)
Shares issued under employee stock plans, net of tax	2.8		—		(12.7		)	—			—			(12.7		)
Stock-based compensation	—		—		33.5			—			—			33.5
Repurchase of common stock	(3.6	)	—		—			(43.8		)	—			(43.8		)
Other	—		—		—			0.1			—			0.1
Balance at March 28, 2020	228.0		$	0.2	$	70,265.5		$	(69,423.2	)	$	(165.6	)	$	676.9



Nine Months Ended March 30, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 30, 2018	226.7		$	0.2	$	70,216.2		$	(69,378.6	)	$	(102.9	)	$	734.9
Net loss	—		—		—			(7.1		)	—			(7.1		)
Other comprehensive loss	—		—		—			—			(12.3		)	(12.3		)
Shares issued under employee stock plans, net of tax	2.9		—		(7.1		)	—			—			(7.1		)
Stock-based compensation	—		—		28.7			—			—			28.7
Repurchase of common stock	(0.9	)	—		—			(9.0		)	—			(9.0		)
Other	—		—		0.2			—			—			0.2
Balance at March 30, 2019	228.7		$	0.2	$	70,238.0		$	(69,394.7	)	$	(115.2	)	$	728.3



Cash consideration paid at closing	$	18.9
Escrow payments	4.3
Fair value of contingent consideration	5.5
Total purchase consideration	$	28.7



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



Cash	$	2.2
Total other assets	3.6
Total liabilities	(1.7		)
Net tangible assets acquired	$	4.1



Cash consideration paid at closing	$	29.9
Escrow payments	3.5
Fair value of contingent consideration	36.2
Total purchase consideration	$	69.6



Cash	$	1.8
Other current assets	1.8
Property and equipment	2.6
Total liabilities	(0.5		)
Net tangible assets acquired	$	5.7



	March 28, 2020
Other non-current assets	$	41.9
Total operating ROU assets	$	41.9

Other current liabilities	$	11.8
Other non-current liabilities	29.0
Total operating lease liabilities	$	40.8



	Balance June 29, 2019		Nine Months Ended March 28, 2020 Benefits			Cash Settlements			Non-cash Settlements and Other Adjustments⁽²⁾			Balance March 28, 2020		Three Months Ended March 28, 2020 Benefits
Fiscal 2019 Plan
NSE, including AW ⁽¹⁾	$	8.7	$	(2.2	)	$	(4.7	)	$	(0.5	)	$	1.3	$	(1.6	)
Plans Prior to Fiscal 2017
Other Plans ⁽¹⁾	0.1		—			—			(0.1		)	—		—
Total ⁽³⁾	$	8.8	$	(2.2	)	$	(4.7	)	$	(0.6	)	$	1.3	$	(1.6	)