What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-23 compared with 2020-08-24 · 162 added, 324 removed, 317 unchanged (61% of the section changed)

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Viavi Solutions Inc.

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

(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 (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), 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.

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

To serve our markets, during fiscal 2021 we operated the following business segments:

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• Optical Security and Performance Products (OSP).

Network Enablement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Field Instruments :

Primarily consisting of (a) Access and Cable products;

(b) Avionics products;

(d) Metro products;

(e) RF Test products;

and (f) Radio Test products.

Lab Instruments :

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

(b) Optical Transport products;

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 wireless and fixed communications networks, including storage networks, as our NE portfolio.

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

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

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

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

Our SE products and associated services are described below:

Data Center :

Consisting of our Network Performance Monitoring and Security tools.

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

Optical Security and Performance Products

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

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

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

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

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

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

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

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

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

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

Refer to “Item 1 Business” for information related to our business segments.

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

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

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

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

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

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

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

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

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

Worldwide distribution by central governments of the vaccines commenced 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.

Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of our employees, customers, suppliers, and communities, including implementing early and regular updates to our health and safety policies and procedures.

We continued to follow the strict COVID-19 pandemic protocols as required by local, state and federal guidelines during the fiscal first half of 2021 and began to relax these restrictions based on government guidelines during the fiscal second half 2021.

These COVID-19 pandemic protocols have not thus far 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.

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.

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

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

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.

In addition, 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.

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.

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

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

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

We have experienced increased freight and logistics costs due to supply chain shortages resulting in extended lead times with respect to our NE Field Instrument products.

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

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

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

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

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.

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

While our industry faced supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and materials shortages resulted in extended lead-times, increased logistics costs, and product volume impact these factors did not materially impact our business in fiscal year 2021.

While capital markets and worldwide economies have stabilized and recovered since being significantly impacted by the COVID-19 pandemic, 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.

As the pandemic spread across the globe in Spring 2020, there was 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.

If there is 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.

We expect our principal growth drivers, 5G Wireless, Fiber and 3D Sensing to continue driving growth and profitability in fiscal 2022.

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.

Recently Issued Accounting Pronouncements” under Item 8 of this Annual Report on Form 10-K, regarding the effect of certain recent accounting pronouncements on our Consolidated Financial Statements.

Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies are affected by significant estimates, assumptions and judgments used in the preparation of our consolidated financial statements:

We believe the following critical accounting policies are affected by significant estimates, assumptions or judgments used in the preparation of our Consolidated Financial Statements.

Revenue Recognition

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NE and SE products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems.

Our OSP products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications.

Our OSP products include proprietary pigments used for optical security and product enhancement applications as well as optical filters and Engineered Diffusers™ used in a range of applications for the consumer electronics, government, automotive and industrial markets.

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

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Promised goods and services are considered distinct provided that:

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

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

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

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

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The allocation of purchase price requires management to make significant estimates and assumptions in determining the fair values of the assets acquired and liabilities assumed.

With respect to intangible assets, critical estimates in valuing intangible assets include, but are not limited to, future cash flows from customer relationships, developed technology, trade names and acquired patents;

and discount rates.

Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

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Goodwill Valuation

Goodwill represents the excess of the purchase price paid, over the net fair value of assets acquired and liabilities assumed, to purchase an enterprise or asset.

Goodwill represents the excess of the purchase price paid over the net fair value of assets acquired and liabilities assumed.

We test goodwill for impairment at the reporting unit level at least annually, during the fourth quarter of each fiscal year, or more frequently if events or changes in circumstance indicate that the asset may be impaired.

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Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures:

using present value techniques of estimated future cash flows or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure.

Application of the goodwill impairment test requires judgments, including:

identification of the reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators, and determining the fair value of each reporting unit.

(i) using present value techniques of estimated future cash flows;

(ii) using valuation techniques based on multiples of earnings or revenue;

or, (iii) a similar performance measure.

Application of the goodwill impairment test requires judgments, including identification of the reporting units, assigning assets and liabilities to reporting units, assigning goodwill to reporting units, a qualitative assessment to determine whether there are any impairment indicators and determining the fair value of each reporting unit.

We generally estimate the fair value of a reporting unit using a combination of the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices.

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Refer to “Note 9.

Goodwill ” for more information.

Goodwill” under Item 8 of this Annual Report on Form 10-K for more information.

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

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

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

Contingent liabilities include contingent consideration in connection with our acquisitions, which represent earn-out payments recognized at fair value on the acquisition date and remeasured each reporting period with subsequent adjustments recognized in the Selling, General and Administrative (SG&A) expense of our Consolidated Statements of Operations.

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

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

Adoption of Lease Accounting Standard

Refer to “ Note 2.

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

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

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

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

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

For additional information refer to “ Note 12.

Pursuant to instruction 1 of the instructions to paragraph 303(a) of Regulation S-K, discussion of the results of operations for the fiscal year ended June 27, 2020 and fiscal year ended June 29, 2019 has been omitted.

Such omitted discussion can be found under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020, filed with the SEC on August 24, 2020.

RESULTS OF OPERATIONS

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The following table summarizes selected Consolidated Statements of Operations items as a percentage of net revenue:

June 27, 2020

June 29, 2019

June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

Segment net revenue:

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Optical Security and Performance 30.1 25.3 25.6

Net revenue 100.0 100.0 100.0

Cost of revenues 37.6 38.6 39.4

Amortization of acquired technologies 2.8 2.9 3.0

Gross profit 59.6 58.5 57.6

Operating expenses:

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Amortization of other intangibles 2.8 3.1 3.4

Restructuring and related charges

Restructuring and related (benefits) charges (0.1) 0.3 1.4

Total operating expenses 47.8 48.1 51.7

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Interest income and other income, net 0.3 0.8 0.6

Gain on sale of investments

Interest expense (3.0) (2.9) (3.0)

Income (loss) from continuing operations before income taxes

Income from continuing operations before income taxes 9.1 8.3 3.5

Provision for income taxes 5.3 5.8 2.8

Income (loss) from continuing operations, net of taxes

Income from continuing operations, net of taxes 3.8 2.5 0.7

(Loss) income from discontinued operations, net of taxes — — (0.2)

Net income (loss)

Net income 3.8 % 2.5 % 0.5 %

Financial Data for Fiscal 2021, 2020 and 2019

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

Percent Change

2021 2020 Change Percent Change 2020 2019 Change Percent Change

Segment net revenue:

NE $746.6 $746.7 $(0.1) —% $746.7 $737.8 $8.9 1.2%

SE 91.3 102.7 (11.4) (11.1)% 102.7 103.4 (0.7) (0.7)%

OSP 361.0 286.9 74.1 25.8% 286.9 289.1 (2.2) (0.8)%

Net revenue $1,198.9 $1,136.3 $62.6 5.5% $1,136.3 $1,130.3 $6.0 0.5%

Amortization of acquired technologies $33.2 $32.7 $0.5 1.5% $32.7 $34.4 $(1.7) (4.9)%

Percentage of net revenue 2.8% 2.9% 2.9% 3.0%

Gross profit $714.4 $665.3 $49.1 7.4% $665.3 $651.4 $13.9 2.1%

Gross margin 59.6% 58.5% 58.5% 57.6%

Amortization of intangibles $33.3 $35.1 $(1.8) (5.1)% $35.1 $38.1 $(3.0) (7.9)%

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Percentage of net revenue 28.2% 27.7% 27.7% 30.4%

Restructuring and related charges

Restructuring and related (benefits) charges $(1.6) $3.5 $(5.1) (145.7)% $3.5 $15.4 $(11.9) (77.3)%

Percentage of net revenue (0.1)% 0.3% 0.3% 1.4%

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Percentage of net revenue 5.3% 5.8% 5.8% 2.8%

(Loss) income from discontinued operations, net of taxes

Percentage of net revenue

Foreign Currency Impact on Results of Operations

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Fiscal 2021 and 2020

If currency exchange rates had been constant in fiscal 2020 and 2019 , our consolidated net revenue in “constant dollars” would have increased by approximately $8.4 million , or 0.7% of net revenue, which primarily impacted our NE and SE segments.

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

If currency exchange rates had been constant in fiscal 2020 and 2019 , our consolidated operating expenses in “constant dollars” would have increased by approximately $6.2 million , or 0.5% of net revenue.

Fiscal 2019 and 2018

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

If currency exchange rates had been constant in fiscal 2021 and 2020, our consolidated net revenue in “constant dollars” would have decreased by approximately $15.5 million, or 1.3% of net revenue, which primarily impacted our NE and SE segments.

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

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

If currency exchange rates had been constant in fiscal 2021 and 2020, our consolidated operating expenses in “constant dollars” would have decreased by approximately $9.8 million, or 0.8% of net revenue.

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

GAAP and not using constant dollars.

Refer to Item 7A.

Qualitative and Quantitative Disclosures about Market Risk of this Annual Report on Form 10-K for further details on foreign currency instruments and our related risk management strategies.

Refer to Item 7A “Qualitative and Quantitative Disclosures about Market Risk” of this Annual Report on Form 10-K for further details on foreign currency instruments and our related risk management strategies.

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

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Fiscal 2021 and 2020

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

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

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

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

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

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

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

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

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

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

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

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

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

Fiscal 2019 and 2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Net revenue increased by $62.6 million, or 5.5%, during fiscal 2021 when compared to fiscal 2020.

This increase was driven by strength in our OSP segment, partially offset by a decrease in our SE segment.

Product revenues increase by $46.2 million, or 4.6%, during fiscal 2021 when compared to fiscal 2020.

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

Service revenues increased $16.4 million, or 12.5%, during fiscal 2021 when compared to fiscal 2020.

This increase was primarily due to increased support revenue from our NE segment, primarily driven by increased support revenues from our Wireless and Legacy Assurance products offset by declines in our SE segment further discussed below.

NE net revenue remained relatively flat between periods despite the impact of the COVID-19 lockdown, which resulted in a significant decline in the first half of fiscal 2021 and was offset by a recovery in the second half.

This was consistent across Field Instruments and Lab and Production Equipment.

SE net revenue decreased by $11.4 million, or 11.1%, during fiscal 2021 when compared to fiscal 2020.

This was primarily driven by decreased volume in our Data Center and Growth Assurance products.

OSP net revenue increased by $74.1 million, or 25.8%, during fiscal 2021 when compared to fiscal 2020.

This increase was primarily driven by growth in revenue from our Anti-Counterfeiting and 3D Sensing 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, profitability and general financial performance, and that could create quarter over quarter variability in our financial measures.

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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;

(a) pricing pressures due to, among other things, advanced chip component shortages, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, a general commoditization trend for certain products and increased freight and logistics costs;

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

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Revenue by Region

We operate in three geographic regions:

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

We operate in three geographic regions, including 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.

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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) :

June 27, 2020

June 29, 2019

June 30, 2018

July 3, 2021 June 27, 2020 June 29, 2019

United States $ 330.0 27.5 % $ 341.6 30.1 % $ 342.1 30.3 %

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Total Asia-Pacific $ 410.5 34.2 % $ 368.2 32.4 % $ 372.2 32.9 %

Switzerland $ 76.6 6.4 % $ 64.6 5.7 % $ 97.0 8.6 %

Other EMEA 296.2 24.7 % 288.7 25.4 % 234.8 20.8 %

Total EMEA $ 372.8 31.1 % $ 353.3 31.1 % $ 331.8 29.4 %

Total net revenue $ 1,198.9 100.0 % $ 1,136.3 100.0 % $ 1,130.3 100.0 %

Net revenue from customers outside the Americas for the fiscal years ended 2020 , 2019 and 2018 represented 63.5% , 62.3% and 52.4% of net revenue, respectively.

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

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

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

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

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

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

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

Net revenue from customers outside the Americas for the fiscal year ended 2021, represented 65.3% of net revenue, an increase of 1.8% year-over-year.

This increase is primarily due to revenue growth in NE from EMEA and OSP from Asia-Pacific.

We expect revenue from customers outside of the 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 in fiscal 2021 increased by 1.1% to 59.6% from 58.5% in fiscal 2020.

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

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

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

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Research and Development

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

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

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

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

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

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

demand of our Wireless and Fiber products.

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

R&D expense increased by $9.4 million, or 4.9%, during fiscal 2021 compared to fiscal 2020.

This increase was primarily driven by targeted investments to support increased demand in our growth products.

As a percentage of net revenue R&D remained relatively flat during fiscal 2021 when compared to fiscal 2020.

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

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

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

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

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

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

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

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

SG&A expense increased by $22.5 million, or 7.1%, in fiscal 2021 compared to fiscal 2020.

This increase was primarily due to a one-time decrease in the fair value of the earn-out liability of $ 29.6 million related to the RPC Photonics, Inc.

(RPC) acquisition in fiscal year 2020, partially offset by continued reduction in net expenses driven by our on-going cost reduction efforts.

As a percentage of net revenue, SG&A remained relatively flat at 28.2% in fiscal 2021.

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

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Amortization of acquired technologies and intangibles for fiscal 2021 decreased $1.3 million, or 1.9%, to $66.5 million from $67.8 million in fiscal 2020.

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

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

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

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

This decrease is primarily due to the runoff of intangible assets becoming fully amortized in fiscal 2021.

Acquired In-Process Research and Development

In accordance with authoritative guidance, we recognize acquired in-process and development (IPR&D) at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts.

We periodically review the stage of completion and likelihood of success of each IPR&D project.

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

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

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

See “ Note 10.

Acquired Developed Technology and Other Intangibles ” of the notes to our Consolidated Financial Statements for more detail.

Restructuring and Related Charges

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

During fiscal 2021, we recorded a net restructuring benefit of $1.6 million.

As of July 3, 2021, the ending balance of our restructuring accrual was $0.5 million which is expected to be paid during fiscal 2022.

We estimate annualized gross cost savings of approximately $33.7 million excluding any one-time charges as a result of the recent restructuring activities.

Refer to “Note 13.

Restructuring and Related Charges ” for more information.

As of June 27, 2020 , our total restructuring accrual was $6.5 million .

During fiscal 2020 , we recorded $3.5 million in restructuring and related charges.

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

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

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

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

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

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

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

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

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

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

As a result, a total restructuring charge of $16.1 million , for approximately 240 employees primarily in manufacturing, R&D and SG&A functions located in North America, Latin America, Europe and Asia was recorded in the year ended June 29, 2019 .

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

Restructuring and Related Charges” under Item 8 of this Annual Report on Form 10-K for more information.

Interest Income and Other Income, Net

Interest income and other income, net was $3.3 million in fiscal 2021 as compared to $9.6 million in fiscal 2020.

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

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

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

This $6.3 million decrease was primarily driven by $2.1 million unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures for fiscal 2021 and a decrease of $4.2 million in interest income due to lower yields on money market funds in which we invested excess cash during fiscal 2021 coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to fiscal 2021.

Interest Expense

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

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

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

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

Interest expense increased by $2.4 million, or 7.1%, during fiscal 2021 compared to fiscal 2020.

This increase was primarily due to an increase in the commitment fee on unutilized portion of the revolving credit facility, an increase in 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.

Provision for Income Tax

Fiscal 2020 Tax Expense

We recorded an income tax expense of $63.3 million for fiscal 2021.

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

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

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

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

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

and provides greater U.S.

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

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

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

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

Tax provisions of the

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

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

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

Treasury Department, the Internal Revenue Service and others.

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

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

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

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

Fiscal 2019 Tax Expense

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

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

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

Tax Cuts and Jobs Act enacted in December 2017.

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

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

Fiscal 2018 Tax Expense

We recorded an income tax expense of $12.9 million for fiscal 2018 .

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2018 differed from the incom e tax expen se recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances.

On December 22, 2017, the U.S.

Tax Cuts and Jobs Act was enacted.

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

The law has significantly changed the way the U.S.

taxes corporations.

The Act repealed the alternative minimum tax (AMT) for corporations and provided that the existing AMT credit carryforwards would be refunded in 2022 if not utilized.

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

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

The Act imposed a deemed repatriation of our foreign subsidiaries’ post-1986 earnings and profits (E&P) which had previously been deferred from U.S.

The deemed repatriation was reported in our fiscal 2018 U.S.

We completed the calculation of the total post-1986 foreign E&P for all foreign subsidiaries during the quarter ended December 29, 2018.

The change in estimate did not materially impact our financial statements.

The Act reduced the U.S.

federal corporate tax rate from 35% to 21% as of January 1, 2018.

We have remeasured our U.S.

deferred tax assets and liabilities which resulted in a net reduction of $734.9 million of our net deferred tax assets and an equal and offsetting reduction to the valuation allowance against these deferred tax assets.

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

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

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

deferred tax assets, there was no impact to the income tax provision from excess tax benefits for the year ended June 30, 2018.

The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2021 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances and to a $19.1 million charge related to the state tax impact of the internal intellectual property restructuring transactions.

On July 2, 2021, we completed a planned series of internal transactions restructuring certain of our intellectual properties.

The result of which aligns the properties in a single entity which owns, manages, directs, and protects the properties, including but not limited to patents, product designs, processes, manufacturing technologies, know-how, and trade secrets.

In conjunction with the internal restructuring, $2.3 billion ($482 million tax effected) of US federal net operating loss carryforwards were utilized, we recognized a new deferred tax asset relating to the book and tax basis difference of certain intangible assets of $589 million.

Given the full valuation allowance that is carried on US deferred tax assets, the change in deferred taxes as a result of the transaction did not have a material impact on the financial statements.

We recorded state tax expense including reserves for uncertain tax positions of $19.1 million related to this transaction.

During fiscal 2018 , the valuation allowance for deferred tax assets decreased by $712.9 million primarily due to the remeasurement of the US deferred tax assets and liabilities related to U.S.

Tax Cuts and Jobs Act.

During fiscal 2021, the valuation allowance for deferred tax assets decreased by $109.6 million primarily related to expiration of federal net operating losses, capital losses and federal research credits.

The decrease in income tax expense of $2.0M or 3.1% during fiscal 2021 compared to fiscal 2020 was primarily driven by the lower differing impact from the aforementioned fiscal 2021 state tax charge of $19.1 million as compared to the $32.5 million charge in fiscal 2020 for withholding taxes expected to be paid on the repatriation of $324 million of foreign earnings that were no longer considered to be permanently reinvested.

This reduction in charges was offset in part by increased income taxes resulting from higher earnings in fiscal 2021.

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

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Operating Segment Information ( in millions ):

Percentage Change

2021 2020 Change Percentage Change 2020 2019 Change Percentage Change

Net revenue $746.6 $746.7 $(0.1) —% $746.7 $737.8 $8.9 1.2%

Gross profit 474.2 482.4 (8.2) (1.7)% 482.4 473.3 9.1 1.9%

Gross margin 63.5% 64.6% 64.6% 64.2%

Net revenue $91.3 $102.7 $(11.4) (11.1)% $102.7 $103.4 $(0.7) (0.7)%

Gross profit 59.9 68.8 (8.9) (12.9)% 68.8 71.0 (2.2) (3.1)%

Gross margin 65.6% 67.0% 67.0% 68.7%

Net revenue $837.9 $849.4 $(11.5) (1.4)% $849.4 $841.2 $8.2 1.0%

Operating income 92.2 108.8 (16.6) (15.3)% 108.8 99.6 9.2 9.2%

Operating margin 11.0% 12.8% 12.8% 11.8%

Net revenue $361.0 $286.9 $74.1 25.8% $286.9 $289.1 $(2.2) (0.8)%

Gross profit 218.1 153.0 65.1 42.5% 153.0 145.8 7.2 4.9%

Gross margin 60.4% 53.3% 53.3% 50.4%

Operating income 161.3 102.1 59.2 58.0% 102.1 98.0 4.1 4.2%

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Network Enablement

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

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

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

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

NE gross margin decreased 1.1% during fiscal 2021 to 63.5% from 64.6% in fiscal 2020.

This decrease is due to unfavorable product mix within Field Instruments.

Service Enablement

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

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

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

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

SE gross margin decreased 1.4% during fiscal 2021 to 65.6% from 67.0% in fiscal 2020.

This decrease was primarily due to unfavorable product mix due to lower revenue volumes in Data Center.

Network and Service Enablement

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

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

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

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

NSE operating margin decreased 1.8% during fiscal 2021 to 11.0% from 12.8% in fiscal 2020.

The decrease in operating margin was primarily driven by decreased revenue volumes and product mix in our NE and SE portfolios and higher operating expense from R&D which lead to a decline in our operating margin.

Optical Security and Performance Products

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

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

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

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

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

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

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

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

OSP gross margin increased by 7.1% during fiscal 2021 to 60.4% from 53.3% in fiscal 2020.

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

OSP operating margin increased 9.1% during fiscal 2021 to 44.7% from 35.6% in fiscal 2020.

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

Liquidity and Capital Resources

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• Compliance with covenants and other terms and conditions related to our financing arrangements;

and the risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K.

Cash Investments

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

In general, our investment policy requires that securities purchased be rated A-1/P-1, A/A2 or better.

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

Securities that are downgraded subsequent to purchase are

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

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

At any time, no more than 5.0% or $5.0 million , whichever is greater, of each of our investment portfolios may be concentrated in a single issuer other than the U.S.

or sovereign governments or agencies.

Our investments in debt securities and marketable equity securities are primarily classified as available-for-sale investments or trading assets and are recorded at fair value.

• The risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K.

Cash and Cash Equivalents and Short Term Investments

Our cash and cash equivalents consist mainly of investments in institutional money market funds, short-term deposits held at major global financial institutions, and similar short duration instruments.

Our strategy is focused on the preservation of capital and supporting our liquidity requirements that meet high credit quality standards, as specified in our investment policy approved by the Audit Committee of our Board of Directors.

Our investments in debt securities and marketable equity securities are primarily classified as available for sale or trading assets and are recorded at fair value.

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

Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity.

We did not hold any investments in auction rate securities, mortgage backed securities, collateralized debt obligations, or variable rate demand notes at June 27, 2020 .

As of June 27, 2020 , U.S.

As of July 3, 2021, U.S.

subsidiaries owned approximately 47.4% of our cash and cash equivalents, short-term investments and restricted cash.

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

As of June 27, 2020 , the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

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

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

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

Nonetheless we could realize investment losses under adverse market conditions.

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

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

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

Refer to “ Note 11.

Debt ” for more information.

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

We are required to a 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 July 3, 2021, we had no amounts outstanding under the Credit Agreement.

Refer to “Note 11.

Debt ” for more information.

Year Ended June 27, 2020

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

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

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

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

Debt” under Item 8 of this Annual Report on Form 10-K for more information.

Year Ended July 3, 2021

As of July 3, 2021, our combined balance of cash and cash equivalents and restricted cash increased by $161.0 million to $708.4 million from a balance of $547.4 million as of June 27, 2020.

Cash provided by operating activities was $243.3 million, consisted of net income of $46.1 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $173.5 million, offset by changes in operating assets and liabilities that provided $23.7 million.

Changes in our operating assets and liabilities related primarily to an increase in accrued payroll and related expenses of $23.1 million due to timing of salary and related payments, a decrease in other current and non-current assets of $14.9 million, an increase in income taxes payable of $18.1, an increase in deferred revenue of $12.3 million, and an increase in accounts payable of $7.0 million driven by timing of purchases and related payments.

This was partially offset by cash outflows from a decrease in accrued expenses and other current and non-current liabilities of $22.4 million, an increase in accounts receivable of $15.0 million, and an increase in inventories of $14.3 million.

Cash used in investing activities was $48.7 million, primarily related to $52.1 million of cash used for capital expenditures and $0.7 million cash used for acquisitions.

This was partially offset by $4.1 million proceeds from sales of assets.

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

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

Year Ended June 29, 2019

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

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

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

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

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

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

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

Cash used in financing activities was $58.8 million, primarily resulting from $42.2 million of cash used to repurchase common stock, $17.9 million in withholding tax payment on vesting of restricted stock awards, $2.8 million cash paid to settle assumed debt from an acquisition in fiscal year 2020, $1.2 million of cash used to pay acquisition related to contingent consideration, and $1.3 million payments related to financing obligations, including issuance costs.

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

Contractual Obligations

The following summarizes our contractual obligations at June 27, 2020 , and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ):

The following summarizes our contractual obligations at July 3, 2021, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ):

Payments due by period

Total Less than

1 year 1 - 3 years 3 - 5 years More than

Asset retirement obligations—expected cash payments $ 3.7 $ 1.3 $ 0.6 $ 0.4 $ 1.4

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2024 1.00% senior convertible notes 460.0 460.0 — —

Short-term debt

Estimated interest payments 23.2 9.5 13.7 — —

Purchase obligations (1)

187.6 178.8 7.9 0.9 —

Operating lease obligations (2)

50.3 11.7 16.2 8.7 13.7

Non-cancelable leaseback obligations (1)

28.8 2.9 4.8 4.9 16.2

Royalty payment 2.8 1.3 0.8 0.7 —

Pension and post-retirement benefit payments (3)

104.3 9.2 13.8 12.6 68.7

Total $ 1,085.7 $ 674.7 $ 282.8 $ 28.2 $ 100.0

(1) Refer to “Note 18.

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

Of the $99.8 million of purchase obligations as of June 27, 2020 , $40.9 million are related to inventory and the other $58.9 million are non-inventory items.

As of June 27, 2020 , our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.

Of the $187.6 million of purchase obligations as of July 3, 2021, $90.8 million are related to inventory and the other $96.8 million are non-inventory items.

As of July 3, 2021, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.

Off-Balance Sheet Arrangements

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

As part of our ongoing business, we have not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, as is defined in rules promulgated by the SEC, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Employee Defined Benefit Plans and Other Post-retirement Benefits

3 unchanged sentences

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

As of June 27, 2020 , our pension plans were underfunded by $109.9 million since the PBO exceeded the fair value of plan assets.

As of July 3, 2021, our pension plans were underfunded by $104.3 million since the Pension Benefit Obligation (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.

10 unchanged sentences

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

We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.1 million based upon data as of June 27, 2020 .

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 $9.0 million based upon data as of July 3, 2021.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis