What changed in this filing

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Item 1. Financial Statements

2020-11-10 compared with 2020-05-07 · 574 added, 475 removed, 591 unchanged (64% of the section changed)

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Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Product revenue

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Provision for income taxes

(Loss) income from continuing operations

Loss from discontinued operations, net of taxes

Net (loss) income

(Loss) income per share - basic:

Continuing operations

Discontinued operations

Net (loss) income per share - basic

(Loss) income per share - diluted:

Continuing operations

Discontinued operations

Net (loss) income per share - diluted

Net income per share:

Shares used in per-share calculations:

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Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

Net (loss) income

October 3, 2020

September 28, 2019

Other comprehensive income (loss):

Net change in cumulative translation adjustment, net of tax

Net change in available-for-sale investments, net of tax:

Unrealized holding gain arising during period

reclassification adjustments included in net loss

Net change in defined benefit obligation, net of tax:

Amortization of actuarial losses

Net change in accumulated other comprehensive (loss) income

Comprehensive (loss) income

Amortization of actuarial income (losses)

Net change in accumulated other comprehensive income (loss)

Comprehensive income (loss)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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(in millions, except share and par value data)

March 28, 2020

October 3, 2020

June 27, 2020

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Accrued expenses

Current portion of long-term debt

Other current liabilities

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1 billion shares authorized;

228 million shares at March 28, 2020 and 229 million shares at June 29, 2019, issued and outstanding

229 million shares at October 3, 2020 and 229 million shares at June 27, 2020, issued and outstanding

Additional paid-in capital

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(in millions)

Nine Months Ended

March 28, 2020

March 30, 2019

Three Months Ended

October 3, 2020

September 28, 2019

OPERATING ACTIVITIES:

Net income (loss)

Adjustments to reconcile net loss to net cash provided by operating activities:

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Amortization of debt issuance costs and accretion of debt discount

Amortization of discount and premium on investments, net

Net change in fair value of contingent liabilities

Loss on disposal of long-lived assets

Changes in operating assets and liabilities, net of acquisitions:

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INVESTING ACTIVITIES:

Maturities of available-for-sale investments

Sales of available-for-sale investments

Capital expenditures

Proceeds from the sale of assets

Acquisitions, net of cash acquired

Net cash (used in) provided by investing activities

Net cash used in investing activities

FINANCING ACTIVITIES:

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Withholding tax payment on vesting of restricted stock awards

Repurchase and redemption of convertible debt

Payment of financing obligations

Proceeds from employee stock purchase plan

Payment of debt

Net cash used in financing activities

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(1) These amounts include both current and non-current balances of restricted cash totaling $ 8.4 million and $ 8.9 million as of June 27, 2020 and June 29, 2019 , respectively.

(2) These amounts include both current and non-current balances of restricted cash totaling $ 8.4 million and $ 13.1 million as of March 28, 2020 and March 30, 2019 , respectively.

(2) These amounts include both current and non-current balances of restricted cash totaling $ 8.4 million and $ 8.3 million as of October 3, 2020 and September 28, 2019 , respectively.

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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(in millions)

Three Months Ended March 28, 2020

Additional Paid-In Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Balance at December 28, 2019

Other comprehensive loss

Shares issued under employee stock plans, net of tax

Stock-based compensation

Repurchase of common stock

Balance at March 28, 2020

Three Months Ended March 30, 2019

Three Months Ended October 3, 2020

Additional Paid-In Capital

1 unchanged sentence

Accumulated Other Comprehensive Loss

Balance at December 29, 2018

Balance at June 27, 2020

Other comprehensive income

2 unchanged sentences

Repurchase of common stock

Balance at March 30, 2019

Nine Months Ended March 28, 2020

Balance at October 3, 2020

Three Months Ended September 28, 2019

Additional Paid-In Capital

7 unchanged sentences

Repurchase of common stock

Balance at March 28, 2020

Nine Months Ended March 30, 2019

Additional Paid-In Capital

Accumulated Deficit

Accumulated Other Comprehensive Loss

Balance at June 30, 2018

Other comprehensive loss

Shares issued under employee stock plans, net of tax

Stock-based compensation

Repurchase of common stock

Balance at March 30, 2019

Balance at September 28, 2019

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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The financial information for Viavi Solutions Inc.

(“VIAVI” also referred to as “the Company”) for the three and nine months ended March 28, 2020 and March 30, 2019 is unaudited, and includes all normal and recurring adjustments Company management considers necessary for a fair statement of the financial information set forth herein.

(“VIAVI” also referred to as “the Company”) for the three months ended October 3, 2020 and September 28, 2019 is unaudited, and includes all normal and recurring adjustments Company management considers necessary for a fair statement of the financial information set forth herein.

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America ( U.S.

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For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended June 27, 2020 .

Other than updates to the Company’s lease accounting policy under Accounting Standards Codification (“ASC”) 842 - Leases , as disclosed in “ Note 2.

Recently Issued Accounting Pronouncements ” and “ Note 12.

Leases ”, there have been no material changes to the Company’s accounting policies during the three and nine months ended March 28, 2020 , as compared to the significant accounting policies presented in “ Note 1.

There have been no material changes to the Company’s accounting policies during the three months ended October 3, 2020 , as compared to the significant accounting policies presented in “ Note 1.

Basis of Presentation ” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report for the year ended June 27, 2020 on Form 10-K, filed with the SEC on August 24, 2020 .

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GAAP for complete financial statements.

The results for the three and nine months ended March 28, 2020 and March 30, 2019 may not be indicative of results for the fiscal year ending June 27, 2020 or any future periods.

The results for the three months ended October 3, 2020 and September 28, 2019 may not be indicative of results for the fiscal year ending July 3, 2021 or any future periods.

The Company utilizes a 52 - 53 week fiscal year ending on the Saturday closest to June 30th.

The Company’s fiscal 2020 is a 52 -week year ending on June 27, 2020 .

The Company’s fiscal 2021 is a 53 -week year ending on July 3, 2021 .

The Company’s fiscal 2020 was a 52 -week year ending on June 27, 2020 .

The Company’s first quarter of fiscal year 2021 was a 14-week quarter compared to the standard 13-week quarters.

Principles of Consolidation

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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 Right-of-Use (“ 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.

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 assets will be estimated based on expected losses.

In the first quarter of fiscal 2021 the Company adopted the accounting standard using the modified retrospective approach.

The adoption of the new standard did not have a material impact on the Company’s Consolidated Financial Statements.

Recent Accounting Pronouncements Not Yet Adopted

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.

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The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.

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 is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.

The Company accounts for revenue in accordance with ASC 606, which was adopted in fiscal 2019 using the retrospective transition method.

The Company’s revenue is derived from a diverse portfolio of network solutions and optical technology products and services, as follows:

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.

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.

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.

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 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.

Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share ( in millions, except per share data ):

Three Months Ended

October 3, 2020

September 28, 2019

Weighted-average shares outstanding:

Shares issuable assuming conversion of convertible notes (1)

Effect of dilutive securities from stock-based benefit plans

Net income per share:

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.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income per share because their effect would have been anti-dilutive ( in millions ):

Three Months Ended

October 3, 2020

September 28, 2019

Restricted stock units

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 price above $ 13.22 per share payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election.

The Company’s average stock price for the period presented did not exceed the conversion price of $ 13.22 .

Refer to “ Note 11.

Debt ” for more details.

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 payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election.

The Company’s average stock price for the period presented did not exceed the conversion price of $ 13.94 .

Refer to “ Note 11.

Debt ” for more details.

Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive loss consists of the accumulated net unrealized gains or losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.

For the three months ended October 3, 2020 , the changes in accumulated other comprehensive loss, net of tax, by component were as follows ( in millions ):

Unrealized losses on available-for sale investments

currency translation adjustments

Change in unrealized components of defined benefit obligations (1)

Beginning balance as of June 27, 2020

Other comprehensive income before reclassification

Amounts reclassified to accumulated other comprehensive loss

Net current-period other comprehensive income

Ending balance as of October 3, 2020

(1) The amount reclassified out of accumulated other comprehensive loss represents the amortization of actuarial losses included as a component of cost of revenues, research and development (“R&D”) and selling, general and administrative (“SG&A”) in the Consolidated Statement of Operations for the three months ended October 3, 2020 .

There was no tax impact for the three months ended October 3, 2020 .

Refer to “ Note 17.

Employee Pension and Other Benefit Plans ” for more details on the computation of net periodic cost for pension plans.

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 .

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance Sheet and Other Details

Contract Balances

Unbilled Receivables:

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Gross receivables include both billed and Unbilled Receivables/Contract Assets.

As of March 28, 2020 and June 29, 2019 , the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $ 3.6 million and $ 11.5 million , respectively.

As of October 3, 2020 and June 27, 2020 , the Company had total unbilled receivables (Unbilled Receivables/Contract Assets) of $ 5.1 million and $ 3.8 million , respectively.

Deferred Revenue:

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The following tables summarize the activity related to deferred revenue ( in millions ):

March 28, 2020

October 3, 2020

Three Months Ended

Nine Months Ended

Deferred revenue:

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Long-term deferred revenue

(1) Included in these amounts is the impact from foreign currency exchange rate fluctuations.

Remaining Performance Obligations:

Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations that are not delivered or incomplete, as of March 28, 2020 .

Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations that are not delivered or incomplete, as of October 3, 2020 .

Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The value of the transaction price allocated to remaining performance obligations as of March 28, 2020 , was $ 205.5 million .

The value of the transaction price allocated to remaining performance obligations as of October 3, 2020 , was $ 205.5 million .

The Company expects to recognize approximately 88 % of remaining performance obligations as revenue within the next 12 months , and the remainder thereafter.

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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.

Earnings Per Share

The following table sets forth the computation of basic and diluted net loss per share ( in millions, except per share data ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

(Loss) Income from continuing operations

Loss from discontinued operations, net of taxes

Net (loss) income

Weighted-average shares outstanding:

Shares issuable assuming conversion of convertible notes (1)

Effect of dilutive securities from stock-based benefit plans

Net (loss) income per share - basic:

Continuing operations

Discontinued operations

Net (loss) income per share

Net (loss) income per share - diluted:

Continuing operations

Discontinued operations

Net (loss) income per share

Represents the number of shares that would be issued if the Company’s Senior Convertible Notes had been converted.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net loss per share because their effect would have been anti-dilutive ( in millions ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

Restricted stock units

Stock options and ESPP

Shares issuable assuming Convertible Notes

Total potentially dilutive securities

As the Company incurred a loss from continuing operations in the period, potential securities from employee stock options, ESPP, RSUs and PSUs have been excluded from the dilutive net loss per share computations as their effects were deemed anti-dilutive.

The Company’s 1.00 % Senior Convertible Notes due 2024 are not included in the table above.

The Company’s average stock price for the period presented did not exceed the conversion price of $ 13.22 .

Refer to “ Note 11.

Debt ” for more details.

The Company’s 1.75 % Senior Convertible Notes due 2023 are not included in the table above.

The Company’s average stock price for the period presented did not exceed the conversion price of $ 13.94 .

Refer to “ Note 11.

Debt ” for more details.

Accumulated Other Comprehensive Loss

For the nine months ended March 28, 2020 , the changes in accumulated other comprehensive loss, net of tax, by component were as follows ( in millions ):

Unrealized losses on available-for sale investments

currency translation adjustments

Change in unrealized components of defined benefit obligations (1)

Beginning balance as of June 29, 2019

Other comprehensive loss before reclassification

Amounts reclassified to accumulated other comprehensive loss

Net current-period other comprehensive (loss) income

Ending balance as of March 28, 2020

There was no tax impact for the nine months ended March 28, 2020 .

Refer to “ Note 17.

Employee Pension and Other Benefit Plans ” for more details on the computation of net periodic cost for pension plans.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3Z Telecom, Inc.

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 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

Escrow payments

Fair value of contingent consideration

Total purchase consideration

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.

Investments, Forward Contracts and Fair Value Measurements .”

The identified tangible and intangible assets acquired, as of the 3Z Close Date, were as follows (in millions) :

Tangible assets acquired:

Intangible assets acquired:

Developed technology

Customer relationships

Customer backlog

Total consideration transferred

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) :

Total other assets

Total liabilities

Net tangible assets acquired

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.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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 years period, subsequent to the RPC Close Date.

The achievement or distributions of earn-out payments are not limited in any one period.

The acquisition of RPC expands the Company’s 3D Sensing offerings.

The Company accounted for the transaction in accordance with the authoritative guidance on business combination;

therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date.

The fair value of consideration transferred for the RPC Close Date, were as follows (in millions) :

Cash consideration paid at closing

Escrow payments

Fair value of contingent consideration

Total purchase consideration

The fair value of the earn-out payments at the RPC Close Date were 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.

Investments, Forward Contracts and Fair Value Measurements ”.

The identified tangible and intangible assets acquired, as of the RPC Close Date, were as follows (in millions) :

Tangible assets acquired:

Intangible assets acquired:

Developed technology

Customer relationships

Customer backlog

Total consideration transferred

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, were as follows (in millions) :

Other current assets

Property and equipment

Total liabilities

Net tangible assets acquired

The allocation of the purchase price was based upon a valuation performed.

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 .

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

Balance Sheet and Other Details

Accounts receivable allowance

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Deductions (1)

March 28, 2020

October 3, 2020

Allowance for doubtful accounts

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The following table presents the components of inventories, net ( in millions ):

March 28, 2020

October 3, 2020

June 27, 2020

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The following table presents the components of prepayments and other current assets ( in millions ):

March 28, 2020

October 3, 2020

June 27, 2020

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The following table presents the components of other current liabilities ( in millions ):

March 28, 2020

October 3, 2020

June 27, 2020

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The following table presents components of other non-current liabilities ( in millions ):

March 28, 2020

October 3, 2020

June 27, 2020

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(1) See “ Note 8.

Investments, Forward Contracts and Fair Value Measurements ” of the Notes to our Consolidated Financial Statements for more detail.

Investments, Forward Contracts and Fair Value Measurements

Fair Value Measurements ” of the Notes to our Consolidated Financial Statements for more detail.

Investments and Forward Contracts

Available-For-Sale Investments

The following table presents the Company’s available-for-sale securities as of March 28, 2020 ( in millions ):

The following table presents the Company’s available-for-sale securities as of October 3, 2020 ( in millions ):

Amortized Cost/

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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 March 28, 2020 , the total estimated fair value of $ 0.5 million was classified as other non-current assets.

As of October 3, 2020 , the total estimated fair value of $ 0.5 million was classified as other non-current assets.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 March 28, 2020 , were $ 1.3 million , of which $ 0.4 million was invested in debt securities, $ 0.3 million was invested in money market instruments and funds and $ 0.6 million was invested in equity securities.

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 October 3, 2020 , were $ 1.5 million , of which $ 0.4 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 three and nine months ended March 28, 2020 and March 30, 2019 , the Company recorded no other-than-temporary impairment charges in each respective period.

The following table presents contractual maturities of the Company’s debt securities classified as available-for-sale as of March 28, 2020 , ( in millions ):

During the three months ended October 3, 2020 and September 28, 2019 , the Company recorded no other-than-temporary impairment charges in each respective period.

The following table presents contractual maturities of the Company’s debt securities classified as available-for-sale as of October 3, 2020 , ( in millions ):

Amortized Cost/

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Level 2 instruments of the Company generally include certain U.S.

and foreign government and agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, certificates of deposit, and foreign currency forward contracts.

and foreign government and agency securities, commercial paper, corporate and

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

municipal bonds and notes, asset-backed securities, certificates of deposit, and foreign currency forward contracts.

To estimate their fair value, the Company utilizes pricing models based on market data.

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includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and significant to the overall fair value measurement.

As of March 28, 2020 and June 29, 2019 , the Company did not hold any Level 3 investment securities.

The fair value of the Company’s contingent liabilities was determined using Level 3 inputs, as discussed below.

As of October 3, 2020 and June 27, 2020 , the Company did not hold any Level 3 investment securities.

The fair value of the Company’s contingent liabilities was determined using Level 3 inputs, as discussed further in “ Note 8.

Fair Value Measurements ”.

The following table presents assets and liabilities measured at fair value as of March 28, 2020 and June 29, 2019 , ( in millions ):

March 28, 2020

June 29, 2019

Debt available-for-sale securities

Asset-backed securities

Total debt available-for-sale securities

Money market funds

Trading securities

Foreign currency forward contract (1)

Total assets (2)

Foreign currency forward contract (3)

Contingent consideration (4)

Total liabilities

$ 5.7 million and $ 1.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019 , respectively.

$ 324.9 million in cash and cash equivalents, $ 1.3 million in short-term investments, $ 3.4 million in restricted cash, $ 5.7 million in prepayments and other current assets, and $ 4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of March 28, 2020 .

$ 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 other current assets, and $ 4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of June 29, 2019 .

$ 9.7 million and $ 4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019 , respectively.

$ 0.8 million and $ 0.7 million in other current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019 , respectively.

$ 33.3 million and $ 37.7 million in other non-current liabilities on the Company’s Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019 , respectively.

The Company’s Level 3 liabilities as of March 28, 2020 , consist of contingent purchase consideration.

The Company has aggregate contingent liabilities related to its acquisitions.

The earn-out liabilities represent future payments by the Company of up to $ 63.0 million over three years , that are contingent on the achievement of certain revenue and gross profit targets.

As of March 28, 2020 , the aggregate fair value of our contingent consideration was $ 34.1 million .

The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the 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 input on the date of remeasurement, with the change in fair value recognized in SG&A expense of the Consolidated Statements of Operations.

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 three and nine months ended March 28, 2020 ( in millions ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

Beginning period balance

To Level 3 contingent consideration liabilities

Fair value adjustment of contingent consideration liabilities

Ending period balance

No payments were made in connection with the Company’s contingent earn-out liabilities during the three and nine months ended March 28, 2020 and March 30, 2019 .

Non-Designated Foreign Currency Forward Contracts

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The Company does not use these foreign currency forward contracts for trading purposes.

As of March 28, 2020 , the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end.

As of October 3, 2020 , the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end.

Therefore, the fair value of these contracts of $ 8.0 million and $ 1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively.

2 unchanged sentences

therefore, the fair value of the contracts is not significant.

As of March 28, 2020 and June 29, 2019 , the notional amounts of the forward contracts the Company held to purchase foreign currencies were $ 96.7 million and $ 117.8 million , respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $ 195.8 million and $ 31.3 million , respectively.

As of October 3, 2020 and June 27, 2020 , the notional amounts of the forward contracts the Company held to purchase foreign currencies were $ 129.3 million and $ 146.4 million , respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $ 19.8 million and $ 22.0 million , respectively.

The change in the fair value of 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 a loss of $ 4.0 million and $ 1.8 million for the three and nine months ended March 28, 2020 , respectively.

The foreign exchange forward contracts incurred a gain of $ 1.7 million and a loss of $ 4.1 million for the three and nine months ended March 30, 2019 , respectively.

The foreign exchange forward contracts incurred a gain of $ 6.5 million and a loss of $ 2.6 million for the three months ended October 3, 2020 and September 28, 2019 , respectively.

Fair Value Measurements

3Z Telecom, Inc.

On May 31, 2019 (“3Z Close Date”), the Company acquired all of the equity of 3Z Telecom, Inc.

The acquisition of 3Z expands the Company’s Field Instrument offerings.

RPC Photonics, Inc.

On October 30, 2018 (“RPC Close Date”), the Company acquired all of the equity interest of RPC Photonics, Inc.

The achievement or distributions of earn-out payments are not limited in any one period.

The acquisition of RPC expands the Company’s 3D Sensing offerings.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

The Company’s assets and liabilities measured at fair value for the periods presented are as follows ( in millions ):

October 3, 2020

June 27, 2020

Debt available-for-sale securities:

Asset-backed securities

Total debt available-for-sale securities

Money market funds

Trading securities

Foreign currency forward contracts (1)

Total assets (2)

Foreign currency forward contracts (3)

Contingent consideration (4)

Total liabilities

(1) $ 8.0 million and $ 2.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of October 3, 2020 and June 27, 2020 , respectively.

(2) Includes as of October 3, 2020 , $ 340.2 million in cash and cash equivalents, $ 1.5 million in short-term investments, $ 3.2 million in restricted cash, $ 8.0 million in prepayments and other current assets and $ 4.8 million in other non-current assets on the Company’s Consolidated Balance Sheets.

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.

(3) Includes $ 1.5 million and $ 1.5 million in other current liabilities on the Company’s Consolidated Balance Sheets as of October 3, 2020 and June 27, 2020 , respectively.

(4) Includes $ 8.9 million and $ 9.4 million in other non-current liabilities and $ 1.0 million and $ 0.5 million in other current liabilities as of October 3, 2020 and June 27, 2020 , respectively.

The Company’s Level 3 liabilities as of October 3, 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 October 3, 2020 and June 27, 2020 and, the aggregate fair value of contingent consideration was $ 9.9 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.

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 three months ended October 3, 2020 ( in millions ):

Three Months Ended

October 3, 2020

Balance as of June 27, 2020

Fair value adjustment of contingent consideration liabilities

Balance as of October 3, 2020

No payments were made in connection with the Company’s contingent earn-out liabilities during the three months ended October 3, 2020 and September 28, 2019 .

The following table presents changes in goodwill allocated to the Company’s reportable segments (in millions) :

5 unchanged sentences

Currency translation adjustments

Balance as of March 28, 2020

Balance as of October 3, 2020

The Company tests goodwill for impairment at the reporting unit level annually during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired.

In the fourth quarter of fiscal 2020 , the Company reviewed goodwill under the qualitative assessment of the authoritative guidance and concluded that it was more likely than not that the fair value of each reporting unit exceeded its carrying amount and that no indication of impairment existed.

There were no events or changes in circumstances which triggered an impairment review during the three and nine months ended March 28, 2020 .

There were no events or changes in circumstances which triggered an impairment review during the three months ended October 3, 2020 .

Acquired Developed Technology and Other Intangibles

The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles ( in millions ):

As of March 28, 2020

As of October 3, 2020

Gross Carrying Amount

9 unchanged sentences

Total intangibles

Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.

The following table presents the amortization recorded relating to acquired developed technology, customer relationships and other intangibles ( in millions ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Cost of revenues

1 unchanged sentence

Total amortization of intangible assets

Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of March 28, 2020 , and assuming no future impairment of the underlying assets, the estimated future amortization is as follows ( in millions ):

Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of October 3, 2020 , and assuming no future impairment of the underlying assets, the estimated future amortization is as follows ( in millions ):

Remainder of 2021

1 unchanged sentence

The acquired developed technology, customer relationships and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.

As of March 28, 2020 and June 29, 2019 , the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the Senior Convertible Notes, net of unamortized debt discounts and issuance costs.

As of October 3, 2020 and June 27, 2020 , the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the Senior Convertible Notes, net of unamortized debt discounts and issuance costs.

The following table presents the carrying amounts of the liability and equity components of our debt ( in millions ):

March 28, 2020

October 3, 2020

June 27, 2020

6 unchanged sentences

Included in additional paid-in-capital on the Consolidated Balance Sheets.

The Company was in compliance with all debt covenants as of March 28, 2020 and June 29, 2019 .

The Company was in compliance with all debt covenants as of October 3, 2020 and June 27, 2020 .

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 October 3, 2020 and June 27, 2020 , we had no amounts outstanding under the Credit Agreement.

1.75 % Senior Convertible Notes (“2023 Notes”)

2 unchanged sentences

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 March 28, 2020 , the expected remaining term of the 2023 Notes is 3.2 years.

As of October 3, 2020 , the expected remaining term of the 2023 Notes is 2.7 years.

The proceeds from the 2023 Notes Private Placement amounted to $ 67.3 million after issuance costs.

1 unchanged sentence

The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.

Based on quoted market prices as of March 28, 2020 and June 29, 2019 , the fair value of the 2023 Notes was approximately $ 231.4 million and $ 261.3 million , respectively.

Based on quoted market prices as of October 3, 2020 and June 27, 2020 , the fair value of the 2023 Notes was approximately $ 250.9 million and $ 251.4 million , respectively.

The 2023 Notes are classified within Level 2 as they are not actively traded in markets.

6 unchanged sentences

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.

As of March 28, 2020 , the expected remaining term of the 2024 Notes is 3.9 years.

Based on quoted market prices as of March 28, 2020 and June 29, 2019 , the fair value of the 2024 Notes was approximately $ 485.5 million and $ 540.8 million , respectively.

As of October 3, 2020 , the expected remaining term of the 2024 Notes is 3.4 years.

Based on quoted market prices as of October 3, 2020 and June 27, 2020 , the fair value of the 2024 Notes was approximately $ 524.8 million and $ 523.3 million , respectively.

The 2024 Notes are classified within Level 2 as they are not actively traded in markets.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Interest Expense

1 unchanged sentence

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Interest expense-contractual interest

6 unchanged sentences

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 ROU assets are

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

recognized at commencement based on the amount of the initial measurement of the lease liability.

Operating 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.

5 unchanged sentences

The Company's leases do not contain any material residual value guarantees.

For the three and nine months ended March 28, 2020 , the total operating lease costs were $ 3.6 million and $ 10.2 million , respectively.

Total variable lease costs were immaterial during the three and nine months ended March 28, 2020 .

For the three months ended October 3, 2020 and September 28, 2019 , the total operating lease costs were $ 3.4 million and $ 3.3 million , respectively.

Total variable lease costs were immaterial during the three months ended October 3, 2020 and September 28, 2019 .

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 March 28, 2020 , the weighted-average remaining lease term was 5.3 years, and the weighted-average discount rate was 4.6 % .

For the three and nine months ended March 28, 2020 , cash paid for amounts included in the measurement of operating lease liabilities were $ 3.7 million and $ 12.9 million , respectively;

As of October 3, 2020 , the weighted-average remaining lease term was 5.1 years, and the weighted-average discount rate was 4.7 % .

For the three months ended October 3, 2020 and September 28, 2019 , cash paid for amounts included in the measurement of operating lease liabilities were $ 4.4 million and $ 3.4 million , respectively;

and operating ROU assets obtained in exchange of new operating lease liabilities were $ 1.6 million and $ 1.9 million , respectively.

The balance sheet information related to our operating leases is as follows ( in millions ):

March 28, 2020

October 3, 2020

Other non-current assets

3 unchanged sentences

Total operating lease liabilities

Future minimum operating lease payments as of March 28, 2020 are as follows ( in millions ):

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Future minimum operating lease payments as of October 3, 2020 are as follows ( in millions ):

Operating Leases

2 unchanged sentences

Present value of lease liabilities

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 ):

Future minimum operating lease payments as of June 27, 2020 , were as follows ( in millions ):

Operating Leases

sublease income

Total lease payments

Present value of lease liabilities

Restructuring and Related Charges

2 unchanged sentences

The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.

As of March 28, 2020 and June 29, 2019 , the Company’s total restructuring accrual was $ 1.3 million and $ 8.8 million , respectively.

During the three and nine months ended March 28, 2020 , the Company recorded restructuring and related benefits of $ 1.6 million and $ 2.2 million , respectively.

During the three and nine months ended March 30, 2019 , the Company recorded restructuring and related charges of $ 0.9 million and $ 16.0 million , respectively.

As of October 3, 2020 and June 27, 2020 , the Company’s total restructuring accrual was $ 4.0 million and $ 6.5 million , respectively.

During the three months ended October 3, 2020 , the Company recorded restructuring and related benefits charges of $ 0.6 million .

During the three months ended September 28, 2019 , the Company recorded restructuring and related charges of $ 0.3 million .

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Restructuring Plans

The following table presents the adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three and nine months ended March 28, 2020 (in millions) :

The following table presents the adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three months ended October 3, 2020 (in millions) :

Balance June 27, 2020

Nine Months Ended March 28, 2020 Benefits

Three Months Ended October 3, 2020 Benefits

Non-cash Settlements

and Other Adjustments (2)

Balance March 28, 2020

Three Months Ended March 28, 2020 Benefits

Balance October 3, 2020

Fiscal 2019 Plan

NSE, including AW (1)

Plans Prior to Fiscal 2017

Other Plans (1)

Plan type includes workforce reduction cost.

Other adjustments including $ 0.2 million lease liability reclassification to Operating lease liability upon ASC 842 adoption.

$ 1.3 million and $ 8.6 million in other current liabilities on the Consolidated Balance Sheets as of March 28, 2020 and June 29, 2019 , respectively.

$ 0.2 million in other non-current liabilities on the Consolidated Balance Sheets as of June 29, 2019 .

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other adjustments represents the effect of currency translation adjustments.

$ 4.0 million and $ 6.5 million in other current liabilities on the Consolidated Balance Sheets as of October 3, 2020 and June 27, 2020 , respectively.

Fiscal 2019 Plans

3 unchanged sentences

Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment.

During the third quarter of fiscal 2019, the Company has updated the plan to include additional headcount primarily to transfer a portion of the manufacturing operations related to the recently acquired AW business to a contract manufacturer.

A restructuring benefits of $ 2.2 million was recorded in the nine months ended March 28, 2020 for adjustments to severance and employee benefits.

The plan was re-approved in the third quarter of fiscal 2019 and the fourth quarter of fiscal 2020 to include additional headcount and to further drive operational improvement.

During the first quarter of fiscal 2021 restructuring benefits of $ 0.6 million was recorded in the three months ended October 3, 2020 for adjustments to severance and employee benefits.

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

The Company recorded an income tax provision of $ 38.8 million and $ 57.0 million for the three and nine months ended March 28, 2020 , respectively.

The Company recorded an income tax provision of $ 5.6 million and $ 22.2 million for the three and nine months ended March 30, 2019 , respectively.

The income tax provision for the three and nine months ended March 28, 2020 primarily relates to a $ 31.6 million charge for withholding taxes expected to be paid on the repatriation of $ 316.4 million of foreign earnings that the Company no longer considers to be permanently reinvested.

In light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considers these earnings to be permanently reinvested.

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

and provide greater U.S.

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

The foreign earnings can be repatriated to the U.S.

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

In addition, the income tax provision for the period includes the income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision for the three and nine months ended March 30, 2019 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to the Company’s income from continuing operations before taxes primarily due to the withholding taxes accrued on foreign earnings and the changes in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign income (loss) from continuing operations.

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.

We do not expect the provisions of the legislation to have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company.

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

Treasury Department, the Internal Revenue Service and others.

As of March 28, 2020 , and June 29, 2019 , the Company’s unrecognized tax benefits totaled $ 50.6 million and $ 50.9 million , respectively, and are included in deferred taxes and other non-current tax liabilities, net.

The Company had $ 3.5 million accrued for the payment of interest and penalties at March 28, 2020 .

The Company recorded an income tax provision of $ 8.6 million and $ 8.3 million for the three months ended October 3, 2020 and September 28, 2019 , respectively.

The income tax provision for the three months ended October 3, 2020 and September 28, 2019 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to the Company’s income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign income (loss) from continuing operations.

As of October 3, 2020 , and June 27, 2020 , the Company’s unrecognized tax benefits totaled $ 48.3 million and $ 48.4 million , respectively, and are included in deferred taxes and other non-current tax liabilities, net.

The Company had $ 3.6 million accrued for the payment of interest and penalties at October 3, 2020 .

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.

7 unchanged sentences

Under the new repurchase program, the Company may repurchase its common stock from time to time at the discretion of the Company’s management.

During the three and nine months ended March 28, 2020 , the Company repurchased 2.8 million and 3.6 million shares of its common stock for $ 33.1 million and $ 43.8 million , respectively.

As of March 28, 2020 , the Company had remaining authorization of $ 156.2 million for future share repurchases.

During the three months ended October 3, 2020 , the Company repurchased 565 thousand shares of its common stock for $ 6.7 million .

As of October 3, 2020 , the Company had remaining authorization of $ 148.8 million for future share repurchases.

The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including business and financial market conditions.

Stock-Based Compensation

The impact on the Company’s results of operations of recording stock-based compensation by function for the three and nine months ended March 28, 2020 and March 30, 2019 , as follows ( in millions ):

The impact on the Company’s results of operations of recording stock-based compensation by function for the three months ended October 3, 2020 and September 28, 2019 , as follows ( in millions ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Cost of revenues

2 unchanged sentences

Total stock-based compensation expense

Approximately $ 1.1 million and $ 1.0 million of stock-based compensation expense was capitalized to inventory as of March 28, 2020 and March 30, 2019 , respectively.

Approximately $ 1.2 million and $ 1.0 million of stock-based compensation expense was capitalized to inventory as of October 3, 2020 and September 28, 2019 , respectively.

Full Value Awards

2 unchanged sentences

When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.

During the nine months ended March 28, 2020 and March 30, 2019 , the Company granted 3.2 million and 3.8 million time-based awards, respectively.

During the three months ended October 3, 2020 and September 28, 2019 , the Company granted 2.5 million and 2.9 million time-based awards, respectively.

The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award.

The majority of these time-based awards vest over three years , with 33 % vesting after one year and the balance vesting quarterly over the remaining two years .

During the nine months ended March 28, 2020 and March 30, 2019 , the Company granted 0.5 million and 0.5 million , performance-based awards, respectively.

These time-based awards granted to eligible employees generally vest in annual or quarterly installments over a period of three years , are subject to the employees’ continuing service to the Company and do not have an expiration date.

During the three months ended October 3, 2020 and September 28, 2019 , the Company granted 0.6 million and 0.5 million , performance-based awards, respectively.

These performance-based shares represent the target amount of grants, and the actual number of shares awarded upon vesting may vary depending upon the achievement of the relevant performance conditions.

The shares attained over target upon vesting are reflected as awards granted during the period.

Accordingly, during the nine months ended March 28, 2020 and March 30, 2019 , the Company granted an additional 0.2 million and 0.1 million shares due to performance-based shares attained over target.

The aggregate grant-date fair value of performance-based awards granted during the nine months ended March 28, 2020 and March 30, 2019 were estimated to be $ 7.7 million and $ 6.2 million , respectively.

The majority of performance-based awards vest in equal annual installments over three years based on the attainment of certain performance measures

Accordingly, during the three months ended October 3, 2020 and September 28, 2019 , the Company granted an additional 0.1 million and 0.1 million shares due to performance-based shares attained over target.

The aggregate grant-date fair value of performance-based awards granted during the three months ended October 3, 2020 and September 28, 2019 were estimated to be $ 8.9 million and $ 6.2 million , respectively.

The majority of performance-based awards vest in equal annual installments over three years based on the attainment of certain performance

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and the employee’s continued service through the vest date.

measures and the employee’s continued service through the vest date.

The performance-based awards with market conditions were valued using a Monte Carlo simulation.

As of March 28, 2020 , $ 65.7 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized.

As of October 3, 2020 , $ 75.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized.

Employee Pension and Other Benefit Plans

3 unchanged sentences

Benefits are generally based upon years of service and compensation or stated amounts for each year of service.

As of March 28, 2020 , the U.K.

As of October 3, 2020 , the U.K.

plan was partially funded while the other plans were unfunded.

1 unchanged sentence

For unfunded plans, the Company pays the post-retirement benefits when due.

During the nine months ended March 28, 2020 , the Company contributed $ 0.6 million to the U.K.

During the three months ended October 3, 2020 , the Company contributed $ 1.0 million to the U.K.

plan and $ 0.8 million to the other plans.

2 unchanged sentences

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Interest cost

6 unchanged sentences

The Company expects to incur cash outlays of approximately $ 10.0 million related to its defined benefit pension plans during fiscal 2021 to make current benefit payments and fund future obligations.

As of March 28, 2020 , approximately $ 4.2 million had been incurred.

As of October 3, 2020 , approximately $ 1.8 million had been incurred.

These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at June 27, 2020 .

13 unchanged sentences

law firm responsible for the error.

As of March 28, 2020 , the related accrued pension liability was £ 6.5 million or $ 8.0 million .

As of October 3, 2020 , the related accrued pension liability was £ 6.5 million or $ 8.4 million .

The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of our business.

11 unchanged sentences

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 March 28, 2020 and June 29, 2019 .

Outstanding Letters of Credit and Performance Bonds

As of March 28, 2020 , the Company had standby letters of credit of $ 7.4 million and performance bonds of $ 1.0 million collateralized by restricted cash.

As of October 3, 2020 , the Company had standby letters of credit of $ 7.5 million and performance bonds of $ 0.9 million collateralized by restricted cash.

Product Warranties

6 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the changes in the Company’s warranty reserve during the three and nine months ended March 28, 2020 and March 30, 2019 , ( in millions ):

The following table presents the changes in the Company’s warranty reserve during the three months ended October 3, 2020 and September 28, 2019 , ( in millions ):

Three Months Ended

Nine Months Ended

March 28, 2020

March 30, 2019

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Balance as of beginning of period

1 unchanged sentence

Utilization of reserve

Adjustments related to pre-existing warranties (including changes in estimates)

Adjustments to pre-existing warranties (includes changes in estimates)

Balance as of end of period

23 unchanged sentences

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables presents information on the Company’s reportable segments for the three months ended March 28, 2020 and March 30, 2019 ( in millions ):

Three Months Ended March 28, 2020

The following tables presents information on the Company’s reportable segments for the three months ended October 3, 2020 and September 28, 2019 ( in millions ):

Three Months Ended October 3, 2020

Network and Service Enablement

8 unchanged sentences

Operating margin

Three Months Ended March 30, 2019

Three Months Ended September 28, 2019

Network and Service Enablement

9 unchanged sentences

Three Months Ended

March 28, 2020

March 30, 2019

Corporate reconciling items impacting gross profit:

Total segment gross profit

Stock-based compensation

Amortization of intangibles

Other charges unrelated to core operating performance (1)

GAAP gross profit

Corporate reconciling items impacting operating income:

Total segment operating income

Stock-based compensation

Amortization of intangibles

Other charges unrelated to core operating performance (1)

Restructuring and related (benefits) charges

GAAP operating income from continuing operations

During the three months ended March 28, 2020 and March 30, 2019 , other charges unrelated to core operating performance primarily consisted of certain acquisiti on and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables presents information on the Company’s reportable segments for the nine months ended March 28, 2020 and March 30, 2019 ( in millions ):

Nine Months Ended March 28, 2020

Network and Service Enablement

Network Enablement

Service Enablement

Network and Service Enablement

Optical Security and Performance Products

Consolidated GAAP Measures

Product revenue

Service revenue

Operating income

Operating margin

Nine Months Ended March 30, 2019

Network and Service Enablement

Network Enablement

Service Enablement

Network and Service Enablement

Optical Security and Performance Products

Consolidated GAAP Measures

Product revenue

Service revenue

Operating income

Operating margin

Nine Months Ended

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Corporate reconciling items impacting gross profit:

12 unchanged sentences

GAAP operating income from continuing operations

During the nine months ended March 28, 2020 and March 30, 2019 , other charges unrelated to core operating performance primarily consisted of certain acquisiti on and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

During the three months ended October 3, 2020 and September 28, 2019 , other charges unrelated to core operating performance primarily consisted of certain acquisiti on and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

The Company operates primarily in three geographic regions:

2 unchanged sentences

For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers.

The following tables present net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue for the three and nine months ended March 28, 2020 and March 30, 2019 (in millions):

The following tables present net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue for the three months ended October 3, 2020 and September 28, 2019 (in millions):

Three Months Ended

March 28, 2020

March 30, 2019

October 3, 2020

September 28, 2019

Product Revenue

10 unchanged sentences

Total net revenue

Nine Months Ended

March 28, 2020

March 30, 2019

Product Revenue

Service Revenue

Product Revenue

Service Revenue

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements contained in this Quarterly report on Form 10-Q, which we also refer to as the Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.

A forward-looking statement may contain words such as “anticipates,” “believes,” “can,” “can impact,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “ongoing,” “plans,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future.

Forward-looking statements include statements such as:

Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition and results of operations;

Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;

Our plans for growth and innovation opportunities;

Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;

Our plans for continued development, use and protection of our intellectual property;

Our strategies for achieving our current business objectives, including related risks and uncertainties;

Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;

Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;

Our research and development plans and the expected impact of such plans on our financial performance;

Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.

Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements.

These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S.

Securities and Exchange Commission.

Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements.

Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements.

We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

In addition, Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 27, 2020 .

You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

Our actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors” and “Forward-Looking Statements.”

OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS

Viavi Solutions Inc.

(“ VIAVI ” also referred to as “the Company”, “we”, “our” and “us”), is a global provider of network test, monitoring and assurance solutions for communications service providers, enterprises, network equipment manufacturers, government and avionics.

We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network.

VIAVI is also a leader in light management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, government, automotive, and defense applications.

To serve our markets we operated the following business segments:

Network Enablement (NE);

Service Enablement (SE), and;

Optical Security and Performance Products (OSP).

Network Enablement

NE provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks.

These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks.

They also support more profitable, higher-performing networks and facilitate time-to-revenue.

Our solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks.

Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major network equipment manufacturers (“NEMs”), operators and services providers worldwide.

Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks.

They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network.

These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them.

Our NE solutions are also used by NEMs in the design and production of next-generation network equipment.

Other Test & Measurement communications products also serve the public safety, government, and aerospace and defense markets.

We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements.

These services include repair, calibration, software support and technical assistance for our products.

We offer product and technology training as well as consulting services.

Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.

NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, and deployed private enterprise customers.

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

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

Field Instruments :

Primarily consisting of (a) Access and Cable products;

(b) Avionics products;

(d) Metro products;

(e) RF Test products;

(f) Radio Test products.

Lab Instruments :

Primarily consisting of (a) Fiber Optic Production Lab Test;

(b) Optical Transport products;

and (d) Wireless products.

Service Enablement

SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data.

These solutions -, which primarily consist of instruments, microprobes and software -, monitor, collect and analyze network data to reveal the actual customer experience, and identify opportunities for new revenue streams and network optimization.

Our portfolio of SE solutions addresses the same lab and production environments, field deployment and service assurance for operational and fixed communications networks, including storage networks, as our NE portfolio,.

Our solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network.

This provides our customers with enhanced network management, control, and optimization that allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, help to make necessary repairs faster and, as a result, lower costs while providing higher quality and more reliable services.

Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.

SE customers include similar CSPs, NEMs, government organizations, large corporate customers, and storage-segment customers that are served by our NE segment.

Our SE products and associated services are described below:

Data Center :

Consisting of our Network Performance Monitoring and Security tools.

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

Optical Security and Performance Products

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

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

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

We also provide OVMP®, a technology that delivers depth and motion effects for authenticating banknotes.

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

Leveraging our expertise in spectral management and our unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer and industrial market, including, for example, 3D Sensing optical filters and Engineered Diffusers TM .

OSP value-added solutions meet the stringent requirements of commercial and government customers.

Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems.

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

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

COVID-19 Pandemic Update

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

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

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

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

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

Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of all those we serve, - our employees, customers, suppliers, and communities, including implementing early and regular updates

to our health and safety policies and procedures.

We have shut down, slowed, or modified business operations and activities in certain geographies, including in some instances, limiting production to essential business services, all in conjunction with federal, state, and local health and safety regulations and shelter-in-place directives.

We continue to follow the guidance of local and national governments, including monitoring the health of our employees who have returned to our offices, by limiting the gathering size of employee groups in indoor spaces per social distancing guidelines, and requiring those employees to wear masks and to undergo screenings prior to entering our offices.

The COVID-19 pandemic has not had a substantial net impact on our liquidity position.

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

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

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

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

Additionally, NSE has experienced some impact to customer demand including for Field Instruments.

Customer demand will be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.

While COVID-19 has brought unprecedented challenges, we believe that we have a robust and adaptable supply chain.

Our supply chain team has been working to meet our customer needs by executing on a risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers.

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

was in a recession.

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

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

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

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

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

Recently Issued Accounting Pronouncements

Refer to “ Note 2.

Recently Issued Accounting Pronouncements ” regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, (U.S.

GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities.

Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

We believe that the accounting estimates employed and the resulting balances are reasonable;

however, actual results may differ from these estimates and such differences may be material.

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).

There have been no material changes to our critical accounting policies and estimates.

RESULTS OF OPERATIONS

The results of operations for the current period are not necessarily indicative of results to be expected for future periods.

The following table summarizes selected Consolidated Statements of Operations items ( in millions, except for percentages ):

Three Months Ended

October 3, 2020

September 28, 2019

Percent Change

Segment net revenue:

Total net revenue

Research and development

Percentage of net revenue

Selling, general and administrative

Percentage of net revenue

Restructuring and related (benefits) charges

Percentage of net revenue

Interest and other income, net

Percentage of net revenue

Interest expense

Percentage of net revenue

Provision for income taxes

Percentage of net revenue

Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations.

Service revenue primarily consists of maintenance and support, extended warranty, training, professional services and post-contract support in addition to other services such as calibration and repair services.

When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories.

Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our

operating plan.

As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the ultimate impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, if the COVID-19 pandemic is prolonged and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.

Three months ended October 3, 2020 and September 28, 2019

Net revenue decrease d by $15.1 million , or 5.0% , during the three months ended October 3, 2020 compared to the same period a year ago.

This decrease was due to revenue decrease from our NE segment, partially offset by revenue increase in our OSP and SE segments as discussed below.

Product revenues decrease d by $16.9 million , or 6.4% , during the three months ended October 3, 2020 compared to the same period a year ago.

This decrease was primarily due to revenue declines from our NE and SE segments, partially offset by increased revenues from our OSP segment as discussed below.

Service revenues increase d by $1.8 million , or 5.1% , during the three months ended October 3, 2020 compared to the same period a year ago.

This increase was primarily due to increased revenues from our NE and SE segments.

NE net revenue decrease d by $36.8 million , or 18.5% , during the three months ended October 3, 2020 compared to the same period a year ago.

This decrease was driven by the impact to our business from the COVID-19 lockdown primarily in our Field Instruments, such as Cable, Access and AvComm products.

SE net revenue increase d by $0.5 million , or 2.4% , during the three months ended October 3, 2020 compared to the same period a year ago.

This increase is primarily driven by increased revenue from our Growth Assurance products.

OSP net revenue increase d by $ 21.2 million , or 26.5% , during the three months ended October 3, 2020 compared to the same period a year ago.

This increase is primarily driven by growth in revenue across all product lines which include our Anti-Counterfeiting, 3D Sensing, and Aerospace & Defense products.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period over period variability in our financial measures and present foreign exchange rate risks.

Additionally, we have seen demand for our NE and SE products affected by macroeconomic uncertainty.

We cannot predict when or to what extent these uncertainties will be resolved.

Our revenues, profitability, and general financial performance may also be affected by:

(a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products;

(b) product mix variability in our NE and SE markets, which affects revenue and gross margin;

(d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections;

(e) the impact of ongoing global trade policies, tariffs and sanctions;

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

Revenue by Region

We operate in three geographic regions:

Americas, Asia-Pacific and Europe Middle East and Africa (“EMEA”).

Net revenue is assigned to the geographic region and country where our product is initially shipped.

For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers.

The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue ( in millions ):

Three Months Ended

October 3, 2020

September 28, 2019

United States

6 unchanged sentences

Total net revenue

VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Subsequent Events

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

Net revenue from customers outside the Americas during the three months ended October 3, 2020 and September 28, 2019 represented 66.5% and 64.7% of net revenue, respectively.

We expect revenue from customers outside of United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.

Gross margin increase d by 1.3 percentage points during the three months ended October 3, 2020 from 58.2% in the same period a year ago to 59.5% in the current period.

This increase was primarily driven by favorable product mix within our OSP segment.

As discussed in more detail under “ Net Revenue ” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns.

We expect these factors to continue to result in variability of our gross margin.

Research and Development

R&D expense decrease d by $2.7 million , or 5.2% , during the three months ended October 3, 2020 compared to the same period a year ago.

This decrease was primarily driven by variable expense reductions and cost efficiencies during the period.

As a percentage of net revenue, R&D remained relatively flat , declining 0.1 percentage points during the three months ended October 3, 2020 compared to the same period a year ago.

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

We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.

Selling, General and Administrative

SG&A expense decrease d by $11.8 million or 12.7% , during the three months ended October 3, 2020 compared to the same period a year ago.

This decrease was primarily due to decreased spend on sales commissions, travel and entertainment expenses in the current period.

As a percentage of net revenue, SG&A decrease d 2.5 percentage points during the three months ended October 3, 2020 compared to the same period a year ago.

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

However, we may experience in the future, certain charges unrelated to our core operating performance, such as mergers and acquisitions-related expenses, litigation expenses and charges from changes in the fair value measurement of our contingent consideration liabilities, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.

Restructuring and Related Charges

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

As of October 3, 2020 , our total restructuring accrual was $4.0 million .

During the three months ended October 3, 2020 , we recorded restructuring and benefits charges of $0.6 million .

During the three months ended September 28, 2019 , the Company recorded restructuring and related charges of $0.3 million .

Refer to “ Note 13.

Restructuring and Related Charges ” for more information.

Interest and Other Income, Net

Interest and other income, net, was $0.6 million during the three months ended October 3, 2020 compared to $2.7 million the same period a year ago.

This $2.1 million decrease was primarily driven by a $1.3 million decrease in interest income due to lower yields on money market funds in which we invest excess cash during the current period and a $1.1 million unfavorable foreign exchange impact as the balance sheet hedging program provided less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest Expense

Interest expense increase d by $0.7 million , or 8.4% , during the three months ended October 3, 2020 compared to the same period a year ago.

This increase was primarily due to the commitment fee on unutilized portion of the revolving credit facility, the amortization of issuance costs related to the revolving credit facility as well as an increase in debt discount accretion of the 2023 Notes and 2024 Notes during the current period.

Provision for Income Taxes

We recorded an income tax provision of $8.6 million and $8.3 million for the three months ended October 3, 2020 and September 28, 2019 , respectively.

The income tax provision for the three months ended October 3, 2020 and September 28, 2019 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income (loss) from continuing operations.

As of October 3, 2020 , and June 27, 2020 , our unrecognized tax benefits totaled $48.3 million and $48.4 million , respectively, and are included in deferred taxes and other non-current tax liabilities, net.

We had $3.6 million accrued for the payment of interest and penalties at October 3, 2020 .

Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

Operating Segment Information

Information related to our operating segments were as follows, ( in millions ):

Three Months Ended

October 3, 2020

September 28, 2019

Percentage Change

Network Enablement

Service Enablement

Network and Service Enablement

Operating income

Operating margin

Optical Security and Performance

Operating income

Operating margin

Network Enablement

During the three months ended October 3, 2020 , NE gross margin decrease d by 0.6 percentage points from 64.4% in the same period a year ago to 63.8% in the current period reflecting lower revenue volumes due to the impact of COVID-19.

Service Enablement

During the three months ended October 3, 2020 , SE gross margin increase d by 6.5 percentage points from 60.3% in the same period a year ago to 66.8% in the current period.

This increase was primarily due to favorable product mix in our Assurance growth products.

Network and Service Enablement (“NSE”)

During the three months ended October 3, 2020 , NSE operating margin decrease d by 2.9 percentage points from 10.1% in the same period a year ago to 7.2% in the current period.

This decrease in operating margin was primarily driven by lower revenue volume and gross profit margin in NE segment and offset by a reduction in operating expenses reflecting disciplined expense management and ongoing efficiency programs and lower variable expenses such as commissions, events travel and entertainment due to the pandemic.

Optical Security and Performance Products

During the three months ended October 3, 2020 OSP gross margin increase d by 6.2 percentage points from 54.1% in the same period a year ago to 60.3% in the current period.

This increase was primarily due to higher volume and better manufacturing cost absorption.

OSP operating margin increase d by 8.7 percentage points during the three months ended October 3, 2020 from 38.0% in the same period a year ago to 46.7% in the current period.

The increase in operating margin was primarily due to higher gross margins as discussed above.

Liquidity and Capital Resources

As of October 3, 2020 and June 27, 2020 , we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $595.5 million and $544.0 million , respectively.

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our 10-K.

As of October 3, 2020 , U.S.

entities owned approximately 50.9% of our cash and cash equivalents, short-term investments and short-term restricted cash.

The recent COVID-19 pandemic has caused disruption in global capital markets and over time may impact our ability to obtain credit and/or negotiate acceptable financing terms.

As of October 3, 2020 , the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

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

During the three months ended October 3, 2020 , we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

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

These balances in the U.S.

may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits.

While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail.

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, the Company 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 the Company’s secured net leverage ratio, determined on a pro forma basis does not exceed 1.50 :1.00.

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 the assets of the Company.

Amounts outstanding under the Credit Agreement accrue interest at a rate equal to either, at the Company’s 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 the Company’s consolidated secured leverage ratio.

The Company is required to pay commitment fee on the unutilized portion of the facility which ranges between 0.30 % and 0.40 % per annum depending on the Company’s consolidated secured leverage ratio.

As of May 7, 2020 , the Company had no amounts outstanding under its revolving credit facility.

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

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

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

As of October 3, 2020 , we had no amounts outstanding under the Credit Agreement.

Three Months Ended October 3, 2020

As of October 3, 2020 , our combined balance of cash and cash equivalents and restricted cash increased by $51.8 million to $599.2 million from $547.4 million as of June 27, 2020 .

During the three months ended October 3, 2020 , Cash provided by operating activities was $63.9 million , consisting of net income of $14.3 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $ 43.5 million , including changes in deferred tax balances, and changes in operating assets and liabilities that provided $6.1 million .

Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $19.7 million driven by strong collections in the quarter, an increase in deferred revenue of $4.0 million , an increase in income taxed payable of $2.5 million .

These were partially offset by a decrease in accounts payable of $8.5 million due to the timing of payment in the quarter, an increase in other current and non-current assets of $3.2 million , an increase in inventory of $3.4 million , a decrease in accrued expenses and other current and non-current liabilities of $3.6 million , and a decrease in accrued payroll and related expenses of $1.4 million .

During the three months ended October 3, 2020 , Cash used in investing activities was $7.5 million , primarily related to $8.0 million of cash used for capital expenditures, offset by $0.5 million proceeds from sales of assets.

During the three months ended October 3, 2020 , Cash used in financing activities was $15.8 million , primarily resulting from $9.3 million in withholding tax payments on the vesting of restricted stock awards, $6.7 million in cash paid to repurchase common stock under our share repurchase program, $2.8 million cash paid to settle assumed debt from an acquisition in fiscal year 2020 and $0.4 million payments on financing obligations;

offset by $3.5 million in proceeds from the issuance of common stock under our employee stock purchase plan.

Three Months Ended September 28, 2019

As of September 28, 2019 , our combined balance of cash and cash equivalents and restricted cash decreased by $3.2 million to $533.6 from $530.4 million as of June 29, 2019 .

During the three months ended September 28, 2019 , Cash provided by operating activities was $31.3 million , consisting of net income of $6.8 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $43.7 million , including changes in deferred tax balance, and changes in operating assets and liabilities that used $19.2 million .

Changes in our operating assets and liabilities related primarily to an increase in inventories of $3.4 million , a decrease in deferred revenue of $4.1 million , an increase in other current and non-current assets of $1.7 million , a decrease in accounts payable of $1.6 million , and a decrease in accrued expenses and other current and non-current liabilities of $14.7 million .

These changes were partially offset by an increase in accrued payroll and related expenses of $3.8 million , an increase in income taxes payable of $2.0 million , and a decrease in accounts receivable of $0.5 million

During the three months ended September 28, 2019 , Cash used in investing activities was $5.9 million , primarily related to $7.1 million of cash used for capital expenditures, offset by $1.2 million proceeds from sales of assets.

During the three months ended September 28, 2019 , Cash used in financing activities was $7.8 million , primarily due to $7.6 million in withholding tax payments on vesting of restricted stock awards, $1.5 million in cash paid to repurchase common stock under our share repurchase program, and $1.0 million in payment of financing obligations;

offset by $2.3 million in proceeds from the issuance of common stock under our employee stock purchase plan.

We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve months.

However, there are a number of factors that could positively or negatively impact our liquidity position, including:

global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;

Impact of the COVID-19 pandemic on our financial condition;

changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;

increase in capital expenditure to support the revenue growth opportunity of our business;

changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;

timing of payments to our suppliers;

factoring or sale of accounts receivable;

volatility in fixed income and credit market which impact the liquidity and valuation of our investment portfolios;

volatility in foreign exchange market which impacts our financial results;

possible investments or acquisitions of complementary businesses, products or technologies;

issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes and/or 2024 Notes prior to their maturity or of our common stock;

potential funding of pension liabilities either voluntarily or as required by law or regulation.

Contractual Obligations

There were no material changes to our existing contractual commitments during the first quarter of fiscal 2021 .

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in “ Note 18.

Commitments and Contingencies .”

Employee Equity Incentive Plan

Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests.

Refer to “ Note 16.

Stock-Based Compensation ” for more details.

Pension and Other Post-Retirement Benefits

We sponsor significant pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany.

We are also responsible for the non-pension post-retirement benefit obligation (“PBO”) assumed from a past acquisition.

All of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010.

plan is partially funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded.

As of October 3, 2020 , our pension plans were under funded by $113.2 million since the PBO exceeded the fair value of plan assets.

Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan.

Pension plan assets are managed by external third parties and we monitor the performance of our investment managers.

As of October 3, 2020 , the fair value of plan assets had decreased approximately 2.4% since June 27, 2020 , our most recent fiscal year end.

A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate.

Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis.

Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO.

Increases in the discount rate tend to have the opposite effect.

We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.2 million based upon data as of June 27, 2020 .

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

While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate.

Refer to “ Note 17.

Employee Pension and Other Benefit Plans ” for more details.

Quantitative and Qualitative Disclosure About Market Risks

The Company’s market risk has not changed materially from the foreign exchange and interest rate risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2020 .

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

What changed 10-Q

Item 1. Financial Statements