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 "anticipates," "believes," "can," "can impact," "could," "continue," "estimates," "expects," "intends," "may," "ongoing," "plans," "potential," "projects," "should," "will," "will continue to be," "would," or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as: •Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition and results of operations; •Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements; •Our plans for growth and innovation opportunities; •Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation; •Our plans for continued development, use and protection of our intellectual property; •Our strategies for achieving our current business objectives, including related risks and uncertainties; •Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities; •Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions; •Our research and development plans and the expected impact of such plans on our financial performance; and •Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues. Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with 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 endedJune 27, 2020 . 33 -------------------------------------------------------------------------------- Table of Contents You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in "Risk Factors" and "Forward-Looking Statements." OUR INDUSTRIES AND QUARTERLY DEVELOPMENTSViavi Solutions Inc. (VIAVI also referred to as the Company, we, our and us), is a global provider of network test, monitoring and assurance solutions for communications service providers, enterprises, network equipment manufacturers, government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network. VIAVI is also a leader in light management solutions for 3D Sensing, anti-counterfeiting, consumer electronics, industrial, government, automotive, and defense applications. To serve our markets we operate the following business segments: •Network Enablement (NE); •Service Enablement (SE), and; •Optical Security and Performance Products (OSP). Network Enablement NE provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. They also support more profitable, higher-performing networks and facilitate time-to-revenue. Our solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major network equipment manufacturers (NEMs), operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks. They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by NEMs in the design and production of next-generation network equipment. Other Test & Measurement communications products also serve the public safety, government, and aerospace and defense markets. We also offer a range of product support and professional services designed to comprehensively address our customers' requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation. NE customers include communication service providers (CSPs), NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage device manufacturers, storage network and switch vendors, and deployed private enterprise customers. Our customers include América Móvil, AT&T Inc., Lumen Technologies (formerlyCenturyLink Inc. ), Cisco Systems, Inc., Nokia, and Verizon Communications, Inc. Our NE products and associated services including acquired business are described below: Field Instruments: Primarily consisting of; (a) Access and Cable products; (b) Avionics products; (c) Fiber Instrument products; (d) Metro products; (e) RF Test products; and, (f) Radio Test products. Lab Instruments: Primarily consisting of; (a) Fiber Optic Production Lab Test; (b)Optical Transport products; (c) Storage Network Test products; and, (d) Wireless products. 34 -------------------------------------------------------------------------------- Table of Contents Service Enablement SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions, which primarily consist of instruments, microprobes and software, monitor, collect and analyze network data to reveal the actual customer experience, and identify opportunities for new revenue streams and network optimization. Our portfolio of SE solutions addresses the same lab and production environments, field deployment and service assurance for operational and fixed communications networks, including storage networks, as our NE portfolio. Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control, and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks. SE customers include similar CSPs, NEMs, government organizations, large corporate customers, and storage-segment customers that are served by our NE segment. Our SE products and associated services are described below: Data Center: Consisting of our Network Performance Monitoring and Security tools. Assurance: Primarily consisting of our Growth Products (Location Intelligence and NITRO Mobile products) and our Mature Products (Legacy Assurance and Legacy Wireline). Optical Security and Performance Products Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, automotive industrial and other markets. Our anti-counterfeiting offerings for the currency market include, OVP® (Optical Variable Pigment) and OVMP® (Optical Variable Magnetic Pigment). OVP enables a color-shifting effect used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents. We also provide OVMP, a technology that delivers depth and motion effects for authenticating banknotes. Our anti-counterfeiting technologies are deployed on the banknotes of more than 100 countries today. Leveraging our expertise in spectral management and our unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer and industrial market, including, for example, 3D Sensing optical filters and Engineered DiffusersTM. OSP value-added solutions meet the stringent requirements of commercial and government customers. Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application. OSP serves customers such as,SICPA Holding SA Company (SICPA), STMicroelectronics N.V., Lockheed Martin Corporation and Seiko Epson Corporation. COVID-19 Pandemic Update The COVID-19 pandemic impacted theU.S. and virtually all of the countries and territories we operate in worldwide. The pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, temporary business closures, among others. The COVID-19 pandemic and these aforementioned measures, have had and continue to have, a substantial macroeconomic impact on businesses and economies worldwide. These conditions may continue and could result in an adverse impact to our operations. 35 -------------------------------------------------------------------------------- Table of Contents Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of all those we serve, our employees, customers, suppliers, and communities - including implementing early and regular updates to our health and safety policies and procedures. We have shut down, slowed, or modified business operations and activities in certain geographies, including in some instances, limiting production to essential business services, all in conjunction with federal, state, and local health and safety regulations and shelter-in-place directives. We continue to follow the guidance of local and national governments, including monitoring the health of our employees who have returned to our offices, by limiting the gathering size of employee groups in indoor spaces per social distancing guidelines, and requiring those employees to wear masks and to undergo screenings prior to entering our offices. While distribution of the vaccines commenced in theUK andU.S. in late 2020, there have been logistical and operational challenges with the rollout, and global demand for the vaccine has far exceeded supply. It will take some time for the global population to receive vaccines, allowing for widespread immunity to develop. At the same time, new and potentially more contagious variants of the virus are developing in several countries and regions in which we operate. We operate a shared services center inPune, India that provides important finance and IT support services. The recent substantial increase of reported COVID-19 transmission rates in that country due to the emergence of a more virulent variant of the virus has led to a significant spike in illness and death rates. Hospitals and medical facilities are overwhelmed and there is a shortage of oxygen and other medical supplies. If the situation inIndia does not improve, our operations and employees there could be negatively impacted. We will continue to take the measures described above to ensure the health and safety of our employees and those they come in contact with. The COVID-19 pandemic has not thus far had a substantial net impact on our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. To date, we have not observed any material or materially adverse indication of impairments under the authoritative guidance, to any of our assets or a significant change to the fair value of assets due to the COVID-19 pandemic. We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has impacted, and may continue to negatively impact, our sales and operating results. In addition, we have experienced, and may continue to experience, shipping and logistics challenges as many of our customers have also closed their facilities and are operating under similar restrictions. Additionally, NSE has experienced some impact to customer demand. Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic. While COVID-19 has brought unprecedented challenges, we believe that we have a robust and adaptable supply chain. Our supply chain team has been working to meet our customer needs by executing on a risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers. Nonetheless, surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and the slow pace of vaccine rollout may impact our suppliers and our ability to source materials in a timely manner. Despite the continued challenges that we are facing due to the COVID-19 pandemic, we remain confident that the actions that we are taking to manage such challenges, combined with our strong liquidity, position us to navigate through the current economic environment and continue to execute on our long-term value creation strategy. Recently Issued Accounting Pronouncements Refer to "Note 2. Recently Issued Accounting Pronouncements" regarding the effect of certain recent accounting pronouncements on our consolidated financial statements. Critical Accounting Policies and Estimates 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 36 -------------------------------------------------------------------------------- Table of Contents resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material. For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2020 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (SEC). There have been no material changes to our critical accounting policies and estimates. RESULTS OF OPERATIONS The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages): Three Months Ended Nine Months Ended Percent Percent April 3, 2021 March 28, 2020 Change Change April 3, 2021 March 28, 2020 Change Change Segment net revenue: NE$ 190.9 $ 163.9 $ 27.0 16.5 %$ 533.9 $ 565.8 $ (31.9) (5.6) % SE 20.3 23.1 (2.8) (12.1) % 67.5 75.2 (7.7) (10.2) % OSP 92.2 69.2 23.0 33.2 % 286.6 228.7 57.9 25.3 % Total net revenue$ 303.4 $ 256.2 $ 47.2 18.4 %$ 888.0 $ 869.7 $ 18.3 2.1 % Gross profit$ 182.0 $ 146.8 $ 35.2 24.0 %$ 531.5 $ 510.7 $ 20.8 4.1 % Gross margin 60.0 % 57.3 % 59.9 % 58.7 %
Research and development
5.3 11.3 %$ 150.9 $ 148.6 $ 2.3 1.5 % Percentage of net revenue 17.2 % 18.3 % 17.0 % 17.1 % Selling, general and administrative$ 86.1 $ 83.6 $ 2.5 3.0 %$ 247.0 $ 263.1 $ (16.1) (6.1) % Percentage of net revenue 28.4 % 32.6 % 27.8 % 30.3 % Restructuring and related benefits$ (0.4) $ (1.6) $ 1.2 (75.0) %$ (0.8) $ (2.2) $ 1.4 (63.6) % Percentage of net revenue (0.1) % (0.6) % (0.1) % (0.3) % Interest and other income, net$ (0.9) $ 5.3$ (6.2) (117.0) %$ 0.8 $ 9.3$ (8.5) (91.4) % Percentage of net revenue (0.3) % 2.1 % 0.1 % 1.1 % Interest expense$ (9.0) $ (8.4) $ 0.6 7.1 %$ (27.0) $ (25.1) $ 1.9 7.6 % Percentage of net revenue 3.0 % 3.3 % 3.0 % 2.9 %
Provision for income taxes
(63.4) % $ 35.3 $ 57.0 $ (21.7) (38.1) %
Percentage of net revenue 4.7 % 15.1 % 4.0 % 6.6 %
Net Revenue
Revenue from our service offerings exceeds 10% of our total consolidated net
revenue and is presented separately in our Consolidated Statements of
Operations. Service revenue primarily consists of maintenance and support,
extended warranty, training, professional services and post-contract support in
addition to other services such as calibration and repair services. When
evaluating the performance of our segments, management focuses
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on total net revenue, gross profit and operating income and not the product or
service categories. Consequently, the following discussion of business segment
performance focuses on total net revenue, gross profit, and operating income
consistent with our approach for managing the business.
COVID-19
We continue to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including federal, state and local
public health authorities and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our
control requiring us to adjust our operating plan. As such, given the dynamic
nature of this situation, the Company cannot reasonably estimate the ultimate
impacts of COVID-19 on our financial condition, results of operations or cash
flows in the future. However, if the COVID-19 pandemic is prolonged, the vaccine
rollouts lag globally, new, and potentially more virulent variants continue to
emerge, and there are continued delays in resumption of normal business
operations and activities, we expect that it could have a material negative
impact on our future revenue growth as well as our overall profitability.
Three months ended April 3, 2021 and March 28, 2020
Net revenue increased by $47.2 million , or 18.4%, during the three months ended
April 3, 2021 compared to the same period a year ago. This increase was due to
revenue increase from our NE and OSP segments, partially offset by revenue
decrease in our SE segment.
Product revenues increased by $42.8 million , or 19.1%, during the three months
ended April 3, 2021 compared to the same period a year ago. This increase was
primarily due to revenue increase from our OSP and NE segments, partially offset
by decreased revenues from our SE segment as discussed below.
Service revenues increased by $4.4 million , or 13.6%, during the three months
ended April 3, 2021 compared to the same period a year ago. This increase was
primarily due to increased revenues from our NE segment, partially offset by
revenue declines in our SE segment.
NE net revenue increased by $27.0 million , or 16.5%, during the three months
ended April 3, 2021 compared to the same period a year ago. This increase was
driven by both Field Instruments and Lab & Production Equipment , including
Fiber, Cable and Wireless products.
SE net revenue decreased by $2.8 million , or 12.1%, during the three months
ended April 3, 2021 compared to the same period a year ago. This decrease is
primarily driven by decreased revenue from our Data Center and Growth Assurance
products.
OSP net revenue increased by $23.0 million , or 33.2%, during the three months
ended April 3, 2021 compared to the same period a year ago. This increase is
driven by growth in revenue from our Anti-Counterfeiting and 3D Sensing
products.
Nine Months Ended April 3, 2021 and March 28, 2020
Net revenue increased by $18.3 million , or 2.1%, during the nine months ended
April 3, 2021 compared to the same period a year ago. This increase was due to
revenue increase from our OSP segment, partially offset by revenue decrease in
our NE and SE segments.
Product revenues increased by $6.1 million , or 0.8% during the nine months ended
April 3, 2021 compared to the same period a year ago due to revenue increases
from our OSP segment, partially offset by decreased revenue from NE and SE
segments.
Service revenues increased by $12.2 million , or 12.3%, during the nine months
ended April 3, 2021 compared to the same period a year ago primarily due to
increased support revenue from the NE and OSP segments, partially offset by a
decline in our SE segment as discussed below.
NE net revenue decreased by $31.9 million , or 5.6%, during the nine months ended
April 3, 2021 compared to the same period a year ago. This decrease was driven
by the impact to our business from the COVID-19 lockdown impacting both Field
Instruments and Lab & Production Equipment , including Fiber, Cable, Access,
Wireless and AvComm products.
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SE net revenue decreased by $7.7 million , or 10.2%, during the nine months ended
April 3, 2021 compared to the same period a year ago. This decrease is primarily
driven by decreased revenue from our Data Center and Growth Assurance products.
OSP net revenue increased by $57.9 million , or 25.3%, during the nine months
ended April 3, 2021 compared to the same period a year ago. This increase is
primarily driven by growth in revenue from our Anti-Counterfeiting and 3D
Sensing products.
Going forward, we expect to continue to encounter a number of industry and
market risks and uncertainties that may limit our visibility, and consequently,
our ability to predict future revenue, seasonality, profitability, and general
financial performance, which could create period over period variability in our
financial measures 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 from Asia -based competitors, and a general commoditization trend
for certain products; (b) product mix variability in our NE and SE markets,
which affects revenue and gross margin; (c) fluctuations in customer buying
patterns, which cause demand, revenue and profitability volatility; (d) the
current trend of communication industry consolidation, which is expected to
continue, that directly affects our NE and SE customer bases and adds additional
risk and uncertainty to our financial and business projections; (e) the impact
of ongoing global trade policies, tariffs and sanctions; and (f) regulatory or
economic developments and/or technology challenges that slow or change the rate
of adoption of 5G, 3D Sensing and other emerging secular technologies and
platforms.
Revenue by Region
We operate in three geographic regions: Americas , Asia-Pacific and Europe Middle
East and Africa (EMEA). Net revenue is assigned to the geographic region and
country where our product is initially shipped. For example, certain customers
may request shipment of our product to a contract manufacturer in one country,
which may differ from the location of their end customers. The following table
presents net revenue by the three geographic regions we operate in and net
revenue from countries that exceeded 10% of our total net revenue (in millions):
Three Months Ended Nine Months Ended
April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020
Americas:
United States $ 77.4 25.5 % $ 71.8 28.0 % $ 243.8 27.5 % $ 253.0 29.1 %
Other Americas 24.4 8.1 % 17.0 6.6 % 61.8 7.0 % 58.3 6.7 %
Total Americas $ 101.8 33.6 % $ 88.8 34.6 % $ 305.6 34.5 % $ 311.3 35.8 %
Asia-Pacific:
Greater China $ 71.9 23.7 % $ 41.3 16.1 % $ 224.2 25.2 % $ 193.7 22.3 %
Other Asia-Pacific 30.3 10.0 % 33.0 12.9 % 82.6 9.3 % 100.8 11.6 %
Total Asia-Pacific $ 102.2 33.7 % $ 74.3 29.0 % $ 306.8 34.5 % $ 294.5 33.9 %
EMEA:
Switzerland $ 18.1 6.0 % $ 27.8 10.9 % $ 55.9 6.3 % $ 53.5 6.2 %
Other EMEA 81.3 26.7 % 65.3 25.5 % 219.7 24.7 % 210.4 24.1 %
Total EMEA $ 99.4 32.7 % $ 93.1 36.4 % $ 275.6 31.0 % $ 263.9 30.3 %
Total net revenue $ 303.4 100.0 % $ 256.2 100.0 % $ 888.0 100.0 % $ 869.7 100.0 %
Net revenue from customers outside the Americas during the three and nine months
ended April 3, 2021 represented 66.4% and 65.5% of net revenue, respectively.
Net revenue from customers outside the Americas during the three and nine months
ended March 28, 2020 represented 65.3% and 64.2% of net revenue, respectively.
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We expect revenue from customers outside of United States to continue to be an
important part of our overall net revenue and an increasing focus for net
revenue growth opportunities.
Gross Margin
Gross margin increased by 2.7 percentage points during the three months ended
April 3, 2021 from 57.3% in the same period a year ago to 60.0% in the current
period. This increase was primarily driven by higher revenue volume, favorable
product mix and improved factory utilization within our OSP and NE segments.
This increase was partially offset by gross margin reduction in our SE segment
as discussed below in the Operating Segment Information section.
Gross margin increased by 1.2 percentage points during the nine months ended
April 3, 2021 from 58.7% in the same period a year ago to 59.9% in the current
period. This increase was primarily driven by improved factory utilization due
to higher revenue volume and favorable product mix within our OSP segment. This
increase was partially offset by gross margin reduction in our SE segment as
discussed below in the Operating Segment Information section.
As discussed in more detail under "Net Revenue" above, we sell products in
certain markets that are consolidating, undergoing product, architectural and
business model transitions, have high customer concentrations, are highly
competitive (increasingly due to Asia-Pacific -based competition), are price
sensitive and/or are affected by customer seasonal and mix variant buying
patterns. We expect these factors to continue to result in variability of our
gross margin.
Research and Development
R&D expense increased by $5.3 million , or 11.3%, during the three months ended
April 3, 2021 compared to the same period a year ago. This increase was driven
by targeted investments to support increased demand for our key product lines.
As a percentage of net revenue, R&D expense decreased, by 1.1 percentage points
during the three months ended April 3, 2021 compared to the same period a year
ago.
R&D expense increased by $2.3 million , or 1.5%, during the nine months ended
April 3, 2021 compared to the same period a year ago. This increase was
primarily driven by targeted investments to support increased demand for our key
product lines. As a percentage of net revenue R&D expense decreased by 0.1
percentage points during the nine months ended April 3, 2021 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 increased by $2.5 million , or 3.0%, during the three months ended
April 3, 2021 compared to the same period a year ago. This increase was
primarily due to targeted investments to support increased demand for our key
growth products including higher sales commissions, partially offset by the
change in the fair value of contingent consideration. As a percentage of net
revenue, SG&A decreased 4.2 percentage points during the three months ended
April 3, 2021 compared to the same period a year ago.
SG&A expense decreased by $16.1 million , or 6.1%, during the nine months ended
April 3, 2021 compared to the same period a year ago. This decrease was
primarily due to lower spend on sales commissions and travel and entertainment
expenses in the current period and the change in the fair value of contingent
consideration. As a percentage of net revenue, SG&A decreased 2.5 percentage
points during the nine months ended April 3, 2021 compared to the same period a
year ago.
We intend to continue to focus on reducing our SG&A expense as a percentage of
net revenue. However, we may experience in the future, increased expenses
related to a return to travel, industry trade shows, and other business related
expenses as the macroeconomic environment returns to normalcy and pre-pandemic
conditions. Further, certain impacts unrelated to our core operating
performance, such as mergers and acquisitions-related expenses, litigation
expenses and changes in the fair value measurement of our contingent
consideration liabilities, could increase our SG&A expenses and potentially
impact our profitability expectations in any particular quarter.
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Restructuring and Related Charges
From time to time we have initiated strategic restructuring events primarily
intended to reduce costs, consolidate our operations, integrate various
acquisitions, rationalize the manufacturing of our products and align our
businesses to address market conditions.
As of April 3, 2021 and June 27, 2020 , the Company's total restructuring accrual
was $2.2 million and $6.5 million , respectively. During the three and nine
months ended April 3, 2021 , the Company recorded restructuring and related
benefits of $0.4 million and $0.8 million , respectively. During the three and
nine months ended March 28, 2020 , the Company recorded restructuring and related
benefits of $1.6 million and $2.2 million , respectively. Refer to "Note 13.
Restructuring and Related Charges" for more information.
Interest and Other Income (Loss), Net
Interest and other income (loss), net, represented a net expense of $0.9 million
during the three months ended April 3, 2021 compared to a net income of $5.3
million the same period a year ago. This $6.2 million decrease was primarily
driven by a $4.4 million 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, and a
$1.3 million decrease in interest income due to lower yields on money market
funds in which we invest excess cash during the current period coupled with cash
repatriation from a jurisdiction with relatively high interest rates to a
jurisdiction with low interest rates prior to the current period.
Interest and other income, net, was $0.8 million during the nine months ended
April 3, 2021 compared to $9.3 million the same period a year ago. This $8.5
million decrease was primarily driven by a $4.4 million unfavorable foreign
exchange impact as the balance sheet hedging program provided less favorable
offset to the remeasurement of underlying foreign exchange exposures during the
current period, and a $3.9 million decrease in interest income due to lower
yields on money market funds in which we invest excess cash during the current
period coupled with cash repatriation from a jurisdiction with relatively high
interest rates to a jurisdiction with low interest rates prior to the current
period.
Interest Expense
Interest expense increased by $0.6 million , or 7.1%, during the three months
ended April 3, 2021 compared to the same period a year ago. This increase was
primarily due to the commitment fee on unutilized portion of the revolving
credit facility, the amortization of issuance costs related to the revolving
credit facility as well as an increase in debt discount accretion on the 2023
Notes and 2024 Notes during the current period.
Interest expense increased by $1.9 million , or 7.6%, during the nine months
ended April 3, 2021 compared to the same period a year ago. This increase was
primarily due to the commitment fee on unutilized portion of the revolving
credit facility, the amortization of issuance costs related to the revolving
credit facility as well as an increase in debt discount accretion on the 2023
Notes and 2024 Notes during the current period.
Provision for Income Taxes
We recorded an income tax expense of $14.2 million and $35.3 million for the
three and nine months ended April 3, 2021 , respectively and an income tax
expense of $38.8 million and $57.0 million for the three and nine months ended
March 28, 2020 , respectively.
The income tax expense for the three and nine months ended April 3, 2021
primarily relates to income tax in certain foreign and state jurisdictions based
on our forecasted pre-tax income or loss for the respective fiscal year. The
income tax provision for the three and nine months ended March 28, 2020
primarily related to a $31.6 million charge for withholding taxes expected to be
paid on the repatriation of $316.4 million of foreign earnings that we no longer
considered to be permanently reinvested. In light of the economic uncertainty
caused by COVID-19, we reevaluated our historic assertion on foreign earnings
and no longer considered these earnings to be permanently reinvested. The
repatriation of these earnings increased available cash in U.S and provided
greater U.S. financial flexibility to assist us in navigating the expected
downturn in the economy. The foreign earnings were repatriated to the U.S.
without incurring any significant additional U.S current or deferred tax
expense. In addition, the income tax provision for the period includes the
income tax in certain foreign and state jurisdictions based on our forecasted
pre-tax income or loss for the respective fiscal year.
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The income tax provision recorded differs from the expected tax provision that
would be calculated by applying the federal statutory rate to our income from
continuing operations before taxes primarily due to the withholding taxes
accrued on foreign earnings and the changes in valuation allowance for deferred
tax assets attributable to our domestic and foreign income from continuing
operations.
As of April 3, 2021 , and June 27, 2020 , our unrecognized tax benefits totaled
$48.4 million and $48.4 million respectively, are included in deferred taxes and
other non-current tax liabilities, net. We had $3.7 million accrued for the
payment of interest and penalties as of April 3, 2021 . The timing and resolution
of income tax examinations is uncertain, and the amounts ultimately paid, if
any, upon resolution of issues raised by the taxing authorities may differ from
the amounts accrued for each year. Although we do not expect that our balance of
gross unrecognized tax benefits will change materially in the next 12 months,
given the uncertainty in the development of ongoing income tax examinations, we
are unable to estimate the full range of possible adjustments to this balance.
Operating Segment Information
Information related to our operating segments were as follows, (in millions):
Three Months Ended Nine Months Ended
April 3, 2021 March 28, 2020 Change Percentage Change April 3, 2021 March 28, 2020 Change Percentage Change
Network Enablement
Net revenue $ 190.9 $ 163.9 $ 27.0 16.5 % $ 533.9 $ 565.8 $ (31.9) (5.6) %
Gross profit 123.1 104.3 18.8 18.0 % 339.9 367.1 (27.2) (7.4) %
Gross margin 64.5 % 63.6 % 63.7 % 64.9 %
Service Enablement
Net revenue $ 20.3 $ 23.1 $ (2.8) (12.1) % $ 67.5 $ 75.2 $ (7.7) (10.2) %
Gross profit 12.4 16.0 (3.6) (22.5) % 44.3 49.4 (5.1) (10.3) %
Gross margin 61.1 % 69.3 % 65.6 % 65.7 %
Network and Service Enablement
Net revenue $ 211.2 $ 187.0 $ 24.2 12.9 % $ 601.4 $ 641.0 $ (39.6) (6.2) %
Operating income 20.9 13.8 7.1 51.4 % 56.4 73.6 (17.2) (23.4) %
Operating margin 9.9 % 7.4 % 9.4 % 11.5 %
Optical Security and Performance
Net revenue $ 92.2 $ 69.2 $ 23.0 33.2 % $ 286.6 $ 228.7 $ 57.9 25.3 %
Gross profit 55.9 36.4 19.5 53.6 % 175.3 123.3 52.0 42.2 %
Gross margin 60.6 % 52.6 % 61.2 % 53.9 %
Operating income 40.5 24.2 16.3 67.4 % 132.4 85.0 47.4 55.8 %
Operating margin 43.9 % 35.0 % 46.2 % 37.2 %
Network Enablement
During the three months ended April 3, 2021 , NE gross margin increased by 0.9
percentage points from 63.6% in the same period a year ago to 64.5% in the
current period, reflecting higher revenue volumes and favorable product mix.
During the nine months ended April 3, 2021 , NE gross margin decreased by 1.2
percentage points from 64.9% in the same period a year ago to 63.7% in the
current period. This decrease in the current period reflects lower revenue
volumes due to the impact of COVID-19 and unfavorable product mix.
Service Enablement
During the three months ended April 3, 2021 , SE gross margin decreased by 8.2
percentage points from 69.3% in the same period a year ago to 61.1% in the
current period. This decrease was primarily due to lower revenue volumes and
unfavorable product mix in our Assurance growth products.
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During the nine months ended April 3, 2021 , SE gross margin decreased by 0.1
percentage points from 65.7% in the same period a year ago to 65.6% in the
current period. This decrease was primarily due to lower revenue volumes.
Network and Service Enablement (NSE)
During the three months ended April 3, 2021 , NSE operating margin increased by
2.5 percentage points from 7.4% in the same period a year ago to 9.9% in the
current period. This increase in operating margin was primarily driven by higher
revenue volume.
During the nine months ended April 3, 2021 , NSE operating margin decreased by
2.1 percentage points from 11.5% in the same period a year ago to 9.4% in the
current period. This decrease in operating margin was primarily driven by lower
revenue volume.
Optical Security and Performance Products
During the three months ended April 3, 2021 OSP gross margin increased by 8.0
percentage points from 52.6% in the same period a year ago to 60.6% in the
current period. This increase was primarily due to favorable product mix driven
by higher revenue in Anti-Counterfeiting and 3D Sensing products and increased
factory utilization due to higher revenue volumes.
During the nine months ended April 3, 2021 , OSP gross margin increased by 7.3
percentage points from 53.9% in the same period a year ago to 61.2% in the
current period primarily due to favorable product mix driven by higher revenue
in Anti-Counterfeiting and 3D Sensing products and increased factory utilization
due to higher revenue volumes.
OSP operating margin increased by 8.9 percentage points during the three months
ended April 3, 2021 from 35.0% in the same period a year ago to 43.9% in the
current period. The increase in operating margin was primarily due to higher
gross margins as discussed above.
OSP operating margin increased by 9.0 percentage points during the nine months
ended April 3, 2021 from 37.2% in the same period a year ago to 46.2% in the
current period. The increase in operating margin was primarily due to higher
gross margins as discussed above.
Liquidity and Capital Resources
As of April 3, 2021 and June 27, 2020 , we had assets classified as cash and cash
equivalents, as well as short-term investments and short-term restricted cash,
in an aggregate amount of $678.1 million and $544.0 million , respectively.
Our cash investments are made in accordance with an investment policy approved
by the Audit Committee of our Board of Directors and has not changed from that
disclosed in our Form 10-K. As of April 3, 2021 , U.S. entities owned
approximately 42.6% of our cash and cash equivalents, short-term investments and
short-term restricted cash. The recent COVID-19 pandemic has caused disruption
in global capital markets and over time may impact our ability to obtain credit
and/or negotiate acceptable financing terms.
As of April 3, 2021 , the majority of our cash investments have maturities of 90
days or less and are of high credit quality. Although we intend to hold these
investments to maturity, in the event that we are required to sell any of these
securities under adverse market conditions, losses could be recognized on such
sales. During the three months ended April 3, 2021 , we have not realized
material investment losses but can provide no assurance that the value or the
liquidity of our investments will not be impacted by adverse conditions in the
financial markets. In addition, we maintain cash balances in operating accounts
that are with third-party financial institutions. These balances in the U.S. may
exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While
we monitor the cash balances in our operating accounts and adjust the cash
balances as appropriate, these cash balances could be impacted if the underlying
financial institutions fail.
On May 5, 2020 , we entered into a credit agreement (the Credit Agreement) with
Wells Fargo Bank, National Association (Wells Fargo) as administrative agent,
and other lender related parties. The Credit Agreement provides for a $300
million senior secured revolving credit facility, which matures on March 1,
2023 . The Credit Agreement also provides that, under certain circumstances, we
may incur term loans or increase the aggregate principal amount of revolving
commitments by an aggregate amount of up to $200 million plus additional amounts
so long as our secured net leverage ratio, determined on a pro forma basis does
not exceed 1.50:1.00. The proceeds from the
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credit facility established under the Credit Agreement will be used for working
capital and other general corporate purposes. The obligations under the Credit
Agreement are secured by substantially all of our assets.
Amounts outstanding under the Credit Agreement accrue interest at a rate equal
to either, at our election, LIBOR plus a margin of 1.75% to 2.50% per annum, or
a specified base rate plus a margin of 0.75% to 1.50%, in each case, depending
on our consolidated secured leverage ratio. We are required to pay a commitment
fee on the unutilized portion of the facility which ranges between 0.30% and
0.40% per annum depending on our consolidated secured leverage ratio. As of
April 3, 2021 , we had no amounts outstanding under the Credit Agreement.
Nine Months Ended April 3, 2021
As of April 3, 2021 , our combined balance of cash and cash equivalents and
restricted cash increased by $134.6 million to $682.0 million from $547.4
million as of June 27, 2020 .
During the nine months ended April 3, 2021 , Cash provided by operating
activities was $180.7 million , consisting of net income of $48.0 million
adjusted for non-cash charges (e.g., depreciation, amortization and stock-based
compensation) which totaled $122.2 million , including changes in deferred tax
balances, and changes in operating assets and liabilities that provided $10.5
million . Changes in our operating assets and liabilities related primarily to a
decrease in other current and non-current assets of $16.2 million , an increase
in income taxes payable of $13.9 million , an increase in deferred revenue of
$8.8 million , and an increase of accrued payroll and related expenses of $8.6
million . These were partially offset by an increase in accounts receivable of
$21.0 million , an increase in inventory of $8.1 million , and a decrease in
accrued expenses and other current and non-current liabilities of $7.9 million .
During the nine months ended April 3, 2021 , Cash used in investing activities
was $24.8 million , primarily related to $26.7 million of cash used for capital
expenditures and $0.7 million of cash used for acquisitions, offset by $2.6
million proceeds from sales of assets.
During the nine months ended April 3, 2021 , Cash used in financing activities
was $43.2 million , primarily resulting from $31.1 million cash paid to
repurchase common stock under our share repurchase program, $14.8 million in
withholding tax payments on the vesting of restricted stock awards, $2.8 million
cash paid to settle assumed debt from an acquisition in fiscal year 2020, and
$1.1 million payments related to financing obligations, including issuance
costs. These were partially offset by $6.6 million in proceeds from the issuance
of common stock under our employee stock purchase plan.
Nine Months Ended March 28, 2020
As of March 28, 2020 , our combined balance of cash and cash equivalents and
restricted cash increased by $10.5 million to $540.9 million from $530.4 million
as of June 29, 2019 .
During the nine months ended March 28, 2020 , Cash provided by operating
activities was $108.4 million , consisting of net income of $2.0 million adjusted
for non-cash charges (e.g., depreciation, amortization and stock-based
compensation) which totaled $159.4 million , including changes in deferred tax
balances, offset by changes in operating assets and liabilities that used $53.0
million . Changes in our operating assets and liabilities related primarily to a
decrease in accrued expenses and other current and non-current liabilities of
$41.6 million driven by a decrease in customer deposit, a decrease in accounts
payable of $16.0 million primarily driven by timing of purchases and related
payments, a decrease in accrued payroll and related expenses of $10.3 million
due to the timing of salary and related payments, and an increase in accounts
receivable of $6.6 million due to higher billings. . These changes were
partially offset by an increase in income taxes payable and other tax
liabilities of $8.6 million , a decrease in inventories of $3.6 million , an
increase in deferred revenue of $7.4 million , and a decrease in other current
and non-current assets of $1.9 million .
During the nine months ended March 28, 2020 , Cash used in investing activities
was $20.1 million , primarily related to $23.6 million of cash used for capital
expenditures; offset by $4.0 million proceeds from sales of assets.
During the nine months ended March 28, 2020 , Cash used in financing activities
was $58.8 million , primarily due to $43.8 million in cash paid to repurchase
common stock under our share repurchase program, $18.4 million in withholding
tax payments on vesting of restricted stock awards, and $2.1 million in payment
of financing obligations; offset by $5.5 million in proceeds from the issuance
of common stock under our employee stock purchase plan.
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We believe that our existing cash balances and investments will be sufficient to
meet our liquidity and capital spending requirements over the next twelve
months. However, there are a number of factors that could positively or
negatively impact our liquidity position, including:
•global economic conditions which affect demand for our products and services
and impact the financial stability of our suppliers and customers;
•impact of the COVID-19 pandemic on our financial condition;
•changes in accounts receivable, inventory or other operating assets and
liabilities which affect our working capital;
•increase in capital expenditure to support the revenue growth opportunity of
our business;
•changes in customer payment terms and patterns, which typically results in
customers delaying payments or negotiating favorable payment terms to manage
their own liquidity positions;
•timing of payments to our suppliers;
•factoring or sale of accounts receivable;
•volatility in fixed income and credit market which impact the liquidity and
valuation of our investment portfolios;
•volatility in foreign exchange market which impacts our financial results;
•possible investments or acquisitions of complementary businesses, products or
technologies;
•issuance or repurchase of debt or equity securities, which may include open
market purchases of our 2023 Notes and/or 2024 Notes prior to their maturity or
of our common stock; and
•potential funding of pension liabilities either voluntarily or as required by
law or regulation.
Contractual Obligations
There were no material changes to our existing contractual commitments during
the third quarter of fiscal 2021.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in
rules promulgated by the SEC , that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors, other than the
guarantees discussed in "Note 18. Commitments and Contingencies."
Employee Equity Incentive Plan
Our stock-based benefit plans are a broad-based, long-term retention program
that is intended to attract and retain employees and align stockholder and
employee interests. Refer to "Note 16. Stock-Based Compensation" for more
details.
Pension and Other Post-Retirement Benefits
We sponsor significant pension plans for certain past and present employees in
the United Kingdom (U.K. ) and Germany . We are also responsible for the
non-pension post-retirement benefit obligation (PBO) assumed from a past
acquisition. All of these plans have been closed to new participants and no
additional service costs are being accrued, except for certain plans in Germany
assumed in connection with an acquisition in fiscal 2010. The U.K. plan is
partially funded, and the other Germany plans, which were initially established
as "pay-as-you-go" plans, are unfunded. As of April 3, 2021 , our pension plans
were under funded by $111.2 million since the PBO exceeded the fair value of
plan assets. Similarly, we had a liability of $0.4 million related to our
non-pension post-retirement benefit plan. Pension plan assets are managed by
external third parties and we monitor the performance of our investment
managers. As of April 3, 2021 , the fair value of plan assets had increased
approximately 7.3% since June 27, 2020 , our most recent fiscal year end.
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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
$9.2 million based upon data as of June 27, 2020 .
In estimating the expected return on plan assets, we consider historical returns
on plan assets, adjusted for forward-looking considerations, inflation
assumptions and the impact of active management of the plan's invested assets.
While it is not possible to accurately predict future rate movements, we believe
our current assumptions are appropriate. Refer to "Note 17. Employee Pension and
Other Benefit Plans" for more details.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
The Company's market risk has not changed materially from the foreign exchange
and interest rate risks disclosed in Item 7A of the Company's Annual Report on
Form 10-K for the fiscal year ended June 27, 2020 .
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
Exchange Act), which are designed to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely
decisions regarding required disclosure. Our management, with the participation
of our CEO and CFO, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO
concluded that our disclosure controls and procedures were effective as of April
3, 2021 .
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
Limitations on Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure
controls and procedures of our internal controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
systems will be achieved. No evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within our
company, have been detected. Accordingly, our disclosure controls and procedures
provide reasonable assurance of achieving their objective.
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