Viavi Solutions(VIAV) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of Viavi Solutions Inc. for the three and six months ended January 2, 2021, and December 28, 2019, including statements of operations, comprehensive income, balance sheets, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial line items Consolidated Statements of Operations This section provides the consolidated statements of operations, detailing revenue, gross profit, operating income, and net income for the specified periods Consolidated Statements of Operations (in millions, except per share data) | Metric | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Product revenue | $262.1 | $281.9 | $510.0 | $546.7 | | Service revenue | $37.8 | $31.8 | $74.6 | $66.8 | | Total net revenue | $299.9 | $313.7 | $584.6 | $613.5 | | Gross profit | $180.1 | $189.5 | $349.5 | $363.9 | | Income from operations | $42.3 | $45.0 | $73.6 | $65.7 | | Net income | $21.9 | $28.0 | $36.2 | $34.8 | | Basic Net income per share | $0.10 | $0.12 | $0.16 | $0.15 | | Diluted Net income per share | $0.09 | $0.12 | $0.16 | $0.15 | Consolidated Statements of Comprehensive Income This section presents the consolidated statements of comprehensive income, including net income and other comprehensive income components Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :------------------------------------ | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net income | $21.9 | $28.0 | $36.2 | $34.8 | | Net change in cumulative translation | $34.4 | $28.0 | $62.0 | $0 | | Amortization of actuarial income | $0.7 | $0.8 | $1.5 | $1 | | Net change in accumulated other | $35.1 | $28.8 | $63.5 | $2 | | Comprehensive income | $57.0 | $56.8 | $99.7 | $36 | Consolidated Balance Sheets This section provides the consolidated balance sheets, detailing assets, liabilities, and stockholders' equity at specific dates Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | January 2, 2021 | June 27, 2020 | | :-------------------------------- | :-------------- | :------------ | | Cash and cash equivalents | $644.2 | $539.0 | | Total current assets | $1,046.4 | $913.6 | | Total assets | $1,915.2 | $1,776.3 | | Total current liabilities | $263.6 | $232.8 | | Long-term debt | $612.4 | $600.9 | | Total stockholders' equity | $801.0 | $711.4 | | Total liabilities and stockholders' equity | $1,915.2 | $1,776.3 | Consolidated Statements of Cash Flows This section presents the consolidated statements of cash flows, categorizing cash activities into operating, investing, and financing for the reported periods Consolidated Statements of Cash Flows (in millions) | Activity | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net cash provided by operating activities | $132.6 | $69.3 | | Net cash used in investing activities | $(18.0) | $(10.7) | | Net cash used in financing activities | $(35.6) | $(25.3) | | Net increase in cash, cash equivalents and restricted cash | $105.3 | $29.8 | | Cash, cash equivalents and restricted cash at end of period | $652.7 | $560.2 | Consolidated Statements of Stockholders' Equity This section details changes in stockholders' equity, including net income, other comprehensive income, and stock transactions for the specified period Changes in Stockholders' Equity (in millions) - Six Months Ended January 2, 2021 | Metric | Balance at June 27, 2020 | Net Income | Other Comprehensive Income | Shares Issued (net of tax) | Stock-based Compensation | Repurchase of Common Stock | Balance at January 2, 2021 | | :----------------------- | :----------------------- | :--------- | :------------------------- | :------------------------- | :----------------------- | :------------------------- | :------------------------- | | Common Stock (Amount) | $0.2 | — | — | — | — | — | $0.2 | | Additional Paid-In Capital | $70,274.3 | — | — | $(8.6) | $22.3 | — | $70,288.0 | | Accumulated Deficit | $(69,397.2) | $36.2 | — | — | — | $(23.8) | $(69,384.8) | | Accumulated Other Comprehensive Loss | $(165.9) | — | $63.5 | — | — | — | $(102.4) | | Total | $711 | $36 | $63 | $(8) | $22 | $(23) | $801 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, estimates, and specific financial line items Note 1. Basis of Presentation This note outlines the basis for the unaudited interim financial statements, confirming adherence to U.S. GAAP and SEC rules, and noting no material changes to accounting policies - The financial information for the three and six months ended January 2, 2021, and December 28, 2019, is unaudited and includes all normal and recurring adjustments deemed necessary by management for a fair statement[29] - The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th; fiscal 2021 is a 53-week year ending July 3, 2021, with the first quarter being 14 weeks[32] - The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity, which is likely to continue to impact demand and disrupt sales channels, potentially having a negative impact on sales and results of operations[35] Note 2. Recently Issued Accounting Pronouncements This note details the adoption of new accounting guidance for recognizing impairments of financial assets in Q1 fiscal 2021, which had no material impact - In the first quarter of fiscal 2021, the Company adopted new guidance for recognizing impairments of financial assets, which did not have a material impact on its consolidated financial statements[38] - The Company is evaluating the impact of new FASB guidance on defined benefit pension plans (effective Q1 fiscal 2022), income taxes (effective Q1 fiscal 2022), and financial instruments with liability and equity characteristics (effective Q1 fiscal 2023)[39][40][41] Note 3. Earnings Per Share This note provides the computation of basic and diluted net income per share, detailing the net income and weighted-average shares outstanding used in the calculations for both three and six-month periods Earnings Per Share Computation (in millions, except per share data) | Metric | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Net income | $21.9 | $28.0 | $36.2 | $34.8 | | Weighted-average shares outstanding: Basic | 228.8 | 230.0 | 228.8 | 229.7 | | Weighted-average shares outstanding: Diluted | 231.1 | 238.3 | 231.3 | 237.4 | | Net income per share: Basic | $0.10 | $0.12 | $0.16 | $0.15 | | Net income per share: Diluted | $0.09 | $0.12 | $0.16 | $0.15 | - Potentially dilutive securities, such as restricted stock units, were excluded from diluted EPS calculations if their effect would have been anti-dilutive[44] Note 4. Accumulated Other Comprehensive Loss This note details the components of the Company's accumulated other comprehensive loss, which includes unrealized gains/losses on available-for-sale investments, foreign currency translation adjustments, and changes in defined benefit obligations - Accumulated other comprehensive loss comprises unrealized gains/losses on available-for-sale investments, foreign currency translation adjustments, and changes in unrealized components of defined benefit obligations[45] Changes in Accumulated Other Comprehensive Loss (in millions) - Six Months Ended January 2, 2021 | Component | Beginning Balance (June 27, 2020) | Other Comprehensive Income before Reclassification | Amounts Reclassified | Net Current-Period OCI | Ending Balance (Jan 2, 2021) | | :-------------------------------- | :-------------------------------- | :--------------------------------------- | :------------------- | :--------------------- | :--------------------------- | | Unrealized losses on available-for-sale investments | $(5.1) | — | — | — | $(5.1) | | Foreign currency translation adjustments | $(129.6) | $62.0 | — | $62.0 | $(67.6) | | Change in unrealized components of defined benefit obligations | $(31.2) | — | $1.5 | $1.5 | $(29.7) | | Total | $(165) | $62 | $1 | $63 | $(102) | Note 5. Acquisitions This note details the Company's acquisitions, including 3Z Telecom (May 2019) to expand Field Instrument offerings, RPC Photonics (October 2018) to expand 3D Sensing offerings, and another business acquisition in fiscal 2020 - On May 31, 2019, the Company acquired 3Z Telecom, Inc. for approximately $23.2 million in cash and up to $7.0 million in contingent consideration, expanding its Field Instrument offerings[49] - On October 30, 2018, the Company acquired RPC Photonics, Inc. for approximately $33.4 million in cash and up to $53.0 million in earn-out, expanding its 3D Sensing offerings[50] - During fiscal 2020, another business acquisition was completed for $5.2 million in cash and up to $5.5 million in contingent consideration, resulting in $6.2 million of developed technology and customer relationships and $1.4 million of deferred tax liability[51] Note 6. Balance Sheet and Other Details This note provides detailed information on various balance sheet accounts, including contract balances, accounts receivable allowance, inventories, and other current and non-current liabilities - Total unbilled receivables increased from $3.8 million at June 27, 2020, to $5.5 million at January 2, 2021[57] Deferred Revenue Activity (in millions) | Metric | Three Months Ended Jan 2, 2021 | Six Months Ended Jan 2, 2021 | | :-------------------------------- | :----------------------------- | :--------------------------- | | Balance at beginning of period | $80.1 | $74 | | Revenue deferrals for new contracts | $31.8 | $61 | | Revenue recognized during the period | $(29.9) | $(54) | | Balance at end of period | $82.0 | $82 | Inventories, net (in millions) | Component | January 2, 2021 | June 27, 2020 | | :---------------- | :-------------- | :------------ | | Finished goods | $37.2 | $30 | | Work in process | $13.6 | $22 | | Raw materials | $37.4 | $30 | | Inventories, net | $88.2 | $83 | Other Current Liabilities (in millions) | Component | January 2, 2021 | June 27, 2020 | | :------------------------ | :-------------- | :------------ | | Income tax payable | $20.8 | $10 | | Operating lease liabilities | $12.1 | $11 | | Other current liabilities | $56.4 | $48 | Other Non-Current Liabilities (in millions) | Component | January 2, 2021 | June 27, 2020 | | :-------------------------------- | :-------------- | :------------ | | Pension and post-employment benefits | $110.9 | $102.7 | | Fair value of contingent consideration | $6.9 | $9.4 | | Other non-current liabilities | $238.2 | $231.2 | Note 7. Investments and Forward Contracts This note details the Company's available-for-sale debt securities and non-designated foreign currency forward contracts, including fair value measurements and recognized gains Available-for-Sale Debt Securities (in millions) - January 2, 2021 | Metric | Amortized Cost/Carrying Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | | :-------------------------- | :--------------------------- | :--------------------- | :---------------------- | :------------------- | | Asset-backed securities | $0.9 | — | $(0.4) | $0 | | Total debt securities | $0.9 | — | $(0.4) | $0 | - The Company uses foreign exchange forward contracts to manage foreign currency risk, recording gains of $6.9 million and $13.3 million for the three and six months ended January 2, 2021, respectively[76][79] - As of January 2, 2021, the notional amounts of forward contracts to purchase foreign currencies were $142.4 million, and to sell foreign currencies were $19.0 million[78] Note 8. Fair Value Measurements This note defines the fair value hierarchy and presents the Company's assets and liabilities measured at fair value, highlighting Level 3 contingent consideration liabilities - Fair value measurements are categorized into Level 1 (quoted market prices), Level 2 (observable inputs), and Level 3 (unobservable inputs). The Company did not hold any Level 3 investment securities as of January 2, 2021, and June 27, 2020[83] Fair Value Measurements (in millions) - January 2, 2021 | Category | Total | Level 1 | Level 2 | Level 3 | | :-------------------------------- | :---- | :------ | :------ | :------ | | Assets: | | | | | | Debt available-for-sale securities | $0.5 | — | $0.5 | — | | Money market funds | $387.2| $387.2 | — | — | | Trading securities | $1.6 | $1.6 | — | — | | Foreign currency forward contracts | $8.4 | — | $8.4 | — | | Liabilities: | | | | | | Foreign currency forward contracts | $1.5 | — | $1.5 | — | | Contingent consideration | $8.9 | — | — | $8.9 | Reconciliation of Level 3 Contingent Consideration Liabilities (in millions) | Metric | Three Months Ended Jan 2, 2021 | Six Months Ended Jan 2, 2021 | | :-------------------------------- | :----------------------------- | :--------------------------- | | Beginning period balance | $9.9 | $9.9 | | Fair value adjustment | $(1.5) | $(1.5) | | Currency translation adjustment | $0.5 | $0.5 | | Balance at end of period | $8.9 | $8.9 | Note 9. Goodwill This note presents changes in goodwill by reportable segment, primarily due to currency translation adjustments, and confirms annual impairment testing with no impairment indicated Goodwill by Reportable Segment (in millions) | Segment | Balance as of June 27, 2020 | Currency Translation Adjustments | Balance as of January 2, 2021 | | :-------------------------------- | :-------------------------- | :----------------------------- | :-------------------------- | | Network Enablement | $334.9 | $13.6 | $348.5 | | Service Enablement | $4.3 | $0.4 | $4.7 | | Optical Security and Performance Products | $42.2 | — | $42.2 | | Total | $381 | $14 | $395 | - The Company tests goodwill for impairment annually and concluded in fiscal 2020 that no impairment existed. No events triggered an impairment review during the three and six months ended January 2, 2021[88][89] Note 10. Acquired Developed Technology and Other Intangibles This note details the Company's acquired developed technology, customer relationships, and other intangible assets, including their gross carrying amounts, accumulated amortization, and estimated future amortization Acquired Developed Technology and Other Intangibles (in millions) - January 2, 2021 | Intangible Asset | Gross Carrying Amount | Accumulated Amortization | Net | | :-------------------------------- | :-------------------- | :----------------------- | :---- | | Acquired developed technology | $447.8 | $(364.9) | $82 | | Customer relationships | $200.4 | $(172.1) | $28 | | Other intangibles | $37.6 | $(28.0) | $9 | | Total intangibles | $685.8 | $(565.0) | $120 | Amortization of Intangible Assets (in millions) | Category | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Cost of revenues | $8.4 | $8.4 | $16.6 | $16.8 | | Operating expenses | $8.1 | $8.8 | $16.6 | $17.5 | | Total amortization | $16.5 | $17.2 | $33.2 | $34.3 | Estimated Future Amortization (in millions) | Fiscal Years | Amount | | :------------- | :----- | | Remainder of 2021 | $32.9 | | 2022 | $39.5 | | 2023 | $25.4 | | 2024 | $10.3 | | 2025 | $5.7 | | Thereafter | $7.0 | | Total | $120.8 | Note 11. Debt This note details the Company's long-term debt, primarily convertible notes, and describes its revolving credit facility and interest expense components Carrying Amounts of Debt Components (in millions) | Debt Component | January 2, 2021 | June 27, 2020 | | :-------------------------------- | :-------------- | :------------ | | Principal amount of 1.00% Senior Convertible Notes | $460.0 | $460.0 | | Principal amount of 1.75% Senior Convertible Notes | $225.0 | $225.0 | | Unamortized discount of liability component | $(68.2) | $(79.1) | | Unamortized debt issuance cost | $(4.4) | $(5.0) | | Carrying amount of liability component | $612.4 | $600.9 | | Carrying amount of equity component | $136.8 | $136.8 | - The Company has a $300 million senior secured revolving credit facility maturing on March 1, 2023, with no outstanding amounts as of January 2, 2021, and June 27, 2020[96][97] Interest Expense (in millions) | Component | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Contractual interest | $2.4 | $2.2 | $4.7 | $4.3 | | Amortization of debt issuance cost | $0.5 | $0.4 | $1.0 | $0.7 | | Accretion of debt discount | $5.5 | $5.2 | $10.8 | $10.3 | Note 12. Leases This note details the Company's operating leases, primarily for real estate facilities, explaining the recognition of ROU assets and lease liabilities, and providing future payment schedules - The Company's operating lease costs were $3.4 million and $6.8 million for the three and six months ended January 2, 2021, respectively[108] - As of January 2, 2021, the weighted-average remaining lease term was 5.0 years, and the weighted-average discount rate was 4.7%[109] Operating Lease Balance Sheet Information (in millions) - January 2, 2021 | Metric | Amount | | :------------------------ | :----- | | Total operating ROU assets | $39 | | Other current liabilities | $12 | | Other non-current liabilities | $25 | | Total operating lease liabilities | $37 | Future Minimum Operating Lease Payments (in millions) - January 2, 2021 | Fiscal Years | Operating Leases | | :------------- | :--------------- | | Remainder of 2021 | $6 | | 2022 | $11 | | 2023 | $7 | | 2024 | $5 | | 2025 | $4 | | Thereafter | $7 | | Total lease payments | $42 | | Less: Interest | $(4) | | Present value of lease liabilities | $37 | Note 13. Restructuring and Related Charges This note outlines the Company's restructuring activities for cost reduction and operational streamlining, detailing accruals and charges for the reported periods - The Company's total restructuring accrual was $3.6 million as of January 2, 2021, down from $6.5 million at June 27, 2020[116] - Restructuring and related charges (benefits) were $0.2 million for the three months ended January 2, 2021, and $(0.4) million for the six months ended January 2, 2021[116] Adjustments to Accrued Restructuring Expenses (in millions) - Six Months Ended January 2, 2021 | Plan Type | Balance June 27, 2020 | Benefits | Cash Settlements | Non-cash Settlements and Other Adjustments | Balance January 2, 2021 | | :---------------- | :-------------------- | :------- | :--------------- | :----------------------------------------- | :---------------------- | | Fiscal 2019 Plan | $6.5 | $(0.4) | $(2.5) | — | $3 | Note 14. Income Taxes This note reports income tax expense, primarily from foreign and state jurisdictions, and discusses differences from the federal statutory rate due to valuation allowances and unrecognized tax benefits - Income tax expense was $12.5 million and $21.1 million for the three and six months ended January 2, 2021, respectively[120] - The Company's unrecognized tax benefits totaled $48.4 million as of January 2, 2021, with $3.9 million accrued for interest and penalties[123] Note 15. Stockholders' Equity This note details the Company's stock repurchase program, including authorized amounts, shares repurchased, and remaining authorization as of January 2, 2021 - The Board of Directors authorized a stock repurchase program of up to $200 million through September 30, 2021[125] - During the three and six months ended January 2, 2021, the Company repurchased 1.3 million and 1.9 million shares for $17.1 million and $23.8 million, respectively[126] - As of January 2, 2021, the Company had $131.8 million remaining authorization for future share repurchases[126] Note 16. Stock-Based Compensation This note provides an overview of the Company's stock-based compensation expense by function and details the granting of full value awards, including time-based and performance-based restricted stock units Stock-Based Compensation Expense by Function (in millions) | Function | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Cost of revenues | $1.2 | $1.0 | $2.4 | $2.0 | | Research and development | $2.3 | $2.0 | $4.5 | $3.7 | | Selling, general and administrative | $6.4 | $8.3 | $15.5 | $15.9 | | Total stock-based compensation expense | $9.9 | $11.3 | $22.4 | $21.6 | - During the six months ended January 2, 2021, the Company granted 2.7 million time-based Full Value Awards and 0.6 million performance-based awards, with an additional 0.1 million shares granted due to performance over target[129][130] - As of January 2, 2021, $63.9 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized[132] Note 17. Employee Pension and Other Benefit Plans This note describes the Company's qualified and non-qualified pension plans and post-retirement benefit obligations, detailing funding status, contributions, and net periodic cost components - The Company sponsors significant pension plans in the U.K. and Germany; the U.K. plan is partially funded, while other plans are unfunded[133][135] - During the six months ended January 2, 2021, the Company contributed $1.3 million to the U.K. plan and $1.8 million to other plans[135] Components of Net Periodic Cost for Pension and Benefit Plans (in millions) | Component | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Service cost | $0.1 | $0.1 | $0.2 | $0.2 | | Interest cost | $0.3 | $0.5 | $0.6 | $0.9 | | Expected return on plan assets | $(0.4) | $(0.4) | $(0.8) | $(0.8) | | Amortization of net actuarial losses | $0.7 | $0.8 | $1.5 | $1.5 | | Net periodic benefit cost | $0.7 | $1.0 | $1.5 | $1.8 | Note 18. Commitments and Contingencies This note details the Company's legal proceedings, including a U.K. pension dispute, and covers guarantees, letters of credit, performance bonds, and product warranties - As of January 2, 2021, the accrued pension liability related to a U.K. legal proceeding was £6.5 million or $8.8 million[140] - The Company had standby letters of credit of $7.6 million and performance bonds of $0.9 million collateralized by restricted cash as of January 2, 2021[145] Changes in Warranty Reserve (in millions) | Metric | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Balance as of beginning of period | $9.6 | $8.8 | $9.4 | $8 | | Provision for warranty | $1.6 | $0.9 | $2.0 | $1 | | Utilization of reserve | $(1.2) | $(0.8) | $(1.4) | $(1) | | Adjustments to pre-existing warranties | $(0.4) | $0.3 | $(0.4) | $1 | | Balance as of end of period | $9.6 | $9.2 | $9.6 | $9 | Note 19. Operating Segments and Geographic Information This note describes the Company's three reportable segments and provides detailed financial information for each, including net revenue, gross profit, operating income, and disaggregated revenue by geographic region - The Company operates in three reportable segments: Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP)[150][151] Segment Net Revenue (in millions) | Segment | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Network Enablement | $180.9 | $203.0 | $343.0 | $401.9 | | Service Enablement | $25.8 | $31.2 | $47.2 | $52.1 | | Optical Security and Performance Products | $93.2 | $79.5 | $194.4 | $159.5 | | Total net revenue | $299.9 | $313.7 | $584.6 | $613.5 | Segment Operating Income (in millions) | Segment | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :-------------------------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Network and Service Enablement | $22.2 | $37.5 | $35.5 | $59.8 | | Optical Security and Performance Products | $44.6 | $30.4 | $91.9 | $60.8 | Net Revenue by Geographic Region (in millions) | Region | Three Months Ended Jan 2, 2021 | Three Months Ended Dec 28, 2019 | Six Months Ended Jan 2, 2021 | Six Months Ended Dec 28, 2019 | | :---------------- | :----------------------------- | :----------------------------- | :--------------------------- | :--------------------------- | | Americas | $108.4 | $116.8 | $203.8 | $222.5 | | Asia-Pacific | $96.4 | $113.0 | $204.6 | $220.2 | | EMEA | $95.1 | $83.9 | $176.2 | $170.8 | | Total net revenue | $299.9 | $313.7 | $584.6 | $613.5 | 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 condition and results of operations, including an overview of its business segments, the impact of the COVID-19 pandemic, and a detailed analysis of revenue, expenses, and profitability for the reported periods Forward-Looking Statements This section highlights that the report contains forward-looking statements based on current expectations, subject to risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements based on current expectations and assumptions, subject to risks and uncertainties that could cause actual results to differ materially[167] - Forward-looking statements cover expectations regarding COVID-19 impact, product demand, growth plans, financial projections, intellectual property, strategic opportunities, supply chain, R&D, and product-related expectations[168] Our Industries and Quarterly Developments This section describes Viavi Solutions Inc. as a global provider of network test, monitoring, and assurance solutions, and a leader in light management solutions, operating through three key business segments - Viavi Solutions Inc. is a global provider of network test, monitoring, and assurance solutions, and a leader in light management solutions for 3D Sensing, anti-counterfeiting, and other markets[170] - The Company operates through three business segments: Network Enablement (NE), Service Enablement (SE), and Optical Security and Performance Products (OSP)[175] - NE provides integrated testing solutions for network build-out and maintenance, including instruments, software, and services for wireless and fixed communications networks[171][172] - SE offers embedded systems and enterprise performance management solutions for CSPs, enterprises, and cloud operators, providing visibility into network, service, and application data[176] - OSP leverages optical coating technologies for anti-counterfeiting (OVP®, OVMP®), consumer/industrial (3D Sensing optical filters), government, automotive, and defense applications[180][181][182] COVID-19 Pandemic Update This section discusses the global economic slowdown caused by the COVID-19 pandemic, its impact on demand and sales channels, and the Company's measures for employee safety and supply chain resilience - The COVID-19 pandemic has led to global economic slowdown, travel bans, quarantines, and temporary business closures, impacting demand and disrupting sales channels[184] - The Company's priority is employee health and safety, implementing measures like limited gathering sizes, masks, and screenings, while also experiencing disruptions to facilities, suppliers, and customer demand, particularly for Field Instruments in the NE segment[185][187] - Despite challenges, the Company maintains a robust and adaptable supply chain with risk mitigation plans, and its liquidity position has not been substantially impacted, though a prolonged recession could pose future liquidity challenges[186][188][189] Recently Issued Accounting Pronouncements This section refers to Note 2 for details regarding the effect of recent accounting pronouncements on the consolidated financial statements - Refer to Note 2 for details regarding the effect of certain recent accounting pronouncements on the consolidated financial statements[191] Critical Accounting Policies and Estimates This section states that the consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management judgments and estimates, with no material changes to critical accounting policies since the last annual report - The consolidated financial statements are prepared in accordance with U.S. GAAP, requiring management to make judgments, estimates, and assumptions that affect reported amounts[192] - There have been no material changes to the Company's critical accounting policies and estimates since the Fiscal 2020 Annual Report on Form 10-K[194] Results of Operations This section provides a detailed analysis of the Company's financial performance, including trends in revenue, gross profit, operating expenses, and net income for the reported periods Selected Consolidated Statements of Operations Items (in millions, except percentages) | Metric | Three Months Ended Jan 2, 2021 | Change (%) | Six Months Ended Jan 2, 2021 | Change (%) | | :-------------------------------- | :----------------------------- | :--------- | :--------------------------- | :--------- | | Total net revenue | $299.9 | (4.4)% | $584.6 | (4.7)% | | Gross profit | $180.1 | (5.0)% | $349.5 | (4.0)% | | Gross margin | 60.1% | (0.3) pp | 59.8% | 0.5 pp | | Research and development | $50.0 | (0.6)% | $98.8 | (2.9)% | | Selling, general and administrative | $79.5 | (7.9)% | $160.9 | (10.4)% | | Net income | $21.9 | (21.8)% | $36.2 | 4.0% | - Net revenue decreased by 4.4% for the three months and 4.7% for the six months ended January 2, 2021, primarily due to declines in NE and SE segments, partially offset by OSP growth[199][204] - OSP net revenue increased by 17.2% for the three months and 21.9% for the six months ended January 2, 2021, driven by growth in Anti-Counterfeiting and 3D Sensing products[203][207] - Gross margin decreased by 0.3 percentage points for the three months but increased by 0.5 percentage points for the six months ended January 2, 2021, influenced by revenue volume, product mix, and factory utilization across segments[213][214] - R&D expense decreased by 0.6% for the three months and 2.9% for the six months, driven by variable expense reductions and cost efficiencies[216][217] - SG&A expense decreased by 7.9% for the three months and 10.4% for the six months, primarily due to lower sales commissions and travel/entertainment expenses[219][220] Liquidity and Capital Resources This section analyzes the Company's liquidity position, including cash balances, operating, investing, and financing cash flows, and its ability to meet future capital spending needs - As of January 2, 2021, cash and cash equivalents, short-term investments, and short-term restricted cash totaled $648.8 million, an increase from $544.0 million at June 27, 2020[243] - Cash provided by operating activities was $132.6 million for the six months ended January 2, 2021, significantly higher than $69.3 million in the prior year period[249][253] - Cash used in investing activities was $18.0 million, primarily for capital expenditures and acquisitions, while cash used in financing activities was $35.6 million, mainly for stock repurchases and withholding tax payments[250][251] - The Company believes existing cash balances and investments will be sufficient for liquidity and capital spending over the next twelve months, despite potential impacts from global economic conditions and the COVID-19 pandemic[256] Contractual Obligations This section states that there were no material changes to the Company's existing contractual commitments during the second quarter of fiscal 2021 - There were no material changes to the Company's existing contractual commitments during the second quarter of fiscal 2021[258] Off-Balance Sheet Arrangements This section states that the Company does not have any material off-balance sheet arrangements, other than the guarantees discussed in Note 18 - The Company does not have any material off-balance sheet arrangements, other than the guarantees discussed in Note 18[259] Employee Equity Incentive Plan This section describes the Company's stock-based benefit plans as a broad-based, long-term retention program designed to attract and retain employees and align stockholder and employee interests - The Company's stock-based benefit plans are a broad-based, long-term retention program designed to attract and retain employees and align stockholder and employee interests. Refer to Note 16 for more details[260] Pension and Other Post-Retirement Benefits This section reports the underfunded status of the Company's pension plans and the liability for non-pension post-retirement benefits, along with the sensitivity of the projected benefit obligation to discount rate changes - As of January 2, 2021, the Company's pension plans were underfunded by $117.6 million, and there was a $0.4 million liability for non-pension post-retirement benefits[261] - A 50-basis point decrease or increase in the discount rate would cause an approximate $9.2 million increase or decrease, respectively, in the projected benefit obligation (PBO)[262] Item 3. Quantitative and Qualitative Disclosure About Market Risks This section states that the Company's market risk, specifically foreign exchange and interest rate risks, has not materially changed from what was disclosed in its Annual Report on Form 10-K for the fiscal year ended June 27, 2020 - The Company's market risk, including foreign exchange and interest rate risks, has not materially changed from the disclosures in its Annual Report on Form 10-K for fiscal year ended June 27, 2020[264] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of January 2, 2021, and states no material changes in internal control over financial reporting - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of January 2, 2021[265] - There have been no material changes in the Company's internal control over financial reporting during the most recent fiscal quarter[266] - Management acknowledges that control systems provide only reasonable, not absolute, assurance and cannot prevent all errors and fraud[267] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section states that the Company is subject to various legal claims in the ordinary course of business, with management believing they will not have a material adverse impact, though outcomes are uncertain - The Company is subject to various legal claims and suits in the ordinary course of business, which management believes will not have a material adverse impact, though outcomes are uncertain[269] Item 1A. Risk Factors This section outlines significant risks facing the Company, including the uncertain and adverse impacts of the COVID-19 pandemic, challenges to future profitability, rapid technological change, and international operational risks - The COVID-19 pandemic has significantly impacted operations, supply chains, and customer demand, with ongoing uncertainty regarding its future effects on financial results[270][272][275] - The Company faces risks to future profitability due to uncertain telecom spending, adverse product mix changes, pricing pressures, component availability, and increasing commoditization[279] - Rapid technological change, challenges in 5G transition, and the shift towards virtualized networks and software solutions pose significant risks to product demand and competitive landscape[283][289][291] - International operations expose the Company to risks from foreign exchange fluctuations, diverse regulatory environments, geopolitical instability (e.g., US-China trade actions, Brexit), and difficulties in enforcing intellectual property rights[301][302][303][306] - The issuance of convertible notes increases leverage and could dilute existing stockholders, while changes in LIBOR may adversely affect interest rates on future indebtedness[319][320] - Dependence on a limited number of customers, including a strategic alliance with SICPA for anti-counterfeiting pigments, creates risks from order reductions or failure to meet contractual obligations[325][326] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities to report for the period Item 4. Mine Safety Disclosures This section states that there were no mine safety disclosures to report for the period Item 5. Other Information This section states that there was no other information to report for the period Item 6. Exhibits This section lists the documents filed as exhibits to the report, including consulting agreements, certifications from the CEO and CFO, and Inline XBRL Taxonomy Extension documents SIGNATURES This section confirms the report was duly signed on February 9, 2021, by Pam Avent, Interim Chief Financial and Accounting Officer - The report was duly signed on February 9, 2021, by Pam Avent, Interim Chief Financial and Accounting Officer[355]