Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Viavi Solutions Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Viavi Solutions Inc. and its subsidiaries (the “Company”) as of June 27, 2020 and June 29, 2019, and the related consolidated statements of operations, of comprehensive loss, of stockholders’ equity and of cash flows for each of the three years in the period ended June 27, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of June 27, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 27, 2020 and June 29, 2019 , and the results of its operations and its cash flows for each of the three years in the period ended June 27, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 27, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of June 30, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
47
Table of Contents
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Identifying and Evaluating Performance Obligations in Certain Customer Contracts in the Network Enablement and Service Enablement Reportable Segments
As described in Notes 1 and 19 to the consolidated financial statements, the Company had $1,136.3 million of revenue for the year ended June 27, 2020 of which $746.7 million and $102.7 million related to the Network Enablement and Service Enablement segments, respectively. The Company’s revenue recognition is determined by management through the following steps: 1) identification of the contract with a customer; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligations are satisfied. Certain of the Company’s contracts with customers include performance obligations consisting of a variety of products and services and may involve a significant level of integration and interdependency between performance obligations. Identifying and evaluating whether products and services are considered distinct performance obligations may require significant management judgment, particularly in the Network Enablement and Service Enablement reportable segments due to the nature of the products and service offerings.
The principal considerations for our determination that performing procedures relating to revenue recognition - identifying and evaluating performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments is a critical audit matter are the significant judgment by management in identifying and evaluating performance obligations, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence obtained related to whether such performance obligations were appropriately identified and evaluated by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing the effectiveness of internal controls relating to the revenue recognition process, including internal controls related to the identification and evaluation of performance obligations in contracts with customers, and (ii) testing, on a sample basis, the completeness and accuracy of management’s identification and evaluation of performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments.
/s/ PricewaterhouseCoopers LLP
San Jose, California
August 24, 2020
We have served as the Company’s auditor since 2005.
48
Table of Contents
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Revenues:
Product revenue
$
1,005.2
$
1,004.2
$
772.5
Service revenue
131.1
126.1
103.2
Total net revenue
1,136.3
1,130.3
875.7
Cost of revenues:
Product cost of revenue
388.5
394.8
310.6
Service cost of revenue
49.8
49.7
50.0
Amortization of acquired technologies
32.7
34.4
26.7
Total cost of revenues
471.0
478.9
387.3
Gross profit
665.3
651.4
488.4
Operating expenses:
Research and development
193.6
187.0
133.3
Selling, general and administrative
315.0
343.5
323.9
Amortization of other intangibles
35.1
38.1
21.0
Restructuring and related charges
3.5
15.4
8.3
Total operating expenses
547.2
584.0
486.5
Income from operations
118.1
67.4
1.9
Interest and other income, net
9.6
6.2
9.7
Interest expense
( 33.7
)
( 34.3
)
( 47.3
)
Income (loss) from continuing operations before income taxes
94.0
39.3
( 35.7
)
Provision for income taxes
65.3
31.5
12.9
Income (loss) from continuing operations, net of taxes
28.7
7.8
( 48.6
)
Loss from discontinued operations, net of taxes
—
( 2.4
)
—
Net income (loss)
$
28.7
$
5.4
$
( 48.6
)
Net income (loss) per share from - basic:
Continuing operations
$
0.13
$
0.03
$
( 0.21
)
Discontinued operations
—
( 0.01
)
—
Net income (loss)
$
0.13
$
0.02
$
( 0.21
)
Net income (loss) per share from - diluted:
Continuing operations
$
0.12
$
0.03
$
( 0.21
)
Discontinued operations
—
( 0.01
)
—
Net income (loss)
$
0.12
$
0.02
$
( 0.21
)
Shares used in per-share calculations:
Basic
229.4
228.1
227.1
Diluted
233.7
231.2
227.1
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
49
Table of Contents
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in millions)
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Net income (loss)
$
28.7
$
5.4
$
( 48.6
)
Other comprehensive loss:
Net change in cumulative translation adjustment, net of tax
( 28.6
)
( 27.0
)
( 8.5
)
Net change in available-for-sale investments, net of tax:
Unrealized holding gains (losses) arising during period
( 0.1
)
0.3
( 0.6
)
Less: reclassification adjustments included in net income
—
0.5
0.1
Net change in defined benefit obligation, net of tax:
Unrealized actuarial losses arising during period
( 5.4
)
( 7.3
)
( 2.8
)
Amortization of actuarial losses
2.8
1.8
1.5
Net change in accumulated other comprehensive loss
( 31.3
)
( 31.7
)
( 10.3
)
Comprehensive loss
$
( 2.6
)
$
( 26.3
)
$
( 58.9
)
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
50
Table of Contents
VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
June 27, 2020
June 29, 2019
ASSETS
Current assets:
Cash and cash equivalents
$
539.0
$
521.5
Short-term investments
1.5
1.5
Restricted cash
3.5
3.5
Accounts receivable, net
235.5
237.7
Inventories, net
83.3
102.7
Prepayments and other current assets
50.8
49.9
Total current assets
913.6
916.8
Property, plant and equipment, net
172.5
179.9
Goodwill, net
381.4
381.1
Intangibles, net
148.1
211.6
Deferred income taxes
105.4
108.4
Other non-current assets
55.3
17.3
Total assets
$
1,776.3
$
1,815.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
53.0
$
63.4
Accrued payroll and related expenses
51.4
58.7
Deferred revenue
54.6
55.3
Accrued expenses
22.6
34.2
Short-term debt
2.8
—
Other current liabilities
48.4
72.4
Total current liabilities
232.8
284.0
Long-term debt
600.9
578.8
Other non-current liabilities
231.2
226.5
Commitments and contingencies (Note 18)
Stockholders’ equity:
Preferred stock, $0.001 par value; 1 million shares authorized, no shares issued or outstanding at June 27, 2020 and June 29, 2019.
—
—
Common stock, $0.001 par value; 1 billion shares authorized; 228 million shares at June 27, 2020 and 229 million shares at June 29, 2019, issued and outstanding
0.2
0.2
Additional paid-in capital
70,274.3
70,244.7
Accumulated deficit
( 69,397.2
)
( 69,384.5
)
Accumulated other comprehensive loss
( 165.9
)
( 134.6
)
Total stockholders’ equity
711.4
725.8
Total liabilities and stockholders’ equity
$
1,776.3
$
1,815.1
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
51
Table of Contents
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
OPERATING ACTIVITIES:
Net income (loss)
$
28.7
$
5.4
$
( 48.6
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation expense
40.0
39.7
35.7
Amortization of acquired technologies and other intangibles
67.8
72.5
47.7
Stock-based compensation
44.6
38.2
30.5
Amortization of debt issuance costs and accretion of debt discount
22.2
22.7
36.4
Amortization of discount and premium on investments, net
—
—
0.3
Net change in fair value of contingent liabilities
( 31.5
)
( 5.9
)
—
Loss (Gain) on sales of investments
—
0.5
—
Loss on disposal of long-lived assets
0.1
1.4
2.1
Loss on extinguishment of debt
—
—
5.0
Other
5.7
5.1
2.2
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
( 5.1
)
( 17.8
)
( 53.2
)
Inventories
3.7
( 15.4
)
( 5.5
)
Other current and non-currents assets
10.6
0.1
3.9
Accounts payable
( 9.2
)
8.7
13.2
Income taxes payable
—
5.0
1.1
Deferred revenue, current and non-current
5.9
( 3.1
)
7.3
Deferred taxes, net
11.9
( 1.9
)
( 6.8
)
Accrued payroll and related expenses
( 7.0
)
5.9
( 3.0
)
Accrued expenses and other current and non-current liabilities
( 52.8
)
( 22.3
)
( 2.3
)
Net cash provided by operating activities
135.6
138.8
66.0
INVESTING ACTIVITIES:
Purchases of available-for-sale investments
—
—
( 382.9
)
Maturities of available-for-sale investments
—
47.3
438.3
Sales of available-for-sale investments
—
119.9
204.7
Acquisition of businesses, net of cash acquired
( 2.5
)
( 47.0
)
( 509.9
)
Capital expenditures
( 31.9
)
( 45.0
)
( 42.5
)
Proceeds from the sale of assets
4.6
5.4
5.8
Net cash (used in) provided by investing activities
( 29.8
)
80.6
( 286.5
)
FINANCING ACTIVITIES:
Proceeds from issuance of senior convertible debt
—
—
225.0
Payment of debt issuance costs
( 1.6
)
( 0.5
)
( 1.7
)
Repurchase and retirement of common stock
( 44.4
)
( 11.2
)
( 40.8
)
Payment of financing obligations
( 2.7
)
( 1.7
)
( 1.3
)
Redemption of convertible debt
—
( 276.9
)
( 353.3
)
Proceeds from exercise of employee stock options and employee stock purchase plan
5.5
5.4
4.9
Withholding tax payment on vesting of restricted stock awards
( 21.0
)
( 15.5
)
( 13.3
)
Payment of acquisition related holdback
( 6.8
)
—
—
Payment of acquisition related contingent consideration
( 0.7
)
—
—
Net cash used in financing activities
( 71.7
)
( 300.4
)
( 180.5
)
Effect of exchange rates on cash, cash equivalents and restricted cash
( 17.1
)
( 12.9
)
2.9
Net increase (decrease) in cash, cash equivalents and restricted cash
17.0
( 93.9
)
( 398.1
)
Cash, cash equivalents and restricted cash at beginning of period (1)
530.4
624.3
1,022.4
Cash, cash equivalents and restricted cash at end of period (2)
$
547.4
$
530.4
$
624.3
Supplemental disclosure of cash flow information
Cash paid for interest
$
11.3
$
11.8
$
11.2
Cash paid for income taxes
$
50.6
$
29.8
$
24.4
(1) These amounts include both current and non-current balances of restricted cash totaling $ 8.9 million , $ 12.9 million and $ 18.0 million as of June 29, 2019 , June 30, 2018 and July 1, 2017 , respectively.
(2) These amounts include both current and non-current balances of restricted cash totaling $ 8.4 million , $ 8.9 million and $ 12.9 million as of June 27, 2020 , June 29, 2019 and June 30, 2018 , respectively.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
52
Table of Contents
VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shares
Amount
Balance at July 1, 2017
227.6
$
0.2
$
70,184.4
$
( 69,288.5
)
$
( 92.6
)
$
803.5
Net loss
—
—
—
( 48.6
)
—
( 48.6
)
Other Comprehensive loss
—
—
—
—
( 10.3
)
( 10.3
)
Shares issued under employee stock plans, net of tax effects
3.5
—
( 8.4
)
—
—
( 8.4
)
Stock-based compensation
—
—
30.5
—
—
30.5
Repurchases of common stock
( 4.4
)
—
—
( 40.9
)
—
( 40.9
)
Issuance of senior convertible notes
—
—
34.6
—
—
34.6
Cumulative adjustment from adoption of ASU 2016-09 (Topic 718)
—
—
0.6
( 0.6
)
—
—
Reacquisition of 2033 Notes equity component
—
—
( 25.5
)
—
—
( 25.5
)
Balance at June 30, 2018
226.7
$
0.2
$
70,216.2
$
( 69,378.6
)
$
( 102.9
)
$
734.9
Net income
—
—
—
5.4
—
5.4
Other comprehensive loss
—
—
—
—
( 31.7
)
( 31.7
)
Shares issued under employee stock plans, net of tax effects
3.2
—
( 10.1
)
—
—
( 10.1
)
Stock-based compensation
—
—
38.6
—
—
38.6
Repurchase of common stock
( 1.1
)
—
—
( 11.3
)
—
( 11.3
)
Balance at June 29, 2019
228.8
$
0.2
$
70,244.7
$
( 69,384.5
)
$
( 134.6
)
$
725.8
Cumulative adjustment for adoption of ASU 2016-02 (Topic 842)
—
—
—
3.0
3.0
Net income
—
—
—
28.7
—
28.7
Other comprehensive loss
—
—
—
—
( 31.3
)
( 31.3
)
Shares issued under employee stock plans, net of tax effects
3.2
—
( 15.3
)
—
—
( 15.3
)
Stock-based compensation
—
—
44.9
—
—
44.9
Repurchase of common stock
( 3.7
)
—
—
( 44.4
)
—
( 44.4
)
Balance at June 27, 2020
228.3
$
0.2
$
70,274.3
$
( 69,397.2
)
$
( 165.9
)
$
711.4
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
53
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1. Basis of Presentation
Description of Business
Viavi Solutions, Inc. (VIAVI, also referred to as the Company), 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. The Company’s Velocity program (Velocity) allows the Company to optimize the use of direct or partner sales depending on application and sales volume. Velocity expands the Company’s reach into new market segments as well as expands the Company’s capability to sell and deliver solutions. VIAVI delivers end-to-end visibility across physical, virtual and hybrid networks, enabling customers to optimize connectivity, quality of experience and profitability. VIAVI is 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.
Fiscal Years
The Company utilizes a 52-53-week fiscal year ending on the Saturday closest to June 30th. The Company’s 2020 , 2019 and 2018 fiscal years were 52-week fiscal years ending on June 27, 2020 , June 29, 2019 and June 30, 2018 , respectively.
Principles of Consolidation
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Reclassification of Prior Period Balances
Certain reclassifications have been made to prior period amounts to conform to the current-year presentation. These reclassifications have no effect on the reported net income (loss) for the fiscal years ending on June 27, 2020 , June 29, 2019 and June 30, 2018 .
Use of Estimates
The preparation of the Company’s Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. Estimates are based on historical factors, current circumstances and the experience and judgment of management. Under changed conditions the Company’s reported financial positions or results of operations may be materially impacted when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect more readily available information. Actual results may differ from these estimates due to the uncertainty around the magnitude, duration and effects of the COVID-19 pandemic, as well as other factors.
COVID-19
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China by the Chinese government in December 2019, and subsequently declared an international pandemic by the World Health Organization (WHO) in March 2020. The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time until the disease is contained. While, the Company expects this to have a negative impact to our sales and our results of operations, the Company is not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Annual Report on Form 10-K. These estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates assumptions or conditions due to risks and uncertainties, including uncertainty in the current economic environment due to the COVID-19.
54
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
The Company considers highly liquid instruments such as treasury bills, commercial paper and other money market instruments with original maturities of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents also include certain term deposits with financial institutions that the Company can liquidate with 30 days’ advance notice without incurring penalties.
Restricted Cash
At June 27, 2020 and June 29, 2019 , the Company’s short-term restricted cash balances were $ 3.5 million and $ 3.5 million , respectively. The Company’s long-term restricted cash balances, included in other non-current assets in the Company’s consolidated balance sheets, were $ 4.9 million and $ 5.4 million as of June 27, 2020 and June 29, 2019 , respectively. These balances primarily include interest-bearing investments in bank certificates of deposit and money market funds which act as collateral supporting the issuance of letters of credit and performance bonds for the benefit of third parties. Refer to “ Note 18. Commitments and Contingencies ” for more information.
Investments
The Company’s 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).
The Company periodically reviews these debt investments for impairment. If a debt security’s fair value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the Company records 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 the Company does not expect to recover the entire amortized cost of the security, the Company separates the other-than-temporary impairment into (i) the portion of the loss related to credit factors, or the credit loss portion, and (ii) 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 the Company’s 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.
The Company’s 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 its current operations.
Fair Value of Financial Instruments
For assets and liabilities measured at fair value, fair value is the price to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. When determining fair value, the Company considers the principle or most advantageous market in which it would transact, and the Company considers assumptions that market participants would use when pricing asset or liabilities.
The three levels of inputs that may be used to measure fair value are:
•
Level 1 : Quoted market prices for identical instruments in active markets for identical assets or liabilities.
•
Level 2 : Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets or model-derived valuations. All significant inputs used in the Company’s valuations, such as discounted cash flows, are observable or derived from or corroborated with observable market data for substantially the full term of the assets or liabilities.
•
Level 3 : Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. Level 3 inputs and valuation models are monitored and reviewed by the Company to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
Estimates of fair value of fixed-income securities are based on third party, market-based pricing sources which the Company believes to be reliable. These estimates represent the third parties’ good faith opinion as to what a buyer in the marketplace would
55
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pay for a security in a current sale. For instruments that are not actively traded, estimates may be based on current treasury yields adjusted by an estimated market credit spread for the specific instrument. The fair value of the Company’s 1.75 % Senior Convertible Notes due 2023 and 1.00 % Senior Convertible Notes due 2024 fluctuates with interest rates and with the market price of the Company’s stock, but does not affect the carrying value of the debt on the balance sheet. The fair value of earn-out liabilities are determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
The Company’s 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, the Company assesses the value of its inventory and writes down those inventories determined to be obsolete or in excess of its forecasted usage to their market value. The Company’s 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. The Company’s product line management personnel play a key role in its 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 the Company’s forecasts, may create favorable or unfavorable inventory positions, and may result in additional inventory write-downs or higher than expected income from operations. The Company’s inventory amounts include material, labor, and manufacturing overhead costs.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. If the rate implicit in the lease is not readily determinable for our operating leases, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. Operating right-of-use (ROU) assets are recognized at commencement based on the amount of the initial measurement of the lease liability. Operating ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
Operating ROU assets are included in other non-current assets and lease liabilities are included in other current liabilities and other non-current liabilities in the Company’s consolidated balance sheets. Lease and non-lease components for all leases are accounted for separately. The Company does not recognize ROU assets and lease liabilities for leases with a lease term of twelve months or less.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using a straight-line method, over the estimated useful lives of the assets: building and improvements 10 to 50 years; machinery and equipment 2 to 20 years; and furniture, fixtures, software and office equipment 2 to 10 years.
Leasehold improvements are amortized on the straight-line method over the lesser of the estimated useful lives of the asset or the initial lease term.
Demonstration units are amortized on the straight-line method and are Company products used for demonstration purposes for existing and prospective customers. These assets are generally not intended to be sold and have an estimated useful life of 3 to 5 years.
Costs related to software acquired, developed or modified solely to meet the Company’s internal requirements and for which there are no substantive plans to market are capitalized in accordance with the authoritative guidance on accounting for the costs of computer software developed or obtained for internal use. Only costs incurred after the preliminary planning stage of the project and after management has authorized and committed funds to the project are eligible for capitalization. Costs capitalized for computer software developed or obtained for internal use are included in Property, plant and equipment, net , on the Company’s Consolidated Balance Sheets.
56
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill
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. The Company tests 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 circumstances indicate that the asset may be impaired.
The accounting guidance provides the Company with 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 the Company’s 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 the Company’s 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. Refer to “ Note 9. Goodwill ” for more information.
Intangible Assets
In connection with the Company’s acquisitions, the Company generally recognize assets for customer relationships, acquired developed technologies, patents, proprietary know-how, trade secrets, in-process research and development (IPR&D) and trademarks and trade names. Finite lived intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. Refer to “ Note 10. Acquired Developed Technology and Other Intangibles ” for more information.
Long-lived Assets
Long-lived assets, including intangible assets and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset or asset group may not be recoverable. Such an evaluation is performed at the lowest identifiable level of cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset or asset group over its estimated fair value. Estimates of future cash flow require significant judgment based on anticipated future and operating results, which are subject to variability and change.
Pension and Other Postretirement Benefits
The funded status of the Company’s retirement-related benefit plans is recognized on 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 its 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 (loss) 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
57
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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 (loss) income 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 the Company’s estimates and actuarial valuations provided by third-party actuaries and are approved by 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. The Company evaluates these assumptions periodically but not less than annually. In estimating the expected return on plan assets, the Company considers 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.
The Company measures its benefit obligation and plan assets using the month-end date of June 30, which is closest to the Company’s fiscal year-end.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, restricted cash, trade receivables and foreign currency forward contracts. The Company’s cash and cash equivalents and short-term investments are held in safekeeping by large, creditworthy financial institutions. The Company invests its excess cash primarily in U.S. government and agency bonds securities, corporate securities, money market funds, asset-backed securities, other investment-grade securities and certificates of deposit.
The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain the safety and liquidity of these investments. The Company’s foreign exchange derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreements. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading such risk across several major financial institutions. Potential risk of loss with any one counterparty resulting from such risk is monitored by the Company on an ongoing basis.
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. When the Company becomes aware that a specific customer is unable to meet its financial obligations, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. In addition, the Company records additional allowances based on certain percentages of aged receivable balances. These percentages consider a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. The Company classifies bad debt expenses as selling, general and administrative (SG&A) expense.
The Company is not able to predict changes in the financial stability of its customers. Any material changes in the financial status of any one customer or a group of customers could have a material adverse effect on the Company’s results of operations and financial condition. Although such losses have been within management’s expectations to date, there can be no assurance that such allowances will continue to be adequate. The Company has significant trade receivables concentrated in the telecommunications industry. While the Company’s allowance for doubtful accounts balance is based on historical loss experience along with anticipated economic trends, unanticipated financial instability in the telecommunications industry could lead to higher than anticipated losses.
As of June 27, 2020 and June 29, 2019 , no customer represented 10% or more of the Company’s total accounts receivable, net.
During fiscal 2020 , 2019 and 2018 , one customer generated 10 % or more of total net revenues. Refer to “ Note 19. Operating Segments and Geographic Information ” for more information.
The Company relies on a limited number of suppliers and contract manufacturers for a number of key components and sub-assemblies contained in the Company’s products.
58
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company generally uses a rolling twelve -month forecast based on anticipated product orders, customer forecasts, product order history and backlog to determine its materials requirements for any one period. Lead times for the parts and components that the Company orders may vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at any given time. If the forecast does not meet actual demand, the Company may have surplus or dearth of some materials and components, as well as excess inventory purchase commitments. The Company could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which may result in increased costs and have a material adverse impact on the Company’s results of operations.
Foreign Currency Forward Contracts
The Company conducts its business and sells its products to customers primarily in North America, Europe, Asia and South America. In the normal course of business, the Company’s financial position is routinely subject to market risks associated with foreign currency rate fluctuations due to balance sheet positions in foreign currencies. The Company evaluates foreign exchange risks and utilizes foreign currency forward contracts to reduce such risks, hedging the gains or losses generated by the re-measurement of significant foreign currency denominated monetary assets and liabilities. The fair value of these contracts is reflected as other current assets or liabilities and the change in fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The gain or loss from the change in fair value of these foreign currency forward contracts largely offsets the change in fair value of the foreign currency denominated monetary assets or liabilities, which is also recorded as a component of Interest and other income, net .
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded as a component of Accumulated other comprehensive loss on the Consolidated Balance Sheets. Income and expense accounts are translated at exchange rates from the prior month end, which are deemed to approximate the exchange rate when the income and expense is recognized. Gains and losses from re-measurement of monetary assets and liabilities that are denominated in currencies other than the respective functional currencies are included in the Consolidated Statements of Operations as a component of Interest and other income, net .
Revenue Recognition
The Company derives revenue from a diverse portfolio of network solutions and optical technology products and services, as follows:
•
Products: Network Enablement (NE) and Service Enablement (SE) products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. NE and SE are collectively referred to as Network and Service Enablement (NSE). The Company’s Optical Security and Performance (OSP) products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications.
•
Services: The Company also offers 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.
59
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Steps of revenue recognition
The Company accounts 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, the Company considers 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 the Company considers 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. The Company utilizes 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 implemented by the Company.
2.
Identify the performance obligations in the contract: The Company assesses 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) the Company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The Company's 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 the Company's 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 nature of the product and service offerings . The Company 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 the Company expects to be entitled in exchange for transferring goods or services to the customer. The Company’s 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 the Company’s 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 the Company, 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, the Company allocates 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 the Company sells 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.
60
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the Company has 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 the Company performs the services and the customers receive and/or consume the benefits.
Revenue policy and practical expedients
The following policy and practical expedient elections have been made by the Company under the revenue standard:
•
Revenue-based taxes as assessed by governmental authorities have been excluded from the measurement of transaction price(s).
•
Shipping and handling activities performed after the customer obtains control of the good are treated as activities to fulfill the promise (cost of fulfillment). Therefore, the Company does not evaluate whether the shipping and handling activities are promised services.
•
Incremental costs of obtaining contracts that would have been recognized within one year or less are recognized as an expense when incurred. These costs are included in SG&A expense. The costs of obtaining contracts where the amortization period for recognition of the expense is beyond a year are capitalized and recognized over the revenue recognition period of the original contract.
•
The portfolio approach is used for certain types of variable consideration for contracts with similar characteristics. The methodology is used when the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
•
If at contract inception, the expected period between the transfer of promised goods or services and payment is within one year or less, the Company forgoes adjustment for the impact of significant financing component for the contract.
Disaggregation of Revenue
The Company's revenue is presented on a disaggregated basis on the Consolidated Statements of Operations and in “ Note 19. Operating Segments and Geographic Information ”. This information includes revenue from reportable segments and a break-out of products and services for which the nature and timing of the revenue as characterized above is generally at a point in time and over time, respectively.
Warranty
The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.
Shipping and Handling Costs
The Company records costs related to shipping and handling of revenue in cost of sales for all periods presented.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising costs totaled $ 3.7 million , $ 2.6 million and $ 2.6 million in fiscal 2020 , 2019 and 2018 , respectively.
61
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Research and Development Expense
Costs related to research and development (R&D), which primarily consists of labor and benefits, supplies, facilities, consulting and outside service fees, are charged to expense as incurred. The authoritative guidance allows for capitalization of software development costs incurred after a product’s technological feasibility has been established until the product is available for general release to the public. The Company believe its software development process is completed concurrent with the establishment of technological feasibility. As such, software development costs have been expensed as incurred.
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award. The Company recognizes stock-based compensation cost over the award’s requisite service period on a straight-line basis. No compensation cost is recognized for awards forfeited by employees who do not render requisite service.
The fair value of restricted stock units (RSUs) and performance-based restricted stock units (PSUs) that do not contain a market condition, is equal to the market value of the Company’s common stock on the grant date. The fair value of PSUs that contain a market condition (MSU) is estimated using the Monte Carlo simulation option-pricing model. MSUs have vesting requirements tied to either the performance of the Company’s stock as compared to the Nasdaq telecommunications index or the performance of the Company’s operating results, and could vest at a higher or lower rate, or not at all, based on relative performance described. The Company estimates the fair value of stock options and Employee Stock Purchase Plan (ESPP) purchase rights 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.
The Company does not apply expected forfeiture rate and accounts for forfeitures as they occur. The total fair value of the equity awards is recorded on a straight-line basis, over the requisite service period of the awards for each separate vesting period of the award, except for MSUs which are amortized based upon the graded vesting method.
Income Taxes
In accordance with the authoritative guidance on accounting for income taxes, the Company recognizes 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 future tax consequences of events that have been recognized in the Company’s 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, the Company has 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 its ability to utilize its net operating loss carryforwards before they expire. Accordingly, the Company has established a valuation allowance for such deferred tax assets. If there is a change in the Company’s ability to realize its deferred tax assets for which a valuation allowance has been established, then its tax provision may decrease in the period in which it determines that realization is more likely than not. Likewise, if the Company determines that it is not more likely than not that its deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and the Company’s tax provision may increase in the period in which the Company 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. The Company is subject to income tax audits by the respective tax authorities in the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The Company recognizes liabilities based on its estimate of whether, and the extent to which, additional tax liabilities are more likely than not. If the Company ultimately determines that the payment of such a liability is not necessary, then it reverses the liability and recognizes a tax benefit during the period it is determined no longer necessary.
The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.
62
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. 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. The Company continually evaluates the adequacy of the remaining liabilities under its restructuring initiatives. Although the Company believes that these estimates accurately reflect the costs of its restructuring plans, actual results may differ, thereby requiring the Company to record additional liabilities or reverse a portion of existing liabilities.
Contingencies
The Company is subject to various potential loss contingencies arising in the ordinary course of business. In determining a loss contingency, the Company considers 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. The Company regularly evaluates 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 the Company’s 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 SG&A expense of the Company’s 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. While the Company believes the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
Asset Retirement Obligations
Asset Retirement Obligations (ARO) are legal obligations associated with the retirement of long-lived assets pertaining to leasehold improvements. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the asset carrying value and ARO by the same amount. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Company records period-to-period changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Company derecognizes ARO liabilities when the related obligations are settled. As of June 27, 2020 , and June 29, 2019 , the Consolidated Balance Sheets included ARO of $ 0.9 million and $ 0.4 million , respectively, in other current liabilities and $ 3.1 million and $ 3.2 million , respectively, in other non-current liabilities.
Balance at Beginning of Period
Liabilities Incurred
Liabilities Settled
Accretion Expense
Revisions to Estimates
Balance at End of Period
Year ended June 27, 2020
$
3.6
$
0.3
$
—
$
0.1
$
—
$
4.0
Year ended June 29, 2019
$
3.7
$
0.4
$
( 0.1
)
$
0.1
$
( 0.5
)
$
3.6
Note 2. Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In 2016, the Financial Accounting Standards Board (FASB) issued guidance on the financial reporting requirements for leasing arrangements, ASC 842 - Leases . ASC 842 requires lessees to recognize operating leases with a term greater than one year on their balance sheets as ROU assets and corresponding lease liabilities, measured at the present value of the lease payments. In the first quarter of fiscal 2020 the Company adopted this standard using the modified retrospective approach. The Company elected to apply the optional transition approach of not adjusting comparative period financial statements for the adoption impact. The Company also elected the package of practical expedients to not reassess whether a contract contains a lease, lease classification and accounting for initial direct costs. Adoption of the leasing standard resulted in $ 35.5 million of ROU assets and $ 37.0 million of lease liabilities on June 30, 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 .”
63
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The guidance is effective for the Company in the first quarter of fiscal 2021 and earlier adoption is permitted. The Company does not expect the adoption of this standard will have a material impact on its Consolidated Financial Statements.
In August 2020, the FASB issued guidance which simplifies the accounting for financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The guidance allows for either full retrospective adoption or modified retrospective adoption. The guidance is effective for the Company in the first quarter of fiscal year 2023 and early adoption is permitted. The Company is evaluating the impact of adoption of this guidance will have on its Consolidated Financial Statements.
In December 2019, the FASB issued guidance which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal year 2022 and early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its Consolidated Financial Statements.
In August 2018, the FASB issued guidance to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period, and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This guidance is effective for the Company in the first quarter of fiscal 2022 and early adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
Note 3. Earnings Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding ESPP purchase rights, RSUs, PSUs, MSUs and options is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares.
64
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted net income (loss) per share ( in millions, except per share data ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Numerator:
Income (loss) from continuing operations, net of taxes
$
28.7
$
7.8
$
( 48.6
)
Loss from discontinued operations, net of taxes
—
( 2.4
)
—
Net income (loss)
$
28.7
$
5.4
$
( 48.6
)
Denominator:
Weighted-average shares outstanding:
Basic
229.4
228.1
227.1
Shares issuable assuming conversion of convertible notes (1)
1.2
—
—
Effect of dilutive securities from stock-based benefit plans
3.1
3.1
—
Diluted
233.7
231.2
227.1
Net income (loss) per share from - basic:
Continuing operations
$
0.13
$
0.03
$
( 0.21
)
Discontinued operations
—
( 0.01
)
—
Net income (loss)
$
0.13
$
0.02
$
( 0.21
)
Net income (loss) per share from - diluted:
Continuing operations
$
0.12
$
0.03
$
( 0.21
)
Discontinued operations
—
( 0.01
)
—
Net income (loss)
$
0.12
$
0.02
$
( 0.21
)
(1)
Represents the number of shares that would be issued if the Company’s Senior Convertible Notes had been converted. The par amount of the Company’s convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and the “in-the money” conversion benefit feature above the conversion price is payable in cash, shares of the Company’s common stock or a combination of both, at the Company’s election.
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income (loss) per share because their effect would have been anti-dilutive ( in millions ):
Years Ended
June 27, 2020 (4)
June 29, 2019 (2)(3)(4)
June 30, 2018 (1)(2)(3)(4)
Stock options and ESPP
—
0.1
1.6
Full Value Awards
0.2
0.4
7.3
Total potentially dilutive securities
0.2
0.5
8.9
(1)
As the Company incurred a net loss from continuing operations in the period, potential dilutive securities from employee stock options, ESPP, RSUs , PSUs and MSUs have been excluded from the diluted net loss per share computations as their effects were deemed anti-dilutive.
(2)
The Company’s 0.625 % Senior Convertible Notes due 2033 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $ 11.28 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. In October 2018 , the 2033 Notes were fully redeemed and any potential dilution effect of the Notes was realized upon the Company settling the “in-the-money” conversion benefit feature of the Notes with shares of common stock. Refer to “ Note 11. Debt ” for more details.
(3)
The Company’s 1.00 % Senior Convertible Notes due 2024 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion
65
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
price above $ 13.22 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. Refer to “ Note 11. Debt ” for more details.
(4)
The Company’s 1.75 % Senior Convertible Notes due 2023 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $ 13.94 per share is payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. Refer to “ Note 11. Debt ” for more details.
Note 4. Accumulated Other Comprehensive Loss
The Company’s accumulated other comprehensive (loss) income consists of the accumulated net unrealized gains and losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.
Changes in accumulated other comprehensive (loss) income by component, net of tax, were as follows ( in millions ):
Unrealized gains (losses)
on available-for-sale
investments (1)
Foreign currency translation adjustments
Change in unrealized components of defined benefit
obligations, net of tax (2)
Total
Beginning balance as of June 29, 2019
$
( 5.0
)
$
( 101.0
)
$
( 28.6
)
$
( 134.6
)
Other comprehensive (loss) income before reclassification
( 0.1
)
( 28.6
)
( 5.4
)
( 34.1
)
Amounts reclassified from accumulated other comprehensive (loss) income
—
—
2.8
2.8
Net current period other comprehensive (loss) income
( 0.1
)
( 28.6
)
( 2.6
)
( 31.3
)
Ending balance as of June 27, 2020
$
( 5.1
)
$
( 129.6
)
$
( 31.2
)
$
( 165.9
)
(1)
Activity before reclassifications to the Consolidated Statements of Operations during the fiscal year ended June 27, 2020 primarily relates to unrealized loss from available-for-sale securities. The amount reclassified out of accumulated other comprehensive (loss) income represents the gross realized loss from available-for-sale securities included as “Interest and other income, net" in the Consolidated Statement of Operations for the year ended June 27, 2020 . There was no tax impact for fiscal year 2020 .
(2)
Activity before reclassifications to the Consolidated Statements of Operations during the fiscal year ended June 27, 2020 relates to the unrealized actuarial loss of $ 5.7 million , net of income tax benefit of $ 0.3 million . The amount reclassified out of accumulated other comprehensive (loss) income represents the amortization of actuarial losses included as a component of SG&A in the Consolidated Statement of Operations for the year ended June 27, 2020 . Refer to “ Note 17. Employee Pension and Other Benefit Plans ” for more details on the computation of net periodic cost for pension plans.
Note 5. Acquisitions
3Z Telecom, Inc. Acquisition
On May 31, 2019 (3Z Close Date), the Company acquired all of the equity of 3Z Telecom, Inc. (3Z) for approximately $ 23.2 million in cash and contingent consideration (earn-out) liability of up to $ 7.0 million in cash based on the achievement of certain net revenue targets over approximately a two year period, subsequent to the 3Z Close Date. The $ 23.2 million cash consideration is subject to final cash and net working capital adjustments and includes escrow payments of $ 4.3 million , which are reserved for potential breaches of representations and warranties. The acquisition of 3Z expands the Company’s Field Instrument offerings.
The 3Z acquisition meets the definition of a business and has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were not material.
The fair value of consideration transferred for the 3Z acquisition consists of the following (in millions) :
Cash consideration paid at closing
$
18.9
Escrow payments
4.3
Fair value of contingent consideration
5.5
Total purchase consideration
$
28.7
66
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the earn-out payments at the 3Z Close Date was determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs not observable in the market, and therefore represents a Level 3 measurement. The fair value of the Company’s earn-out liabilities is further discussed in “ Note 8. Fair Value Measurements .”
The identified tangible and intangible assets acquired, as of the 3Z Close Date, were as follows (in millions) :
Tangible assets acquired:
$
4.1
Intangible assets acquired:
Developed technology
4.4
Customer relationships
7.9
Customer backlog
0.1
Goodwill
12.2
Total consideration transferred
$
28.7
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the 3Z Close Date, was as follows (in millions) :
Cash
$
2.2
Total other assets
3.6
Total liabilities
( 1.7
)
Net tangible assets acquired
$
4.1
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives, which range from five to six years . Customer backlog will be fully amortized within one year .
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of 3Z. Goodwill has been assigned to the NE segment and is not deductible for tax purposes.
Results of operations of 3Z have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
RPC Photonics, Inc. Acquisition
On October 30, 2018 (RPC Close Date), the Company acquired all of the equity interest of RPC Photonics, Inc. (RPC) for approximately $ 33.4 million in cash and an additional earn-out of up to $ 53.0 million in cash based on the achievement of certain gross profit targets over approximately a four year period, subsequent to the RPC Close Date. The $ 33.4 million cash consideration includes escrow payments of $ 3.5 million , which are reserved for potential breaches of representations and warranties. The acquisition of RPC expands the Company’s 3D Sensing offerings. The allocation of the purchase price was completed in the fourth quarter of fiscal 2019.
The RPC acquisition met the definition of a business and the acquisition has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were not material.
The fair value of consideration transferred for the RPC acquisition consists of the following (in millions) :
Cash consideration paid at closing
$
29.9
Escrow payments
3.5
Fair value of contingent consideration
36.2
Total purchase consideration
$
69.6
67
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value of the earn-out payments at the RPC Close Date was determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs that are not observable in the market, and therefore represents a Level 3 measurement. The fair value of this earn-out is discussed further in “ Note 8. Fair Value Measurements ”.
The identified tangible and intangible assets acquired, as of the RPC Close Date, were as follows (in millions) :
Tangible assets acquired:
$
5.7
Intangible assets acquired:
Developed technology
15.7
Customer relationships
14.0
Customer backlog
0.3
Goodwill
33.9
Total consideration transferred
$
69.6
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the RPC Close Date, was as follows (in millions) :
Cash
$
1.8
Other current assets
1.8
Property and equipment
2.6
Total liabilities
( 0.5
)
Net tangible assets acquired
$
5.7
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives that range from six to seven years . Customer backlog will be fully amortized within one year .
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of RPC. Goodwill has been assigned to the OSP segment and is not deductible for tax purposes.
Results of operations of RPC have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
AvComm and Wireless Test and Measurement Acquisition
On March 15, 2018 ( AW Close Date ), the Company completed the acquisition of the AW Business of Cobham plc. ( AW ) for $ 466.8 million in cash. The acquired business has been integrated into the Company’s NE segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date. The allocation of the purchase price was completed in March 2019.
68
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The identified intangible assets acquired, were as follows (in millions) :
Tangible assets acquired:
$
59.0
Intangible assets acquired:
Developed technology
113.5
Customer relationships
75.0
Trade names
28.0
In-process research and development
9.0
Customer backlog
6.5
Goodwill
175.8
Total consideration transferred
$
466.8
The allocation of the purchase price was as follows (in millions) :
Cash
$
16.1
Accounts receivable
43.0
Inventory
33.5
Property and equipment
33.5
Other assets
6.1
Accounts payable
( 10.9
)
Other liabilities
( 28.4
)
Deferred revenue
( 10.2
)
Deferred tax liabilities
( 23.7
)
Net tangible assets acquired
$
59.0
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair value of acquired developed technology, customer relationships, trade names, acquired IPR&D and order backlog was determined based on the income approach, discounted cash flow method. The intangible assets, except IPR&D, are being amortized over their estimated useful lives that range from three to six years . Order backlog was fully amortized within one year of the AW Close Date .
In accordance with authoritative guidance, the Company recognized an IPR&D asset at fair value as of March 15, 2018. The IPR&D is accounted for as an indefinite-lived intangible asset until project completion or abandonment of the research and development projects. During the three months ended March 30, 2019, the IPR&D activities were completed and transferred to developed technology, with an estimated useful life of 6 years.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of AW . Goodwill has been assigned to the NE segment and is partially deductible for tax purposes.
Trilithic, Inc. Acquisition
On August 9, 2017 ( Trilithic Close Date ), the Company completed the acquisition of Trilithic Inc. ( Trilithic ) for $ 56.4 million in cash. The acquisition has been integrated into the Company’s NE segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The allocation of the purchase price was completed during the first quarter of fiscal 2019.
69
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The identified intangible assets acquired, were as follows (in millions) :
Net tangible assets acquired
$
11.8
Intangible assets acquired:
Developed technology
15.5
Customer relationships
11.0
Other
0.3
Goodwill
17.8
Total purchase price
$
56.4
The allocation of the purchase price was as follows (in millions) :
Cash
$
0.2
Accounts receivable
3.2
Inventory
10.1
Property and equipment
1.2
Accounts payable
( 1.7
)
Other liabilities, net of other assets
( 1.2
)
Net tangible assets acquired
$
11.8
Acquired intangible assets are classified as Level 3 assets for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair value of acquired developed technology, customer relationships, and other intangible assets was determined based on an income approach, discounted cash flow method. The intangible assets are being amortized over their estimated useful lives that range from three to five years for the acquired developed technology and customer relationships.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of Trilithic . Goodwill has been assigned to the NE segment and is not deductible for tax purposes.
Trilithic ’s results of operations have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition.
Other Acquisitions:
During the twelve months ended June 27, 2020 , the Company completed a business acquisition for total consideration of approximately $ 10.7 million , of which $ 5.2 million cash was paid at close and $ 5.5 million in payments to be made based on the occurrence of future events. The fair value of earn-out liabilities is discussed further in “ Note 8. Fair Value Measurements ”.
In connection with this acquisition, the Company recorded approximately $ 6.2 million of developed technology and customer relationships and $ 1.4 million of deferred tax liability resulting from the acquisitions. The acquired developed technology and customer relationship assets are being amortized over their estimated useful lives of six years .
During the twelve months ended June 29, 2019 , the Company completed various asset acquisitions for total consideration of approximately $ 7.7 million , of which $ 5.1 million cash was paid at close and $ 2.6 million in payments to be made based on the occurrence of future events. The fair value of earn-out liabilities is discussed further in “ Note 8. Fair Value Measurements ”.
These acquisitions were accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset. In connection with these acquisitions, the Company recorded approximately $ 7.6 million of developed technology and $ 2.4 million of deferred tax liability resulting from these acquisitions. The acquired developed technology assets are being amortized over their estimated useful lives which range from five to ten years .
70
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6. Balance Sheet and Other Details
Contract Balances
Unbilled Receivables: The Company records a receivable when an unconditional right to consideration exists and transfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of customer invoicing. Payment terms vary based on product or service offerings and payment is generally required within 30 to 90 days from date of invoicing. Certain performance obligations may require payment before delivery of the service to the customer .
Contract assets: A Contract Asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract Assets include fixed fee professional services, where the transfer of services has occurred in advance of the Company's right to invoice. Contract Assets, included in accounts receivable, net, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. Contract Asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.
Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of June 27, 2020 and June 29, 2019 , the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $ 3.8 million and $ 11.5 million , respectively
Deferred revenue: Deferred revenue consists of contract liabilities primarily related to support, solution deployment services, software maintenance, product, professional services, and training when the Company has a right to invoice or payments have been received and transfer of control has not occurred. Revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. Contract liabilities are included in other current liabilities on the consolidated balance sheets.
The Company also has short-term and long-term deferred revenues related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as the Company's performance obligations under the contract are completed and accepted by the customer.
The following tables summarize the activity related to deferred revenue, for the year ended June 27, 2020 ( in millions ):
June 27, 2020
Deferred revenue:
Balance at beginning of period
$
68.5
Revenue deferrals for new contracts (1)
107.5
Revenue recognized during the period (2)
( 101.4
)
Balance at end of period
$
74.6
Short-term deferred revenue
$
54.6
Long-term deferred revenue
$
20.0
(1)
Included in these amounts is the impact from foreign currency exchange rate fluctuations.
(2)
Revenue recognized during the period represents releases from the balance at the beginning of the period as well as releases from the following period quarter-end deferrals.
Remaining performance obligations: Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations not delivered or are incomplete, as of June 27, 2020 . Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded. The aggregate amount of the transaction price allocated to remaining performance obligations does not include amounts owed under cancelable contracts where there is no substantive termination penalty.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidation, adjustments for revenue that has not materialized, and adjustments for currency.
71
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The value of the transaction price allocated to remaining performance obligations as of June 27, 2020 , was $ 204.6 million . The Company expects to recognize 87 % of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.
Accounts Receivable Allowances
The table below presents the activities and balances for allowance for doubtful accounts, as follows ( in millions ):
Balance at Beginning of Period
Acquisitions (1)
Charged to Costs and Expenses
Deduction (2)
Balance at
End of Period
Year Ended June 27, 2020
$
2.0
$
—
$
2.0
$
( 1.0
)
$
3.0
Year Ended June 29, 2019
2.4
—
1.4
( 1.8
)
2.0
Year Ended June 30, 2018
1.6
0.7
( 0.4
)
0.5
2.4
(1)
See “ Note 5. Acquisitions ” of the Notes to Consolidated Financial Statements for detail of acquisition.
(2)
Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
Inventories, Net
The following table presents the components of inventories, net, as follo ws ( in millions ):
June 27, 2020
June 29, 2019
Finished goods
$
30.0
$
36.7
Work in process
22.5
26.5
Raw materials
30.8
39.5
Inventories, net
$
83.3
$
102.7
Prepayments and Other Current Assets
The following table presents the components of prepayments and other current assets, as follo ws ( in millions ):
June 27, 2020
June 29, 2019
Prepayments
$
10.9
$
14.2
Assets held for sale
2.5
2.5
Advances to contract manufacturers
7.3
5.1
Refundable income taxes
10.8
8.9
Transaction tax receivables
10.6
11.8
Other current assets
8.7
7.4
Prepayments and other current assets
$
50.8
$
49.9
72
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property, Plant and Equipment, net
The following table presents the components of property, plant and equipment, net, as follows ( in millions ):
June 27, 2020
June 29, 2019
Land
$
16.8
$
20.8
Buildings and improvements
22.9
36.9
Machinery and equipment
298.5
280.0
Furniture, fixtures, software and office equipment
74.3
103.5
Leasehold improvements
66.8
56.8
Construction in progress
15.6
31.1
Property, plant and equipment, gross
494.9
529.1
Less : Accumulated depreciation and amortization
( 322.4
)
( 349.2
)
Property, plant and equipment, net
$
172.5
$
179.9
Other current liabilities
The following table presents the components of other current liabilities, as follows ( in millions ):
June 27, 2020
June 29, 2019
Customer prepayments
$
0.5
$
30.2
Restructuring accrual
6.5
8.6
Income tax payable
10.7
8.5
Warranty accrual
4.6
4.7
Transaction tax payable
3.2
3.8
Operating lease liabilities (Note 12)
11.7
—
Foreign exchange forward contracts liability
1.5
4.0
Other
9.7
12.6
Other current liabilities
$
48.4
$
72.4
Other Non-current Liabilities
The following table presents the components of other non-current liabilities, as follo ws ( in millions ):
June 27, 2020
June 29, 2019
Pension and post-employment benefits
$
102.7
$
103.2
Deferred tax liability
23.9
14.6
Financing obligation
16.2
25.5
Fair value of contingent consideration (1)
9.4
37.7
Long-term deferred revenue
20.0
13.2
Operating lease liabilities (Note 12)
28.1
—
Uncertain tax position
11.6
13.6
Other
19.3
18.7
Other non-current liabilities
$
231.2
$
226.5
(1)
See “ Note 5. Acquisitions ” and “ Note 7. Investments and Forward Contracts ” of the Notes to the Company’s Consolidated Financial Statements for more detail.
73
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest Income and Other Income, net
The following table presents the components of interest income and other income, net, as follows ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Interest income
$
7.1
$
8.1
$
16.0
Foreign exchange gains (loss), net
2.1
( 2.9
)
( 1.3
)
Loss on extinguishment of debt (1)
—
—
( 5.0
)
Other income, net
0.5
1.5
0.1
Loss on sale of investments
( 0.1
)
( 0.5
)
( 0.1
)
Interest income and other income, net
$
9.6
$
6.2
$
9.7
(1)
In connection with the debt extinguishment, a loss of $ 5.0 million was recognized in fiscal 2018. Refer to “ Note 11. Debt ” for more information.
Note 7. Investments and Forward Contracts
Available-For-Sale Investments
The following table presents the Company’s available-for-sale securities as of June 27, 2020 ( in millions ):
Amortized Cost/
Carrying Cost
Gross Unrealized
Gains
Gross Unrealized
Losses
Estimated
Fair Value
Available-for-sale debt securities:
Asset-backed securities
$
0.9
$
—
$
( 0.4
)
$
0.5
Total available-for-sale debt securities
$
0.9
$
—
$
( 0.4
)
$
0.5
The Company generally classifies debt securities as available-for-sale and as cash equivalents, short-term investments, or other non-current assets based on the stated maturities; however, certain securities with stated maturities of longer than twelve months, which are highly liquid and available to support current operations are also classified as short-term investments. As of June 27, 2020 , the total estimated fair value of $ 0.5 million was classified as other non-current assets.
In addition to the amounts presented above, the Company’s short-term investments classified as trading securities related to the deferred compensation plan as of June 27, 2020 , were $ 1.4 million , of which $ 0.3 million was invested in debt securities, $ 0.2 million was invested in money market instruments and funds and $ 0.9 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
During the fiscal years ended June 27, 2020 , June 29, 2019 and June 30, 2018 , respectively, the Company recorded no other-than-temporary impairment charges in each respective period.
As of June 27, 2020 , the Company’s total gross unrealized losses on available-for-sale securities, aggregated by type of investment instrument, are as follows ( in millions ):
Less than 12 Months
Greater than 12 Months
Total
Asset-backed securities
$
—
$
( 0.4
)
$
( 0.4
)
Total gross unrealized losses
$
—
$
( 0.4
)
$
( 0.4
)
74
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 27, 2020 , the Company’s debt securities classified as available-for-sale securities with contractual maturities are as follows ( in millions ):
Amortized Cost/Carrying Cost
Estimated
Fair Value
Amounts maturing in more than 5 years
$
0.9
$
0.5
Total debt available-for-sale securities
$
0.9
$
0.5
As of June 29, 2019 , the Company’s available-for-sale securities are as follows ( in millions ):
Amortized Cost/
Carrying Cost
Gross Unrealized Gains
Gross Unrealized Losses
Estimated Fair Value
Available-for-sale securities:
Asset-backed securities
$
0.9
$
—
$
( 0.3
)
$
0.6
Total available-for-sale securities
$
0.9
$
—
$
( 0.3
)
$
0.6
As of June 29, 2019 , the estimated fair value of $ 0.6 million was classified as other non-current assets.
In addition to the amounts presented above, as of June 29, 2019 , the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $ 1.5 million , of which $ 0.4 million was invested in debt securities, $ 0.3 million was invested in money market instruments and funds and $ 0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
As of June 29, 2019 , the Company’s total gross unrealized losses on available-for-sale securities, aggregated by investment type, are as follows ( in millions ):
Less than 12 Months
Greater than 12 Months
Total
Asset-backed securities
$
—
$
( 0.3
)
$
( 0.3
)
Total gross unrealized losses
$
—
$
( 0.3
)
$
( 0.3
)
Non-Designated Foreign Currency Forward Contracts
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions. The Company does not use these foreign currency forward contracts for trading purposes.
As of June 27, 2020 , the Company had forward contracts that were effectively closed but not settled with the counterparties by year end. Therefore, the fair value of these contracts of $ 2.2 million and $ 1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of June 29, 2019 , the fair value of these contracts of $ 1.2 million and $ 4.0 million is reflected as prepayments and other current assets and other current liabilities, respectively.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near year end; therefore, the fair value of the contracts is not significant. As of June 27, 2020 and June 29, 2019 , the notional amounts of the forward contracts that Company held to purchase foreign currencies were $ 146.4 million and $ 117.8 million , respectively, and the notional amounts of forward contracts that Company held to sell foreign currencies were $ 22.0 million and $ 31.3 million , respectively.
The change in the fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The cash flows related to the settlement of foreign currency forward contracts are classified as operating activities. The foreign exchange forward contracts incurred loss of $ 0.8 million and $ 6.9 million for the years ended June 27, 2020 and June 29, 2019 , respectively.
75
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Fair Value Measurements
Fair Value Measurements
The Company’s assets and liabilities measured at fair value for the periods presented are as follows ( in millions ):
June 27, 2020
June 29, 2019
Total
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Assets:
Debt available-for-sale securities:
Asset-backed securities
$
0.5
$
—
$
0.5
$
—
$
0.6
$
—
$
0.6
$
—
Total debt available-for-sale securities
0.5
—
0.5
—
0.6
—
0.6
—
Money market funds
334.6
334.6
—
—
322.9
322.9
—
—
Trading securities
1.4
1.4
—
—
1.5
1.5
—
—
Foreign currency forward contracts (1)
2.2
—
2.2
—
1.2
—
1.2
—
Total assets (2)
$
338.7
$
336.0
$
2.7
$
—
$
326.2
$
324.4
$
1.8
$
—
Liability:
Foreign currency forward contracts (3)
$
1.5
$
—
$
1.5
$
—
$
4.0
$
—
$
4.0
$
—
Contingent consideration (4)
9.9
—
—
9.9
38.4
—
—
38.4
Total liabilities
$
11.4
$
—
$
1.5
$
9.9
$
42.4
$
—
$
4.0
$
38.4
(1)
$ 2.2 million and $ 1.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019 , respectively.
(2)
Includes as of June 27, 2020 , $ 327.2 million in cash and cash equivalents, $ 1.4 million in short-term investments, $ 3.4 million in restricted cash, $ 2.2 million in prepayments and other current assets, and $ 4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets. Includes as of June 29, 2019 , $ 315.5 million in cash and cash equivalents, $ 1.5 million in short-term investments, $ 3.5 million in restricted cash, $ 1.2 million in prepayments and other current assets and $ 4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets.
(3)
Includes $ 1.5 million and $ 4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019 , respectively.
(4)
Includes $ 9.4 million and $ 37.7 million in other non-current liabilities and $ 0.5 million and $ 0.7 million in other current liabilities as of June 27, 2020 and June 29, 2019 , respectively.
The Company’s Level 3 liabilities as of June 27, 2020 , consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2020 and 2019 . As of June 27, 2020 and June 29, 2019 , the aggregate fair value of contingent consideration was $ 9.9 million and $ 38.4 million , respectively. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in the Selling, General and Administrative expense of the Consolidated Statements of Operations.
76
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a reconciliation of changes in fair value of the Company’s Level 3 liabilities for the year ended June 27, 2020 and June 29, 2019 , as follows ( in millions ):
RPC
Other (1)
Total
Balance: June 30, 2018
$
—
$
—
$
—
Additions to Contingent Consideration
36.2
8.1
44.3
Change in Fair Value measurement
( 5.9
)
—
( 5.9
)
Balance: June 29, 2019
$
30.3
$
8.1
$
38.4
Additions to Contingent Consideration
—
3.7
3.7
Change in Fair Value measurement
( 29.6
)
( 1.9
)
( 31.5
)
Payments of Contingent Consideration
( 0.7
)
—
( 0.7
)
Balance June 27, 2020
$
—
$
9.9
$
9.9
(1)
See Note 5. Acquisitions and of the Notes to the Company’s Consolidated Financial Statements for more detail.
In connection with the acquisition of RPC, the Company agreed to pay RPC’s Securityholders up to $ 53.0 million over the subsequent 4 -year period based on subsequent achievement of gross profit targets agreed upon at the time of close. The fair value of earn-out payments at the date of acquisition was $ 36.2 million .
As of June 27, 2020 , the fair value of RPC related earn-out liability was remeasured to $ 0 million . The decrease in fair value of the earn-out liability of $ 29.6 million in fiscal 2020 was primarily due to the lower-than-expected rate of adoption by Android customers, which was further compounded by the macroeconomic impact of COVID-19. During fiscal 2020 , the Company made a earn-out payment to RPC’s Securityholders in the amount of $ 0.7 million . As of June 29, 2019 , the fair value was remeasured to $ 30.3 million . The decrease in fair value of the earn-out liability of $ 5.9 million in fiscal 2019 was primarily due to revised projected forecast of RPC, primarily driven by rate of adoption assumptions.
Note 9. Goodwill
Changes in the carry value of goodwill allocated segment are as follows (in millions) :
Network
Enablement
Service
Enablement
Optical Security
and Performance
Products
Total
Balance as of June 30, 2018 (1)
$
328.0
$
—
$
8.3
$
336.3
Acquisitions (2)
12.2
—
33.9
46.1
Other
3.7
—
—
3.7
Currency translation and other adjustments
( 5.0
)
—
—
( 5.0
)
Balance as of June 29, 2019 (3)
$
338.9
$
—
$
42.2
$
381.1
Acquisitions (2)
—
4.3
—
4.3
Currency translation and other adjustments
( 4.0
)
—
—
$
( 4.0
)
Balance as of June 27, 2020 (4)
$
334.9
$
4.3
$
42.2
$
381.4
(1)
Gross goodwill balances for NE, SE and OSP were $ 629.9 million , $ 272.6 million and $ 92.8 million , respectively as of June 30, 2018 . Accumulated impairment for NE, SE and OSP was $ 301.9 million , $ 272.6 million and $ 84.5 million , respectively as of June 30, 2018 .
(2)
See “ Note 5. Acquisitions ” of the Notes to Consolidated Financial Statement for additional information related to the Company’s acquisitions.
(3)
Gross goodwill balances for NE, SE and OSP were $ 640.8 million , $ 272.6 million and $ 126.7 million , respectively as of June 29, 2019 . Accumulated impairment for NE, SE and OSP was $ 301.9 million , $ 272.6 million and $ 84.5 million , respectively as of June 29, 2019 .
(4)
Gross goodwill balances for NE, SE and OSP were $ 636.8 million , $ 276.9 million and $ 126.7 million , respectively as of June 27, 2020 . Accumulated impairment for NE, SE and OSP was $ 301.9 million , $ 272.6 million and $ 84.5 million , respectively as of June 27, 2020 .
77
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Impairment of Goodwill
The Company tests goodwill at the reporting unit level for impairment annually, during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired. The Company determined that, based on its organizational structure and the financial information that is provided to and reviewed by the Company’s Chief Operating Decision Maker (CODM) during fiscal 2020 , 2019 and 2018 and its reporting units were NE, SE and OSP.
No indications of impairment were identified for fiscal years ending on June 27, 2020 , June 29, 2019 and June 30, 2018 .
Note 10. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles as of June 27, 2020 , and June 29, 2019 , ( in millions ):
As of June 27, 2020
Weighted-Average Remaining Useful Life
Gross Carrying Amount
Accumulated Amortization
Net
Acquired developed technology
3.7 years
$
437.1
$
( 341.6
)
$
95.5
Customer relationships
2.6 years
194.7
( 154.1
)
40.6
Other (1)
2.0 years
35.7
( 23.7
)
12.0
Total intangibles
$
667.5
$
( 519.4
)
$
148.1
As of June 29, 2019
Weighted-Average Remaining Useful Life
Gross Carrying Amount
Accumulated Amortization
Net
Acquired developed technology
4.7 years
$
437.0
$
( 311.1
)
$
125.9
Customer relationships
3.1 years
193.7
( 126.3
)
67.4
Other (1)
3.3 years
36.1
( 17.8
)
18.3
Total intangibles
$
666.8
$
( 455.2
)
$
211.6
(1)
Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.
In connection with the AW acquisition, the Company recorded an IPR&D asset, at its fair value and subsequently accounts for it as an indefinite-lived asset until 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 . Refer to “ Note 5. Acquisitions ” for more information related to acquisitions.
During fiscal 2020 , 2019 and 2018 , the Company recorded $ 67.8 million , $ 72.5 million and $ 47.7 million , respectively, of amortization related to acquired developed technology and other intangibles. The following table presents details of the Company’s amortization ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Cost of revenues
$
32.7
$
34.4
$
26.7
Operating expense
35.1
38.1
21.0
Total
$
67.8
$
72.5
$
47.7
78
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of June 27, 2020 , and assuming no future impairment of the underlying assets, the estimated future amortization is as follows ( in millions ):
Fiscal Years
2021
$
63.9
2022
37.8
2023
24.1
2024
10.2
2025
6.6
Thereafter
5.5
Total amortization
$
148.1
Note 11. Debt
As of June 27, 2020 and June 29, 2019 , the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component, net of unamortized debt discounts and issuance cost, of the Senior Convertible Notes as discussed below. The following table presents the carrying amounts of the liability and equity components ( in millions ):
June 27, 2020
June 29, 2019
Principal amount of 1.00% Senior Convertible Notes
$
460.0
$
460.0
Principal amount of 1.75% Senior Convertible Notes
225.0
225.0
Unamortized discount of Senior Convertible Notes liability component
( 79.1
)
( 99.8
)
Unamortized Senior Convertible Notes debt issuance cost
( 5.0
)
( 6.4
)
Carrying amount of Senior Convertible Notes liability component
$
600.9
$
578.8
Carrying amount of Senior Convertible Notes equity component (1)
$
136.8
$
136.8
(1)
Included in additional paid-in-capital on the Consolidated Balance Sheets.
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.
79
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Short-term Debt
As of June 27, 2020 , the Company had short-term debt in the amount of $ 2.8 million , assumed as part of an acquisition completed during the period.
1.75 % Senior Convertible Notes (2023 Notes)
On May 29, 2018, the Company issued $ 225.0 million aggregate principal amount of 1.75 % Senior Convertible Notes due 2023 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $ 155.5 million aggregate principal of the 2023 Notes to certain holders of the 2033 Notes in exchange for $ 151.5 million principal of the 2033 Notes ( the Exchange Transaction) and issued and sold $ 69.5 million aggregate principal amount of the 2023 Notes in a private placement to accredited institutional buyers (the Private Placement). The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.3 % based on the 5 -year swap rate plus credit spread as of the issuance date. As of June 27, 2020 , the expected remaining term of the 2023 Notes is 2.9 years.
The proceeds from the 2023 Notes Private Placement amounted to $ 67.3 million after issuance costs. The 2023 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.75 % payable in cash semi-annually in arrears on June 1st and December 1st of each year, beginning December 1, 2018. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.
Under certain circumstances and during certain periods, the 2023 Notes may be converted at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The initial conversion price is $ 13.94 per share, representing a 37.5 % premium to the closing sale price of the Company’s common stock on the pricing date, May 22, 2018, which will be subject to customary anti-dilution adjustments. Holders may convert the 2023 Notes at any time on or prior to the close of business on the business day immediately preceding March 1, 2023 in multiples of $1,000 principal amount, under the following circumstances:
•
on any date during any calendar quarter beginning after September 30, 2018 (and only during such calendar quarter) if the closing price of the Company’s common stock was more than 130 % of the then current conversion price for at least 20 trading days during the 30 consecutive trading-day period ending the last trading day of the previous calendar quarter;
•
upon the occurrence of specified corporate events;
•
if the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the indenture of the 2023 Notes); or
•
during the five consecutive business-day period immediately following any ten consecutive trading-day period in which the trading price per $1,000 principal amount of the 2023 Notes for each day of such ten consecutive trading-day period was less than 98 % of the product of the closing sale price of the Company’s common stock and the applicable conversion rate on such date.
During the periods from, and including, March 1, 2023, until the close of business on the business day immediately preceding June 1, 2023, holders may convert the 2023 Notes at any time, regardless of the foregoing circumstances.
Holders of the 2023 Notes may require the Company to purchase all or a portion of the 2023 Notes upon the occurrence of a fundamental change at a price equal to 100 % of the principal amount of the 2023 Notes to be purchased, plus accrued and unpaid interest to, but excluding the fundamental repurchase date. The Company may redeem all or a portion of the 2023 Notes for cash at any time on or after June 1, 2021, at a redemption price equal to 100 % of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date under certain conditions.
In accordance with the authoritative accounting guidance, the Company separated the 2023 Notes into liability and equity components. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2023 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.3 % over the period from the issuance date through June 1, 2023 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $ 190.1 million , and the equity component, or debt discount, of the 2023 Notes was determined to be $ 34.9 million .
80
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the issuance of the 2023 Notes, the Company incurred $ 2.2 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $ 1.9 million and the equity issuance costs, attributable to the equity component of $ 0.3 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through June 1, 2023. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of June 27, 2020 , the unamortized portion of the debt issuance costs related to the 2023 Notes was $ 1.1 million , which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
Based on quoted market prices as of June 27, 2020 and June 29, 2019 , the fair value of the 2023 Notes was approximately $ 251.4 million and $ 261.3 million , respectively. The 2023 Notes are classified within Level 2 as they are not actively traded in markets.
1.00 % Senior Convertible Notes (2024 Notes)
On March 3, 2017, the Company issued $ 400 million aggregate principal amount of 1.00 % Senior Convertible Notes due 2024 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On March 22, 2017, the Company issued an additional $ 60 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $ 451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00 % payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased.
Under certain circumstances and during certain periods, the 2024 Notes may be converted at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The initial conversion price is $ 13.22 per share, representing a 32.5 % premium to the closing sale price of the Company’s common stock on the pricing date, February 27, 2017, which will be subject to customary anti-dilution adjustments.
The 2024 Notes may be converted at any time on or prior to the close of business on the business day immediately preceding December 1, 2023, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances: (i) on any date during any calendar quarter beginning after June 30, 2017 (and only during such calendar quarter) if the closing price of VIAVI’s common stock was more than 130 % of the then current conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period ending on the last trading day of the previous calendar quarter, (ii)if the Company distributes to all or substantially all holders of its common stock rights or warrants (other than pursuant to a stockholder rights plan) entitling them to purchase, for a period of 45 calendar days or less, shares of VIAVI’s common stock at a price less than the average closing sale price of VIAVI’s common stock for the ten trading days preceding the declaration date for such distribution, (iii) if the Company distributes to all or substantially all holders of its common stock, cash or other assets, debt securities or rights to purchase our securities (other than pursuant to a stockholder rights plan), at a per share value exceeding 10 % of the closing sale price of VIAVI’s common stock on the trading day preceding the declaration date for such distribution, (iv) if the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the Indenture), or (v) during the five consecutive business-day period immediately following any 10 consecutive trading-day period in which the trading price per $1,000 principal amount of the Notes for each day during such 10 consecutive trading-day period was less than 98 % of the product of the closing sale price of VIAVI’s common stock and the applicable conversion rate on such date. During the periods from, and including, December 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders of the Notes may convert the Notes regardless of the circumstances described in the immediately preceding sentence.
Holders of the 2024 Notes may require VIAVI to repurchase for cash all or a portion of the Notes upon the occurrence of a fundamental change (as defined in the Indenture) at a repurchase price equal to 100 % of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the date of repurchase.
The Indenture provides for customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable, subject to certain conditions set forth in the Indenture. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.
81
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with the authoritative accounting guidance, the Company separated the 2024 Notes into liability and equity components. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 4.8 % based on the 7 -year swap rate plus credit spread as of the issuance date. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2024 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 4.8 % over the period from the issuance date through March 1, 2024 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $ 358.1 million , and the equity component, or debt discount, of the 2024 Notes was determined to be $ 101.9 million . As of June 27, 2020 , the expected remaining term of the 2024 Notes is 3.7 years.
In connection with the issuance of the 2024 Notes, the Company incurred $ 8.9 million of issuance costs, which were bifurcated into the debt issuance costs (attributable to the liability component) of $ 6.9 million and the equity issuance costs (attributable to the equity component) of $ 2.0 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through March 1, 2024. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of June 27, 2020 , the unamortized portion of the debt issuance costs related to the 2024 Notes was $ 3.9 million , which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
Based on quoted market prices as of June 27, 2020 and June 29, 2019 , the fair value of the 2024 Notes was approximately $ 523.3 million and $ 540.8 million , respectively. The 2024 Notes are classified within Level 2 as they are not actively traded in markets.
The Company was in compliance with all debt covenants as of June 27, 2020 and June 29, 2019 .
Interest Expense
The following table presents the interest expense for contractual interest, amortization of debt issuance cost and accretion of debt discount ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Interest expense-contractual interest
$
8.5
$
8.8
$
7.7
Amortization of debt issuance cost
1.4
1.4
2.6
Accretion of debt discount
20.8
21.3
33.8
Note 12. Leases
The Company is a lessee in several operating leases, primarily real estate facilities for office space. The Company's lease arrangements are composed of operating leases with various expiration dates through March 31, 2030 . The Company's leases do not contain any material residual value guarantees.
During the fiscal year ending on June 27, 2020 , the total operating lease costs was $ 13.5 million . Total variable lease costs were immaterial During the fiscal year ending on June 27, 2020 . The total operating costs were included in cost of revenues, research and development, and selling, general and administrative in the Company’s Consolidated Statements of Operations.
As of June 27, 2020 , the weighted-average remaining lease term was 5.2 years, and the weighted-average discount rate was 4.7 % .
During the fiscal year ending on June 27, 2020 , cash paid for amounts included in the measurement of operating lease liabilities was $ 15.7 million ; and operating ROU assets obtained in exchange of new operating lease liabilities was $ 17.3 million .
82
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The balance sheet information related to our operating leases is as follows ( in millions ):
June 27, 2020
Other non-current assets
$
40.5
Total operating ROU assets
$
40.5
Other current liabilities
$
11.7
Other non-current liabilities
28.1
Total operating lease liabilities
$
39.8
Future minimum operating lease payments as of June 27, 2020 are as follows ( in millions ):
Operating Leases
Fiscal 2021
$
12.8
Fiscal 2022
10.2
Fiscal 2023
6.0
Fiscal 2024
4.6
Fiscal 2025
3.6
Thereafter
7.5
Total lease payments
$
44.7
Less: Interest
( 4.9
)
Present value of lease liabilities
$
39.8
Prior to the adoption of the new lease standard, future minimum undiscounted operating lease payments as of June 29, 2019 , excluding non-lease components, were as follows ( in millions ):
Operating Leases
Fiscal 2020
$
11.7
Fiscal 2021
10.8
Fiscal 2022
7.4
Fiscal 2023
3.9
Fiscal 2024
2.5
Thereafter
5.3
Less: sublease income
( 0.1
)
Total lease payments
$
41.5
Note 13. Restructuring and Related Charges
The Company has initiated various restructuring events primarily intended to reduce its costs, consolidate operations, streamline product manufacturing and address market conditions. The Company’s restructuring charges primarily include severance and benefit costs to eliminate a specific number of positions, facilities and equipment costs to vacate facilities and consolidate operations and lease termination costs. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.
As of June 27, 2020 and June 29, 2019 , the Company’s total restructuring accrual was $ 6.5 million and $ 8.8 million , respectively. During fiscal years 2020 , 2019 and 2018 , the Company recorded restructuring and related charges of $ 3.5 million , $ 15.4 million and $ 8.3 million , respectively.
83
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summary of Restructuring Plans
The adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the fiscal years ended June 27, 2020 were as follows (in millions) :
Balance as of June 29, 2019
Fiscal Year 2020 Charges
Cash
Settlements
Non-cash
Settlements
and Other
Adjustments (2)
Balance as of June 27, 2020
Fiscal 2019 Plan
NSE, including AW (1)
$
8.7
$
3.5
$
( 5.2
)
$
( 0.5
)
$
6.5
Plans Prior to Fiscal 2019
Other Plans (1)
0.1
—
—
( 0.1
)
—
Total (3)
$
8.8
$
3.5
$
( 5.2
)
$
( 0.6
)
$
6.5
(1)
Plan includes workforce reduction cost.
(2)
Other adjustments including $ 0.2 million lease liability reclassification to Operating lease liability upon ASC 842 adoption.
(3)
$ 6.5 million and $ 8.6 million in other current liabilities on the Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019 , respectively. $ 0.2 million in other non-current liabilities on the Consolidated Balance Sheets as of June 29, 2019 .
Fiscal 2019 Plans
NSE, including AW Restructuring Plan
During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within its NSE business segment, including actions related to the recently acquired AW business. These actions further drive the Company’s strategy for organizational alignment and consolidation as part of its continued commitment to a more cost effective and agile organization and to improve overall profitability in the Company’s NSE business. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment. The plan was re-approved in the third quarter of fiscal 2019 and the fourth quarter of fiscal 2020 to include additional headcount.
During the fourth quarter of fiscal 2020, we updated the plan to include additional headcount to further drive operational improvement. 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 .
Note 14. Income Taxes
The Company’s income (loss) before income taxes consisted of the following ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Domestic
$
( 35.1
)
$
( 66.9
)
$
( 112.5
)
Foreign
129.2
106.2
76.8
Income (loss) before income taxes
$
94.1
$
39.3
$
( 35.7
)
84
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s income tax expense (benefit) consisted of the following ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Federal:
Current
$
—
$
—
$
( 4.5
)
Deferred
—
—
( 1.7
)
Total federal income tax (benefit)
—
—
( 6.2
)
State:
Current
2.7
0.1
—
Deferred
—
—
( 0.1
)
Total state income tax (benefit) expense
2.7
0.1
( 0.1
)
Foreign:
Current
50.1
33.3
22.0
Deferred
12.5
( 1.9
)
( 2.8
)
Total foreign income tax (benefit) expense
62.6
31.4
19.2
Total income tax expense
$
65.3
$
31.5
$
12.9
The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions and withholding tax paid on the repatriation of foreign earnings during the year. The foreign deferred tax benefit expense relates to the accrual of withholding tax on unrepatriated foreign earnings.
A reconciliation of the Company’s income tax expense at the federal statutory rate to the income tax expense at the effective tax rate is as follows ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Income tax (benefit) expense computed at federal statutory rate
$
19.8
$
8.3
$
( 10.0
)
Withholding Taxes
34.2
1.5
0.7
US Inclusion of foreign earnings
12.8
16.0
1.0
Tax Reform E&P Inclusion
—
—
14.3
Valuation allowance
0.7
1.0
13.0
Foreign rate differential
4.5
4.8
( 1.1
)
Reserves
2.3
3.5
0.4
AMT Tax Repeal
—
—
( 4.5
)
Permanent items
( 0.3
)
( 1.4
)
0.7
Fair value change of the earn-out liability
( 6.6
)
( 1.3
)
—
Reversal of previously accrued taxes
( 3.7
)
( 1.2
)
( 1.2
)
Research and experimentation benefits and other tax credits
( 0.2
)
—
( 0.7
)
State taxes
2.1
0.1
—
Other
( 0.3
)
0.2
0.3
Income tax expense
$
65.3
$
31.5
$
12.9
85
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company’s net deferred taxes consisted of the following ( in millions ):
Balance as of
June 27, 2020
June 29, 2019
June 30, 2018
Gross deferred tax assets:
Tax credit carryforwards
$
159.5
$
164.3
$
158.8
Net operating loss carryforwards
1,118.6
1,206.9
1,219.0
Capital loss carryforwards
63.9
63.9
63.9
Inventories
20.3
9.6
4.2
Accruals and reserves
61.6
55.6
20.5
Acquisition-related items
45.1
42.1
31.5
Capitalized research costs
72.0
—
—
Other
44.6
43.1
43.8
Gross deferred tax assets
1,585.6
1,585.5
1,541.7
Valuation allowance
( 1,405.5
)
( 1,405.3
)
( 1,382.1
)
Deferred tax assets
180.1
180.2
159.6
Gross deferred tax liabilities:
Acquisition-related items
( 31.8
)
( 33.5
)
( 26.8
)
Tax on unrepatriated earnings
( 15.6
)
( 1.8
)
( 1.6
)
Foreign branch taxes
( 21.4
)
( 22.0
)
—
Other
( 29.8
)
( 29.1
)
( 37.4
)
Deferred tax liabilities
( 98.6
)
( 86.4
)
( 65.8
)
Total net deferred tax assets
$
81.5
$
93.8
$
93.8
As of June 27, 2020 , the Company had federal, state and foreign tax net operating loss carryforwards of $ 4,752.2 million , $ 575.8 million and $ 590.2 million , respectively, and federal, state and foreign research and other tax credit carryforwards of $ 105.8 million , $ 52.6 million and $ 0.9 million , respectively. The tax net operating loss, tax credit and capital loss carryforwards will start to expire in calendar 2021 and at various other dates through 2038 if not utilized. In addition, a portion of the foreign tax net operating loss, tax credit and capital loss carryforwards have an indefinite carryforward period. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses. During the preparation of the fiscal 2019 US tax return, the Company elected to capitalize research and development costs as a result there is true-up adjustment to our estimated beginning of year capitalized research costs deferred tax asset of $ 37.5 million with an offsetting decrease in the beginning net operating loss carryforward deferred tax asset.
Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $ 9.3 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $ 1.2 million of foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.
During fiscal year 2020, in light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considers a majority of its earnings to be permanently reinvested resulting in a $ 32.5 million charge for withholding taxes expected to be paid on the repatriation of $ 324.0 million of foreign earnings that the Company does not consider to be permanently reinvested. During the third quarter of fiscal 2020, which included changing the Company’s intent with regard to the indefinite reinvestment of such foreign earnings, the Company initially accrued $ 31.6 million for withholding taxes expected to be paid on the repatriation of $ 316.4 million of accumulated foreign earnings that it no longer considers to be permanently reinvested as of the third quarter. During the Fiscal year 2020, the Company paid $ 19.5 million withholding income tax on the repatriation of foreign earnings. The repatriation of these earnings increases available cash in the U.S. and provides greater U.S. financial flexibility to assist the Company in navigating the expected downturn in the economy.
86
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 of the Company. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
During fiscal year 2018, the U.S. Tax Cuts and Jobs Act was enacted. Income tax effects resulting from changes in tax laws were accounted for by the Company in accordance with the authoritative guidance, which required that these tax effects be recognized in the period in which the law was enacted, and the effects were recorded as a component of the provision for income taxes from continuing operations. The law had 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 fully refunded in 2022 if not utilized. As a result, the Company 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, the Company’s deferred tax liability associated with indefinite-lived intangible assets offset 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 valuation allowance.
The Act imposed a deemed repatriation of the Company’s foreign subsidiaries’ post-1986 earnings and profits (E&P) which had previously been deferred from US income tax. This deemed repatriation was reported in the Company’s fiscal 2018 U.S. tax return. The Company 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 the Company’s financial statements.
The Act reduced the U.S. federal corporate tax rate from 35% to 21% as of January 1, 2018. The Company remeasured its US 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 in fiscal 2018, the Company 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.
The valuation allowance increased by $ 0.2 million in fiscal 2020 , increased by $ 23.2 million in fiscal 2019 , and decreased by $ 712.9 million in fiscal 2018 . The increase during fiscal 2020 was primarily due to the business acquired during the year. The increase during fiscal 2019 was primarily due to the net increase of deferred tax assets resulting from the inclusion of the Company’s foreign subsidiaries in the U.S. tax return as a consequence of the U.S. Tax Cuts and Jobs Act. The decrease during fiscal 2018 was primarily due to the revaluation of the U.S. deferred tax assets as a result of the Act. The following table provides information about the activity of our deferred tax valuation allowance (in millions) :
Deferred Tax Valuation Allowance
Balance at
Beginning
of Period
Additions Charged
to Expenses or
Other Accounts (1)
Deductions Credited to Expenses or Other Accounts (2)
Balance at
End of
Period
Year Ended June 27, 2020
$
1,405.3
$
95.1
$
( 94.9
)
$
1,405.5
Year Ended June 29, 2019
$
1,382.1
$
72.8
$
( 49.6
)
$
1,405.3
Year Ended June 30, 2018
$
2,095.0
$
31.7
$
( 744.6
)
$
1,382.1
(1)
Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, other adjustments.
(2)
Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and increases in deferred tax liabilities .
87
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of unrecognized tax benefits between July 1, 2017 and June 27, 2020 is as follows ( in millions ):
Balance at July 1, 2017
$
38.9
Additions based on tax positions related to current year
4.4
Additions based on tax positions related to prior year
5.6
Reductions for lapse of statute of limitations
( 0.3
)
Balance at June 30, 2018
48.6
Additions based on tax positions related to current year
1.7
Additions based on tax positions related to prior year
7.3
Reduction based on tax positions related to prior year
( 2.8
)
Reductions for lapse of statute of limitations
( 0.6
)
Balance at June 29, 2019
54.2
Additions based on tax positions related to current year
2.2
Additions based on tax positions related to prior year
0.3
Reduction based on tax positions related to prior year
( 3.8
)
Reduction related to settlement
( 0.4
)
Reductions for lapse of statute of limitations
( 0.5
)
Balance at June 27, 2020
$
52.0
The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at June 27, 2020 are $ 8.5 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at June 27, 2020 are $ 39.9 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance.
The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within th e income tax provision. The amount of interest and penalties accrued as of June 27, 2020 , June 29, 2019 and June 30, 2018 was approximately $ 2.7 million , $ 3.7 million , and $ 1.9 million , respectively. During fiscal 2020 , the Company’s accrued interest and penalties decreased by $ 0.9 million . The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.
The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.
The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of June 27, 2020 :
Tax Jurisdictions
Tax Years
United States*
2001 and onward
Canada
2019 and onward
China
2015 and onward
France
2017 and onward
Germany
2015 and onward
Korea
2015 and onward
United Kingdom
2019 and onward
* Although the Company is generally subject to a three-year statute of limitations in the U.S., tax authorities maintain the ability to adjust tax attribute carryforwards generated in earlier years.
88
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Stockholders' Equity
Repurchase of Common Stock
As of June 27, 2020 , the Board of Directors authorized a stock repurchase program of up to $ 200 million of the Company’s common stock through open market or private transactions before September 30, 2021.
The following table summarizes share repurchase activity related to the Company’s stock repurchase program (in millions, except per share amounts) :
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Total number of shares repurchased
3.7
1.1
4.4
Average price per share
$
11.99
$
10.14
$
9.25
Total purchase price
$
44.4
$
11.3
$
40.9
Remaining authorization at end of period
$
155.6
$
51.4
$
62.7
The total purchase price of these repurchases was reflected as a decrease to common stock based on the stated par value per share with the remainder charged to accumulated deficit. All common shares repurchased during fiscal 2020 , 2019 and 2018 have been canceled and retired.
Preferred Stock
The Company’s Board of Directors has authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without the consent of the Company’s stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock. Subsequent issuance of any preferred stock by the Company’s Board of Directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.
Note 16. Stock-Based Compensation
Stock-Based Benefit Plans
Stock Option Plans
On November 13, 2019, the Company's stockholders approved the amendment and restatement of the Company’s Amended and Restated 2003 Equity Incentive Plan (the 2003 Plan, as most recently amended and restated, the Amended and Restated 2003 Plan). An additional 10.5 million shares were authorized under the re-approved 2003 plan effective as of November 13, 2019. The Amended and Restated 2003 Plan provides for the granting of stock options, stock appreciation rights (SARs), dividend equivalent rights, restricted stocks, restricted stock units, performance units and performance shares, the vesting of which may be time-based or upon satisfaction of performance criteria or other conditions.
As of June 27, 2020 , the Company had 7.2 million shares subject to (i) stock options and Full Value Awards (defined below) issued and outstanding under the Amended and Restated 2003 Plan, (ii) inducement grants made in connection with the appointment of new CEO in fiscal 2016 and (iii) stock options and Full Value Awards issued and outstanding under various other plans the Company assumed through acquisitions. The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. The Company issues new shares of common stock upon exercise of stock options. Options generally become exercisable over a three - or four -year period and, if not exercised, expire from five to ten years after the date of grant.
As of June 27, 2020 , 17.8 million shares of common stock, primarily under Amended and Restated 2003 Plan, were available for grant.
89
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plans
In June 1998, the Company adopted the ESPP, which became effective August 1, 1998 and provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a discounted purchase price as well as a look-back period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. The ESPP will terminate upon the earlier of November 15, 2027 or the date on which all shares available for issuance have been sold. As of June 27, 2020 , 2.9 million shares remained available for issuance. The ESPP as adopted provided for a 5 % discount and a six months look-back period. In May 2019, the ESPP was amended to provide for a 15 % discount.
Full Value Awards
Full Value Awards refer to RSUs, MSUs and PSUs that are granted without an exercise price and are converted to shares immediately upon vesting. Full Value Awards are time-based, performance-based with market conditions or other performance conditions and are expected to vest over one to four years . The fair value of the time-based RSUs is based on the closing market price of the Company’s common stock on the date the award is granted.
Stock-Based Compensation
The impact on the Company’s results of operations of recording stock-based compensation expense by function for fiscal 2020 , 2019 and 2018 was as follows ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Cost of revenue
$
4.3
$
3.8
$
3.3
Research and development
7.7
6.1
4.9
Selling, general and administrative
32.6
28.3
22.3
Total stock-based compensation expense
$
44.6
$
38.2
$
30.5
Approximately $ 1.2 million of stock-based compensation expense was capitalized to inventory at June 27, 2020 .
Stock Option Activity
The following is a summary of stock option activities ( in millions, except per share amounts ):
Options Outstanding
Number of Shares
Weighted-Average
Exercise Price
Balance as of July 1, 2017
1.5
$
6.16
Exercised
( 0.2
)
4.53
Balance as of June 30, 2018
1.3
6.42
Exercised
( 0.1
)
10.54
Balance as of June 29, 2019
1.2
5.95
Exercised
—
—
Balance as of June 27, 2020
1.2
$
5.95
Expected to vest
1.2
$
5.95
As of June 27, 2020 , stock-based compensation expense related to stock options have been fully amortized and recognized.
90
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes outstanding and exercisable options as of June 27, 2020 .
Options Outstanding
Options Exercisable
Exercise Price
Number of Shares
Weighted Average Remaining Contractual Term
(years)
Weighted Average Exercise Price
Aggregate Intrinsic Value
(millions)
Number of Shares
Weighted Average Remaining Contractual Term
(years)
Weighted Average Exercise Price
Aggregate Intrinsic Value
(millions)
$5.95
1,180,257
3.64
5.95
$
7.7
1,180,257
3.64
5.95
$
7.7
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $ 12.50 as of June 27, 2020 , which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of June 27, 2020 was 1.2 million .
Employee Stock Purchase Plan Activity
The expense related to the ESPP is recorded on a straight-line basis over the relevant subscription period.
The following summarizes the shares purchased and issued, pursuant to the Company’s ESPP during the year ended June 27, 2020 and the fair value market value of the shares at the purchase date:
Purchase date
July 31, 2019
January 31, 2020
Shares issued
222,956
261,303
Fair market value at purchase date
$
10.98
$
14.45
As of June 27, 2020 , there was $ 0.2 million of unrecognized stock-based compensation cost related to the ESPP that remains to be amortized. The cost will be recognized in the first quarter of fiscal 2021 .
Full Value Awards Activity
A summary of the status of the Company’s non-vested Full Value Awards as of June 27, 2020 and changes during the same period is presented below ( amount in millions, except per share amounts ):
Full Value Awards
Performance Shares (1)
Non-Performance Shares
Total Number of Shares
Weighted-average Grant-dated Fair Value
Non-vested at July 1, 2017
1.0
6.3
7.3
$
7.17
Awards granted
0.8
3.3
4.1
$
10.01
Awards vested
( 0.6
)
( 3.6
)
( 4.2
)
$
7.10
Awards forfeited
( 0.1
)
( 0.7
)
( 0.8
)
$
8.01
Non-vested at June 30, 2018
1.1
5.3
6.4
$
8.93
Awards granted
0.5
3.9
4.4
$
11.52
Awards vested
( 0.6
)
( 3.2
)
( 3.8
)
$
8.61
Awards forfeited
—
( 0.3
)
( 0.3
)
$
9.63
Non-vested June 29, 2019
1.0
5.7
6.7
$
10.81
Awards granted
0.7
3.2
3.9
$
13.76
Awards vested
( 0.7
)
( 3.4
)
( 4.1
)
$
10.40
Awards forfeited
—
( 0.4
)
( 0.4
)
$
11.44
Non-vested June 27, 2020
1.0
5.1
6.1
$
12.97
(1)
Performance Shares refer to the Company’s MSU and PSU awards, where the actual number of shares awarded upon vesting may be higher or lower than the target amount depending on the achievement of the relevant market conditions and performance goal achievement. The majority of MSUs vest
91
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in equal annual installments over three to four years based on the attainment of certain total shareholder performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs granted during fiscal 2020 , 2019 and 2018 was estimated to be $ 7.7 million , $ 6.2 million and $ 4.7 million , respectively, and was calculated using a Monte Carlo simulation. The Company did no t grant any PSU awards in fiscal 2020 and 2019. The fair value of the PSUs granted in fiscal 2018 was $ 1.4 million . PSU awards vest based on the attainment of certain performance measures and the employee’s continued service through the vest date.
As of June 27, 2020 , $ 54.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 1.7 years .
Valuation Assumptions
The Company estimates the fair value of the MSUs on the date of grant using a Monte Carlo simulation with the following assumptions:
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Volatility of common stock
30.4
%
28.9
%
30.1
%
Average volatility of peer companies
52.5
%
31.0
%
32.6
%
Average correlation coefficient of peer companies
0.1842
0.1383
0.1618
Risk-free interest rate
1.5
%
2.6
%
1.4
%
The Company did no t issue stock option grants during the fiscal years ended June 27, 2020 , June 29, 2019 and June 30, 2018 . The Company estimates the fair value ESPP purchase rights using a BSM valuation model. The fair value is estimated on the date of grant using the BSM option valuation model with the following weighted-average assumptions:
Employee Stock Purchase Plans
June 27, 2020
June 29, 2019
June 30, 2018
Expected term (in years)
0.5
0.5
0.5
Expected volatility
27.6
%
33.2
%
28.0
%
Risk-free interest rate
1.8
%
2.3
%
1.4
%
Expected Term: The Company's expected term for stock options was calculated utilizing the simplified method in accordance with the authoritative guidance. The Company used the simplified method as the Company does not have sufficient historical share option exercise data due to the limited number of shares granted as well as changes in the Company's business following the Separation, rendering existing historical experience less reliable in formulating expectations for current grants. The Company’s expected term for ESPP purchase rights is in line with the six months offerings periods provided for under the ESPP.
Expected Volatility: The expected volatility for stock options was based on the historical volatility of the Company's common stock and its peers. The expected volatility for ESPP purchase rights was based on the historical volatility of its stock price with similar expected term.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the BSM valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend: The BSM valuation model calls for a single expected dividend yield as an input. The Company has not paid and does not anticipate paying any dividends in the near future.
Note 17. Employee Pension and Other Benefit Plans
Employee 401(k) Plans
The Company sponsors the Viavi Solutions 401(k) Plan (the 401(k) Plan), a defined contribution plan under ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 50 % of their annual compensation, with contributions limited to $ 19,500 in calendar year 2020 as set by the Internal Revenue Service.
92
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For all eligible employees, the Company offers a 401(k) Plan that provides a 100 % match of employees’ contributions up to the first 3 % of annual compensation and 50 % match on the next 2 % of compensation. All matching contributions are made in cash and vest immediately. The Company’s matching contributions to the 401(k) Plan were $ 4.9 million , $ 4.9 million and $ 4.2 million in fiscal 2020 , 2019 and 2018 , respectively.
Employee Defined Benefit Plans
The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany including the plan assumed from AW acquisition. The Company also is responsible for the non-pension postretirement benefit obligation assumed from a past acquisition.
Most of the 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. Benefits are generally based upon years of service and compensation or stated amounts for each year of service. As of June 27, 2020 , the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the postretirement benefits when due. Future estimated benefit payments are summarized below. No other required contributions are expected in fiscal 2021, but the Company, at its discretion, can make contributions to one or more of the defined benefit plans.
The Company accounts for its obligations under these pension plans in accordance with the authoritative guidance which requires the Company to record its obligation to the participants, as well as the corresponding net periodic cost. The Company determines its obligation to the participants and its net periodic cost principally using actuarial valuations provided by third-party actuaries. The obligation the Company records on its Consolidated Balance Sheets is reflective of the total PBO and the fair value of plan assets.
The following table presents the components of the net periodic benefit cost for the pension and benefits plans ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Service cost
$
0.3
$
0.2
$
0.2
Interest cost
1.9
2.5
2.7
Expected return on plan assets
( 1.5
)
( 1.6
)
( 1.5
)
Recognized net actuarial losses
2.8
1.8
1.5
Net periodic cost
$
3.5
$
2.9
$
2.9
The Company’s accumulated other comprehensive income includes unrealized net actuarial (gains)/losses. The amount expected to be recognized in net periodic benefit cost during fiscal 2021 is $ 2.1 million . Refer to “ Note 18. Commitments and Contingencies ” for further information on the provision for legal proceeding. The changes in the benefit obligations and plan assets of the pension and benefits plans were ( in millions ):
93
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension Benefit Plans
June 27, 2020
June 29, 2019
Change in benefit obligation
Benefit obligation at beginning of year
$
140.0
$
136.7
Service cost
0.3
0.2
Interest cost
1.9
2.5
Actuarial (gains) losses
4.6
10.0
Benefits paid
( 5.1
)
( 5.4
)
Assumed benefit obligation from acquisition
—
—
Foreign exchange impact
( 2.8
)
( 4.0
)
Benefit obligation at end of year
$
138.9
$
140.0
Change in plan assets
Fair value of plan assets at beginning of year
$
29.9
$
30.0
Actual return on plan assets
0.2
1.4
Employer contributions
4.8
5.1
Benefits paid
( 5.0
)
( 5.4
)
Foreign exchange impact
( 0.9
)
( 1.2
)
Fair value of plan assets at end of year
$
29.0
$
29.9
Funded status
$
( 109.9
)
$
( 110.1
)
Accumulated benefit obligation
$
138.6
$
139.7
Pension Benefit Plans
June 27, 2020
June 29, 2019
Amount recognized in the Consolidated Balance Sheets at end of year:
Current liabilities
$
7.6
$
7.3
Non-current liabilities
102.3
102.8
Net amount recognized at end of year
$
109.9
$
110.1
Amount recognized in accumulated other comprehensive (loss) income at end of year:
Actuarial losses, net of tax
$
( 31.2
)
$
( 28.6
)
Net amount recognized at end of year
$
( 31.2
)
$
( 28.6
)
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income:
Net actuarial gain (loss)
$
( 5.4
)
$
( 7.3
)
Amortization of accumulated net actuarial losses
2.8
1.8
Total recognized in other comprehensive (loss) income
$
( 2.6
)
$
( 5.5
)
As of June 27, 2020 and June 29, 2019 , the liability balances related to the post retirement benefit plan were $ 0.4 million and $ 0.4 million , respectively. The liability balances were included in other non-current liabilities on the Consolidated Balance Sheets.
During fiscal 2020 , the Company (amounts represented as £ and $ denote GBP and USD, respectively) contributed £ 0.5 million or approximately $ 0.6 million , while in fiscal 2019 , the Company contributed £ 0.5 million or approximately $ 0.6 million to its U.K. pension plan. These contributions allowed the Company to comply with regulatory funding requirements.
94
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Assumptions
Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, the Company considered the yield available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme’s liabilities as well as a yield curve model developed by the Company’s actuaries.
The expected return on assets was estimated by using the weighted average of the real expected long-term return (net of inflation) on the relevant classes of assets based on the target asset mix and adding the chosen inflation assumption.
The following table summarizes the weighted average assumptions used to determine net periodic cost and benefit obligation for the Company’s U.K. and German pension plans:
Pension Benefit Plans
June 27, 2020
June 29, 2019
June 30, 2018
Used to determine net period cost at end of year:
Discount rate
1.1
%
1.4
%
1.9
%
Expected long-term return on plan assets
5.6
5.6
5.7
Rate of pension increase
2.3
2.3
2.3
Used to determine benefit obligation at end of year:
Discount rate
1.0
%
1.4
%
1.9
%
Rate of pension increase
2.2
2.3
2.3
Investment Policies and Strategies
The Company’s investment objectives for its funded pension plan are to ensure that there are sufficient assets available to pay out members’ benefits as and when they arise and that, should the plan be discontinued at any point in time, there would be sufficient assets to meet the discontinuance liabilities.
To achieve these objectives, the trustees of the U.K. pension plan are responsible for regularly monitoring the funding position and managing the risk by investing in assets expected to outperform the increase in value of the liabilities in the long term and by investing in a diversified portfolio of assets in order to minimize volatility in the funding position. The trustees invest in a range of frequently traded funds (pooled funds) rather than direct holdings in individual securities to maintain liquidity, achieve diversification and reduce the potential for risk concentration. The funded plan assets are managed by professional third-party investment managers.
95
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fair Value Measurement of Plan Assets
The following table sets forth the plan assets at fair value and the percentage of assets allocations as of June 27, 2020 ( in millions, except percentage data ):
Fair value measurement as of
June 27, 2020
Target Allocation
Total
Percentage of Plan Assets
Level 1
Level 2
Assets:
Global equity
40
%
$
11.6
40.0
%
$
—
$
11.6
Fixed income
40
%
10.9
37.6
%
—
10.9
Other
20
%
6.4
22.1
%
—
6.4
Cash
0.1
0.3
%
0.1
—
Total assets
$
29.0
100.0
%
$
0.1
$
28.9
The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of June 29, 2019 ( in millions, except percentage data ).
Fair value measurement as of
June 29, 2019
Target Allocation
Total
Percentage of Plan Assets
Level 1
Level 2
Assets:
Global equity
40
%
$
11.6
38.8
%
$
—
$
11.6
Fixed income
40
%
11.5
38.5
%
—
11.5
Other
20
%
6.7
22.4
%
—
6.7
Cash
0.1
0.3
%
0.1
—
Total assets
$
29.9
100.0
%
$
0.1
$
29.8
The Company’s pension assets consist of multiple institutional funds (pension funds) of which the fair values are based on the quoted prices of the underlying funds. Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets.
Global equity consists of several index funds that invest primarily in U.K. equities and other overseas equities.
Fixed income consists of several funds that invest primarily in index-linked Gilts (over 5 year), sterling-denominated investment grade corporate bonds, and overseas government bonds.
Other consists of several funds that primarily invest in global equities, bonds, private equity, global real estate and infrastructure funds.
96
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future Benefit Payments
The following table reflects the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the Company’s PBO at fiscal year end and include benefits attributable to estimated future compensation increases ( in millions ).
Pension Benefit Plans
2021
$
8.6
2022
6.0
2023
6.7
2024
6.1
2025
5.9
2026 - 2030
26.5
Thereafter
50.1
Total
$
109.9
Timing of the payment relating to the legal proceeding, which is included in the above table under “Thereafter,” is not yet determined. Refer to “ Note 18. Commitments and Contingencies ” for further information.
Note 18. Commitments and Contingencies
Royalty payment
In connection with the AW acquisition, the Company is obligated to make future minimum royalty payments of $ 2.3 million measured as of June 27, 2020 for the use of certain licensed technologies. Future minimum quarterly payments are scheduled at approximately $ 0.2 million through the second quarter of fiscal 2023 and $ 0.1 million thereafter until approximately the fourth quarter of fiscal 2026.
Purchase Obligations
Purchase obligations of $ 99.8 million as of June 27, 2020 , represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on the Company’s business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year .
The Company depends on a limited number of contract manufacturers, subcontractors, and suppliers for raw materials, packages and standard components. The Company generally purchases these single or limited source products through standard purchase orders or one -year supply agreements and has no significant long-term guaranteed supply agreements with such vendors. While the Company seeks to maintain a sufficient safety stock of such products and maintains on-going communications with its suppliers to guard against interruptions or cessation of supply, the Company’s business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of such supplies, or the Company’s inability to obtain reduced pricing from its suppliers in response to competitive pressures.
Financing Obligations
On August 21, 2007, the Company entered into a sale and lease-back of certain buildings and land in Santa Rosa, California (the Santa Rosa Transactions), under which we leased back certain buildings. The net cash proceeds received from the transaction were $ 32.2 million . The lease terms range from a one year lease with multiple renewal options to a ten years lease with two five years renewal options. These buildings did not qualify for sale and lease back accounting due to various forms of continuing involvement and as a result, they were accounted for as financing transactions.
In August 2012 and May 2019, the Company entered into two lease amendments to extend the term of the lease to August 31, 2032 with a 10 years renewal option. In the first quarter of fiscal 2020, the Company reassessed whether a sale would have occurred
97
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on the date of adoption of ASC 842 and at which time, concluded that the buildings did not qualify for sale and lease back accounting in accordance with ASC 842. As a result, they were continuously accounted for as financing transactions.
As of June 27, 2020 , $ 0.1 million was included in Other current liabilities, and $ 16.2 million was included in Other non-current liabilities. As of June 29, 2019 , $ 1.1 million was included in Other current liabilities, and $ 21.8 million was included in Other non-current liabilities.
As of June 27, 2020 , future minimum annual lease payments of Santa Rosa’s non-cancelable leaseback agreements were as follows (in millions) :
2020
$
2.8
2021
2.9
2022
2.4
2023
2.4
2024
2.4
Thereafter
18.7
Total minimum leaseback payments
$
31.6
Guarantees
In accordance with authoritative guidance which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on the Consolidated Balance Sheets as of June 27, 2020 and June 29, 2019 .
Pursuant to the Separation and Distribution Agreement dated as of July 31, 2015 between the Company and Lumentum Holdings Inc. (Lumentum) and the Tax Matter Agreement dated as of July 31, 2015 between the Company and Lumentum, the Company is required to indemnify Lumentum and its subsidiaries for certain specified tax liabilities. During the second quarter of fiscal 2019, the Ontario Ministry of Finance denied the Company’s appeal of an assessment of the applicable tax liabilities at which time the Company recorded a charge of $ 2.4 million to its discontinued operations.
Outstanding Letters of Credit and Performance Bonds
As of June 27, 2020 , the Company had standby letters of credit of $ 7.4 million and performance bonds of $ 1.0 million collateralized by restricted cash.
Product Warranties
The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. In general, the Company offers its customers warranties up to three years and has accrued a reserve for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
98
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the changes in the Company’s warranty reserve during fiscal years 2020 and 2019 ( in millions ):
Year Ended
June 27, 2020
June 29, 2019
Balance as of beginning of period
$
8.7
$
8.2
Provision for warranty
3.1
4.0
Utilization of reserve
( 3.4
)
( 5.2
)
Adjustments related to pre-existing warranties (including changes in estimates)
1.0
1.7
Balance as of end of period
$
9.4
$
8.7
Contingent Purchase Consideration
Contingent liabilities include contingent consideration in connection with the Company’s 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 consolidated statements of income. See “ Note 5. Acquisitions ” for additional information related to the Company’s acquisitions. The Company discounts the contingent purchase consideration to present value using a risk adjusted interest rate at each reporting period. Contingent consideration is valued using significant Level 3 inputs, that are not observable in the market pursuant to fair value measurement accounting. While the Company believes the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
The Company’s Level 3 liabilities as of June 27, 2020 , consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2020 and 2019 . As June 27, 2020 and June 29, 2019 , the aggregate fair value of contingent consideration was $ 9.9 million and $ 38.4 million , respectively. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period. See “ Note 8. Fair Value Measurements ” for additional information related to the Company’s earn-outs.
Legal Proceedings
In June 2016, the Company received a court decision regarding the validity of an amendment to a pension deed of trust related to one of its foreign subsidiaries which the Company contends contained an error requiring the Company to increase the pension plan’s benefit. The Company had subsequently further amended the deed to rectify the error. The court ruled that the amendment increasing the pension plan benefit was valid until the subsequent amendment. The Company estimated the liability to range from (amounts represented as £ denote GBP) £ 5.7 million to £ 8.4 million . The Company determined that the likelihood of loss to be probable and accrued £ 5.7 million as of July 2, 2016 in accordance with authoritative guidance on contingencies. The accrual is included as a component of other non-current liabilities, in the Company’s Consolidated Statement of Operations and Consolidated Balance Sheets, respectively.
The Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company is pursuing a deed of rectification claim and continues to pursue a claim against the U.K. law firm responsible for the error. As of June 27, 2020, the related accrued pension liability was £ 7.5 million or $ 9.2 million .
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Note 19. Operating Segments and Geographic Information
The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer is the Company’s Chief Operating Decision Maker (CODM), uses operating segment financial information to evaluate segment performance and to allocate resources.
99
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s reportable segments are:
(i) Network Enablement:
NE provides 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. The Company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for its products. NE’s avionics products provide test and measuring solutions for aviation, aerospace, government, defense, communications and public safety.
(ii) Service Enablement:
SE solutions are embedded systems that yield network, service and application performance data. These solutions—including instruments, microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.
(iii) Optical Security and Performance Products:
OSP provides innovative, precision, high performance optical products for anti-counterfeiting, consumer and industrial, government, automotive, industrial and other markets.
Segment Reporting
The CODM manages the Company in two broad business categories: NSE and OSP. The CODM evaluates segment performance of the NSE business based on the combined segment gross and operating margins. Operating expenses associated with the NSE business are not allocated to the individual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on segment operating margin. The Company allocates corporate-level operating expenses to its segment results, except for certain non-core operating and non-operating activities as discussed below.
The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related charges, impairment of goodwill, non-operating income and expenses, changes in fair value of contingent consideration liabilities, or other charges unrelated to core operating performance to its segments because management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.
100
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information on the Company’s reportable segments is as follows ( in millions ):
Year Ended June 27, 2020
Network and Service Enablement
Network Enablement
Service Enablement
Network and
Service
Enablement
Optical Security and Performance Products
Other Items
Consolidated GAAP Measures
Product revenue
$
669.1
$
49.9
$
719.0
$
286.2
$
—
$
1,005.2
Service revenue
77.6
52.8
130.4
0.7
—
131.1
Net revenue
$
746.7
$
102.7
$
849.4
$
286.9
$
—
$
1,136.3
Gross profit
482.4
68.8
551.2
153.0
( 38.9
)
665.3
Gross margin
64.6
%
67.0
%
64.9
%
53.3
%
58.5
%
Operating income
108.8
102.1
( 92.8
)
118.1
Operating margin
12.8
%
35.6
%
10.4
%
Year Ended June 29, 2019
Network and Service Enablement
Network Enablement
Service Enablement
Network and
Service
Enablement
Optical Security and Performance Products
Other Items
Consolidated GAAP Measures
Product revenue
$
666.2
$
49.7
$
715.9
$
288.3
$
—
$
1,004.2
Service revenue
71.6
53.7
125.3
0.8
—
126.1
Net revenue
$
737.8
$
103.4
$
841.2
$
289.1
$
—
$
1,130.3
Gross profit
473.3
71.0
544.3
145.8
( 38.7
)
651.4
Gross margin
64.2
%
68.7
%
64.7
%
50.4
%
57.6
%
Operating income
99.6
98.0
( 130.2
)
67.4
Operating margin
11.8
%
33.9
%
6.0
%
Year Ended June 30, 2018
Network and Service Enablement
Network Enablement
Service Enablement
Network and
Service
Enablement
Optical Security and Performance Products
Other Items
Consolidated GAAP Measures
Product revenue
$
497.1
$
59.3
$
556.4
$
216.0
$
—
$
772.5
Service revenue
42.0
59.2
101.2
2.1
—
103.2
Net revenue
$
539.1
$
118.5
$
657.6
$
218.1
$
—
$
875.7
Gross profit
334.3
82.6
416.9
115.2
( 43.7
)
488.4
Gross margin
62.0
%
69.7
%
63.4
%
52.8
%
55.8
%
Operating income
43.6
78.2
( 119.9
)
1.9
Operating margin
6.6
%
35.9
%
0.2
%
101
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Corporate reconciling items impacting gross profit:
Total segment gross profit
$
704.2
$
690.1
$
532.1
Stock-based compensation
( 4.3
)
( 3.8
)
( 3.3
)
Amortization of intangibles
( 32.7
)
( 34.4
)
( 26.7
)
Other charges unrelated to core operating performance
( 1.9
)
( 0.5
)
( 13.7
)
GAAP gross profit
$
665.3
$
651.4
$
488.4
Corporate reconciling items impacting operating income:
Total segment operating income
$
210.9
$
197.6
$
121.8
Stock-based compensation
( 44.6
)
( 38.2
)
( 30.5
)
Amortization of intangibles
( 67.8
)
( 72.5
)
( 47.7
)
Change in fair value of contingent liability (4)
31.5
5.9
—
Other charges unrelated to core operating performance (1)(2)(3)
( 8.4
)
( 10.0
)
( 33.4
)
Restructuring and related charges
( 3.5
)
( 15.4
)
( 8.3
)
GAAP operating income from continuing operations
$
118.1
$
67.4
$
1.9
(1)
During the years ended June 27, 2020 , other charges unrelated to core operating performance primarily consisted of $ 1.4 million in acquisition related costs.
(2)
During the years ended June 29, 2019 , other charges unrelated to core operating performance primarily consisted of $ 5.0 million in acquisition related costs.
(3)
During the years ended June 30, 2018 , other charges unrelated to core operating performance primarily consisted of a $ 12.7 million in acquisition related costs and $ 12.4 million in amortization of inventory step-up.
(4)
Refer to “ Note 8. Fair Value Measurements ” for further detail.
The Company operates primarily 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 the Company’s product is initially shipped. For example, certain customers may request shipment of 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 the Company operates in and net revenue from countries that exceeded 10% of the Company’s total net revenue (in millions):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
Product Revenue
Service Revenue
Total
Product Revenue
Service Revenue
Total
Product Revenue
Service Revenue
Total
Americas:
United States
$
288.3
$
53.3
$
341.6
$
287.1
$
55.0
$
342.1
$
282.6
$
52.9
$
335.5
Other Americas
57.8
15.4
73.2
69.4
14.8
84.2
64.2
16.8
81.0
Total Americas
$
346.1
$
68.7
$
414.8
$
356.5
$
69.8
$
426.3
$
346.8
$
69.7
$
416.5
Asia-Pacific:
Greater China
$
238.2
$
7.5
$
245.7
$
209.4
$
7.2
$
216.6
$
126.6
$
2.0
$
128.6
Other Asia
108.0
14.5
122.5
142.3
13.3
155.6
78.3
6.9
85.2
Total Asia-Pacific
$
346.2
$
22.0
$
368.2
$
351.7
$
20.5
$
372.2
$
204.9
$
8.9
$
213.8
EMEA:
Switzerland
$
64.5
$
0.1
$
64.6
$
97.0
$
—
$
97.0
$
75.2
$
0.1
$
75.3
Other EMEA
248.4
40.3
288.7
199.0
35.8
234.8
145.6
24.5
170.1
Total EMEA
$
312.9
$
40.4
$
353.3
$
296.0
$
35.8
$
331.8
$
220.8
$
24.6
$
245.4
Total net revenue
$
1,005.2
$
131.1
$
1,136.3
$
1,004.2
$
126.1
$
1,130.3
$
772.5
$
103.2
$
875.7
102
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SICPA Holding SA Company (SICPA), served by the Company’s OSP segment, generated more than 10% of VIAVI net revenue from continuing operations during fiscal 2020 , 2019 and 2018 as summarized below ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
June 30, 2018
SICPA - OSP customer
$
139.9
$
161.1
$
129.3
Property, plant and equipment, net was identified based on the operations in the corresponding geographic areas ( in millions ):
Years Ended
June 27, 2020
June 29, 2019
United States
$
85.0
$
89.4
Other Americas
1.6
1.6
China
43.8
49.0
Other Asia-Pacific
5.8
5.6
United Kingdom
30.1
23.8
Other EMEA
6.2
10.5
Total property, plant and equipment, net
$
172.5
$
179.9
103
Table of Contents
VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 20. Selected Quarterly Financial Information (unaudited)
The following table presents the Company’s selected quarterly financial information from the Consolidated Statements of Operations for fiscal 2020 and 2019 ( in millions, except per share data ):
June 27, 2020
March 28, 2020
December 28, 2019
September 28, 2019
June 29, 2019
March 30, 2019
December 29, 2018
September 29, 2018
Net revenue
$
266.6
$
256.2
$
313.7
$
299.8
$
289.7
$
265.2
$
306.9
$
268.5
Gross profit
154.6
146.8
189.5
174.4
169.5
153.5
178.0
150.4
Net income (loss) from continuing operations, net of tax
26.7
( 32.8
)
28.0
6.8
12.5
( 4.8
)
15.4
( 15.3
)
Net income (loss) from discontinued operations, net of tax
—
—
—
—
—
—
( 2.4
)
—
Net income (loss)
$
26.7
$
( 32.8
)
$
28.0
$
6.8
$
12.5
$
( 4.8
)
$
13.0
$
( 15.3
)
Net income (loss) per share from - basic:
Continuing operations (1)
$
0.12
$
( 0.14
)
$
0.12
$
0.03
$
0.05
$
( 0.02
)
$
0.07
$
( 0.07
)
Discontinued operations (1)
—
—
—
—
—
—
( 0.01
)
—
Net income (loss) (1)
$
0.12
$
( 0.14
)
$
0.12
$
0.03
$
0.05
$
( 0.02
)
$
0.06
$
( 0.07
)
Net income (loss) per share from - diluted:
Continuing operations (1)
$
0.12
$
( 0.14
)
$
0.12
$
0.03
$
0.05
$
( 0.02
)
$
0.07
$
( 0.07
)
Discontinued operations (1)
—
—
—
—
—
—
( 0.01
)
—
Net income (loss) (1)
$
0.12
$
( 0.14
)
$
0.12
$
0.03
$
0.05
$
( 0.02
)
$
0.06
$
( 0.07
)
Shares used in per-share calculation:
Basic
228.1
230.0
230.0
229.4
228.7
228.3
228.3
227.2
Diluted
230.3
230.0
238.3
236.4
232.5
228.3
230.4
227.2
(1)
Net income (loss) per share is computed independently for each of the fiscal quarters presented. Therefore, the sum of the quarterly basic and diluted net income (loss) per share amounts may not equal the annual basic and diluted net in come (loss) per share amount for the full fiscal years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.