Viavi Solutions(VIAV) - 2024 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited consolidated financial information, including statements, notes, and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents Viavi Solutions Inc.'s unaudited consolidated financial statements and detailed notes for the periods ended December 30, 2023, and December 31, 2022 Consolidated Statements of Operations Net revenue decreased for both three and six-month periods, while net income showed mixed results | Metric (in millions, except per share data) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Product revenue | $210.9 | $241.5 | $416.5 | $509.2 | | Service revenue | $43.6 | $43.0 | $85.9 | $85.5 | | Total net revenue | $254.5 | $284.5 | $502.4 | $594.7 | | Gross profit | $148.0 | $167.0 | $292.4 | $351.8 | | Income from operations | $22.4 | $22.9 | $38.4 | $72.7 | | Net income | $10.7 | $8.4 | $20.5 | $41.0 | | Basic EPS | $0.05 | $0.04 | $0.09 | $0.18 | | Diluted EPS | $0.05 | $0.04 | $0.09 | $0.18 | Consolidated Statements of Comprehensive Income This statement details net income and other comprehensive income components, including foreign currency translation adjustments | Metric (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $10.7 | $8.4 | $20.5 | $41.0 | | Net change in cumulative translation adjustment, net of tax | $29.7 | $43.3 | $9.3 | $0.7 | | Comprehensive income | $40.4 | $51.7 | $29.7 | $41.4 | Consolidated Balance Sheets The balance sheet provides a snapshot of assets, liabilities, and equity at specific fiscal year-end dates | Metric (in millions) | December 30, 2023 | July 1, 2023 | | :------------------- | :---------------- | :----------- | | Cash and cash equivalents | $543.7 | $506.5 | | Total current assets | $965.3 | $945.0 | | Total assets | $1,856.2 | $1,850.5 | | Total current liabilities | $312.1 | $343.5 | | Long-term debt | $632.8 | $629.5 | | Total stockholders' equity | $728.0 | $690.8 | | Total liabilities and stockholders' equity | $1,856.2 | $1,850.5 | Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating, investing, and financing activities | Metric (in millions) | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :------------------- | :---------------------------- | :---------------------------- | | Net cash provided by operating activities | $70.7 | $72.8 | | Net cash used in investing activities | $(20.3) | $(95.9) | | Net cash used in financing activities | $(18.3) | $(52.7) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $37.0 | $(75.9) | | Cash, cash equivalents and restricted cash at end of period | $552.6 | $496.9 | Consolidated Statements of Stockholders' Equity This statement tracks changes in stockholders' equity, including net income, share repurchases, and other comprehensive income | Metric (in millions) | Dec 30, 2023 | Sep 30, 2023 | July 1, 2023 | Dec 31, 2022 | Oct 1, 2022 | July 2, 2022 | | :------------------- | :----------- | :----------- | :----------- | :----------- | :---------- | :----------- | | Total Stockholders' Equity | $728.0 | $675.2 | $690.8 | $687.8 | $648.4 | $671.7 | Notes to Consolidated Financial Statements These notes provide detailed explanations of accounting policies, financial statement line items, and other relevant disclosures Note 1. Basis of Presentation This note outlines the accounting principles and fiscal year structure used in preparing the financial statements - No material changes to the Company's accounting policies during the three and six months ended December 30, 2023[26] - The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th; Fiscal 2024 ends on June 29, 2024[28] Note 2. Recently Issued Accounting Pronouncements This note discusses the potential impact of new accounting standards on the company's financial statements - ASU 2023-06 (Disclosure Improvements) is not expected to have a material impact on Consolidated Financial Statements[34] - ASU 2023-07 (Improvements to Reportable Segment Disclosures) is effective for fiscal years beginning after December 15, 2023 (fiscal 2025 for the Company), and the Company is evaluating its impact[35] - ASU 2023-09 (Improvements to Income Tax Disclosures) is effective for fiscal years beginning after December 15, 2024 (fiscal 2026 for the Company), and the Company is evaluating its impact[36] Note 3. Earnings Per Share This note details the calculation of basic and diluted earnings per share, including shares outstanding | Metric (in millions, except per share data) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $10.7 | $8.4 | $20.5 | $41.0 | | Basic shares outstanding | 222.5 | 225.9 | 222.2 | 226.1 | | Diluted shares outstanding | 223.5 | 227.1 | 223.9 | 228.8 | | Basic EPS | $0.05 | $0.04 | $0.09 | $0.18 | | Diluted EPS | $0.05 | $0.04 | $0.09 | $0.18 | - Restricted stock units of 5.6 million (3 months) and 3.1 million (6 months) were excluded from diluted EPS calculation for December 30, 2023, as their effect would have been anti-dilutive[41] Note 4. Accumulated Other Comprehensive Loss This note presents the components of accumulated other comprehensive loss, including unrealized gains/losses and currency adjustments | Component (in millions) | Beginning Balance (July 1, 2023) | Other Comprehensive Income before Reclassification | Amounts Reclassified out of AOCI | Ending Balance (Dec 30, 2023) | | :---------------------- | :------------------------------- | :----------------------------------------------- | :----------------------------- | :---------------------------- | | Unrealized losses on available-for-sale investments | $(5.3) | — | — | $(5.3) | | Foreign currency translation adjustments, net of tax | $(125.4) | $9.3 | — | $(116.1) | | Change in unrealized components of defined benefit obligations | $(5.3) | — | $(0.1) | $(5.4) | | Total | $(136.0) | $9.3 | $(0.1) | $(126.8) | Note 5. Acquisitions This note details the financial impact of business acquisitions, including goodwill and contingent consideration - Acquired Jackson Labs Technologies, LLC in October 2022 for approximately $49.9 million cash and up to $117.0 million contingent consideration[47][48] - Recorded $48.3 million of goodwill (allocated to Network Enablement segment) and $30.6 million of developed technology and other intangibles from Jackson Labs acquisition[48][49] | Metric (in millions) | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :------------------- | :---------------------------- | :---------------------------- | | Beginning period balance (Contingent Consideration) | $19.7 | $2.5 | | Fair value adjustment of earn-out liabilities | $(8.4) | $1.8 | | Ending period balance (Contingent Consideration) | $10.6 | $33.2 | Note 6. Balance Sheet and Other Details This note provides detailed breakdowns of deferred revenue, inventories, and various current and non-current liabilities | Deferred Revenue (in millions) | Six Months Ended Dec 30, 2023 | | :----------------------------- | :---------------------------- | | Balance at beginning of period | $102.0 | | Revenue deferrals for new contracts | $44.9 | | Revenue recognized during the period | $(62.2) | | Balance at end of period | $84.7 | - Remaining performance obligations as of December 30, 2023, totaled $248.4 million, with approximately 89% expected to be recognized as revenue within the next 12 months[58] | Inventories, net (in millions) | December 30, 2023 | July 1, 2023 | | :----------------------------- | :---------------- | :----------- | | Finished goods | $53.4 | $49.0 | | Work in process | $16.6 | $17.7 | | Raw materials | $45.1 | $49.4 | | Total Inventories, net | $115.1 | $116.1 | | Other Current Liabilities (in millions) | December 30, 2023 | July 1, 2023 | | :-------------------------------------- | :---------------- | :----------- | | Operating lease liabilities | $10.0 | $10.1 | | Interest payable | $5.4 | $5.5 | | Income tax payable | $4.5 | $4.4 | | Warranty accrual | $4.0 | $4.2 | | Acquisition related holdback and related accruals | $3.0 | $4.1 | | Transaction tax payable | $2.6 | $4.3 | | Fair value of forward contracts | $2.0 | $2.4 | | Restructuring accrual | $1.2 | $5.8 | | Fair value of contingent consideration | — | $1.1 | | Other | $10.0 | $7.9 | | Total Other current liabilities | $42.7 | $49.8 | | Other Non-Current Liabilities (in millions) | December 30, 2023 | July 1, 2023 | | :------------------------------------------ | :---------------- | :----------- | | Pension and post-employment benefits | $54.9 | $53.2 | | Operating lease liabilities | $27.0 | $29.4 | | Long-term deferred revenue | $23.9 | $23.4 | | Deferred tax liability | $19.1 | $13.9 | | Uncertain tax position | $15.9 | $15.8 | | Financing obligation | $15.8 | $15.8 | | Fair value of contingent consideration | $10.6 | $18.6 | | Warranty accrual | $4.5 | $4.8 | | Asset retirement obligations | $3.9 | $3.8 | | Other | $7.7 | $8.0 | | Total Other non-current liabilities | $183.3 | $186.7 | Note 7. Investments and Forward Contracts This note describes the company's short-term investments and foreign currency forward contracts, including their fair values | Short-Term Investments (in millions) | December 30, 2023 | July 1, 2023 | | :----------------------------------- | :---------------- | :----------- | | 30-day term deposit | $23.3 | $13.1 | | Trading securities | $1.7 | $1.5 | | Total short-term investments | $25.0 | $14.6 | - As of December 30, 2023, the Company held foreign currency forward contracts with notional amounts of $96.4 million to purchase foreign currencies and $82.4 million to sell foreign currencies[73] - Foreign exchange forward contracts resulted in a gain of $3.4 million for the three months ended December 30, 2023, and a loss of $0.1 million for the six months ended December 30, 2023[75] Note 8. Fair Value Measurements This note categorizes financial assets and liabilities based on fair value hierarchy levels (Level 1, 2, and 3) - Level 1 assets include money market funds, U.S. Treasury securities, and marketable equity securities; Level 2 includes asset-backed securities, foreign currency forward contracts, and debt; Level 3 liabilities consist of contingent purchase consideration[78] | Fair Value Measurements (in millions) | December 30, 2023 Total | Level 1 | Level 2 | Level 3 | July 1, 2023 Total | Level 1 | Level 2 | Level 3 | | :------------------------------------ | :---------------------- | :------ | :------ | :------ | :----------------- | :------ | :------ | :------ | | Assets: | | | | | | | | | | Debt available-for-sale securities | $0.3 | — | $0.3 | — | $0.3 | — | $0.3 | — | | Money market funds | $377.7 | $377.7 | — | — | $344.8 | $344.8 | — | — | | Trading securities | $1.7 | $1.7 | — | — | $1.5 | $1.5 | — | — | | Foreign currency forward contracts | $5.4 | — | $5.4 | — | $3.5 | — | $3.5 | — | | Total assets | $385.1 | $379.4| $5.7| — | $350.1 | $346.3| $3.8| — | | Liabilities: | | | | | | | | | | Foreign currency forward contracts | $2.0 | — | $2.0 | — | $2.4 | — | $2.4 | — | | Contingent consideration | $10.6 | — | — | $10.6 | $19.7 | — | — | $19.7 | | Total liabilities | $12.6 | — | $2.0| $10.6 | $22.1 | — | $2.4| $19.7 | | Fair Value of Debt (in millions) | December 30, 2023 Total | Level 1 | Level 2 | Level 3 | July 1, 2023 Total | Level 1 | Level 2 | Level 3 | | :------------------------------- | :---------------------- | :------ | :------ | :------ | :----------------- | :------ | :------ | :------ | | 3.75% Senior Notes | $351.5 | — | $351.5 | — | $341.8 | — | $341.8 | — | | 1.625% Senior Convertible Notes | $249.7 | — | $249.7 | — | $262.7 | — | $262.7 | — | | 1.00% Senior Convertible Notes | $95.4 | — | $95.4 | — | $95.6 | — | $95.6 | — | | Total | $696.6 | — | $696.6| — | $700.1 | — | $700.1| — | Note 9. Goodwill This note provides details on goodwill balances by segment and the results of impairment testing | Goodwill (in millions) | Network Enablement | Service Enablement | Optical Security and Performance Products | Total | | :--------------------- | :----------------- | :----------------- | :---------------------------------------- | :---- | | Balance as of July 1, 2023 | $399.2 | $13.8 | $42.2 | $455.2| | Currency translation | $1.0 | — | — | $1.0 | | Other adjustment | — | $(1.0) | — | $(1.0)| | Balance as of December 30, 2023 | $400.2 | $12.8 | $42.2 | $455.2| - No goodwill impairment was identified in the fourth quarter of fiscal 2023, as the fair value of each reporting unit was at least two times its carrying value[87] - No events or changes in circumstances triggered an impairment review during the three and six months ended December 30, 2023[88] Note 10. Acquired Developed Technology and Other Intangibles This note details the gross carrying amount, accumulated amortization, and net value of acquired intangible assets | Intangibles (in millions) | Gross Carrying Amount (Dec 30, 2023) | Accumulated Amortization (Dec 30, 2023) | Net (Dec 30, 2023) | Gross Carrying Amount (July 1, 2023) | Accumulated Amortization (July 1, 2023) | Net (July 1, 2023) | | :------------------------ | :----------------------------------- | :-------------------------------------- | :----------------- | :----------------------------------- | :-------------------------------------- | :----------------- | | Acquired developed technology | $438.9 | $(397.5) | $41.4 | $438.5 | $(390.2) | $48.3 | | Customer relationships | $195.5 | $(189.0) | $6.5 | $195.2 | $(185.9) | $9.3 | | Other | $39.8 | $(39.5) | $0.3 | $39.8 | $(38.8) | $1.0 | | Total intangibles | $674.2 | $(626.0) | $48.2 | $673.5 | $(614.9) | $58.6 | | Amortization of Intangible Assets (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :---------------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Cost of revenues | $3.4 | $5.7 | $6.9 | $12.8 | | Operating expenses | $1.4 | $2.2 | $3.5 | $4.4 | | Total amortization of intangible assets | $4.8 | $7.9 | $10.4 | $17.2 | | Estimated Future Amortization (in millions) | Amount | | :------------------------------------------ | :----- | | Remainder of 2024 | $9.6 | | 2025 | $15.9 | | 2026 | $11.4 | | 2027 | $7.6 | | 2028 | $3.0 | | Thereafter | $0.7 | | Total amortization | $48.2 | Note 11. Debt This note outlines the company's debt structure, including senior notes, convertible notes, and credit facilities | Debt (in millions) | December 30, 2023 | July 1, 2023 | | :----------------- | :---------------- | :----------- | | Short-term debt | $96.3 | $96.2 | | Long-term debt | $632.8 | $629.5 | | Total Debt | $729.1 | $725.7 | - The Company issued $250.0 million aggregate principal amount of 1.625% Senior Convertible Notes due 2026 in March 2023, maturing on March 15, 2026[94][97] - The Company issued $400.0 million aggregate principal amount of 3.75% Senior Notes due 2029 in September 2021, maturing on October 1, 2029[98] - The 1.00% Senior Convertible Notes due 2024 mature on March 1, 2024[103] - As of December 30, 2023, the Company had no borrowings under its $300.0 million Senior Secured Asset-Based Revolving Credit Facility and an available borrowing capacity of approximately $159.0 million[111][114] | Interest Expense (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :----------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Interest expense-contractual interest | $5.0 | $4.6 | $10.0 | $9.2 | | Amortization of debt issuance cost | $0.6 | $0.6 | $1.3 | $1.2 | | Accretion of debt discount | $1.2 | — | $2.4 | — | | Other | $1.0 | $1.0 | $2.0 | $1.9 | | Total interest expense | $7.8 | $6.2 | $15.7 | $12.3 | Note 12. Leases This note provides details on operating lease costs, right-of-use assets, liabilities, and future lease payments | Lease Information (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :------------------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Operating lease costs | $3.3 | $3.2 | $6.6 | $6.5 | | Cash paid for operating lease liabilities | $3.2 | $3.6 | $7.8 | $8.2 | | Operating ROU assets obtained | $1.5 | $2.3 | $2.6 | $3.0 | | Balance Sheet Information (in millions) | December 30, 2023 | July 1, 2023 | | :-------------------------------------- | :---------------- | :----------- | | Operating ROU assets | $37.5 | $40.4 | | Total operating lease liabilities | $37.0 | $39.5 | | Weighted-average remaining lease term | 6.5 years | 6.8 years | | Weighted-average discount rate | 4.8 % | 4.8 % | | Future Minimum Operating Lease Payments (in millions) | Amount | | :---------------------------------------------------- | :----- | | Remainder of 2024 | $4.9 | | Fiscal 2025 | $10.3 | | Fiscal 2026 | $7.9 | | Fiscal 2027 | $6.0 | | Fiscal 2028 | $4.1 | | Thereafter | $9.9 | | Total lease payments | $43.1 | | Present value of lease liabilities | $37.0 | Note 13. Restructuring and Related Charges This note outlines the company's restructuring plans, including workforce reductions and associated cost savings - The Fiscal 2023 Plan impacts approximately 5% of the global workforce, with estimated annualized gross cost savings of $25.0 million[122][217] - Phase I of the Fiscal 2023 Plan was substantially complete as of December 30, 2023; Phase II is focused on the Service Enablement segment and is anticipated to be substantially complete by the end of fiscal 2024[123][218] | Restructuring Accrual Activity (in millions) | Balance as of July 1, 2023 | Restructuring and related (benefits) charges | Cash Settlements | Balance as of December 30, 2023 | | :------------------------------------------- | :------------------------- | :------------------------------------------- | :--------------- | :------------------------------ | | Fiscal 2023 Plan Phase I | $4.1 | $(0.7) | $(3.1) | $0.3 | | Fiscal 2023 Plan Phase II | $1.7 | $(0.2) | $(0.6) | $0.9 | | Total | $5.8 | $(0.9) | $(3.7) | $1.2 | Note 14. Income Taxes This note details the provision for income taxes and unrecognized tax benefits, including interest and penalties | Income Tax Provision (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :--------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Provision for income taxes | $7.6 | $10.5 | $16.2 | $22.7 | - Unrecognized tax benefits totaled $50.8 million as of December 30, 2023, with $3.3 million accrued for interest and penalties[128] Note 15. Stockholders' Equity This note provides information on share repurchases and the remaining authorization under the repurchase plan - During the six months ended December 30, 2023, the Company repurchased 1.0 million shares of common stock for $10.0 million under the 2022 Repurchase Plan[130] - As of December 30, 2023, $224.8 million remained authorized for future share repurchases under the 2022 Repurchase Plan[130] Note 16. Stock-Based Compensation This note details stock-based compensation expense, including grants of restricted stock and performance-based awards - The Company granted 3.5 million time-based restricted stock awards and 1.2 million performance-based awards during the six months ended December 30, 2023[134][135] | Stock-Based Compensation Expense (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :--------------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Cost of revenues | $1.2 | $1.2 | $2.4 | $2.4 | | Research and development | $2.3 | $2.0 | $4.4 | $4.3 | | Selling, general and administrative | $9.0 | $9.8 | $16.9 | $19.3 | | Total stock-based compensation expense | $12.5 | $13.0 | $23.7 | $26.0 | - As of December 30, 2023, $80.0 million of unrecognized stock-based compensation costs remain to be amortized[136] Note 17. Employee Pension and Other Benefit Plans This note describes the company's defined benefit pension plans, their funding status, and net periodic benefit costs - The U.K. pension plan was fully funded as of December 30, 2023, while other plans in Germany were unfunded[141] | Net Periodic Benefit Cost (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Interest cost | $0.8 | $0.7 | $1.7 | $1.4 | | Expected return on plan assets | $(0.5) | $(0.4) | $(1.0) | $(0.8) | | Amortization of net actuarial gains | — | — | $(0.1) | — | | Net periodic benefit cost | $0.3 | $0.3 | $0.6 | $0.6 | - The Company expects to incur approximately $8.7 million in cash outlays for its defined benefit pension plans during fiscal 2024[143] Note 18. Commitments and Contingencies This note discloses legal settlements, pension funding obligations, and warranty reserve activity - Received $7.3 million in payments from Tel-Instruments Electronics Corp. and two former employees in July 2023, recorded as a gain to Interest and other income, net[145][146] - A favorable court decision in September 2022 removed a U.K. pension funding obligation, resulting in a $6.7 million gain (reduction to SG&A expense)[149] | Warranty Reserve (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :----------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Balance as of beginning of period | $8.8 | $9.5 | $9.0 | $10.6 | | Provision for warranty | $0.3 | $0.4 | $0.7 | $1.0 | | Utilization of reserve | $(0.7) | $(0.7) | $(1.5) | $(1.2) | | Adjustments to pre-existing warranties | $0.1 | $0.2 | $0.3 | $(1.0) | | Balance as of end of period | $8.5 | $9.4 | $8.5 | $9.4 | Note 19. Operating Segments and Geographic Information This note provides financial data by operating segment and geographic region, including net revenue and operating income - The Company's reportable segments are Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP)[154][155][156] | Segment Net Revenue (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Network Enablement | $155.5 | $183.3 | $305.5 | $379.8 | | Service Enablement | $24.1 | $23.8 | $44.5 | $46.2 | | Optical Security and Performance Products | $74.9 | $77.4 | $152.4 | $168.7 | | Total net revenue | $254.5 | $284.5 | $502.4 | $594.7 | | Segment Operating Income (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :------------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Network and Service Enablement | $6.4 | $18.5 | $7.9 | $47.3 | | Optical Security and Performance Products | $27.3 | $27.5 | $56.6 | $66.1 | - Net revenue from customers outside the Americas represented 59.5% of total net revenue during the three and six months ended December 30, 2023[206] | Net Revenue by Region (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Americas | $103.1 | $106.3 | $203.6 | $229.3 | | Asia-Pacific | $79.5 | $105.1 | $165.4 | $216.7 | | EMEA | $71.9 | $73.1 | $133.4 | $148.7 | | Total net revenue | $254.5 | $284.5 | $502.4 | $594.7 | Note 20. Subsequent Events This note discloses significant events that occurred after the balance sheet date but before the financial statements were issued - VIAVI received a $21.7 million grant from the U.S. NTIA to create an advanced test lab for Open Radio Access Network (Open RAN) technology[175] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and future outlook, covering business trends, financial highlights, and critical accounting estimates Forward-Looking Statements This section cautions that future results may differ materially from current expectations due to various risks and uncertainties - Forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially[179] - The Company is under no duty to update any forward-looking statements after the report date[179] Overview This overview introduces VIAVI as a global provider of network and light management solutions, outlining its segments and strategic priorities - VIAVI is a global provider of network test, monitoring, and assurance solutions and a leader in light management technologies, operating through Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP) segments[182][188] - The company experienced lower capital expenditure by NEMs and service providers, partially offset by increased demand for Avionics, PNT, and SE products during the second quarter[183] - Long-term strategic priorities include defending leadership, investing in secular trends (Wireless, Fiber, 3D sensing, PNT), extending technologies into adjacent markets, and improving productivity[187][189] Financial Highlights This section summarizes key GAAP and non-GAAP financial metrics, including operating income, margin, and diluted EPS | Metric | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :----- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | GAAP Measures: | | | | | | Operating Income | $22.4 | $22.9 | $38.4 | $72.7 | | Operating Margin | 8.8 % | 8.0 % | 7.6 % | 12.2 % | | Diluted EPS | $0.05 | $0.04 | $0.09 | $0.18 | | Non-GAAP Measures: | | | | | | Operating Income | $33.7 | $46.0 | $64.5 | $113.4 | | Operating Margin | 13.2 % | 16.2 % | 12.8 % | 19.1 % | | Diluted EPS | $0.11 | $0.14 | $0.19 | $0.37 | - Net revenue of $254.5 million, down 10.5% year-over-year for the three months ended December 30, 2023[191] Use of Non-GAAP (Adjusted) Financial Measures This section explains the rationale for using non-GAAP measures to assess core operating performance and comparability - Non-GAAP measures are used to evaluate historical and prospective financial performance and performance relative to competitors, focusing on core operating performance[192] - Excluded items from non-GAAP calculations include certain purchase price accounting adjustments, amortization of acquisition-related intangibles, stock-based compensation, legal settlements, restructuring, changes in fair value of contingent consideration liabilities, and certain investing expenses[192][195][196][197] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance, including revenue, expenses, and profitability Net Revenue This section analyzes net revenue trends by segment and geographic region, highlighting changes in product and service revenues | Segment Net Revenue (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Change | Percent Change | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | Change | Percent Change | | :-------------------------------- | :------------------------------ | :------------------------------ | :----- | :------------- | :---------------------------- | :---------------------------- | :----- | :------------- | | NE | $155.5 | $183.3 | $(27.8) | (15.2)% | $305.5 | $379.8 | $(74.3) | (19.6)% | | SE | $24.1 | $23.8 | $0.3 | 1.3 % | $44.5 | $46.2 | $(1.7) | (3.7)% | | OSP | $74.9 | $77.4 | $(2.5) | (3.2)% | $152.4 | $168.7 | $(16.3) | (9.7)% | | Total net revenue | $254.5 | $284.5 | $(30.0) | (10.5)% | $502.4 | $594.7 | $(92.3) | (15.5)% | - Product revenues decreased by $30.6 million (12.7%) for the three months ended December 30, 2023, while service revenues increased by $0.6 million (1.4%)[8][202][203] | Net Revenue by Region (in millions) | Three Months Ended Dec 30, 2023 | Three Months Ended Dec 31, 2022 | Six Months Ended Dec 30, 2023 | Six Months Ended Dec 31, 2022 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Americas | $103.1 | $106.3 | $203.6 | $229.3 | | Asia-Pacific | $79.5 | $105.1 | $165.4 | $216.7 | | EMEA | $71.9 | $73.1 | $133.4 | $148.7 | | Total net revenue | $254.5 | $284.5 | $502.4 | $594.7 | Amortization of Acquired Technologies (Cost of revenues) This section discusses the decrease in amortization expense due to certain intangible assets becoming fully amortized - Amortization of acquired technologies decreased by 40.4% for the three months and 46.1% for the six months ended December 30, 2023, primarily due to certain intangible assets becoming fully amortized[199][208] Gross Margin This section analyzes the changes in gross margin, attributing shifts to segment performance and product mix - Gross margin decreased by 0.5 percentage points (to 58.2%) for the three months and 1.0 percentage point (to 58.2%) for the six months ended December 30, 2023[199][209][210] - The decrease was primarily due to gross margin reduction from NE and OSP segments, partially offset by gross margin increase in the SE segment[209][210] Research and Development This section examines changes in R&D expense, including the impact of restructuring activities and variable expense reductions - R&D expense decreased by 4.6% for the three months and 4.9% for the six months ended December 30, 2023, primarily due to restructuring activities and variable expense reductions[199][212] - As a percentage of net revenue, R&D expense increased by 1.2 percentage points for both the three and six months ended December 30, 2023[199][212] Selling, General and Administrative This section analyzes changes in SG&A expense, driven by contingent consideration adjustments, restructuring, and variable expense reductions - SG&A expense decreased by 16.9% for the three months and 10.7% for the six months ended December 30, 2023[199][214][215] - The decrease was primarily due to the fair value adjustment of contingent consideration related to acquisitions, benefits from restructuring activities, and variable expense reductions including lower commissions[214][215] Amortization of Intangibles (Operating expenses) This section discusses the decrease in amortization of other intangibles due to certain assets becoming fully amortized - Amortization of other intangibles decreased by 36.4% for the three months and 20.5% for the six months ended December 30, 2023, primarily due to certain intangible assets becoming fully amortized[199][216] Restructuring This section details restructuring benefits and the expected annualized gross cost savings from the Fiscal 2023 Plan - The Company recorded restructuring benefits of $0.1 million for the three months and $0.9 million for the six months ended December 30, 2023[199][219] - The Fiscal 2023 Plan is expected to result in estimated annualized gross cost savings of approximately $25.0 million[217] Interest and other income, net This section analyzes the increase in interest and other income, net, driven by a legal settlement and higher interest income - Interest and other income, net, increased by $1.6 million (72.7%) for the three months and $10.7 million (324.2%) for the six months ended December 30, 2023[199][220][221] - The six-month increase was primarily driven by a $7.3 million legal settlement in the company's favor and higher interest income[221] Interest Expense This section discusses the increase in interest expense, primarily due to debt discount accretion and new convertible notes - Interest expense increased by 27.4% for the three months and 27.6% for the six months ended December 30, 2023[199][222] - The increase was primarily driven by the accretion of debt discount and interest expense on the Senior Convertible Notes due 2026[222] Provision for Income Taxes This section analyzes the decrease in income tax provision and factors influencing the effective tax rate - Income tax provision decreased by 27.6% for the three months and 28.6% for the six months ended December 30, 2023[199][223] - The provision primarily relates to income tax in certain foreign and state jurisdictions, with differences from the federal statutory rate due to changes in valuation allowance for deferred tax assets[224][225] Operating Segment Information This section provides a detailed breakdown of financial performance for each operating segment Network Enablement This section analyzes NE segment's revenue and gross margin changes, driven by volume shifts and product mix - NE net revenue decreased by 15.2% for the three months and 19.6% for the six months ended December 30, 2023, driven by lower volumes in Fiber and Access, Wireless, and Lab and Production, partially offset by higher AvComm revenue[228][229][230] - NE gross margin decreased by 1.9 percentage points (to 62.5%) for the three months and 1.7 percentage points (to 62.8%) for the six months, primarily due to lower volumes and unfavorable product mix[228][230][231] Service Enablement This section examines SE segment's revenue fluctuations and gross margin improvements due to favorable product mix - SE net revenue increased by 1.3% for the three months but decreased by 3.7% for the six months ended December 30, 2023, due to fluctuations in Assurance and Data Center revenue[228][232] - SE gross margin increased by 4.6 percentage points (to 68.9%) for the three months and 2.9 percentage points (to 68.1%) for the six months, primarily due to favorable product mix[228][233][234] Network and Service Enablement This section analyzes the decrease in NSE operating margin, primarily attributed to lower sales volumes - NSE operating margin decreased by 5.3 percentage points (to 3.6%) for the three months and 8.8 percentage points (to 2.3%) for the six months ended December 30, 2023, primarily due to lower volumes[235] Optical Security and Performance Products This section details OSP segment's revenue and gross margin declines, mainly due to lower anti-counterfeiting revenue and manufacturing variances - OSP net revenue decreased by 3.2% for the three months and 9.7% for the six months ended December 30, 2023, primarily driven by lower anti-counterfeiting revenue[228][236][237] - OSP gross margin decreased by 0.2 percentage points (to 52.1%) for the three months and 2.4 percentage points (to 52.3%) for the six months, primarily due to lower volumes and unfavorable manufacturing variances[228][237][238] - OSP operating margin increased by 0.9 percentage points (to 36.4%) for the three months but decreased by 2.1 percentage points (to 37.1%) for the six months[238][239] Liquidity and Capital Resources This section discusses the company's financial resources, cash management, debt, and share repurchase activities Cash and Cash Equivalents and Short-Term Investments This section outlines the company's liquidity strategy and the composition of its cash and short-term investments - The Company's liquidity strategy focuses on preservation of capital and supporting liquidity requirements with high credit quality standards[243] - As of December 30, 2023, U.S. subsidiaries owned approximately 29.6% of the Company's cash and cash equivalents, short-term investments, and restricted cash[243] Senior Secured Asset-Based Revolving Credit Facility This section details the company's revolving credit facility, including its maturity and available borrowing capacity - The Company has a $300.0 million senior secured asset-based revolving credit facility, maturing on December 30, 2026[245] - As of December 30, 2023, there were no borrowings under the facility, and the available borrowing capacity was approximately $159.0 million[246] Cash Flows for the Six Months Ended December 30, 2023 This section summarizes cash flow activities from operations, investing, and financing for the six-month period | Cash Flow Activity (in millions) | Six Months Ended Dec 30, 2023 | | :------------------------------- | :---------------------------- | | Cash provided by operating activities | $70.7 | | Cash used in investing activities | $(20.3) | | Cash used in financing activities | $(18.3) | | Net increase in cash, cash equivalents and restricted cash | $37.0 | | Combined balance at end of period | $552.6 | Share Repurchase Program This section details share repurchases made and the remaining authorization under the company's repurchase plan - The Company repurchased 1.0 million shares of common stock for $10.0 million during the six months ended December 30, 2023[251] - As of December 30, 2023, $224.8 million remained authorized for future share repurchases under the 2022 Repurchase Plan[251] Contractual Obligations This section confirms no material changes to existing contractual commitments during the recent fiscal quarter - No material changes to existing contractual commitments during the second quarter of fiscal 2024[252] Off-Balance Sheet Arrangements This section states that the company has no material off-balance sheet arrangements, other than disclosed guarantees - The Company does not have any material off-balance sheet arrangements, other than guarantees disclosed in Note 18[253] Employee Equity Incentive Plan This section describes the equity incentive plan as a broad-based program for employee retention and alignment of interests - Stock-based benefit plans are a broad-based, long-term retention program to attract and retain employees and align stockholder and employee interests[254] Employee Defined Benefit Plans and Other Post-retirement Benefits This section provides an update on the funding status of the company's pension plans and changes in plan asset fair value - As of December 30, 2023, the Company's pension plans were under-funded by $54.4 million[256] - The fair value of plan assets increased approximately 5.6% since July 1, 2023[256] Recently Issued Accounting Pronouncements This section refers to Note 2 for detailed information on the impact of recent accounting pronouncements - Refer to Note 2 for details on the effect of certain recent accounting pronouncements[259] Critical Accounting Estimates This section highlights key accounting estimates, including pension discount rates and goodwill impairment testing - A 50-basis point decrease or increase in the discount rate for pension plans would cause a corresponding increase or decrease of approximately $4.0 million in the projected benefit obligation (PBO)[261] - Goodwill is tested for impairment annually; in fiscal 2023, no impairment was identified as the fair value of each reporting unit was at least two times its carrying value[262][267] Item 3. Quantitative and Qualitative Disclosure About Market Risks This section states that the company's market risk exposure has not materially changed since its most recent Annual Report on Form 10-K - The Company's market risk has not changed materially from the foreign exchange and interest rate risks disclosed in its Annual Report on Form 10-K for the fiscal year ended July 1, 2023[268] Item 4. Controls and Procedures This section details the evaluation of disclosure controls and procedures, confirming effectiveness and reporting on internal control changes Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of December 30, 2023 - The Company's disclosure controls and procedures were evaluated and concluded to be effective as of December 30, 2023[269] Changes in Internal Control Over Financial Reporting This section reports no material changes in the company's internal control over financial reporting during the quarter - No material changes in the Company's internal control over financial reporting during the most recent fiscal quarter[270] Limitations on Effectiveness of Controls This section acknowledges that control systems provide reasonable, but not absolute, assurance of achieving objectives - Control systems provide only reasonable, not absolute, assurance that objectives will be achieved[271] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, and other disclosures Item 1. Legal Proceedings The company is involved in various legal claims and suits, with potential for future material adverse impacts despite current management beliefs - The Company is subject to a variety of claims and suits in the ordinary course of business[273] - Management believes current resolutions will not have a material adverse impact, but inherent uncertainties could lead to a material adverse impact in the future[273] ITEM 1A. RISK FACTORS This section outlines significant risks across global, business, operational, legal, and financial areas that could materially affect the company Global Risks This section addresses risks from geopolitical conditions, market instability, supply chain pressures, and the lingering impacts of COVID-19 - Geopolitical conditions, including regional conflicts and US-China tensions, could result in market instability, supply chain pressure, increased energy costs, inflation, and cybersecurity attacks[275] - The lingering impacts of COVID-19 may continue to adverse