What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-08-24 compared with 2019-08-27 · 209 added, 266 removed, 432 unchanged (52% of the section changed)

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Viavi Solutions Inc.

(“VIAVI,” also referred to as “the Company,” “we,” “our,” and “us”), is a global provider of network test, monitoring and assurance solutions to communications service providers, enterprises, network equipment manufacturers, civil government, military and avionics customers, supported by a worldwide channel community including VIAVI Velocity Partners.

Our Velocity program (“Velocity”) allows us to optimize the use of direct or partner sales depending on application and sales volume.

Velocity expands our reach into new market segments as well as expands our capability to sell and deliver solutions.

We deliver end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability.

We are also a leader in high performance thin film optical coatings, providing light management solutions to anti-counterfeiting, 3D sensing, electronics, automotive, defense and instrumentation markets.

(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, during fiscal 2020 we operated the following business segments:

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NE customers include CSPs, NEM s, 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., CenturyLink, Inc., Cisco Systems, Inc., Comcast Corporation, Nokia Solutions and Networks and Verizon Communications Inc.

Our customers include América Móvil, AT&T Inc., Inc., CenturyLink, Inc., Cisco Systems, Inc., Nokia Solutions and Networks and Verizon Communications Inc.

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

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Primarily consisting of (a) Access and Cable products;

(b) Fiber Instrument products;

(d) RF Test products;

(e) Radio Test products;

and (f) Avionics products.

(b) Avionics products;

(d) Metro products;

(e) RF Test products;

and (f) Radio Test products.

Lab Instruments :

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Consisting of our Network Performance Monitoring and Security tools.

Primarily consisting of our (a) Mature Products (Legacy Assurance, Legacy Wireline, Protocol Test, Video Assurance products and RAN) and (b) Growth Products (xSight, Packet Portal products, Location Intelligence).

Primarily consisting of our (a) Growth Products (Location Intelligence and Nitro Mobile products) and (b) Mature Products (Legacy Assurance and Legacy Wireline).

Optical Security and Performance Products

Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, healthcare and other markets.

Our security offerings for the currency market include OVP® and OVMP®.

Our anti-counterfeiting offerings for the currency market include OVP® and OVMP®.

OVP® enables a color-shifting effect used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents.

Our technologies are deployed on the banknotes of more than 100 countries today.

OVMP is an advanced product version of OVP with the added magnetic property feature.

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 Diffusers TM .

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These products, including coatings and optical filters, are optimized for each specific application.

OSP serves customers such as, L-3 Communications, Lockheed Martin, Seiko Epson, SICPA and STMicroelectronics.

OSP serves customers such as SICPA Holding SA Company (SICPA), STMicroelectronics Holding N.V., Lockheed Martin Corporation and Seiko Epson Corporation.

COVID-19 Pandemic Update

The COVID-19 pandemic has confirmed cases in the U.S.

and most of the countries and territories we operate in worldwide.

The pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, temporary business closures among others.

The COVID-19 pandemic and these aforementioned measures, have had and continue to have, a substantial macroeconomic impact on businesses and economies worldwide.

These conditions may continue and result in an adverse impact to our operations.

Our priority during the COVID-19 pandemic has remained focused on 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.

The COVID-19 pandemic has not had a substantial net impact on our liquidity position in the second half of the fiscal year.

We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets enabled by our strong credit ratings.

To date, we have not observed any material or materially adverse indication of impairments under the authoritative guidance, to any of our assets or a significant change to the fair value of assets due to the COVID-19 pandemic.

We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results.

In addition, we have experienced and may continue to experience shipping and logistics challenges as many of our customers have also closed their facilities and are operating under similar restrictions.

Both NE and SE net revenue declined in the second half of fiscal 2020.

NE revenue declined as the COVID-19 pandemic resulted in certain customer operation and logistic shutdowns that resulted in shipment or acceptance delays, which resulted in a demand slowdown in Field Instruments with orders pushed out into future periods, and SE revenue declined as customers were unable to provide on-site verification and acceptance due to facility closures and other restrictions.

We have a global supply chain footprint with our primary manufacturing partners located in China, France, Germany, United Kingdom and the United States.

Supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and materials shortages resulted in extended lead-times to our customers, increased logistics costs, and impacted the volume of product we were able to deliver, which negatively impacted our ability to fully recognize the associated revenue in the second half of 2020.

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.

We have also experienced shipping and logistics challenges with respect to our NE Field Instruments products as many of our customers closed facilities and are continuing to operate under similar restrictions, and have delayed purchase decisions or placed orders on hold due to shipment or acceptance delays.

In addition, many of our customers have been unable provide on-site verification and acceptance of our SE products due to facility closures and other restrictions.

Capital markets and worldwide economies have also been significantly impacted by the COVID-19 pandemic, and on June 8, 2020, the National Bureau of Economic Research announced that the U.S.

was in a recession.

Deterioration of macro-economic conditions could have a material adverse impact on our longer-term business as customers curtail and reduce overall spending.

As the pandemic spread across the globe, there has been a tightening of the credit markets.

We entered into a $300 million secured credit facility in May 2020 to strengthen our liquidity position but have not drawn on this facility to date.

Under a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.

Despite the continued challenges that we are facing due to the COVID-19 pandemic, we remain confident that the actions that we are taking to manage such challenges, combined with our strong liquidity, position us well to navigate through the current economic environment and continue to execute on our long-term value creation strategy.

Recently Issued Accounting Pronouncements

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Revenue Recognition

In the first quarter of fiscal 2019, we adopted the revenue standard using the retrospective transition method which requires that we recast each prior period presented.

The most significant impact of the revenue standard relates to our accounting for contracts containing software solutions bundled with post-contract support (“PCS”) and/or services where, due to lack of vendor-specific objective evidence (“VSOE”) of fair value, the software revenue was deferred and recognized ratably over the support or service period.

Revenue associated with the software under these types of contracts will now be recognized when control of the software is transferred, which is usually at time of billing rather than ratably over the life of the support term.

The actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances transfer of control and revenue recognition may differ from the time of billing.

Revenue recognition under the revenue standard for the remainder of our products and services remains substantially unchanged.

We derive revenue from a diverse portfolio of network solutions and optical technology products and services, as follows:

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Promised goods and services are considered distinct provided that:

(i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer;

and, (ii) our promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract.

(i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and (ii) our promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract.

Our performance obligations consist of a variety of products and services offerings, which include networking equipment;

proprietary pigment, optical filters, proprietary software licenses;

support and maintenance which includes hardware support that extends beyond our standard warranties, software maintenance, installation, professional and implementation services, and training.

Determining whether products and services are considered distinct performance obligations may require significant judgment.

proprietary pigment;

optical filters;

proprietary software licenses;

and support and maintenance, which includes hardware support that extends beyond our standard warranties, software maintenance, installation, professional and implementation services, and training.

Identifying and evaluating whether products and services are considered distinct performance obligations may require significant judgment particularly in NSE due to the underlying nature of the product and service offerings.

We may enter into contracts that involve a significant level of integration and interdependency between a software license and installation services.

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If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation.

Many of our contracts include multiple

performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training.

Many of our contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training.

Contracts may also include rights or options to acquire future products and/or services, which are accounted for as separate performance obligations by us, only if the right or option provides the customer with a material right that it would not receive without entering into the contract.

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For other professional services or time-based labor contracts, revenue is recognized as we perform the services and the customers receive and/or consume the benefits.

Our investments are primarily investments in debt securities which are classified as available-for-sale investments or trading securities, recorded at fair value.

The cost of securities sold is based on the specific identified method.

Unrealized gains and losses resulting from changes in fair value on available-for-sale investments, net of tax, are reported within accumulated other comprehensive (loss).

We periodically review these debt investments for impairment.

If a debt security’s fair value is below amortized cost and we either intend to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, we record an other-than-temporary impairment charge to current earnings for the entire amount of the impairment;

if a debt security’s fair value is below amortized cost and we do not expect to recover the entire amortized cost of the security, we separate the other-than-temporary impairment into the portion of the loss related to credit factors, or the credit loss portion, and the portion of the loss that is not related to credit factors, or the non-credit loss portion.

The credit loss portion is the difference between the amortized cost of the security and our best estimate of the present value of the cash flows expected to be collected from the debt security.

The non-credit loss portion is the residual amount of the other-than-temporary impairment.

The credit loss portion is recorded as a charge to income (loss), and the non-credit loss portion is recorded as a separate component of other comprehensive (loss) income.

Our short-term investments are classified as current assets, include certain securities with stated maturities of longer than twelve months, are highly liquid and available to support our current operations.

Inventory Valuation

Our inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of net realizable value.

On a quarterly basis, we assess the value of our inventory and write down those inventories determined to be obsolete or in excess of our forecasted usage to their market value.

Our estimates of realizable value are based upon management analysis and assumptions including, but not limited to, forecasted sales levels by product, expected product life cycle, product development plans and future demand requirements.

Our product line management personnel play a key role in our excess review process by providing updated sales forecasts, managing product transitions and working with manufacturing to minimize excess inventory.

Differences between actual market conditions and customer demand to our forecasts, may create favorable or unfavorable inventory positions, and may result in additional inventory write-downs or than higher expected income from operations.

Our inventory amounts include material, labor, and manufacturing overhead costs.

Business Combinations

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Each acquired company’s operating results are included in our Consolidated Financial Statements beginning on the date of acquisition.

purchase price is equivalent to the fair value of consideration transferred.

The purchase price is equivalent to the fair value of consideration transferred.

Tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition are recorded at their estimated fair values as of the acquisition date.

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For example, if the price of our common stock were to significantly decrease combined with other adverse changes in market conditions, thus indicating that the underlying fair value of our reporting units may have decreased, we might be required to reassess the value of our goodwill in the period such circumstances were identified.

In the fourth quarter of fiscal 2019, we performed the goodwill impairment test in accordance with the authoritative guidance for NE and OSP reporting units, and determined no indicator of impairment.

As of June 29, 2019 , the SE reporting unit did not have any goodwill, all of which previously was fully impaired in the fourth quarter of fiscal 2016.

In the fourth quarter of fiscal 2020, we performed the goodwill impairment test in accordance with the authoritative guidance for NE, SE and OSP reporting units, and determined no indicator of impairment.

Refer to “ Note 9.

Goodwill ” for more information.

Long -lived Asset Valuation (Property, Plant and Equipment and Intangible Assets )

We test long-lived assets for recoverability, at the asset group level, when events or changes in circumstances indicate that their carrying amounts may not be recoverable.

Circumstances which could trigger a review include, but are not limited to, significant decreases in the market price of the asset, significant adverse changes in the business climate or legal factors, accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset, current period cash

flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset, or current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.

Recoverability is assessed based on the difference between the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset.

An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.

In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and liability approach.

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Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.

Restructuring Accrual

In accordance with authoritative guidance on accounting for costs associated with exit or disposal activities, generally costs associated with restructuring activities are recognized when they are incurred.

However, in the case of leases, the expense is estimated and accrued when the property is vacated.

Given the significance of, and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made from the time the property was vacated, including evaluating real estate market conditions for expected vacancy periods and sub-lease income.

Additionally, a liability for post-employment benefits for workforce reductions related to restructuring activities is recorded when payment is probable and the amount is reasonably estimable.

We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives.

Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

Pension and Other Postretirement Benefits

The funded status of our retirement-related benefit plans is recognized in the Consolidated Balance Sheets.

The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal year end, the measurement date.

For defined benefit pension plans, the benefit obligation is the projected benefit obligation (“PBO”);

and for the non-pension postretirement benefit plan, the benefit obligation is the accumulated postretirement benefit obligation (“APBO”).

The PBO represents the actuarial present value of benefits expected to be paid upon our employee’s retirement.

The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered.

Unfunded or partially funded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and non-pension postretirement benefit obligation equal to this excess.

The current portion of the retirement-related benefit obligation

represents the actuarial present value of benefits payable in the next 12 months in excess of the fair value of plan assets, measured on a plan-by-plan basis.

This liability is recorded in other current liabilities in the Consolidated Balance Sheets.

Net periodic pension cost is recorded in the Consolidated Statements of Operations and includes service cost, interest cost, expected return on plan assets, amortization of prior service cost (credit) and (gains) losses previously recognized as a component of accumulated other comprehensive income.

Service cost represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year.

Interest cost represents the time value of money cost associated with the passage of time.

(Gains) losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions.

Prior service cost (credit) represents the cost of or credit resulting from benefit improvements attributable to prior service granted in plan amendments.

(Gains) losses and prior service cost (credit) not recognized as a component of net periodic pension cost in the Consolidated Statements of Operations as they arise are recognized as a component of accumulated other comprehensive income (loss) on the Consolidated Balance Sheets, net of tax.

Those (gains) losses and prior service cost (credit) are subsequently recognized as a component of net periodic pension cost pursuant to the recognition and amortization provisions of the authoritative guidance.

The measurement of the benefit obligation and net periodic pension cost is based on our estimates and actuarial valuations, provided by third-party actuaries, which are approved by our management.

These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases, and mortality rates.

We evaluate these assumptions periodically but not less than annually.

In estimating the expected return on plan assets, we consider historical returns on plan assets, diversification of plan investments, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plan’s invested assets.

We measure our benefit obligation and plan assets using the month-end date of June 30, which is closest to our fiscal year-end.

Contingencies

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We regularly evaluate current information available to determine whether such accruals should be adjusted and whether new accruals are required.

Contingent liabilities include contingent consideration in connection with our acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and remeasured each reporting period with subsequent adjustments recognized in the Selling, general and administrative expense of our Consolidated Statements of Operations.

Contingent consideration is valued using significant Level 3 inputs, that are not observable in the market pursuant to fair value measurement accounting.

We believe the estimates and assumptions are reasonable, however, there is significant judgment and uncertainty involved.

Contingent liabilities include contingent consideration in connection with our acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and is remeasured each reporting period with subsequent adjustments recognized in the Selling, general and administrative expense of our Consolidated Statements of Operations.

Contingent consideration is valued using significant inputs that are not observable in the market pursuant to fair value measurement accounting.

While we believe the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.

Adoption of Lease Accounting Standard

Refer to “ Note 2.

Recently Issued Accounting Pronouncements ” regarding the impact to our financial statements of the adoption of the accounting standard leases (ASC 842 - Lease ) on June 30, 2019.

In the first quarter of fiscal 2020 the Company adopted this standard lease using the modified retrospective approach.

Adoption of the leasing standard resulted in $35.5 million of Right-of-Use (ROU) assets and $37.0 million of lease liabilities on June 30,

In addition, the Company recorded an adjustment to accumulated deficit, net of taxes, of $3.0 million from the recognition of previously deferred profit under sale-leaseback arrangements and de-recognition of related real estate assets of $7.1 million and financing obligations of $10.1 million .

The adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Operations and Statements of Cash Flows.

For additional information refer to “ Note 12.

RESULTS OF OPERATIONS

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June 29, 2019

June 30, 2018

Segment net revenue:

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Percentage of net revenue

Gain (loss) on sale of investments

Percentage of net revenue

Provision for income taxes

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Fiscal 2019 and 2018

If currency exchange rates had been constant in fiscal 2018 and 2017 , our consolidated net revenue in “constant dollars” would have decreased by approximately $12.8 million , or 1.5% of net revenue, which primarily impacted our NE and SE segments.

If currency exchange rates had been constant in fiscal 2019 and 2018 , our consolidated net revenue in “constant dollars” would have increased by approximately $13.7 million , or 1.2% of net revenue, which primarily impacted our NE and SE segments.

The impact of foreign currency fluctuations on net revenue was not indicative of the impact on net income due to the offsetting foreign currency impact on operating costs and expenses.

If currency exchange rates had been constant in fiscal 2018 and 2017 , our consolidated operating expenses in “constant dollars” would have decreased by approximately $9.3 million , or 1.1% of net revenue.

If currency exchange rates had been constant in fiscal 2019 and 2018 , our consolidated operating expenses in “constant dollars” would have increased by approximately $10.1 million , or 0.9% of net revenue.

The Results of Operations are presented in accordance with U.S.

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Net revenue increase d by $6.0 million , or 0.5% , during fiscal 2020 compared to fiscal 2019 .

This increase was primarily due to increase from our NE and OSP segment, partially offset by revenue decrease from our SE segment.

Product revenues increase d by $231.7 million , or 30.0% , during fiscal 2019 compared to fiscal 2018 .

This increase was primarily from our NE and OSP segment as discussed below.

This increase was driven by a slight growth in NE revenue, partially offset by a small decrease in our OSP and SE segments.

Product revenues remained relatively flat by $1.0 million , or 0.1% , during fiscal 2020 compared to fiscal 2019 .

During the period we realized strength from our NE segment, which was largely offset by declines in our SE and OSP segments as further discussed below.

Service revenues increase d $5.0 million , or 4.0% , during fiscal 2020 compared to fiscal 2019 .

This increase was primarily due to increased support revenue from the NE segment primarily driven by revenues from AW business acquired in the third quarter of fiscal 2018, partially offset by a decline in support contract renewals from the SE segment as discussed below.

This increase was primarily due to increased support revenue from our NE and SE segments, primarily driven by increased support revenues from our Wireless and Mature Assurance products.

NE net revenue increase d by $8.9 million , or 1.2% , during fiscal 2020 compared to fiscal 2019 .

This increase was primarily driven by revenues from AW business acquired in the third quarter of fiscal 2018, 5G wireless secular growth trend and organic growth in our Fiber business across Lab and Field Instruments.

This increase was partially offset by revenue declines primarily in Cable products from a year ago peak levels driven by DOCSIS 3.1 upgrade cycle.

This increase was primarily driven by 5G wireless secular growth trends, higher fiber demand from Field Instruments due to the 400Gb upgrade cycle.

The increase in revenue was partially offset by the effect of COVID-19.

SE net revenue decrease d by $0.7 million , or 0.7% , during fiscal 2020 compared to fiscal 2019 .

This decrease was primarily driven by a decline in our Data Center customer demand and from the expected run-off in our Mature Assurance products due to a decline in support renewal contracts.

This decrease was partially offset by an increase in our Growth Assurance product portfolio.

OSP net revenue increase d by $71.0 million , or 32.6% , during fiscal 2019 compared to fiscal 2018 .

This increase was primarily driven by increase in demand from our Anti-Counterfeiting products due to bank note redesign and higher revenue from our Consumer and Industrial products, due to higher demand for our 3D Sensing optical filters and newly acquired Engineered Diffusers TM products as smartphones increased its technology adoption for facial recognition applications.

This was primarily driven by the continued run-off in our Mature Assurance portfolio solutions.

OSP net revenue decrease d by $2.2 million , or 0.8% , during fiscal 2020 compared to fiscal 2019 .

This decrease was primarily driven by decrease in demand for our Anti-Counterfeiting products which benefited from higher banknote redesign demand in fiscal 2019, This decrease was partially offset by continued 3D Sensing products demand driven by further adoption and the broadening of our customer base.

Fiscal 2019 and 2018

Net revenue increase d by $254.6 million , or 29.1% , during fiscal 2019 compared to fiscal 2018 .

There have not been any significant changes in our pricing strategy.

This increase was primarily due to increase in our NSE revenue, partially offset by decrease in our OSP revenue as discussed below.

This increase was primarily due to increases from our NE and OSP segments, partially offset by a revenue decrease from our SE segment.

Product revenues increase d by $231.7 million , or 30.0% , during fiscal 2019 compared to fiscal 2018 .

This increase was primarily due to product revenue increase in NE segment due to increase in both Field and Lab Instrument product portfolio, primarily from Cable products and AW businesses acquired in the third quarter of fiscal 2018.

This increase was primarily from our NE and OSP segment as discussed below.

Service revenues increase d $22.9 million , or 22.2% , during fiscal 2019 compared to fiscal 2018 .

This increase was due to a combination of Trilithic and AW related service revenue as a result of the acquisitions and increase in support activities from SE segment Data Center products.

This increase was primarily due to increased support revenue from the NE segment primarily driven by revenues from the AW business acquired in the third quarter of fiscal 2018, partially offset by a decline in support contract renewals from the SE segment as discussed below.

NE net revenue increase d by $198.7 million or 36.9% , during fiscal 2019 compared to fiscal 2018 .

This increase was primarily driven by revenue from the acquired AW business in fiscal 2018, and organic growth in Field Instrument demand contributed by strength in Cable, which was driven by the DOCSIS 3.1 deployment.

This increase was partially offset by net revenue decrease in our organic Lab Instruments products driven by weak demand from our Optical Components customers.

This increase was primarily driven by revenue from the AW business acquired in the third quarter of fiscal 2018, the 5G wireless secular growth trend and organic growth in our Fiber business across Lab and Field Instruments.

This increase was partially offset by revenue declines primarily in Cable products from peak levels a year ago driven by the DOCSIS 3.1 upgrade cycle.

SE net revenue decrease d by $15.1 million , or 12.7% , during fiscal 2019 compared to fiscal 2018 .

This decrease was primarily driven by net revenue decreases from our Assurance offerings.

The decrease was attributable to the planned restructuring initiated in fiscal 2017 that narrowed the scope of SE segment and our Mature Assurance product offerings being negatively impacted by service maintenance contracts expiration, offset by net revenue increase from our Data Center primarily from current period large deals and renewals.

OSP net revenue decrease d by $14.1 million , or 6.1% , during fiscal 2018 compared to fiscal 2017 .

This decrease was primarily driven by revenue decrease from Anti-Counterfeiting products which benefited from a major banknote redesign a year ago, partially offset by revenue growth in 3D Sensing revenue from Consumer and Industrial products and from Government products.

This decrease was primarily driven by a decline in our Data Center customer demand and from the expected run-off in our Mature Assurance products due to a decline in support renewal contracts.

This decrease was partially offset by an increase in our Growth Assurance product portfolio.

OSP net revenue increase d by $71.0 million , or 32.6% , during fiscal 2019 compared to fiscal 2018 .

This increase was primarily driven by increase in demand from out Anti-Counterfeiting products due to bank note redesign and higher revenue from out Consumer and Industrial products, due to higher demand for our 3D Sensing optical filters and newly acquired Engineered Diffusers TM products as technology adoption of facial recognition applications for smartphones increased.

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, profitability and general financial performance, and that could create quarter over quarter variability in our financial measures.

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(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;

(e) the impact of ongoing global trade policies, political tensions between the U.S.

and China, tariffs and sanctions;

and (f) regulatory or economic developments that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms.

In fiscal 2020, we expect to see an increase in net revenue from our NSE business segment driven by macro industry technology trends from 5G wireless testing and deployment, and FTTX deployment.

In our OSP segment, while the Anti-Counterfeiting product pipeline remains robust, visibility remains limited and we don’t expect to see revenue uptick until sometime in calendar year 2020.

We also expect to see 3D Sensing revenue increase in fiscal 2020 driven by increased adoption of this technology on multiple mobile devices.

Revenue by Region

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June 29, 2019

June 30, 2018

United States

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Greater China

Other Asia-Pacific

Total Asia-Pacific

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Gross margin in fiscal 2020 increase d by 0.9 % to 58.5% from 57.6% in fiscal 2019 .

This increase was primarily driven by higher revenue volume and favorable product mix within our NE segment and a decrease in acquisition related costs incurred from our past acquisitions.

The increase was partially offset by gross margin reduction in our SE segment and increase in amortization of acquired developed technology from recent acquisitions.

This is discussed below.

Gross margin in fiscal 2018 decrease d 3.7 % to 55.8% from 59.5% in fiscal 2017 .

This decrease was primarily driven by gross margin reduction in our NE and OSP segments as discussed below in the “Operating Segment Information” section and higher amortization of intangibles related to the acquired Trilithic and AW business.

This decrease was partially offset by gross margin improvement in our SE segment.

This increase was primarily driven by higher revenue volume in our NE segment and better manufacturing absorption in our NE and OSP segments.

The increase was partially offset by gross margin reduction in our SE segment, further discussed in the sections below.

Gross margin in fiscal 2019 increase d 1.8 % to 57.6% from 55.8% in fiscal 2018 .

This increase was primarily driven by higher revenue volume and a favorable product mix within our NE segment and a decrease in acquisition related costs incurred from our past acquisitions.

This increase was partially offset by gross margin reduction in our SE segment and increase in amortization of acquired developed technology from recent acquisitions, further discussed in the sections below.

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.

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R&D expense increase d by $6.6 million , or 3.5% , during fiscal 2020 compared to fiscal 2019 .

This increase was driven by full period R&D expense from acquisitions in the past, in particular the AW business acquired in the third quarter of fiscal 2018 and higher investments to support the demand of our Wireless and fiber product.

This increase was primarily driven by targeted investments to support increased demand for our key products lines and additional R&D costs incurred from our acquired businesses.

As a percentage of revenue net revenue R&D increase d by 0.5 % during fiscal 2020 compared to fiscal 2019 .

R&D expense decrease d by $3.0 million , or 2.2% , during fiscal 2018 compared to fiscal 2017 .

This decrease was primarily driven by net cost savings realized from our strategic restructuring activities related to site consolidations and internal

reorganizations to align our investment strategy, particularly offset by incremental R&D expense from acquired Trilithic and AW businesses.

As a percentage of net revenue R&D decrease d by 1.7 % during fiscal 2018 compared to fiscal 2017 as we continue to execute targeted cost savings initiatives.

R&D expense increase d by $53.7 million , or 40.3% , during fiscal 2019 compared to fiscal 2018 .

This increase was driven by full period R&D expense from acquisitions in the past;

in particular, the AW business and targeted investments to support the

demand of our Wireless and Fiber products.

As a percentage of net revenue R&D increase d by 1.3 % during fiscal 2019 compared to fiscal 2018 .

We believe that continuing our investments in R&D is critical to attaining our strategic objectives.

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Selling, General and Administrative

SG&A expense increase d by $19.6 million , or 6.1% , in fiscal 2019 compared to fiscal 2018 .

This increase was primarily due to incremental SG&A expense from the AW business acquired in the third quarter of fiscal 2018 , on-going investment in upgrading our ERP and related systems, partially offset by the decrease of acquisition related costs from a year ago high levels, decrease in fair value of RPC earn-out liability of $5.9 million , the reduction in net expenses driven by our recent restructuring activities and on-going cost reduction efforts.

SG&A expense decrease d by $28.5 million , or 8.3% , in fiscal 2020 compared to fiscal 2019 .

This decrease was primarily due to a decrease in the fair value of the earn-out liability of $29.5 million related to the RPC Photonics, Inc.

(RPC) acquisition, driven by the lower-than-expected rate of adoption by Android customers further compounded by the macroeconomic impact of COVID-19 and the reduction in net expenses driven by our recent restructuring activities and on-going cost reduction efforts.

Offset by costs incurred for intellectual property protection and prosecution during the period.

As a percentage of net revenue, SG&A decrease d 8.3% in fiscal 2020 .

SG&A expense increase d by $19.6 million , or 6.1% , in fiscal 2019 compared to fiscal 2018 .

This increase was primarily due to acquisition and integration related costs, as well as incremental SG&A expense from Trilithic and AW business, particularly offset by reduction in expenses with our strategic restructuring activities and on-going cost reduction efforts.

As a percentage of net revenue, SG&A remained relatively flat in fiscal 2018 .

This increase was primarily due to incremental SG&A expense from the AW business acquired in fiscal 2018 and on-going investment in upgrading our ERP and related systems, partially offset by the decrease of acquisition related costs from high levels a year ago, a decrease in the fair value of our RPC earn-out liability of $5.9 million , the reduction in net expenses driven by our recent restructuring activities and on-going cost reduction efforts.

As a percentage of net revenue, SG&A decrease d 6.7% in fiscal 2019 .

We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue.

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Amortization of Acquired Technologies and Intangibles

Amortization of acquired technologies and intangibles for fiscal 2019 increased $24.8 million, or 52.0% , to $72.5 million from $47.7 million in fiscal 2018 .

This increase is primarily due to the acquisition of RPC, acquired in October 2018, and a full period of amortization from the acquisition AW, acquired in the third quarter of fiscal 2018 which contributed $34.7 million incremental charge;

partially offset by the impact from intangible assets becoming fully amortized in 2018 and 2019 .

Amortization of acquired technologies and intangibles for fiscal 2020 decreased $4.7 million, or 6.4% , to $67.8 million from $72.5 million in fiscal 2019 .

This decrease is primarily due to the impact from intangible assets becoming fully amortized in fiscal 2020 .

Amortization of acquired technologies and intangibles for fiscal 2019 increased $24.8 million, or 52.0% , to $72.5 million from $47.7 million in fiscal 2018 .

This increase is primarily due to the acquisitions of AW and Trilithic during the third quarter of fiscal 2018 that contributed $27.4 million incremental charge;

partially offset by the impact of foreign exchange and acquisition related intangible assets becoming fully amortized in 2017 and 2018 .

This increase is primarily due to the acquisition of RPC in October 2018, and a full period of amortization from the acquisition of AW, acquired in the third quarter of fiscal 2018, which contributed a $34.7 million incremental charge;

partially offset by the impact of intangible assets becoming fully amortized in 2018 and 2019 .

Acquired In-Process Research and Development

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The nature of the efforts required to develop IPR&D projects into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

In connection with the AW acquisition, we recorded an IPR&D assets, at their fair value and account for them as indefinite-lived intangible assets that shall last until the completion or abandonment of the associated research and development projects of $9.0 million .

In connection with the AW acquisition, we recorded IPR&D assets of $9.0 million at their fair value and account for them as indefinite-lived intangible assets that shall last until the completion or abandonment of the associated research and development projects.

During the third quarter of fiscal 2019, the IPR&D activities were completed and transferred to developed technology, with an estimated useful life of 6 years .

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

We estimate annualized gross cost savings of approximately $24.4 million excluding any one-time charges as a result of the restructuring activities initiated in the past year.

We estimate annualized gross cost savings of approximately $36.2 million excluding any one-time charges as a result of the recent restructuring activities.

Refer to “ Note 13.

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These charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:

During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within our Network Service and Enablement (“NSE”) business, including actions related to the recently acquired AW business.

During the fourth quarter of fiscal 2020, we updated our NSE, including AW Restructuring plan to include additional headcount to further drive operational improvement consistent with the original plan.

As a result, a net restructuring charge of $3.5 million , for approximately 60 employees primarily in R&D and SG&A functions located in North America, Europe and Asia was recorded in the year ended June 27, 2020 .

Payments related to the severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2021.

During fiscal 2019 , we recorded $15.4 million in restructuring and related charges.

The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:

During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within our Network Service and Enablement (NSE) business, including actions related to the recently acquired AW business (NSE, including AW Restructuring plan).

These actions further drive our strategy for organizational alignment and consolidation as part of our continued commitment to a more cost effective and agile organization and to improve overall profitability of the NSE business.

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Payments related to the severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2020.

During fiscal 2018 , we recorded $8.3 million in restructuring and related charges.

The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:

During the second quarter of fiscal 2018 , management approved a plan within NE business segment related to the integration of the Trilithic business acquired in the first quarter of fiscal 2018.

As a result, a restructuring charge of $3.3 million , $2.3 million for lease costs and $1.0 million severance and employee benefits for approximately 40 employees primarily in manufacturing and SG&A functions located in the United States.

Payments related to the lease exit costs and severance and benefits accrual were paid by the end of the first quarter of fiscal 2019.

During the fiscal 2017 , we implemented a plan in the NE and SE business segments as part of our continued strategy to improve profitability in the NSE business by narrowing the scope of the SE business and reducing costs by streamlining NSE operations.

During the second and fourth quarter of fiscal 2018, the headcount impact by this plan was increased by approximately 60 employees and as a result, a restructuring charge of $2.7 million was recorded for severance and employee benefits.

As a result, approximately 360 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia were impacted.

Payments related to the severance and benefits accrual were paid by the end of the first quarter of fiscal 2019.

During the third quarter of fiscal 2017, we implemented a plan in the NE and SE segment to exit the leased site in Colorado Springs, Colorado.

In the first quarter of fiscal 2018, we exited the site in Colorado Springs and recorded a lease exit cost of $1.6 million which was paid off in the third quarter of fiscal 2018.

During fiscal 2017 , we recorded $21.6 million in restructuring and related charges.

The charges are a combination of new and previously announced restructuring plans and are primarily the result of the following:

During the fourth quarter of fiscal 2017, we implemented a plan within the OSP business segment to realign its operations and exit from the printed security product offering.

As a result, we recorded a restructuring charge of $0.8 million for severance and employee benefits for approximately 30 employees in manufacturing and SG&A functions located in the United States.

Payments related to the severance and benefits accrual were paid by the end of the third quarter of fiscal 2018.

During the second and third quarters of fiscal 2017, we implemented a plan within the NE and SE business segments as part of our continued strategy to improve profitability in the NSE business by narrowing the scope of the SE business and reducing costs by streamlining NSE operations.

As a result, we recorded a restructuring charge of $21.0 million for severance and employee benefits for approximately 300 employees in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia.

Payments related to the severance and benefits accrual were paid by the end of the first quarter of fiscal 2019.

Our restructuring and other lease exit cost obligations are net of sublease income or lease settlement estimates of approximately $0.2 million .

Our ability to generate sublease income, as well as our ability to terminate lease obligations and recognize the anticipated related savings, is highly dependent upon the economic conditions, particularly commercial real estate market conditions in certain geographies, at the time we negotiate the lease termination and sublease arrangements with third parties as well as the performances by such third parties of their respective obligations.

While the amount we have accrued represents the best estimate of the remaining obligations we expect to incur in connection with these plans, estimates are subject to change.

Routine adjustments are required and may be required in the future as conditions and facts change through the implementation period.

If adverse macroeconomic conditions continue, particularly as they pertain to the commercial real estate market, or if, for any reason, tenants under subleases fail to perform their obligations, we may be required to reduce estimated future sublease income and adjust the estimated amounts of future settlement agreements, and accordingly, increase estimated costs to exit certain facilities.

Amounts related to the lease expense, net of anticipated sublease proceeds, will be paid over the respective lease terms through fiscal 2021.

Interest Income and Other Income, Net

Interest income and other income, net was $9.6 million in fiscal 2020 as compared to $6.2 million in fiscal 2019 .

This $3.1 million decrease was primarily driven by a decrease in interest income in the amount of $7.9 million during fiscal 2019 due to decrease in investment balance in the US and much lower yield on money market fund in China, offset by repurchase of our 2033 Notes in the amount of $5.0 million during fiscal 2018 with no such loss recorded in fiscal 2019 .

This $3.4 million increase was primarily driven by a $5.1 million favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during fiscal 2020 , offset by a decrease of $1.0 million in interest income due to lower yields on money market funds and deposits during fiscal 2020.

Interest income and other income, net was $6.2 million in fiscal 2019 as compared to $9.7 million in fiscal 2018 .

This $3.3 million decrease was primarily driven by $3.9 million more loss from the extinguishment of our 2033 Notes;

$2.3 million unfavorable foreign exchange impact as the balance sheet hedging program provided an unfavorable offset to the remeasurement of underlying foreign exchange exposures during the current period;

and a $3.0 million gain on sale of other assets in fiscal 2017 .

This was partially offset by interest income increase of $4.8 million primarily due to higher cash and short-term investment balances coupled with higher yields.

Gain on Sale of Investments

During fiscal 2019 , we realized a loss on investments of $0.5 million , from its fixed income investments

During fiscal 2018 , we realized a loss on investments of $0.1 million , from its fixed income investments.

During fiscal 2017, we sold approximately 7.2 million shares of Lumentum common stock which were retained as part of a Separation.

We recognized a realized gain of $203.0 million from the sale.

Refer to “ Note 8.

Investments, Forward Contracts and Fair Value Measurements ” for more information.

This $3.5 million decrease was primarily driven by a decrease in interest income in the amount of $7.9 million during fiscal 2019 due to a decrease in the investment balance in the US and a much lower yield on money market funds in China, offset by a loss on repurchase of our 2033 Notes in the amount of $5.0 million during fiscal 2018 with no such loss recorded in fiscal 2019 .

Interest Expense

Interest expense decrease d by $0.6 million , or 1.7% , during fiscal 2020 compared to fiscal 2019 .

This was primarily due to a decrease in debt discount accretion from the 2033 Notes as the notes were fully redeemed or converted in the second quarter of fiscal 2019 .

Interest expense decreased by $13.0 million , or 27.5% , during fiscal 2019 compared to fiscal 2018 .

This was primarily due to a decrease in debt discount accretion from the 2033 Notes as the notes were fully redeemed or converted in the second quarter of fiscal 2019 , offset by the accretion of debt discount from the issuance of the 2023 Notes in the fourth quarter of fiscal 2018 .

Interest expense increased by $4.1 million , or 9.5% , during fiscal 2018 compared to fiscal 2017 .

This was primarily due to the full-year accretion of unamortized debt discount and debt issuance cost related to the 2024 Notes, which were issued in March 2017 .

Provision for Income Tax

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We recorded an income tax expense of $65.3 million for fiscal 2020 .

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2019 differed from the incom e tax expen se recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2020 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances and to a $32.5 million charge for withholding taxes expected to be paid on the repatriation of $324.0 million of foreign earnings that we do not consider to be permanently reinvested.

During the third quarter of fiscal 2020, which included changing our intent with regard to the indefinite reinvestment of such foreign earnings, we initially accrued $31.6 million for withholding taxes expected to be paid on the repatriation of $316.4 million of accumulated foreign earnings that we no longer considers to be permanently reinvested as of the third quarter.

During the Fiscal year 2020, we paid $19.5 million withholding income tax on the repatriation of foreign earnings.

In light of the economic uncertainty caused by COVID-19, we reevaluated our historic assertion on foreign earnings and no longer consider a majority of these earnings to be permanently reinvested.

The repatriation of these earnings increases available cash in the U.S.

and provides greater U.S.

financial flexibility to assist us in navigating the expected downturn in the economy.

The foreign earnings are being repatriated to the U.S.

without incurring any significant additional U.S current or deferred tax expense.

On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law.

Tax provisions of the

Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions.

The provisions of the legislation did not have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions.

We continue to monitor additional guidance issued by the U.S.

Treasury Department, the Internal Revenue Service and others.

Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management has determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions.

During fiscal 2020 , the valuation allowance for deferred tax assets increased by $0.2 million primarily related to the business acquired during the year.

We are routinely subject to various federal, state and foreign audits by taxing authorities.

We believe that adequate amounts have been provided for any adjustments that may result from these examinations.

Fiscal 2019 Tax Expense

We recorded an income tax expense of $31.5 million for fiscal 2019 .

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2019 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.

During fiscal 2019, the valuation allowance for deferred tax assets increased by $23.2 million primarily due to the net increase of deferred tax assets resulting from the inclusion of our foreign subsidiaries in the US tax return as a consequence of U.S.

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On December 22, 2017, the U.S.

Tax Cuts and Jobs Act (the “Act”) was enacted.

Tax Cuts and Jobs Act was enacted.

Income tax effects resulting from changes in tax laws were accounted for by us in accordance with the authoritative guidance and the effects were recorded as a component of the provision for income taxes from continuing operations.

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As a result, we recognized a benefit of $4.5 million for the year ended June 30, 2018 for the release of the valuation allowance previously maintained against the AMT credit deferred tax asset.

In addition, under the Act, our fiscal 2018 net operating losses and any future net operating losses can now be carried forward indefinitely.

As a result, our deferred tax liability associated with indefinite-lived intangible assets was offset against these indefinite-lived deferred tax assets, resulting in a benefit of $2.0 million for the year ended June 30, 2018 due to release of the valuation allowance.

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Upon adoption of the new guidance on share-based payment awards, we had $117.7 million of net operating loss carryforwards resulting from excess tax benefit deductions.

The deferred tax asset recorded for these net operating loss carryforwards was fully

offset by a corresponding increase in valuation allowance, resulting in no impact to opening accumulated deficit.

The deferred tax asset recorded for these net operating loss carryforwards was fully offset by a corresponding increase in valuation allowance, resulting in no impact to opening accumulated deficit.

In addition, due to the full valuation allowance on the U.S.

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We believe that adequate amounts have been provided for any adjustments that may result from these examinations.

Fiscal 2017 Tax Expense

We recorded an income tax expense of $21.4 million for fiscal 2017.

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2017 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.

Based on a jurisdiction by jurisdiction review of anticipated future income and due to the continued economic uncertainty in the industry, management determined that in many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions.

During fiscal 2017, the valuation allowance for deferred tax assets decreased by $77.5 million primarily due the utilization of deferred tax assets and the increase in deferred tax liabilities as result of the issuance of convertible debt.

We are routinely subject to various federal, state and foreign audits by taxing authorities.

We believe that adequate amounts have been provided for any adjustments that may result from these examinations.

Discontinued Operations

Our discontinued operations activities during fiscal 2019 and 2017 related to the Separation on August 1, 2015.

Lumentum Separation

As a result of the Separation, the financial results of Lumentum are presented as discontinued operations during fiscal 2019 and 2017 .

Net income (loss) attributable to the Lumentum discontinued operations was $2.4 million loss during fiscal 2019 .

There was no impact from discontinued operations during fiscal 2018 .

Net income (loss) attributable to the Lumentum discontinued operations was $1.6 million income during fiscal 2017 .

Operating Segment Information ( in millions ):

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NE gross margin increase d 0.4 % during fiscal 2020 to 64.6% from 64.2% in fiscal 2019 .

This increase was primarily due to higher revenue volume and gross margin improvement from favorable product mix in our Field Instrument and Lab Instrument products driven by both organic revenue growth from our fiber and acquired AW business product offerings.

NE gross margin decrease d 2.6 % during fiscal 2018 to 62.0% from 64.6% in fiscal 2017 .

This decrease was primarily due to unfavorable product mix as Lab Instrument revenue declined.

This increase was primarily due to higher revenue volume and gross margin improvement from favorable product mix in our Lab Instrument products.

NE gross margin increase d 2.2 % during fiscal 2019 to 64.2% from 62.0% in fiscal 2018 .

This increase was primarily due to higher revenue volume and gross margin improvement from a favorable product mix in our Field Instrument and Lab Instrument products driven by both organic revenue growth from our fiber and acquired AW business product offerings.

Service Enablement

SE gross margin decrease d 1.7 % during fiscal 2020 to 67.0% from 68.7% in fiscal 2019 .

This decrease was primarily due to lower revenue and unfavorable product mix from the continued run-off of higher margin Mature Assurance solutions and declines in revenue from Data Center products.

SE gross margin increase d 8.6 % during fiscal 2018 to 69.7% from 61.1% in fiscal 2017 .

This increase was primarily due to favorable product mix from growth in Data Center product revenue and absence of lower margin pass-through hardware revenue mix in our Growth Assurance offerings in the same period a year ago.

This decrease was primarily due to lower revenue and unfavorable product mix from the continued run-off of higher margin Mature Assurance solutions.

SE gross margin decrease d 1.0 % during fiscal 2019 to 68.7% from 69.7% in fiscal 2018 .

This decrease was primarily due to lower revenue and an unfavorable product mix from the continued run-off of higher margin Mature Assurance solutions and declines in revenue from Data Center products.

Network and Service Enablement

NSE operating margin increase d 1.0 % during fiscal 2020 to 12.8% from 11.8% in fiscal 2019 .

The increase in operating margin was primarily driven by continuing efficient cost management including restructuring, cost synergies realized from the acquisition as well as the benefit of higher operating leverage from increased revenue volume due to the acquired AW business.

The increase in operating margin was primarily driven by continuing efficient cost management including restructuring, cost synergies realized from our acquisitions, lower travel expenses as a result of COVID-19 as well as the benefit of higher operating leverage from increased revenue volumes.

NSE operating margin increase d 5.2 % during fiscal 2019 to 11.8% from 6.6% in fiscal 2018 .

The increase in operating margin was primarily driven by reduction in NSE operating expense across all function lines as we executed our strategy and cost reduction initiatives.

Operating income accretion from acquired businesses further expanded the operating margin.

The increase in operating margin was primarily driven by continuing efficient cost management, including restructuring, cost synergies realized from the acquisition as well as the benefit of higher operating leverage from increased revenue volume due to the acquired AW business.

Optical Security and Performance Products

OSP gross margin decrease d by 2.4 % during fiscal 2019 to 50.4% from 52.8% in fiscal 2018 .

This decrease was primarily due to unfavorable product mix from the increasing revenue contribution from 3D Sensing products within our consumer and industrial product portfolio with inherently lower gross margins.

OSP gross margin increase d by 2.9 % during fiscal 2020 to 53.3% from 50.4% in fiscal 2019 .

This increase was primarily due to operational efficiencies in manufacturing partially offset by unfavorable product mix from decreased revenue contribution from our Anti-Counterfeiting products.

OSP gross margin decrease d by 2.4 % during fiscal 2019 to 50.4% from 52.8% in fiscal 2018 .

This decrease was primarily due to unfavorable product mix driven by lower revenue from Anti-Counterfeiting products coupled with incremental revenue from 3D Sensing products.

OSP operating margin decrease d 2.0 % during fiscal 2019 to 33.9% from 35.9% in fiscal 2018 .

The decrease in operating margin was primarily due to lower gross margins as discussed above and targeted investments in our operating expenses as we expand our 3D sensing products within consumer industrial product portfolio.

This decrease was primarily due to an unfavorable product mix from the increasing revenue contribution from 3D Sensing products within our consumer and industrial product portfolio with inherently lower gross margins.

OSP operating margin increase d 1.7 % during fiscal 2020 to 35.6% from 33.9% in fiscal 2019 .

The increase in operating margin was primarily due to higher gross margins as discussed above offset by targeted investments in our operating expenses as we expand our 3D sensing products within our Consumer and Industrial product portfolio.

OSP operating margin decrease d 2.0 % during fiscal 2019 to 33.9% from 35.9% in fiscal 2018 .

The decrease in operating margin was primarily due to decrease in gross margin as discussed above and higher operating expense as a percentage of revenue.

The decrease in operating margin was primarily due to lower gross margins as discussed above and targeted investments in our operating expenses as we expand our 3D Sensing products within our consumer industrial product portfolio.

Liquidity and Capital Resources

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;

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 Annual Report on Form 10-K.

Cash Investments

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors.

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Our policy allows an allocation to securities rated A-2/P-2, BBB/Baa2 or better, so long as such allocation below A-1/P-1, A/A2 but minimum A-2/P-2, BBB/Baa2 does not exceed 10% of any investment portfolio.

Securities that are downgraded subsequent to purchase are evaluated and may be sold or held at management’s discretion.

Securities that are downgraded subsequent to purchase are

evaluated and may be sold or held at management’s discretion.

No security may have an effective maturity that exceeds 37 months , and the average duration of our holdings may not exceed 18 months .

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subsidiaries owned approximately 53.8% of our cash and cash equivalents, short-term investments and 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 June 27, 2020 , the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales.

During the year ended June 29, 2019 , 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.

During the years ended June 27, 2020 , we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

In addition, we maintain cash balances in operating accounts that are with third party financial institutions.

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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.

Revolving Credit Facility

On May 5, 2020 , we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties.

The Credit Agreement provides for a $300 million senior secured revolving credit facility, which matures on March 1, 2023 .

The Credit Agreement also provides that, under certain circumstances, we may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $200 million plus additional amounts so long as our secured net leverage ratio, determined on a pro forma basis does not exceed 1.50:1.00.

The proceeds from the credit facility established under the Credit Agreement will be used for working capital and other general corporate purposes.

The obligations under the Credit Agreement are secured by substantially all of our assets.

Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at our election, LIBOR plus a margin of 1.75% to 2.50% per annum, or a specified base rate plus a margin of 0.75% to 1.50% , in each case, depending on our consolidated secured leverage ratio.

We are required to pay commitment fee on the unutilized portion of the facility which ranges between 0.30% and 0.40% per annum depending on our consolidated secured leverage ratio.

As of June 27, 2020 , we had no amounts outstanding under the Credit Agreement.

Refer to “ Note 11.

Debt ” for more information.

During fiscal 2019 , we fully repurchased and redeemed our 0.625% Senior Convertible Notes .

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Year Ended June 27, 2020

As of June 29, 2019 , our combined balance of cash and cash equivalents, short-term investments and short-term restricted cash decreased by $ 261.5 million to $526.5 million from $ 788.0 million as of June 30, 2018 .

cost and discount and net change in fair value of contingent liabilities) which totaled $172.3 million , including changes in deferred tax balances, offset by changes in operating assets and liabilities that used $38.9 million .

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $22.3 million primarily due to a decrease in customer deposit and other accrued liabilities, an increase in accounts receivable of $15.2 million primarily driven by higher volume of billing and timing of collections, an increase in inventories of $15.4 million due to inventory build-up to support revenue growth for our Wireless, fiber and 3D sensing product offerings, an increase in other current and non-current assets of $2.5 million , and a decrease in deferred revenue of $3.1 million primarily due to a decrease in current deferred revenue.

This was partially offset by cash inflows from an increase in accounts payable of $8.7 million driven by increased inventory purchases and timing of payments, an increase in accrued payroll and related expenses of $5.9 million due to timing of salary and bonus payments, and an increase in income taxes payable of $5.0 million .

Offset by $47.0 million cash used for acquisitions and $45.0 million of cash used for capital expenditures.

Cash used in financing activities was $300.4 million , primarily resulting from $276.9 million used for redemption of our 2033 Notes, $11.2 million of cash used to repurchase common stock, $15.5 million in withholding tax payment on vesting of restricted stock awards and $2.2 million in payment of financing obligations and issuance cost of our 1.75% senior convertible Notes.

As of June 27, 2020 , our combined balance of cash and cash equivalents and restricted cash increased by $17.0 million to $547.4 million from $530.4 million as of June 29, 2019 .

Cash provided by operating activities was $135.6 million , consisted of net income of $28.7 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $160.8 million , offset by changes in operating assets and liabilities that used $53.9 million .

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $52.8 million comprised primarily of a decrease in customer deposit and net payments of lease liability and pension obligations, a decrease in accounts payable of $9.2 million driven by timing of purchases and related payments, a decrease in accrued payroll and related expenses of $7.0 million due to timing of salary and related payments, and an increase in accounts receivable of $5.1 million primarily driven by higher volume of billing.

This was partially offset by cash inflows from a decrease in other current and non-current assets of $10.6 million , an increase in deferred revenue of $5.9 million primarily due to the amortization of support agreements and the release of revenue upon customer acceptance, and a decrease in inventories of $3.7 million .

Cash used in investing activities was $29.8 million , primarily related to $31.9 million of cash used for capital expenditures and $2.5 million cash used for acquisitions.

This was partially offset by $4.6 million proceeds from sales of assets.

Cash used in financing activities was $71.7 million , primarily resulting from $44.4 million of cash used to repurchase common stock, $21.0 million in withholding tax payment on vesting of restricted stock awards, $6.8 million of cash used to pay acquisition related holdback, $2.7 million in payment of financing obligations, $1.6 million in issuance cost of the credit agreement, and $0.7 million of cash used to pay acquisition related to contingent consideration.

This was offset by $5.5 million in proceeds from the exercise of stock options and the issuance of common stock under our Amended and Restated 1998 Employee Stock Purchase Plan (the ESPP).

Year Ended June 29, 2019

As of June 30, 2018, our combined balance of cash and cash equivalents, short-term investments and short-term restricted cash decreased by $659.8 million to $788.0 million from $1,447.8 million as of July 1, 2017.

Cash provided by operating activities was $66.0 million , consisted of net loss of $48.6 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount, and loss on extinguishment of debt) which totaled $153.1 million , including changes in deferred tax balances, offset by changes in operating assets and liabilities that used $38.5 million .

Changes in our operating assets and liabilities related primarily to an increase in accounts receivable of $51.9 million primarily driven by higher volume of billing and timing of collections in both our acquired AW business and our organic business, an increase in inventories of $5.5 million due to inventory build-up primarily for our 3D sensing products, a decrease in accrued payroll and related expenses of $3.0 million due to timing of salary and bonus payments and a decrease in accrued expenses and other current and non-current liabilities of $2.3 million .

This was partially offset by cash inflows from an increase in accounts payable of $13.2 million driven by the timing of payments and higher transaction cost from our acquisitions, a decrease in other current and non-current assets of $2.6 million primarily driven by change in forward contract and prepaid inventory, an increase in deferred revenue of $7.3 million due to higher volume in Wireless business and future features for 5G business partly offset by amortization of support agreements and the release of revenue upon customer acceptance, and an increase in income taxes payable of $1.1 million .

Cash used in investing activities was $286.5 million , primarily related to $509.9 million cash used for the acquisition of the AW business and Trilithic, $42.5 million of cash used for capital expenditures offset by $260.1 million of net purchase, sales and maturities of available-for-sale debt securities and $5.8 million proceeds from sales of assets.

Cash used in financing activities was $180.5 million , primarily resulting from $353.3 million used for repurchase of our 2033 Notes, $40.8 million of cash used to repurchase common stock under our share repurchase program, $13.3 million in withholding tax payment on vesting of restricted stock awards and $3.0 million in payment of financing obligations and issuance cost of our 1% senior convertible Notes, offset by $225.0 million proceed from issuance of 1% senior convertible Notes and $4.9 million in proceeds from the exercise of stock options and the issuance of common stock under the ESPP.

Year Ended July 1, 2017

As of July 1, 2017, our combined balance of cash and cash equivalents, short-term investments and short-term restricted cash increased by $468.0 million to $1,447.8 million from $979.8 million as of July 2, 2016.

Cash provided by operating activities was $94.3 million, consisted of net income of $160.2 million adjusted for non-cash charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount, and loss on extinguishment of debt) which totaled $139.6 million, including changes in deferred tax balances less gain on sales of investments of $203.1 million, offset by changes in operating assets and liabilities that used $2.4 million.

Changes in our operating assets and liabilities related primarily to a decrease in deferred revenue of $20.6 million due to amortization of support agreements and the release of revenue upon customer acceptance, an increase in other current and non-current assets of $18.2

million primarily due to change in forward contract that were effectively closed but not settled at year end and other prepayments, a decrease in accounts payable of $14.8 million due to higher payment activity and lower overall spend.

This was partially offset by cash inflows from an increase in accrued expenses and other current and non-current liabilities of $29.3 million primarily due to customer deposit offset by restructuring payments and a decrease in accounts receivable of $23.7 million primarily driven by timing of collections.

Cash provided by investing activities was $113.5 million, primarily resulting from $831.5 million of proceeds from the sales and maturities of available-for-sale investments and other assets, which included proceeds of $265.0 million from the sale of 7.2 million shares of Lumentum common stock in fiscal 2017, partially offset by $679.4 million of purchases of available-for-sale investments and $38.6 million of cash used for capital expenditures.

As of July 1, 2017, we have sold all of our ownership of Lumentum common stock.

Cash provided by financing activities was $311.0 million, primarily resulting from $451.1 million net proceeds from issuance of 2024 Notes and $12.4 million in proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan, partially offset by $92.0 million of cash used to repurchase common stock under our share repurchase programs and $45.4 million used for repurchase of our 2033 Notes, and $14.3 million in withholding tax payment on vesting of restricted stock awards.

As of June 29, 2019, our combined balance of cash and cash equivalents and restricted cash decreased by $93.9 million to $530.4 million from $624.3 million as of June 30, 2018.

Cash provided by operating activities was $138.8 million , consisted of net income of $5.4 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount, and discount and net change in fair value of contingent liabilities) which totaled $172.3 million , including changes in deferred tax balances, offset by changes in operating assets and liabilities that used $38.9 million .

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $22.3 million primarily due to a decrease in customer deposit and other accrued liabilities, an increase in accounts receivable of $17.8 million primarily driven by higher volume of billing and timing of collections, an increase in inventories of $15.4 million due to inventory build-up to support revenue growth for our Wireless, fiber and 3D sensing product offerings, and a decrease in deferred revenue of $3.1 million primarily due to a decrease in current deferred revenue.

Cash provided by investing activities was $80.6 million , primarily related to $167.2 million of net sales and maturities of available-for-sale debt securities and $5.4 million proceeds from sales of assets, offset by $47.0 million cash used for acquisitions and $45.0 million of cash used for capital expenditures.

Cash used in financing activities was $300.4 million , primarily resulting from $276.9 million used for repurchase of our 2033 Notes, $11.2 million of cash used to repurchase common stock, $15.5 million in withholding tax payment on vesting of restricted stock awards and $2.2 million in payment of financing obligations and issuance costs of our 1.75% senior convertible Notes.

This was offset by $5.4 million in proceeds from the exercise of stock options and the issuance of common stock under our Amended and Restated 1998 Employee Stock Purchase Plane (the ESPP).

Contractual Obligations

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2024 1% senior convertible notes

Short-term debt

Estimated interest payments

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Refer to “ Note 12.

Leases ” for more information.

Refer to “ Note 17.

Employee Pension and Other Benefit Plans ” for more information.

As of June 29, 2019 , we have accrued on our Consolidated Balance Sheet $ 0.3 million in connection with restructuring and related activities relating to our operating lease obligations disclosed above, of which $ 0.2 million was included in other current liabilities and $ 0.1 million was included in other non-current liabilities.

Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements.

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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.

Liquidity and Capital Resources Requirement

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;

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;

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.

Employee Equity Incentive Plan

Our stock option and Full Value Award program is a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests.

As of June 29, 2019 , we have available for issuance 10.9 million shares of common stock for grant primarily under our Amended and Restated 2003 Equity Incentive Plan (the “2003 Plan”).

The exercise price for the options is equal to the fair market value of the underlying stock at the date of grant.

Options generally become exercisable over a three- or four-year period and, if not exercised, expire from five to ten years post grant date.

Full Value Awards refer to restricted stock units (“RSUs”), market-based RSUs (“MSUs”) and performance-based RSUs (“PSUs”).

The fair value of MSUs is estimated using the Monte Carlo simulation option pricing model.

The MSUs have vesting requirements tied to the performance of our stock as compared to the Nasdaq telecommunications index, and could vest at a higher or lower rate or not at all, based on this relative performance.

The PSUs have vesting requirements tied to our performance.

We estimate the fair value of stock options and awards under the ESPP using the Black-Scholes Merton (“BSM”) option-pricing model.

This option-pricing model requires the input of assumptions, including the award’s expected life and the price volatility of the underlying stock.

Refer to “ Note 15.

Stock-Based Compensation ” for more information.

Employee Defined Benefit Plans and Other Post-retirement Benefits

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis