VIAVI SOLUTIONS INC. Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q, which we also refer to as the Report, which are not historical facts, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "anticipate," "believe," "can," "can impact," "could," "continue," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "projects," "should," "will," "will continue to be," "would," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements, but are not limited to statements such as: •Our expectations regarding demand for our products and services, including macroeconomic conditions, industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;
•Our plans for growth and innovation opportunities;
•Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition, pricing and demand pressures, the future impact of certain accounting pronouncements, and our estimation of the potential impact and materiality of litigation;
•Our plans for continued development, use and protection of our intellectual property;
•Our strategies for achieving our current business objectives, including related risks and uncertainties;
•Our plans or expectations relating to investments, execution of capital allocation and debt management strategies, acquisitions, partnerships and other strategic opportunities;
•Our expectations regarding the continuing impact of the coronavirus disease (COVID-19) pandemic on our business, financial condition, results of operations and liquidity;
•Our strategies for mitigating the risk of supply chain interruptions and inflationary impacts;
•Our research and development plans and the expected impact of such plans on our financial performance; and
•Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.
Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with theU.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 endedJuly 2, 2022 . 29
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You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors" and "Forward-Looking Statements."
Overview
VIAVI is a global provider of network test, monitoring, and assurance solutions for communications service providers, hyperscalers, equipment manufacturers, enterprises, government and avionics. We help customers harness the power of instruments, automation, intelligence, and virtualization. VIAVI is also a leader in light management technologies for 3D sensing, anti-counterfeiting, consumer electronics, industrial, automotive, government and aerospace applications. Together with our customers and partners we are United in Possibility, finding innovative ways to solve real-world problems.
To serve our markets we operate the following business segments:
•Network Enablement (NE);
•Service Enablement (SE); and,
•Optical Security and Performance Products (OSP).
During the first quarter, we experienced currency headwinds, increased raw material costs, higher shipping-related charges, and inflationary pressures.
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 business, operations, and financial conditions.
Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating profit, non-GAAP diluted earnings per share (EPS) and cash flow from operations. We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.
Looking Ahead
As we look ahead for this fiscal year, we expect the macroeconomic headwinds and end market demand volatility to persist into the near future. We remain positive on our long-term growth drivers in 5G Wireless, Fiber, 3D Sensing and Resilient PNT. We will continue to focus on executing against our strategic priorities highlighted during ourSeptember 2022 Analyst Day Event such as:
•Defend and consolidate leadership in core business segments;
•Invest in secular trends to drive growth and expand Total Addressable Market (TAM);
•Extend VIAVI technologies and platforms into lucrative adjacent markets and applications; and,
•Continuous productivity improvement in Operations, Research & Development (R&D) and Selling, General and Administrative (SG&A).
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Recent Global Events
We operate globally and sell our products in countries throughout the world. Recent escalation in regional conflicts, including the Russian invasion ofUkraine , resulting in ongoing economic sanctions, and the risk of increased tensions betweenChina andTaiwan , could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations. Moreover, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions; inflation, which could result in increases in the cost of manufacturing products, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders; increased risk of cybersecurity attacks; and general market instability, all of which could adversely impact our financial results. As a result of the restrictions on exports toRussia , we suspended transactions in the region effectiveFebruary 2022 , which has negatively impacted our business. While sales in this jurisdiction are not material to our total consolidated revenues or net income, we are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. However, these estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates, assumptions or conditions due to risks and uncertainties, including the ongoing geopolitical instability as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains, the impact on our future operations and results remains uncertain.
COVID-19 Pandemic Update
The worldwide spread of the COVID-19 virus and global slowdown of economic activity could continue to impact demand for a broad variety of goods and services, including from the Company's customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time. New and potentially more contagious variants of the virus have emerged over the course of the pandemic, along with a surge in cases in several regions across the globe, includingEurope andAsia , resulting in renewed shutdown, mandatory quarantines and shelter in place orders in certain regions. These events have led, at times, to slowdowns in shipping and commercial activities. Through continued economic challenges, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures. While the Company expects that all of this could have a negative impact to its sales and its results of operations, the Company is not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates, assumptions or conditions. 31
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Financial Highlights
First quarter fiscal 2023 results included the following notable items:
• Net revenue of
• GAAP operating margin of 16.1%, up 170 bps year-over-year.
• Non-GAAP operating margin of 21.7%, down 100 bps year-over-year.
• GAAP EPS of
• Non-GAAP EPS of
A reconciliation of Non-GAAP financial measures to GAAP financial measures is provided below (in millions, except EPS amounts):
Three Months Ended
October 1, 2022 October 2, 2021
Operating Operating
Operating Income Margin Operating Income Margin
GAAP measures $ 49.8 16.1 % $ 46.9 14.4 %
Stock-based compensation 13.0 4.2 % 13.6 4.1 %
Change in fair value of contingent liability 0.5 0.1 % 0.3 0.1 %
Other (benefits) charges unrelated to core operating
performance (1) (5.2) (1.7) % 2.9 0.9 %
Amortization of intangibles 9.3 3.0 % 10.6 3.2 %
Total related to Cost of Revenue and Operating Expenses 17.6 5.6 % 27.4 8.3 %
Non-GAAP measures $ 67.4 21.7 % $ 74.3 22.7 %
Three Months Ended
October 1, 2022 October 2, 2021
Diluted Net Income Diluted
Net Income EPS (loss) EPS
GAAP measures $ 32.6 $ 0.14 $ (54.8) $ (0.24)
Items reconciling GAAP net income (loss) and EPS to
non-GAAP net income and EPS:
Stock-based compensation 13.0 0.06 13.6 0.06
Change in fair value of contingent liability 0.5 - 0.3
-
Other (benefits) charges unrelated to core operating performance (1)
(5.2) (0.02) 2.9 0.01
Amortization of intangibles 9.3 0.04 10.6
0.05
Non-cash interest expense and other expense (2) - - 85.9
0.36
Provision for (benefit) from income taxes 2.3 0.01 (0.3)
-
Total related to net income and EPS 19.9 0.09 113.0 0.48 Non-GAAP measures$ 52.5 $ 0.23 $ 58.2 $ 0.24 Shares used in per share calculation for Non-GAAP EPS 230.4
242.3
Note: Certain totals may not add due to rounding.
(1) Other (benefits) charges unrelated to core operating performance primarily consisted of acquisition and integration related charges, transformational initiatives such as site consolidations and reorganization, legal settlements, sale of investments and disposal of long-lived assets. (2) The Company incurred a loss of$85.9M in the first quarter of fiscal 2022 in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes. The Company eliminates this in calculating non-GAAP net income and non-GAAP net income per share, because it believes that in so doing, it can provide investors a clearer and more consistent view of the Company's core operating performance. 32
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Use of Non-GAAP (Adjusted) Financial Measures
The Company provides non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share financial measures as supplemental information regarding the Company's operational performance. The Company uses the measures disclosed in this Report to evaluate the Company's historical and prospective financial performance, as well as its performance relative to its competitors. Specifically, management uses these items to further its own understanding of the Company's core operating performance, which the Company believes represent its performance in the ordinary, ongoing and customary course of its operations. Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition-related intangibles, stock-based compensation, legal settlements, restructuring, separation costs, changes in fair value of contingent consideration liabilities and certain investing expenses and other activities that management believes are not reflective of such ordinary, ongoing and core operating activities. The Company believes excluding these items enables investors to evaluate more clearly and consistently the Company's core operational performance. The Company believes providing this additional information allows investors to see Company results through the eyes of management. The Company further believes that providing this information allows investors to better understand the Company's financial performance and, importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance. The non-GAAP adjustments described in this release are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company's core operational performance. The non-GAAP adjustments are outlined below. Cost of revenues, costs of research and development and costs of selling, general and administrative: The Company's GAAP presentation of operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, equipment and intangibles that have been identified for disposal but remained in use until the date of disposal, (ii) workforce related charges such as severance, retention bonuses and employee relocation costs related to formal restructuring plans, (iii) costs for facilities not required for ongoing operations, and costs related to the relocation of certain equipment from these facilities and/or contract manufacturer facilities, (iv) stock-based compensation, (v) amortization expense related to acquired intangibles, (vi) changes in fair value of contingent consideration liabilities and (vii) other charges unrelated to our core operating performance comprised mainly of acquisition related transaction costs, integration costs related to acquired entities, litigation and legal settlements and other costs and contingencies unrelated to current and future operations, including transformational initiatives such as the implementation of simplified automated processes, site consolidations, and reorganizations. The Company excludes these items in calculating non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share.
Non-cash interest expense and other expense: The Company excludes certain investing expenses and non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities, in calculating non-GAAP net income and non-GAAP net income per share.
Income tax expense or benefit: The Company excludes certain non-cash tax expense or benefit items, such as the utilization of net operating losses where valuation allowances were released, intra-period tax allocation benefit and the tax effect for amortization of non-tax deductible intangible assets, in calculating non-GAAP net income and non-GAAP net income per share. Non-GAAP financial measures are not in accordance with, preferable to, or an alternative for, generally accepted accounting principles inthe United States . The GAAP measure most directly comparable to non-GAAP net income is net income. The GAAP measure most directly comparable to non-GAAP net income per share is net income per share. The Company believes these GAAP measures alone are not fully indicative of its core operating expenses and performance and that providing non-GAAP financial measures in conjunction with GAAP measures provides valuable supplemental information regarding the Company's overall performance. 33
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RESULTS OF OPERATIONS
The results of operations for the current period are not necessarily indicative
of results to be expected for future periods. The following table summarizes
selected Consolidated Statements of Operations items (in millions, except for
percentages):
Three Months Ended
October 1, October 2,
2022 2021 Change Percent Change
Segment net revenue:
NE $ 194.9 $ 204.9 $ (10.0) (4.9) %
SE 24.0 23.0 1.0 4.3 %
OSP 91.3 98.9 (7.6) (7.7) %
Total net revenue $ 310.2 $ 326.8 $ (16.6) (5.1) %
Amortization of acquired technologies $ 7.1 $ 7.9 $ (0.8) (10.1) %
Percentage of net revenue 2.3 % 2.4 %
Gross profit $ 184.8 $ 195.0 $ (10.2) (5.2) %
Gross margin 59.6 % 59.7 %
Research and development $ 52.6 $ 53.6 $ (1.0) (1.9) %
Percentage of net revenue 17.0 % 16.4 %
Selling, general and administrative $ 80.2 $ 91.8 $ (11.6) (12.6) %
Percentage of net revenue 25.9 % 28.1 %
Amortization of other intangibles $ 2.2 $ 2.7 $ (0.5) (18.5) %
Percentage of net revenue 0.7 % 0.8 %
Loss on convertible note exchange $ - $ (85.9) $ 85.9 (100.0) %
Percentage of net revenue - % (26.3) %
Interest income and other income, net$ 1.1 $ 1.4 $ (0.3) (21.4) % Percentage of net revenue 0.4 % 0.4 % Interest expense$ (6.1) $ (3.6) $ (2.5) (69.4) % Percentage of net revenue 2.0 % 1.1 % Provision for income taxes$ 12.2 $ 13.6 $ (1.4) (10.3) % Percentage of net revenue 3.9 % 4.2 % 34
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Table of Contents Net Revenue Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.
Three months ended
Net revenue decreased by$16.6 million , or 5.1%, during the three months endedOctober 1, 2022 compared to the same period a year ago. This decrease was due to revenue decrease from our NE and OSP segments, partially offset by revenue increase in our SE segment. Product revenues decreased by$21.4 million , or 7.4%, during the three months endedOctober 1, 2022 compared to the same period a year ago, driven by revenue decreases in all segments. Service revenues increased by$4.8 million , or 12.7%, during the three months endedOctober 1, 2022 compared to the same period a year ago. This increase was due to revenue increase from our SE segment, partially offset by revenue decreases in our NE and OSP segments. NE net revenue decreased by$10.0 million , or 4.9%, during the three months endedOctober 1, 2022 compared to the same period a year ago. This decrease was primarily driven by lower volume in Field Instruments and Wireless partially offset by increased volumes inAvComm and Lab & Production products compared to the same period a year ago.
SE net revenue increased by
OSP net revenue decreased by
Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period over period variability in our financial measures and present foreign exchange rate risks. Additionally, we have seen demand for our NE and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly fromAsia -based competitors, and a general commoditization trend for certain products; (b) product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) chip component shortages, supply chain and shipping logistic constraints; (f) the impact of ongoing global trade policies, tariffs and sanctions; and (g) regulatory or economic developments and/or technology challenges that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms. 35
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Revenue by Region
We operate in three geographic regions:Americas ,Asia-Pacific andEurope ,Middle East andAfrica (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 October 1, 2022 October 2, 2021Americas : United States$ 96.6 31.1 %$ 93.3 28.5 % Other Americas 26.4 8.5 % 28.2 8.7 % Total Americas$ 123.0 39.6 %$ 121.5 37.2 % Asia-Pacific: Greater China$ 65.6 21.2 %$ 72.6 22.2 % Other Asia-Pacific 46.0 14.8 % 53.7 16.4 % TotalAsia-Pacific
$ 111.6 36.0 %$ 126.3 38.6 % EMEA: Switzerland$ 17.5 5.7 %$ 13.2 4.0 % Other EMEA 58.1 18.7 % 65.8 20.2 % Total EMEA$ 75.6 24.4 %$ 79.0 24.2 % Total net revenue$ 310.2 100.0 %$ 326.8 100.0 %
Net revenue from customers outside the
We expect revenue from customers outside ofthe United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.
Gross Margin
Gross margin decreased by 0.1 percentage points during the three months endedOctober 1, 2022 from 59.7% in the same period a year ago to 59.6% in the current period. The decrease was primarily driven by gross margin reduction in our NE and OSP segments as discussed below in the Operating Segment Information section. Partially offsetting the decrease was higher revenue volume and favorable product mix within our SE segment. 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 toAsia-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.
Amortization of Acquired Technologies and Other Intangibles
Amortization of acquired technologies and other intangibles decreased$1.3M or 12.3% during the three months endedOctober 1, 2022 compared to the same period a year ago. This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022. 36
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Research and Development
R&D expense decreased by$1.0 million , or 1.9%, during the three months endedOctober 1, 2022 compared to the same period a year ago. This decrease was driven primarily by foreign exchange impacts. As a percentage of net revenue, R&D expense increased by 0.6 percentage points during the three months endedOctober 1, 2022 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$11.6 million , or 12.6%, during the three months endedOctober 1, 2022 compared to the same period a year ago. This decrease was primarily due to the reversal of theU.K. pension accrued liability, lower commission expense and foreign exchange impacts. As a percentage of net revenue, SG&A decreased 2.2 percentage points during the three months endedOctober 1, 2022 compared to the same period a year ago.
Loss on convertible note exchange
During the three months endedOctober 1, 2022 , the Company did not enter into any convertible note exchange agreements. During the three months endedOctober 2, 2021 , the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024. The Company paid an aggregate of 10.6 million shares of its common stock, par value$0.001 per share, and$196.5 million in cash in exchange for$93.8 million principal amount of the 2023 Notes and$181.2 million principal amount of the 2024 Notes. The Company recorded a loss of$85.9 million in connection with the settlement transaction, which included a loss on induced conversion of$9.5 million , a loss on debt extinguishment of$72.7 million and third-party fees of$3.7 million . Interest income and other income, net Interest income and other income, net, was$1.1 million during the three months endedOctober 1, 2022 compared to$1.4 million during the same period a year ago. This$0.3 million decrease was primarily driven by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period. Interest Expense Interest expense increased by$2.5 million or 69.4% during the three months endedOctober 1, 2022 compared to the same period a year ago. This increase was primarily due to a full quarter of interest and amortization of issuance costs for the Senior Notes due 2029 in the current period as a result of the issuance inSeptember 2021 . Provision for Income Taxes
We recorded an income tax provision of
The income tax provision for the three months ended
The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations. As ofOctober 1, 2022 , andJuly 2, 2022 , our unrecognized tax benefits totaling$50.0 million and$49.7 million , respectively, are included in deferred taxes and other non-current tax liabilities, net. We had$2.4 million accrued for the payment of interest and penalties as ofOctober 1, 2022 . 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. 37
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Operating Segment Information
Information related to our operating segments were as follows, (in millions):
Three Months Ended
October 1, October 2,
2022 2021 Change Percentage Change
Network Enablement
Net revenue $ 194.9 $ 204.9 $ (10.0) (4.9) %
Gross profit 125.6 132.7 (7.1) (5.4) %
Gross margin 64.4 % 64.8 %
Service Enablement
Net revenue $ 24.0 $ 23.0 $ 1.0 4.3 %
Gross profit 16.0 14.7 1.3 8.8 %
Gross margin 66.7 % 63.9 %
Network and Service Enablement
Net revenue $ 218.9 $ 227.9 $ (9.0) (3.9) %
Operating income 28.8 30.7 (1.9) (6.2) %
Operating margin 13.2 % 13.5 %
Optical Security and Performance
Net revenue $ 91.3 $ 98.9 $ (7.6) (7.7) %
Gross profit 51.8 57.1 (5.3) (9.3) %
Gross margin 56.7 % 57.7 %
Operating income 38.6 43.6 (5.0) (11.5) %
Operating margin 42.3 % 44.1 %
Network Enablement
During the three months ended
Service Enablement
During the three months endedOctober 1, 2022 , SE gross margin increased by 2.8 percentage points from 63.9% in the same period a year ago to 66.7% in the current period. This increase was primarily due to higher revenue and favorable product mix.
Network and Service Enablement
During the three months endedOctober 1, 2022 , NSE operating margin decreased by 0.3 percentage points from 13.5% in the same period a year ago to 13.2% in the current period. This decrease in operating margin was primarily driven by lower volumes.
Optical Security and Performance Products
During the three months endedOctober 1, 2022 , OSP gross margin decreased by 1.0 percentage points from 57.7% in the same period a year ago to 56.7% in the current period. This decrease was primarily due to lower revenue and unfavorable manufacturing variances. OSP operating margin decreased by 1.8 percentage points during the three months endedOctober 1, 2022 from 44.1% in the same period a year ago to 42.3% in the current period. The decrease in operating margin was primarily due to the aforementioned reduction in gross margin. 38
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Liquidity and Capital Resources
We believe our existing liquidity and sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet our liquidity needs, including but not limited to, contractual obligations, working capital and capital expenditure requirements, financing strategic initiatives, fund debt maturities, and execute purchases under our share repurchase program over the next twelve months and beyond. However, there are a number of factors that could positively or negatively impact our liquidity position, including:
•Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
•Impact of the COVID-19 pandemic on our financial condition;
•Changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
•Increase in capital expenditure to support the revenue growth opportunity of our business;
•Changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;
•Timing of payments to our suppliers;
•Factoring or sale of accounts receivable;
•Volatility in fixed income and credit markets which impact the liquidity and valuation of our investment portfolios;
•Volatility in credit markets which would impact our ability to obtain additional financing on favorable terms or at all;
•Volatility in foreign exchange markets which impacts our financial results;
•Possible investments or acquisitions of complementary businesses, products or technologies;
•While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the "Notes") are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt; •Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes and/or 2029 Notes prior to their maturity or of our common stock;
•Potential funding of pension liabilities either voluntarily or as required by law or regulation;
•Compliance with covenants and other terms and conditions related to our financing arrangements; and
•The risks and uncertainties detailed in Item 1A "Risk Factors" section of our Quarterly Report on Form 10-Q.
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Cash and Cash Equivalents and Short-Term Investments
Our cash and cash equivalents consist mainly of investments in institutional money market funds, short-term deposits held at major global financial institutions, and similar short duration instruments. Our strategy is focused on the preservation of capital and supporting our liquidity requirements that meet high credit quality standards, as specified in our investment policy approved by the Audit Committee of our Board of Directors. Our investments in debt securities and marketable equity securities are primarily classified as available for sale or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders' equity. As ofOctober 1, 2022 ,U.S. subsidiaries owned approximately 52.3% of our cash and cash equivalents, short-term investments and restricted cash. As ofOctober 1, 2022 , the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Nonetheless we could realize investment losses under adverse market conditions. During the three months endedOctober 1, 2022 , 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 theU.S. may exceed theFederal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
Senior Secured Asset-Based Revolving Credit Facility
OnDecember 30, 2021 , we entered into a credit agreement (the Credit Agreement) withWells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties. The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of$300 million , which matures onDecember 30, 2026 . The Credit Agreement also provides that, under certain circumstances, we may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to$100 million so long as certain conditions are met.
As of
Refer to "Note 11. Debt" for more information.
Cash Flows for the Three Months Ended
As ofOctober 1, 2022 , our combined balance of cash and cash equivalents and restricted cash decreased by$47.8 million to$525.0 million from$572.8 million as ofJuly 2, 2022 . During the three months endedOctober 1, 2022 , Cash provided by operating activities was$26.6 million , consisting of net income of$32.6 million adjusted for non-cash charges (e.g. depreciation, amortization, stock-based compensation and other non-cash items) which totaled$27.6 million , including changes in deferred tax balances, and changes in operating assets and liabilities that used$33.6 million . Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of$25.7 million , a decrease in income taxes payable of$10.4 million , an increase in inventory of$6.6 million , a decrease in deferred revenue of$6.6 million and a decrease in accrued expenses and other current and non-current liabilities of$5.0 million . These were partially offset by a decrease in accounts receivable of$11.3 million , an increase in accounts payable of$5.4 million , and a decrease in other current and non-current assets of$4.0 million . During the three months endedOctober 1, 2022 , Cash used in investing activities was$29.7 million , primarily related to$14.8 million of cash used for capital expenditures and$15.5 million of cash used for acquisitions, offset by$0.6 million proceeds from sales of assets. During the three months endedOctober 1, 2022 , Cash used in financing activities was$26.8 million , primarily resulting from$18.7 million cash paid to repurchase common stock under our share repurchase program,$11.1 million in withholding tax payments on the vesting of restricted stock awards and$0.7 million in other payments, primarily acquisition related. These were partially offset by$3.7 million in proceeds from the issuance of common stock under our employee stock purchase plan. 40
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Share Repurchase Program
InSeptember 2022 the Board of Directors authorized a new stock repurchase plan ("2022 Repurchase Plan") of up to$300 million effectiveOctober 1, 2022 which will remain in effect until the amount authorized has been fully repurchased or until suspension or termination of the program. Under the 2022 Repurchase Plan, the Company is authorized to repurchase shares through a variety of methods, including open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans. The timing of repurchases under the plan will depend upon business and financial market conditions. The 2022 Repurchase Plan replaces the$200 million stock repurchase plan that the Board previously authorized inSeptember 2019 ("2019 Repurchase Plan"). The 2019 Repurchase Plan expired onSeptember 30, 2022 .
During the three months ended
Refer to "Note 15. Stockholders Equity" for more information.
Contractual Obligations
There were no material changes to our existing contractual commitments during the first quarter of fiscal 2023.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by theSEC , 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 17. 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 15. Stock-Based Compensation" for more details.
Pension and Other Post-Retirement Benefits
We sponsor significant pension plans for certain past and present employees in theUnited Kingdom (U.K. ) andGermany . 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 inGermany assumed in connection with an acquisition in fiscal 2010. TheU.K. plan is fully funded, and the otherGermany plans, which were initially established as "pay-as-you-go" plans, are unfunded. As ofOctober 1, 2022 , our pension plans were under-funded by$54 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 ofOctober 1, 2022 , the fair value of plan assets had decreased approximately 13.8% sinceJuly 2, 2022 , our most recent fiscal year end. In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan's invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to "Note 16. Employee Pension and Other Benefit Plans" for more details.
Recently Issued Accounting Pronouncements
Refer to "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.
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Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted inthe United States of America , (U.S. GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material. A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately$5.0 million based upon data as ofJuly 2, 2022 .
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