What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2021-02-09 · 133 added, 123 removed, 275 unchanged (48% of the section changed)

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

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

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

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

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

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

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Consisting of our Network Performance Monitoring and Security tools.

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

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

Optical Security and Performance Products

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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.

These conditions may continue and could 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.

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While distribution of the vaccines commenced in the UK and U.S.

in late 2020, there have been logistical and operational challenges with the rollout, demand for the vaccine has far exceeded supply, and it will take some time for the global population to receive vaccines and for widespread immunity to develop.

in late 2020, there have been logistical and operational challenges with the rollout, and global demand for the vaccine has far exceeded supply.

It will take some time for the global population to receive vaccines, allowing for widespread immunity to develop.

At the same time, new and potentially more contagious variants of the virus are developing in several countries and regions in which we operate.

We will continue to take the health and safety measures described above to ensure the health and safety of our employees and those they come in contact with.

We operate a shared services center in Pune, India that provides important finance and IT support services.

The recent substantial increase of reported COVID-19 transmission rates in that country due to the emergence of a more virulent variant of the virus has led to a significant spike in illness and death rates.

Hospitals and medical facilities are overwhelmed and there is a shortage of oxygen and other medical supplies.

If the situation in India does not improve, our operations and employees there could be negatively impacted.

We will continue to take the measures described above to ensure the health and safety of our employees and those they come in contact with.

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

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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.

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

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

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

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

Additionally, NSE has experienced some impact to customer demand.

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

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

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Nonetheless, surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and the slow pace of vaccine rollout may impact our suppliers and our ability to source materials in a timely manner.

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.

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

Recently Issued Accounting Pronouncements

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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.

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;

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.

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

Three Months Ended Six Months Ended

January 2, 2021 December 28, 2019 Change Percent Change January 2, 2021 December 28, 2019 Change Percent Change

Three Months Ended Nine Months Ended

April 3, 2021 March 28, 2020 Change Percent Change April 3, 2021 March 28, 2020 Change Percent Change

Segment net revenue:

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Percentage of net revenue 28.4 % 32.6 % 27.8 % 30.3 %

Restructuring and related charges (benefits) $ 0.2 $ (0.9) $ 1.1 (122.2) % $ (0.4) $ (0.6) $ 0.2 (33.3) %

Restructuring and related benefits $ (0.4) $ (1.6) $ 1.2 (75.0) % $ (0.8) $ (2.2) $ 1.4 (63.6) %

Percentage of net revenue (0.1) % (0.6) % (0.1) % (0.3) %

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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.

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.

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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 January 2, 2021 and December 28, 2019

Net revenue decreased by $13.8 million, or 4.4%, during the three months ended January 2, 2021 compared to the same period a year ago.

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

Product revenues decreased by $19.8 million, or 7.0%, during the three months ended January 2, 2021 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 increased by $6.0 million, or 18.9%, during the three months ended January 2, 2021 compared to the same period a year ago.

This increase was primarily due to increased revenues from our NE segment.

NE net revenue decreased by $22.1 million, or 10.9%, during the three months ended January 2, 2021 compared to the same period a year ago.

This decrease was driven by the impact to our business from the COVID-19 lockdown impacting both Field Instruments and Lab & Production Equipment, including Cable, Access, Fiber, Wireless and AvComm products.

SE net revenue decreased by $5.4 million, or 17.3%, during the three months ended January 2, 2021 compared to the same period a year ago.

However, if the COVID-19 pandemic is prolonged, the vaccine rollouts lag globally, new, and potentially more virulent variants continue to emerge, and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.

Three months ended April 3, 2021 and March 28, 2020

Net revenue increased by $47.2 million, or 18.4%, during the three months ended April 3, 2021 compared to the same period a year ago.

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

Product revenues increased by $42.8 million, or 19.1%, during the three months ended April 3, 2021 compared to the same period a year ago.

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

Service revenues increased by $4.4 million, or 13.6%, during the three months ended April 3, 2021 compared to the same period a year ago.

This increase was primarily due to increased revenues from our NE segment, partially offset by revenue declines in our SE segment.

NE net revenue increased by $27.0 million, or 16.5%, during the three months ended April 3, 2021 compared to the same period a year ago.

This increase was driven by both Field Instruments and Lab & Production Equipment, including Fiber, Cable and Wireless products.

SE net revenue decreased by $2.8 million, or 12.1%, during the three months ended April 3, 2021 compared to the same period a year ago.

This decrease is primarily driven by decreased revenue from our Data Center and Growth Assurance products.

OSP net revenue increased by $13.7 million, or 17.2%, during the three months ended January 2, 2021 compared to the same period a year ago.

OSP net revenue increased by $23.0 million, or 33.2%, during the three months ended April 3, 2021 compared to the same period a year ago.

This increase is driven by growth in revenue from our Anti-Counterfeiting and 3D Sensing products.

Six Months Ended January 2, 2021 and December 28, 2019

Net revenue decreased by $28.9 million, or 4.7%, during the six months ended January 2, 2021 compared to the same period a year ago due to revenue decrease from our NE and SE segments, partially offset by our OSP segment.

Product revenues decreased by $36.7 million, or 6.7% during the six months ended January 2, 2021 compared to the same period a year ago due to revenue decrease from our NE and SE segments, partially offset by our OSP segment.

Service revenues increased by $7.8 million, or 11.7%, during the six months ended January 2, 2021 compared to the same period a year ago primarily due to increased support revenue from the NE and SE segments, partially offset by a decline in our OSP segment as discussed below.

NE net revenue decreased by $58.9 million, or 14.7%, during the six months ended January 2, 2021 compared to the same period a year ago.

This decrease was driven by the impact to our business from the COVID-19

lockdown impacting both Field Instruments and Lab & Production Equipment, including Cable, Access, Fiber, Wireless and AvComm products.

SE net revenue decreased by $4.9 million, or 9.4%, during the six months ended January 2, 2021 compared to the same period a year ago.

Nine Months Ended April 3, 2021 and March 28, 2020

Net revenue increased by $18.3 million, or 2.1%, during the nine months ended April 3, 2021 compared to the same period a year ago.

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

Product revenues increased by $6.1 million, or 0.8% during the nine months ended April 3, 2021 compared to the same period a year ago due to revenue increases from our OSP segment, partially offset by decreased revenue from NE and SE segments.

Service revenues increased by $12.2 million, or 12.3%, during the nine months ended April 3, 2021 compared to the same period a year ago primarily due to increased support revenue from the NE and OSP segments, partially offset by a decline in our SE segment as discussed below.

NE net revenue decreased by $31.9 million, or 5.6%, during the nine months ended April 3, 2021 compared to the same period a year ago.

This decrease was driven by the impact to our business from the COVID-19 lockdown impacting both Field Instruments and Lab & Production Equipment, including Fiber, Cable, Access, Wireless and AvComm products.

SE net revenue decreased by $7.7 million, or 10.2%, during the nine months ended April 3, 2021 compared to the same period a year ago.

This decrease is primarily driven by decreased revenue from our Data Center and Growth Assurance products.

OSP net revenue increased by $34.9 million, or 21.9%, during the six months ended January 2, 2021 compared to the same period a year ago.

OSP net revenue increased by $57.9 million, or 25.3%, during the nine months ended April 3, 2021 compared to the same period a year ago.

This increase is primarily driven by growth in revenue from our Anti-Counterfeiting and 3D Sensing products.

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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 Six Months Ended

January 2, 2021 December 28, 2019 January 2, 2021 December 28, 2019

Three Months Ended Nine Months Ended

April 3, 2021 March 28, 2020 April 3, 2021 March 28, 2020

United States $ 77.4 25.5 % $ 71.8 28.0 % $ 243.8 27.5 % $ 253.0 29.1 %

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Total net revenue $ 303.4 100.0 % $ 256.2 100.0 % $ 888.0 100.0 % $ 869.7 100.0 %

Net revenue from customers outside the Americas during the three and six months ended January 2, 2021 represented 63.8% and 65.1% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and six months ended December 28, 2019 represented 62.8% and 63.7% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended April 3, 2021 represented 66.4% and 65.5% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended March 28, 2020 represented 65.3% and 64.2% of net revenue, respectively.

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 decreased by 0.3 percentage points during the three months ended January 2, 2021 from 60.4% in the same period a year ago to 60.1% in the current period.

This decrease was primarily driven by lower revenue volume and unfavorable product mix within our NE segment, offset by increased factory utilization due to revenue growth and favorable product mix in our OSP and SE segments.

Gross margin increased by 0.5 percentage points during the six months ended January 2, 2021 from 59.3% in the same period a year ago to 59.8% in the current period.

This increase was primarily driven by improved factory utilization due to higher revenue volume and favorable product mix within our OSP segment and gross margin improvement in our SE segment.

This increase was partially offset by gross margin reduction in our NE segment as discussed below in the Operating Segment Information section.

Gross margin increased by 2.7 percentage points during the three months ended April 3, 2021 from 57.3% in the same period a year ago to 60.0% in the current period.

This increase was primarily driven by higher revenue volume, favorable product mix and improved factory utilization within our OSP and NE segments.

This increase was partially offset by gross margin reduction in our SE segment as discussed below in the Operating Segment Information section.

Gross margin increased by 1.2 percentage points during the nine months ended April 3, 2021 from 58.7% in the same period a year ago to 59.9% in the current period.

This increase was primarily driven by improved factory utilization due to higher revenue volume and favorable product mix within our OSP segment.

This increase was partially offset by gross margin reduction in our SE segment as discussed below in the Operating Segment Information section.

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

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Research and Development

R&D expense decreased by $0.3 million, or 0.6%, during the three months ended January 2, 2021 compared to the same period a year ago.

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

As a percentage of net revenue, R&D expense increased, by 0.7 percentage points during the three months ended January 2, 2021 compared to the same period a year ago.

R&D expense decreased by $3.0 million, or 2.9%, during the six months ended January 2, 2021 compared to the same period a year ago.

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

As a percentage of net revenue R&D expense increased by 0.3 percentage points during the six months ended January 2, 2021 compared to the same period a year ago.

R&D expense increased by $5.3 million, or 11.3%, during the three months ended April 3, 2021 compared to the same period a year ago.

This increase was driven by targeted investments to support increased demand for our key product lines.

As a percentage of net revenue, R&D expense decreased, by 1.1 percentage points during the three months ended April 3, 2021 compared to the same period a year ago.

R&D expense increased by $2.3 million, or 1.5%, during the nine months ended April 3, 2021 compared to the same period a year ago.

This increase was primarily driven by targeted investments to support increased demand for our key product lines.

As a percentage of net revenue R&D expense decreased by 0.1 percentage points during the nine months ended April 3, 2021 compared to the same period a year ago.

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

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Selling, General and Administrative

SG&A expense decreased by $6.8 million, or 7.9%, during the three months ended January 2, 2021 compared to the same period a year ago.

This decrease was primarily due to lower spend on sales commissions and travel and entertainment expenses in the current period, partially offset by the change in the fair value of contingent consideration.

As a percentage of net revenue, SG&A decreased 1.0 percentage point during the three months ended January 2, 2021 compared to the same period a year ago.

SG&A expense decreased by $18.6 million, or 10.4%, during the six months ended January 2, 2021 compared to the same period a year ago.

As a percentage of net revenue, SG&A decreased 1.8 percentage points during the six months ended January 2, 2021 compared to the same period a year ago.

SG&A expense increased by $2.5 million, or 3.0%, during the three months ended April 3, 2021 compared to the same period a year ago.

This increase was primarily due to targeted investments to support increased demand for our key growth products including higher sales commissions, partially offset by the change in the fair value of contingent consideration.

As a percentage of net revenue, SG&A decreased 4.2 percentage points during the three months ended April 3, 2021 compared to the same period a year ago.

SG&A expense decreased by $16.1 million, or 6.1%, during the nine months ended April 3, 2021 compared to the same period a year ago.

This decrease was primarily due to lower spend on sales commissions and travel and entertainment expenses in the current period and the change in the fair value of contingent consideration.

As a percentage of net revenue, SG&A decreased 2.5 percentage points during the nine months ended April 3, 2021 compared to the same period a year ago.

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

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

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 January 2, 2021 and June 27, 2020, the Company’s total restructuring accrual was $3.6 million and $6.5 million, respectively.

During the three and six months ended January 2, 2021, the Company recorded restructuring and related charges (benefits) of $0.2 million and $(0.4) million, respectively.

During the three and six months ended December 28, 2019, the Company recorded restructuring and related benefits of $(0.9) million and $(0.6) million, respectively.

As of April 3, 2021 and June 27, 2020, the Company’s total restructuring accrual was $2.2 million and $6.5 million, respectively.

During the three and nine months ended April 3, 2021, the Company recorded restructuring and related benefits of $0.4 million and $0.8 million, respectively.

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

Refer to “Note 13.

Restructuring and Related Charges” for more information.

Interest and Other Income, Net

Interest and Other Income (Loss), Net

Interest and other income (loss), net, represented a net expense of $0.9 million during the three months ended April 3, 2021 compared to a net income of $5.3 million the same period a year ago.

This $6.2 million decrease was primarily driven by a $4.4 million unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period, and a $1.3 million decrease in interest income due to lower yields on money market funds in which we invest excess cash during the current period coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to the current period.

Interest and other income, net, was $0.8 million during the nine months ended April 3, 2021 compared to $9.3 million the same period a year ago.

This $8.5 million decrease was primarily driven by a $4.4 million unfavorable foreign exchange impact as the balance sheet hedging program provided less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period, and a $3.9 million decrease in interest income due to lower yields on money market funds in which we invest excess cash during the current period coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to the current period.

Interest Expense

Interest expense increase d by $0.6 million, or 7.1%, during the three months ended January 2, 2021 compared to the same period a year ago.

Interest expense increase d by $0.6 million, or 7.1%, during the three months ended April 3, 2021 compared to the same period a year ago.

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

Interest expense increased by $1.3 million, or 7.8%, during the six months ended January 2, 2021 compared to the same period a year ago.

Interest expense increased by $1.9 million, or 7.6%, during the nine months ended April 3, 2021 compared to the same period a year ago.

Interest and other income, net, was $1.1 million during the three months ended January 2, 2021 compared to $1.3 million the same period a year ago.

This $0.2 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 coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to the current period.

This decrease in interest income was offset by a $1.1 million favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest and other income, net, was $1.7 million during the six months ended January 2, 2021 compared to $4.0 million the same period a year ago.

This $2.3 million decrease was primarily driven by $2.6 million decrease in interest income due to lower yields on money market funds in which we invest excess cash during the current period coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to the current period.

Provision for Income Taxes

We recorded an income tax expense of $12.5 million and $21.1 million for the three and six months ended January 2, 2021, respectively.

We recorded an income tax expense of $9.9 million and $18.2 million for the three and six months ended December 28, 2019, respectively.

The income tax expense for the three months and six ended January 2, 2021 and December 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 from continuing operations.

As of January 2, 2021, and June 27, 2020, our unrecognized tax benefits totaled $48.4 million and $48.4 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net.

We had $3.9 million accrued for the payment of interest and penalties as of January 2, 2021.

We recorded an income tax expense of $14.2 million and $35.3 million for the three and nine months ended April 3, 2021, respectively and an income tax expense of $38.8 million and $57.0 million for the three and nine months ended March 28, 2020, respectively.

The income tax expense for the three and nine months ended April 3, 2021 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.

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

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

The repatriation of these earnings increased available cash in U.S and provided greater U.S.

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

The foreign earnings were repatriated to the U.S.

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

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

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

As of April 3, 2021, and June 27, 2020, our unrecognized tax benefits totaled $48.4 million and $48.4 million respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $3.7 million accrued for the payment of interest and penalties as of April 3, 2021.

The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year.

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

Three Months Ended Six Months Ended

January 2, 2021 December 28, 2019 Change

Three Months Ended Nine Months Ended

April 3, 2021 March 28, 2020 Change

Percentage Change

January 2, 2021 December 28, 2019 Change Percentage Change

April 3, 2021 March 28, 2020 Change Percentage Change

Network Enablement

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Network Enablement

During the three months ended January 2, 2021, NE gross margin decreased by 3.8 percentage points from 66.4% in the same period a year ago to 62.6% in the current period, reflecting lower revenue volumes due to the impact of COVID-19 and unfavorable product mix.

During the six months ended January 2, 2021, NE gross margin decreased by 2.2 percentage points from 65.4% in the same period a year ago to 63.2% in the current period.

During the three months ended April 3, 2021, NE gross margin increased by 0.9 percentage points from 63.6% in the same period a year ago to 64.5% in the current period, reflecting higher revenue volumes and favorable product mix.

During the nine months ended April 3, 2021, NE gross margin decreased by 1.2 percentage points from 64.9% in the same period a year ago to 63.7% in the current period.

This decrease in the current period reflects lower revenue volumes due to the impact of COVID-19 and unfavorable product mix.

Service Enablement

During the three months ended January 2, 2021, SE gross margin increased by 1.5 percentage points from 66.7% in the same period a year ago to 68.2% in the current period.

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

During the six months ended January 2, 2021, SE gross margin increased by 3.5 percentage points from 64.1% in the same period a year ago to 67.6% in the current period.

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

During the three months ended April 3, 2021, SE gross margin decreased by 8.2 percentage points from 69.3% in the same period a year ago to 61.1% in the current period.

This decrease was primarily due to lower revenue volumes and unfavorable product mix in our Assurance growth products.

During the nine months ended April 3, 2021, SE gross margin decreased by 0.1 percentage points from 65.7% in the same period a year ago to 65.6% in the current period.

This decrease was primarily due to lower revenue volumes.

Network and Service Enablement (NSE)

During the three months ended January 2, 2021, NSE operating margin decreased by 5.3 percentage points from 16.0% in the same period a year ago to 10.7% in the current period.

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

During the six months ended January 2, 2021, NSE operating margin decreased by 4.1 percentage points from 13.2% in the same period a year ago to 9.1% in the current period.

During the three months ended April 3, 2021, NSE operating margin increased by 2.5 percentage points from 7.4% in the same period a year ago to 9.9% in the current period.

This increase in operating margin was primarily driven by higher revenue volume.

During the nine months ended April 3, 2021, NSE operating margin decreased by 2.1 percentage points from 11.5% in the same period a year ago to 9.4% in the current period.

This decrease in operating margin was primarily driven by lower revenue volume.

Optical Security and Performance Products

During the three months ended January 2, 2021 OSP gross margin increased by 7.9 percentage points from 54.8% in the same period a year ago to 62.7% in the current period.

This increase was primarily due to increased factory utilization due to higher revenue volumes.

During the six months ended January 2, 2021, OSP gross margin increased by 6.9 percentage points from 54.5% in the same period a year ago to 61.4% in the current period primarily due to favorable product mix driven by higher revenue in Anti-Counterfeiting and 3D Sensing products.

OSP operating margin increased by 9.7 percentage points during the three months ended January 2, 2021 from 38.2% in the same period a year ago to 47.9% in the current period.

During the three months ended April 3, 2021 OSP gross margin increased by 8.0 percentage points from 52.6% in the same period a year ago to 60.6% in the current period.

This increase was primarily due to favorable product mix driven by higher revenue in Anti-Counterfeiting and 3D Sensing products and increased factory utilization due to higher revenue volumes.

During the nine months ended April 3, 2021, OSP gross margin increased by 7.3 percentage points from 53.9% in the same period a year ago to 61.2% in the current period primarily due to favorable product mix driven by higher revenue in Anti-Counterfeiting and 3D Sensing products and increased factory utilization due to higher revenue volumes.

OSP operating margin increased by 8.9 percentage points during the three months ended April 3, 2021 from 35.0% in the same period a year ago to 43.9% in the current period.

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

OSP operating margin increased by 9.2 percentage points during the six months ended January 2, 2021 from 38.1% in the same period a year ago to 47.3% in the current period.

OSP operating margin increased by 9.0 percentage points during the nine months ended April 3, 2021 from 37.2% in the same period a year ago to 46.2% in the current period.

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

Liquidity and Capital Resources

As of January 2, 2021 and June 27, 2020, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $648.8 million and $544.0 million, respectively.

As of April 3, 2021 and June 27, 2020, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $678.1 million and $544.0 million, respectively.

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

As of January 2, 2021, U.S.

As of April 3, 2021, U.S.

entities owned approximately 42.6% of our cash and cash equivalents, short-term investments and short-term restricted cash.

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

As of January 2, 2021, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

As of April 3, 2021, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

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

During the three months ended January 2, 2021, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

During the three months ended April 3, 2021, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

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

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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 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.

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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 January 2, 2021, we had no amounts outstanding under the Credit Agreement.

Six Months Ended January 2, 2021

As of January 2, 2021, our combined balance of cash and cash equivalents and restricted cash increased by $105.3 million to $652.7 million from $547.4 million as of June 27, 2020.

During the six months ended January 2, 2021, Cash provided by operating activities was $132.6 million, consisting of net income of $36.2 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $82.6 million, including changes in deferred tax balances, and changes in operating assets and liabilities that provided $13.8 million.

Changes in our operating assets and liabilities related primarily to an increase of accrued payroll and related expenses of $16.0 million, an increase in deferred revenue of $4.1 million, an increase in income taxes payable of $10.4 million, and a decrease in other current and non-current assets of $3.9 million.

These were partially offset by a decrease in accrued expenses and other current and non-current liabilities of $8.5 million, an increase in accounts receivable of $6.4 million, an increase in inventory of $3.3 million, and a decrease in accounts payable of $2.4 million.

During the six months ended January 2, 2021, Cash used in investing activities was $18.0 million, primarily related to $18.5 million of cash used for capital expenditures and $0.6 million of cash used for acquisitions, offset by $1.1 million proceeds from sales of assets.

During the six months ended January 2, 2021, Cash used in financing activities was $35.6 million, primarily resulting from $23.8 million cash paid to repurchase common stock under our share repurchase program, $11.8 million in withholding tax payments on the vesting of restricted stock awards, $2.8 million cash paid to settle assumed debt from an acquisition in fiscal year 2020, and $0.6 million payments on financing obligations.

As of April 3, 2021, we had no amounts outstanding under the Credit Agreement.

Nine Months Ended April 3, 2021

As of April 3, 2021, our combined balance of cash and cash equivalents and restricted cash increased by $134.6 million to $682.0 million from $547.4 million as of June 27, 2020.

During the nine months ended April 3, 2021, Cash provided by operating activities was $180.7 million, consisting of net income of $48.0 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $122.2 million, including changes in deferred tax balances, and changes in operating assets and liabilities that provided $10.5 million.

Changes in our operating assets and liabilities related primarily to a decrease in other current and non-current assets of $16.2 million, an increase in income taxes payable of $13.9 million, an increase in deferred revenue of $8.8 million, and an increase of accrued payroll and related expenses of $8.6 million.

These were partially offset by an increase in accounts receivable of $21.0 million, an increase in inventory of $8.1 million, and a decrease in accrued expenses and other current and non-current liabilities of $7.9 million.

During the nine months ended April 3, 2021, Cash used in investing activities was $24.8 million, primarily related to $26.7 million of cash used for capital expenditures and $0.7 million of cash used for acquisitions, offset by $2.6 million proceeds from sales of assets.

During the nine months ended April 3, 2021, Cash used in financing activities was $43.2 million, primarily resulting from $31.1 million cash paid to repurchase common stock under our share repurchase program, $14.8 million in withholding tax payments on the vesting of restricted stock awards, $2.8 million cash paid to settle assumed debt from an acquisition in fiscal year 2020, and $1.1 million payments related to financing obligations, including issuance costs.

These were partially offset by $6.6 million in proceeds from the issuance of common stock under our employee stock purchase plan.

Six Months Ended December 28, 2019

As of December 28, 2019, our combined balance of cash and cash equivalents and restricted cash increased by $29.8 million to $560.2 from $530.4 million as of June 29, 2019.

During the six months ended December 28, 2019, Cash provided by operating activities was $69.3 million, consisting of net income of $34.8 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $81.9 million, including changes in deferred tax balance, and changes in operating assets and liabilities that used $47.4 million.

Changes in our operating assets and liabilities related primarily to an increase in accounts receivable of $13.5 million mainly driven by revenue growth, a decrease in accounts payable of $14.2 million primarily driven by timing of purchases and related payments, a decrease in accrued expenses and other current and non-current liabilities of $37.3 million, and an increase in other current and non-current assets of $2.5 million.

These changes were partially offset by an increase in accrued payroll and related expenses of $8.2 million, an increase in income taxes payable of $5.8 million, a decrease in inventories of $3.2 million due to higher shipment volume at the end of the quarter, and an increase in deferred revenue of $2.9 million.

During the six months ended December 28, 2019, Cash used in investing activities was $10.7 million, primarily related to $13.3 million of cash used for capital expenditures, offset by $3.1 million proceeds from sales of assets.

During the six months ended December 28, 2019, Cash used in financing activities was $25.3 million, primarily due to $15.1 million in withholding tax payments on vesting of restricted stock awards, $10.7 million in cash paid to repurchase common stock under our share repurchase program, and $1.8 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.

Nine Months Ended March 28, 2020

As of March 28, 2020, our combined balance of cash and cash equivalents and restricted cash increased by $10.5 million to $540.9 million from $530.4 million as of June 29, 2019.

During the nine months ended March 28, 2020, Cash provided by operating activities was $108.4 million, consisting of net income of $2.0 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $159.4 million, including changes in deferred tax balances, offset by changes in operating assets and liabilities that used $53.0 million.

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $41.6 million driven by a decrease in customer deposit, a decrease in accounts payable of $16.0 million primarily driven by timing of purchases and related payments, a decrease in accrued payroll and related expenses of $10.3 million due to the timing of salary and related payments, and an increase in accounts receivable of $6.6 million due to higher billings.

These changes were partially offset by an increase in income taxes payable and other tax liabilities of $8.6 million, a decrease in inventories of $3.6 million, an increase in deferred revenue of $7.4 million, and a decrease in other current and non-current assets of $1.9 million.

During the nine months ended March 28, 2020, Cash used in investing activities was $20.1 million, primarily related to $23.6 million of cash used for capital expenditures;

offset by $4.0 million proceeds from sales of assets.

During the nine months ended March 28, 2020, Cash used in financing activities was $58.8 million, primarily due to $43.8 million in cash paid to repurchase common stock under our share repurchase program, $18.4 million in withholding tax payments on vesting of restricted stock awards, and $2.1 million in payment of financing obligations;

offset by $5.5 million in proceeds from the issuance of common stock under our employee stock purchase plan.

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.

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Contractual Obligations

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

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

Off-Balance Sheet Arrangements

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

As of January 2, 2021, our pension plans were under funded by $117.6 million since the PBO exceeded the fair value of plan assets.

As of April 3, 2021, our pension plans were under funded by $111.2 million since the PBO exceeded the fair value of plan assets.

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

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

As of January 2, 2021, the fair value of plan assets had increased approximately 8.5% since June 27, 2020, our most recent fiscal year end.

As of April 3, 2021, the fair value of plan assets had increased approximately 7.3% since June 27, 2020, our most recent fiscal year end.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis