VIAVI SOLUTIONS INC. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.” Our Industries and Developments 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 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: • Network Enablement ( NE ); • Service Enablement ( SE ); and • Optical Security and Performance Products ( OSP ). Network Enablement NE provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. They also support more profitable, higher-performing networks and facilitate time-to-revenue. Our solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major network-equipment manufacturers ( NEM s), operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks. They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by NEMs in the design and production of next-generation network equipment. Other Test & Measurement communications products also serve the public safety, government, and aerospace and defense markets. We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation. NE customers include 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., 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: Field Instruments : Primarily consisting of (a) Access and Cable products; (b) Avionics products; (c) Fiber Instrument products; (d) Metro products; (e) RF Test products; and (f) Radio Test products. Lab Instruments : Primarily consisting of (a) Fiber Optic Production Lab Test; (b) Optical Transport products; (c) Storage Network Test products; and (d) Wireless products. 27 Table of Contents Service Enablement SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions, which primarily consist of instruments, microprobes and software, monitor, collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization. Our portfolio of SE solutions addresses the same lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks, as our NE portfolio. Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network. This provides our customers with enhanced network management, control and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks. SE customers include similar CSPs, NEMs, government organizations, large corporate customers and storage-segment customers that are served by our NE segment. Our SE products and associated services are described below: Data Center : Consisting of our Network Performance Monitoring and Security tools. Assurance : Primarily consisting of our (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, automotive, industrial and other markets. 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. 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 . OSP value-added solutions meet the stringent requirements of commercial and government customers. Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application. OSP serves customers such as SICPA Holding SA Company (SICPA), STMicroelectronics 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. 28 Table of Contents 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 Refer to “ Note 2. Recently Issued Accounting Pronouncements ” regarding the effect of certain recent accounting pronouncements on our consolidated financial statements. Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material. We believe the following critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements: 29 Table of Contents Revenue Recognition We derive revenue from a diverse portfolio of network solutions and optical technology products and services, as follows: • Products: NE and SE products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. Our OSP products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications. • Services: We also offer a range of product support and professional services designed to comprehensively address customer requirements. These include repair, calibration, extended warranty, software support, technical assistance, training and consulting services. Implementation services provided in conjunction with hardware or software solution projects include sale of the products along with project management, set-up and installation. Steps of revenue recognition We account for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue: 1. Identify the contract with a customer: Generally, we consider customer purchase orders which, in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before we consider an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable; and, (v) the agreement has commercial substance. We exercise reasonable judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures that we implement. 2. Identify the performance obligations in the contract: We assess whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. 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. Our performance obligations consist of a variety of products and services offerings, which include networking equipment; 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. Judgment may be required to determine whether the software license is considered distinct in the context of the contract and accounted for separately, or not distinct in the context of the contract and accounted for together with the installation service. 3. Determine the transaction price: Transaction price reflects the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to the customer. Our contracts may include terms that could cause variability in the transaction price including rebates, sales returns, market incentives and volume discounts. Variable consideration is generally accounted for at the portfolio level and estimated based on historical information. If a contract includes a variable amount, the price adjustments are estimated at contract inception. In both cases, estimates are updated at the end of each reporting period as additional information becomes available. 4. Allocate the transaction price to performance obligations in the contract: 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. 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. For contracts with multiple performance obligations, we allocate the total transaction value to each distinct performance obligation based on relative standalone selling price (SSP). Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when we sell that good or service separately under similar circumstances to similar customers. If a directly observable price is not available, the SSP must be estimated based on multiple factors including, but not limited to, historical pricing practices, internal costs, and profit objectives as well as overall market conditions. 30 Table of Contents 5. Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales, transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and solution contracts or in instances where software is sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if we have evidence that all acceptance provisions will be, or have been, satisfied. For fixed-price support and extended warranty contracts, or certain software arrangements, which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services outside of an extended warranty or support contract is recognized at the time of completion of the related service. 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. Business Combinations We use the acquisition method of accounting under the authoritative guidance on business combinations. Each acquired company’s operating results are included in our Consolidated Financial Statements beginning on the date of acquisition. 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. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed. The allocation of purchase price requires management to make significant estimates and assumptions in determining the fair values of the assets acquired and liabilities assumed. With respect to intangible assets, critical estimates in valuing intangible assets include, but are not limited to, future cash flows from customer relationships, developed technology, trade names and acquired patents; and discount rates. Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Goodwill Valuation Goodwill represents the excess of the purchase price paid, over the net fair value of assets acquired and liabilities assumed, to purchase an enterprise or asset. We test goodwill for impairment at the reporting unit level at least annually, during the fourth quarter of each fiscal year, or more frequently if events or changes in circumstance indicate that the asset may be impaired. The accounting guidance provides us the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that might indicate that a reporting unit’s fair value is less than its carry amount. These events and circumstances include, macro-economic conditions, such as a significant adverse change in our operating environment, industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel; or other events, such as the sale of a reporting unit, adverse regulatory developments or a sustained decrease in our stock price. If it is determined, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative test is required. Otherwise, no further testing is required. Under the quantitative test, if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the Consolidated Statements of Operations as impairment of goodwill. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: using present value techniques of estimated future cash flows or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure. Application of the goodwill impairment test requires judgments, including: identification of the reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of each reporting unit. We generally estimate the fair value of a reporting unit using a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. Our significant estimates in the income approach include our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business and working capital effects. The market approach estimates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market approach include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. 31 Table of Contents We base our estimates on historical experience and on various assumptions about the future that we believe are reasonable based on available information. Unanticipated events and circumstances may occur that affect the accuracy of our assumptions, estimates and judgments. 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 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. Income Taxes In accordance with the authoritative guidance on accounting for income taxes, we recognize income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated. The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, we have determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to our ability to utilize our net operating loss carryforwards before they expire. Accordingly, we have established a valuation allowance for such deferred tax assets. If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax provision may decrease in the period in which we determine that realization is more likely than not. Likewise, if we determine that it is not more likely than not that our deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period in which we make the determination. The authoritative guidance on accounting for uncertainty in income taxes prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification and disclosure of tax positions. We are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which we operate. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. We recognize liabilities based on our estimate of whether, and the extent to which, additional tax liabilities are more likely than not. If we ultimately determine that the payment of such a liability is not necessary, then we reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period. Contingencies We are subject to various potential loss contingencies arising in the ordinary course of business. In determining a loss contingency, we consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss. An estimated loss is accrued when it is probable that an asset has been impaired, a liability has been incurred and the amount of loss can be reasonably estimated. 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 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, 32 Table of Contents 2019. 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. Leases .” RESULTS OF OPERATIONS The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items as a percentage of net revenue: Years Ended June 27, 2020 June 29, 2019 June 30, 2018 Segment net revenue: Network Enablement 65.7 % 65.3 % 61.6 % Service Enablement 9.0 9.1 13.5 Optical Security and Performance 25.3 25.6 24.9 Net revenue 100.0 100.0 100.0 Cost of revenues 38.6 39.4 41.2 Amortization of acquired technologies 2.9 3.0 3.0 Gross profit 58.5 57.6 55.8 Operating expenses: Research and development 17.0 16.5 15.2 Selling, general and administrative 27.7 30.4 37.1 Amortization of other intangibles 3.1 3.4 2.4 Restructuring and related charges 0.3 1.4 0.9 Total operating expenses 48.1 51.7 55.6 Income from operations 10.4 5.9 0.2 Interest income and other income, net 0.8 0.6 1.1 Gain on sale of investments — — — Interest expense (2.9 ) (3.0 ) (5.3 ) Income (loss) from continuing operations before income taxes 8.3 3.5 (4.0 ) Provision for income taxes 5.8 2.8 1.5 Income (loss) from continuing operations, net of taxes 2.5 0.7 (5.5 ) (Loss) income from discontinued operations, net of taxes — (0.2 ) — Net income (loss) 2.5 % 0.5 % (5.5 )% 33 Table of Contents Financial Data for Fiscal 2020, 2019 and 2018 The following table summarizes selected Consolidated Statement of Operations items ( in millions, except for percentages ): 2020 2019 Change Percent Change 2019 2018 Change Percent Change Segment net revenue: NE $746.7 $737.8 $8.9 1.2 % $737.8 $539.1 $198.7 36.9 % SE 102.7 103.4 (0.7) (0.7 )% 103.4 118.5 (15.1) (12.7 )% OSP 286.9 289.1 (2.2) (0.8 )% 289.1 218.1 71.0 32.6 % Net revenue $1,136.3 $1,130.3 $6.0 0.5 % $1,130.3 $875.7 $254.6 29.1 % Amortization of acquired technologies $ 32.7 $ 34.4 $ (1.7 ) (4.9 )% $ 34.4 $ 26.7 $ 7.7 28.8 % Percentage of net revenue 2.9 % 3.0 % 3.0 % 3.0 % Gross profit $ 665.3 $ 651.4 $ 13.9 2.1 % $ 651.4 $ 488.4 $ 163.0 33.4 % Gross margin 58.5 % 57.6 % 57.6 % 55.8 % Amortization of intangibles $ 35.1 $ 38.1 $ (3.0 ) (7.9 )% $ 38.1 $ 21.0 $ 17.1 81.4 % Percentage of net revenue 3.1 % 3.4 % 3.4 % 2.4 % Research and development $ 193.6 $ 187.0 $ 6.6 3.5 % $ 187.0 $ 133.3 $ 53.7 40.3 % Percentage of net revenue 17.0 % 16.5 % 16.5 % 15.2 % Selling, general and administrative $ 315.0 $ 343.5 $ (28.5 ) (8.3 )% $ 343.5 $ 323.9 $ 19.6 6.1 % Percentage of net revenue 27.7 % 30.4 % 30.4 % 37.1 % Restructuring and related charges $ 3.5 $ 15.4 $ (11.9 ) (77.3 )% $ 15.4 $ 8.3 $ 7.1 85.5 % Percentage of net revenue 0.3 % 1.4 % 1.4 % 0.9 % Interest and other income, net 9.6 6.2 $ 3.4 54.8 % 6.2 9.7 $ (3.5 ) (36.1 )% Percentage of net revenue 0.8 % 0.5 % 0.5 % 1.1 % Interest expense $ (33.7 ) $ (34.3 ) $ 0.6 (1.7 )% $ (34.3 ) $ (47.3 ) $ 13.0 (27.5 )% Percentage of net revenue (2.9 )% (3.0 )% (3.0 )% (5.4 )% Provision for income taxes $ 65.3 $ 31.5 $ 33.8 107.3 % $ 31.5 $ 12.9 $ 18.6 144.2 % Percentage of net revenue 5.8 % 2.8 % 2.8 % 1.5 % (Loss) income from discontinued operations, net of taxes $ — $ (2.4 ) $ 2.4 (100.0 )% $ (2.4 ) $ — $ (2.4 ) — % Percentage of net revenue — % (0.2 )% (0.2 )% — % Foreign Currency Impact on Results of Operations While the majority of our net revenue and operating expenses are denominated in U.S. dollar, a portion of our international operations are denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates may significantly affect revenue and expenses. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses. We have presented below “constant dollar” comparisons of our net sales and operating expenses which exclude the impact of currency exchange rate fluctuations. Constant dollar net revenue and operating expenses are non-GAAP financial measures, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management believes these non-GAAP measures, when considered in conjunction with the corresponding U.S. GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses. 34 Table of Contents Fiscal 2020 and 2019 If currency exchange rates had been constant in fiscal 2020 and 2019 , our consolidated net revenue in “constant dollars” would have increased by approximately $8.4 million , or 0.7% 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 2020 and 2019 , our consolidated operating expenses in “constant dollars” would have increased by approximately $6.2 million , or 0.5% of net revenue. Fiscal 2019 and 2018 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 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. GAAP and not using constant dollars. Refer to Item 7A. Qualitative and Quantitative Disclosures about Market Risk of this Annual Report on Form 10-K for further details on foreign currency instruments and our related risk management strategies. Net Revenue Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business. Fiscal 2020 and 2019 Net revenue increase d by $6.0 million , or 0.5% , during fiscal 2020 compared to fiscal 2019 . 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 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 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 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 . 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 from our NE and OSP segment as discussed below. 35 Table of Contents Service revenues increase d $22.9 million , or 22.2% , during fiscal 2019 compared to fiscal 2018 . 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 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 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. For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations are denominated in foreign currencies. The strengthening of the U.S. dollar relative to foreign currencies could negatively impact reported revenue. Additionally, we have seen demand for our NE and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) the impact of ongoing global trade policies, 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. 36 Table of Contents Revenue by Region We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (in millions) : Years Ended June 27, 2020 June 29, 2019 June 30, 2018 Americas: United States $ 341.6 30.1 % $ 342.1 30.3 % $ 335.5 38.3 % Other Americas 73.2 6.4 % 84.2 7.4 % 81.0 9.3 % Total Americas $ 414.8 36.5 % $ 426.3 37.7 % $ 416.5 47.6 % Asia-Pacific: Greater China $ 245.7 21.6 % $ 216.6 19.1 % $ 128.6 14.7 % Other Asia-Pacific 122.5 10.8 % 155.6 13.8 % 85.2 9.7 % Total Asia-Pacific $ 368.2 32.4 % $ 372.2 32.9 % $ 213.8 24.4 % EMEA: Switzerland $ 64.6 5.7 % $ 97.0 8.6 % $ 75.3 8.6 % Other EMEA 288.7 25.4 % 234.8 20.8 % 170.1 19.4 % Total EMEA $ 353.3 31.1 % $ 331.8 29.4 % $ 245.4 28.0 % Total net revenue $ 1,136.3 100.0 % $ 1,130.3 100.0 % $ 875.7 100.0 % Net revenue from customers outside the Americas for the fiscal years ended 2020 , 2019 and 2018 represented 63.5% , 62.3% and 52.4% of net revenue, respectively. We expect revenue from customers outside of United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities. Gross Margin Gross margin 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 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. We expect these factors to continue to result in variability of our gross margin. Research and Development R&D expense increase d by $6.6 million , or 3.5% , during fiscal 2020 compared to fiscal 2019 . 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 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 37 Table of Contents 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. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace. Selling, General and Administrative SG&A expense 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 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. However, we have in the recent past experienced, and may continue to experience in the future, certain charges unrelated to our core operating performance, such as acquisitions and integration related expenses and litigation expenses, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter. Amortization of Acquired Technologies and Intangibles 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 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 In accordance with authoritative guidance, we recognize acquired in-process and development (IPR&D) at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. We periodically review the stage of completion and likelihood of success of each IPR&D project. 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 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 . See “ Note 10. Acquired Developed Technology and Other Intangibles ” of the notes to our Consolidated Financial Statements for more detail. Restructuring and Related Charges 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 $36.2 million excluding any one-time charges as a result of the recent restructuring activities. Refer to “ Note 13. Restructuring and Related Charges ” for more information. As of June 27, 2020 , our total restructuring accrual was $6.5 million . During fiscal 2020 , we recorded $3.5 million in restructuring and related charges. These charges are a combination of new and previously announced restructuring plans and are primarily the result of the following: 38 Table of Contents i. 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: i. 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. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment. During the third quarter of fiscal 2019, we updated the plan to include additional headcount primarily to transfer a portion of the manufacturing operations related to the recently acquired AW business to a contract manufacturer. As a result, a total restructuring charge of $16.1 million , for approximately 240 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia was recorded in the year ended June 29, 2019 . Payments related to the severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2020. 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 $3.4 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 $3.5 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 . Provision for Income Tax Fiscal 2020 Tax Expense 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 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 39 Table of Contents 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. 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 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. Tax Cuts and Jobs Act enacted in December 2017. 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 2018 Tax Expense We recorded an income tax expense of $12.9 million for fiscal 2018 . The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2018 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. On December 22, 2017, the U.S. 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. The law has significantly changed the way the U.S. taxes corporations. The Act repealed the alternative minimum tax (AMT) for corporations and provided that the existing AMT credit carryforwards would be refunded in 2022 if not utilized. 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. 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. The Act imposed a deemed repatriation of our foreign subsidiaries’ post-1986 earnings and profits (E&P) which had previously been deferred from U.S. income tax. The deemed repatriation was reported in our fiscal 2018 U.S. Tax return. We completed the calculation of the total post-1986 foreign E&P for all foreign subsidiaries during the quarter ended December 29, 2018. The change in estimate did not materially impact our financial statements. The Act reduced the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. We have remeasured our U.S. deferred tax assets and liabilities which resulted in a net reduction of $734.9 million of our net deferred tax assets and an equal and offsetting reduction to the valuation allowance against these deferred tax assets. 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. In addition, due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the income tax provision from excess tax benefits for the year ended June 30, 2018. 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 2018 , the valuation allowance for deferred tax assets decreased by $712.9 million primarily due to the remeasurement of the US deferred tax assets and liabilities related to U.S. Tax Cuts and Jobs Act. 40 Table of Contents 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. Operating Segment Information ( in millions ): 2020 2019 Change Percentage Change 2019 2018 Change Percentage Change NE Net revenue $ 746.7 $ 737.8 $ 8.9 1.2 % $ 737.8 $ 539.1 $ 198.7 36.9 % Gross profit 482.4 473.3 9.1 1.9 % 473.3 334.3 139.0 41.6 % Gross margin 64.6 % 64.2 % 64.2 % 62.0 % SE Net revenue $ 102.7 $ 103.4 $ (0.7 ) (0.7 )% $ 103.4 $ 118.5 $ (15.1 ) (12.7 )% Gross profit 68.8 71.0 (2.2 ) (3.1 )% 71.0 82.6 (11.6 ) (14.0 )% Gross margin 67.0 % 68.7 % 68.7 % 69.7 % NSE Net revenue $ 849.4 $ 841.2 $ 8.2 1.0 % $ 841.2 $ 657.6 $ 183.6 27.9 % Operating income 108.8 99.6 9.2 9.2 % 99.6 43.6 56.0 128.4 % Operating margin 12.8 % 11.8 % 11.8 % 6.6 % OSP Net revenue $ 286.9 $ 289.1 $ (2.2 ) (0.8 )% $ 289.1 $ 218.1 $ 71.0 32.6 % Gross profit 153.0 145.8 7.2 4.9 % 145.8 115.2 30.6 26.6 % Gross margin 53.3 % 50.4 % 50.4 % 52.8 % Operating income 102.1 98.0 4.1 4.2 % 98.0 78.2 19.8 25.3 % Operating margin 35.6 % 33.9 % 33.9 % 35.9 % Network Enablement 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 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. 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 our acquisitions, lower travel expenses as a result of COVID-19 as well as the benefit of higher operating leverage from increased revenue volumes. 41 Table of Contents 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 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 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 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 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. In general, our investment policy requires that securities purchased be rated A-1/P-1, A/A2 or better. 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 42 Table of Contents 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 . At any time, no more than 5.0% or $5.0 million , whichever is greater, of each of our investment portfolios may be concentrated in a single issuer other than the U.S. or sovereign governments or agencies. Our investments in debt securities and marketable equity securities are primarily classified as available-for-sale investments or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity. We did not hold any investments in auction rate securities, mortgage backed securities, collateralized debt obligations, or variable rate demand notes at June 27, 2020 . As of June 27, 2020 , U.S. 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 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. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail. 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 . Refer to “ Note 11. Debt ” for more information. Year Ended June 27, 2020 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. 43 Table of Contents 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 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. 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 . 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 The following summarizes our contractual obligations at June 27, 2020 , and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ): Payments due by period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years Asset retirement obligations—expected cash payments $ 4.0 $ 0.9 $ 1.3 $ 0.3 $ 1.5 Debt: 2023 1.75% senior convertible notes 225.0 — 225.0 — — 2024 1% senior convertible notes 460.0 — — 460.0 — Short-term debt 2.8 2.8 — — — Estimated interest payments 32.7 9.5 18.6 4.6 — Purchase obligations (1) 99.8 87.9 11.8 0.1 — Operating lease obligations (2) 44.7 12.8 16.2 8.2 7.5 Non-cancelable leaseback obligations (1) 31.6 2.8 5.3 4.8 18.7 Royalty payment 3.9 0.7 1.7 1.2 0.3 Pension and post-retirement benefit payments (2) 109.9 8.6 12.7 12.0 76.6 Total $ 1,014.4 $ 126.0 $ 292.6 $ 491.2 $ 104.6 (1) Refer to “ Note 18. Commitments and Contingencies ” for more information. (2) Refer to “ Note 12. Leases ” for more information. 44 Table of Contents (3) Refer to “ Note 17. Employee Pension and Other Benefit Plans ” for more information. Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Of the $99.8 million of purchase obligations as of June 27, 2020 , $40.9 million are related to inventory and the other $58.9 million are non-inventory items. As of June 27, 2020 , our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Employee Defined Benefit Plans and Other Post-retirement Benefits We sponsor significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany. We also are responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition. Most of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition during fiscal 2010. The U.K. plan is partially funded and the other plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of June 27, 2020 , our pension plans were underfunded by $109.9 million since the PBO exceeded the fair value of plan assets. Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan. We anticipate future annual outlays related to the German plans will approximate estimated future benefit payments. These future benefit payments have been estimated based on the same actuarial assumptions used to measure our projected benefit obligation and currently are forecasted to range between $4.9 million and $7.7 million per annum. In addition, we expect to contribute approximately $1.8 million to the U.K. plan during fiscal 2021 . During fiscal 2020 , we (amounts represented as £ and $ denote GBP and USD, respectively) contributed £ 0.5 million or approximately $ 0.6 million , while in fiscal 2019 , we contributed £ 0.5 million or approximately $ 0.6 million to its U.K. pension plan. These contributions allowed us to comply with regulatory funding requirements. A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.1 million based upon data as of June 27, 2020 .