Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Viavi Solutions Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Viavi Solutions Inc. and its subsidiaries (the “Company”) as of July 3, 2021 and June 27, 2020, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders’ equity and of cash flows for each of the three years in the period ended July 3, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of July 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 3, 2021 and June 27, 2020, and the results of its operations and its cash flows for each of the three years in the period ended July 3, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases as of June 30, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - Identifying and Evaluating Performance Obligations in Certain Customer Contracts in the Network Enablement and Service Enablement Reportable Segments
As described in Notes 1 and 19 to the consolidated financial statements, the Company had $1,198.9 million of revenue for the year ended July 3, 2021 of which $746.6 million and $91.3 million related to the Network Enablement and Service Enablement segments, respectively. The Company’s revenue recognition is determined by management through the following steps: 1) identification of the contract with a customer; 2) identification of the performance obligations in the contract; 3) determination of the transaction price; 4) allocation of the transaction price to the performance obligations in the contract; and 5) recognition of revenue when (or as) the performance obligations are satisfied. Certain of the Company’s contracts with customers include performance obligations consisting of a variety of products and services and may involve a significant level of integration and interdependency between performance obligations. Identifying and evaluating whether products and services are considered distinct performance obligations may require significant management judgment, particularly in the Network Enablement and Service Enablement reportable segments due to the nature of the products and service offerings.
The principal considerations for our determination that performing procedures relating to revenue recognition - identifying and evaluating performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments is a critical audit matter are the significant judgment by management in identifying and evaluating performance obligations, which in turn led to a high degree of auditor judgment and effort in performing procedures and evaluating audit evidence obtained related to whether such performance obligations were appropriately identified and evaluated by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls related to the identification and evaluation of performance obligations in contracts with customers. These procedures also included, among others, testing on a sample basis, the completeness and accuracy of management’s identification and evaluation of performance obligations in certain customer contracts in the Network Enablement and Service Enablement reportable segments.
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/s/ PricewaterhouseCoopers LLP
San Jose, California
August 23, 2021
We have served as the Company’s auditor since 2005.
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VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Revenues:
Product revenue $ 1,051.4 $ 1,005.2 $ 1,004.2
Service revenue 147.5 131.1 126.1
Total net revenue 1,198.9 1,136.3 1,130.3
Cost of revenues:
Product cost of revenue 391.7 388.5 394.8
Service cost of revenue 59.6 49.8 49.7
Amortization of acquired technologies 33.2 32.7 34.4
Total cost of revenues 484.5 471.0 478.9
Gross profit 714.4 665.3 651.4
Operating expenses:
Research and development 203.0 193.6 187.0
Selling, general and administrative 337.5 315.0 343.5
Amortization of other intangibles 33.3 35.1 38.1
Restructuring and related (benefits) charges ( 1.6 ) 3.5 15.4
Total operating expenses 572.2 547.2 584.0
Income from operations 142.2 118.1 67.4
Interest and other income, net 3.3 9.6 6.2
Interest expense ( 36.1 ) ( 33.7 ) ( 34.3 )
Income from continuing operations before income taxes 109.4 94.0 39.3
Provision for income taxes 63.3 65.3 31.5
Income from continuing operations, net of taxes 46.1 28.7 7.8
Loss from discontinued operations, net of taxes — — ( 2.4 )
Net income $ 46.1 $ 28.7 $ 5.4
Net income per share from - basic:
Continuing operations $ 0.20 $ 0.13 $ 0.03
Discontinued operations — — ( 0.01 )
Net income $ 0.20 $ 0.13 $ 0.02
Net income per share from - diluted:
Continuing operations $ 0.20 $ 0.12 $ 0.03
Discontinued operations — — ( 0.01 )
Net income $ 0.20 $ 0.12 $ 0.02
Shares used in per-share calculations:
Basic 228.7 229.4 228.1
Diluted 235.9 233.7 231.2
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Net income $ 46.1 $ 28.7 $ 5.4
Other comprehensive income (loss):
Net change in cumulative translation adjustment, net of tax 61.5 ( 28.6 ) ( 27.0 )
Net change in available-for-sale investments, net of tax:
Unrealized holding (losses) gains arising during period — ( 0.1 ) 0.3
Less: reclassification adjustments included in net income — — 0.5
Net change in defined benefit obligation, net of tax:
Unrealized actuarial gains (losses) arising during period 4.1 ( 5.4 ) ( 7.3 )
Amortization of actuarial losses 3.1 2.8 1.8
Net change in accumulated other comprehensive income (loss) 68.7 ( 31.3 ) ( 31.7 )
Comprehensive income (loss) $ 114.8 $ ( 2.6 ) $ ( 26.3 )
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
July 3, 2021 June 27, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 697.8 $ 539.0
Short-term investments 1.6 1.5
Restricted cash 4.3 3.5
Accounts receivable, net 256.5 235.5
Inventories, net 94.9 83.3
Prepayments and other current assets 57.0 50.8
Total current assets 1,112.1 913.6
Property, plant and equipment, net 196.0 172.5
Goodwill, net 396.5 381.4
Intangibles, net 88.0 148.1
Deferred income taxes 109.3 105.4
Other non-current assets 59.5 55.3
Total assets $ 1,961.4 $ 1,776.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 63.2 $ 53.0
Accrued payroll and related expenses 76.0 51.4
Deferred revenue 69.7 54.6
Accrued expenses 24.8 22.6
Short-term debt (Note 11)
414.2 2.8
Other current liabilities 57.1 48.4
Total current liabilities 705.0 232.8
Long-term debt 209.8 600.9
Other non-current liabilities 226.0 231.2
Commitments and contingencies (Note 18)
Convertible senior notes (Note 11)
45.8 —
Stockholders’ equity:
Common stock, $ 0.001 par value; 1 billion shares authorized; 228 million shares issued and outstanding at July 3, 2021 and June 27, 2020
0.2 0.2
Additional paid-in capital 70,265.5 70,274.3
Accumulated deficit ( 69,393.7 ) ( 69,397.2 )
Accumulated other comprehensive loss ( 97.2 ) ( 165.9 )
Total stockholders’ equity 774.8 711.4
Total liabilities and stockholders’ equity $ 1,961.4 $ 1,776.3
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
OPERATING ACTIVITIES:
Net income $ 46.1 $ 28.7 $ 5.4
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense 35.8 40.0 39.7
Amortization of acquired technologies and other intangibles 66.5 67.8 72.5
Stock-based compensation 48.3 44.6 38.2
Amortization of debt issuance costs and accretion of debt discount 23.7 22.2 22.7
Net change in fair value of contingent liabilities ( 5.3 ) ( 31.5 ) ( 5.9 )
Loss on sales of investments — — 0.5
Loss on disposal of long-lived assets 0.1 0.1 1.4
Other 2.8 5.7 5.1
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ( 15.0 ) ( 5.1 ) ( 17.8 )
Inventories ( 14.3 ) 3.7 ( 15.4 )
Other current and non-currents assets 14.9 10.6 0.1
Accounts payable 7.0 ( 9.2 ) 8.7
Income taxes payable 18.1 — 5.0
Deferred revenue, current and non-current 12.3 5.9 ( 3.1 )
Deferred taxes, net 1.6 11.9 ( 1.9 )
Accrued payroll and related expenses 23.1 ( 7.0 ) 5.9
Accrued expenses and other current and non-current liabilities ( 22.4 ) ( 52.8 ) ( 22.3 )
Net cash provided by operating activities 243.3 135.6 138.8
INVESTING ACTIVITIES:
Maturities of available-for-sale investments — — 47.3
Sales of available-for-sale investments — — 119.9
Acquisition of businesses, net of cash acquired ( 0.7 ) ( 2.5 ) ( 47.0 )
Capital expenditures ( 52.1 ) ( 31.9 ) ( 45.0 )
Proceeds from the sale of assets 4.1 4.6 5.4
Net cash (used in) provided by investing activities ( 48.7 ) ( 29.8 ) 80.6
FINANCING ACTIVITIES:
Payment of debt issuance costs ( 0.1 ) ( 1.6 ) ( 0.5 )
Repurchase and retirement of common stock ( 42.2 ) ( 44.4 ) ( 11.2 )
Payment of financing obligations ( 1.2 ) ( 2.7 ) ( 1.7 )
Redemption of convertible debt — — ( 276.9 )
Proceeds from exercise of employee stock options and employee stock purchase plan 6.6 5.5 5.4
Withholding tax payment on vesting of restricted stock awards ( 17.9 ) ( 21.0 ) ( 15.5 )
Payment of acquisition related holdback — ( 6.8 ) —
Payment of acquired debt ( 2.8 ) — —
Payment of acquisition related contingent consideration ( 1.2 ) ( 0.7 ) —
Net cash used in financing activities ( 58.8 ) ( 71.7 ) ( 300.4 )
Effect of exchange rates on cash, cash equivalents and restricted cash 25.2 ( 17.1 ) ( 12.9 )
Net increase (decrease) in cash, cash equivalents and restricted cash 161.0 17.0 ( 93.9 )
Cash, cash equivalents and restricted cash at beginning of period (1)
547.4 530.4 624.3
Cash, cash equivalents and restricted cash at end of period (2)
$ 708.4 $ 547.4 $ 530.4
Supplemental disclosure of cash flow information
Cash paid for interest $ 12.3 $ 11.3 $ 11.8
Cash paid for income taxes $ 43.8 $ 50.6 $ 29.8
(1) These amounts include both current and non-current balances of restricted cash totaling $ 8.4 million, $ 8.9 million and $ 12.9 million as of June 27, 2020, June 29, 2019, and June 30, 2018, respectively.
(2) These amounts include both current and non-current balances of restricted cash totaling $ 10.6 million, $ 8.4 million and $ 8.9 million as of July 3, 2021, June 27, 2020 and June 29, 2019, respectively.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in millions)
Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated
Other
Comprehensive
Income (Loss) Total
Shares Amount
Balance at June 30, 2018 226.7 $ 0.2 $ 70,216.2 $ ( 69,378.6 ) $ ( 102.9 ) $ 734.9
Net income — — — 5.4 — 5.4
Other comprehensive loss — — — — ( 31.7 ) ( 31.7 )
Shares issued under employee stock plans, net of tax effects 3.2 — ( 10.1 ) — — ( 10.1 )
Stock-based compensation — — 38.6 — — 38.6
Repurchase of common stock ( 1.1 ) — — ( 11.3 ) — ( 11.3 )
Balance at June 29, 2019 228.8 $ 0.2 $ 70,244.7 $ ( 69,384.5 ) $ ( 134.6 ) $ 725.8
Cumulative adjustment for adoption of ASU 2016-02 (Topic 842) — — — 3.0 3.0
Net income — — — 28.7 — 28.7
Other comprehensive loss — — — — ( 31.3 ) ( 31.3 )
Shares issued under employee stock plans, net of tax effects 3.2 — ( 15.3 ) — — ( 15.3 )
Stock-based compensation — — 44.9 — — 44.9
Repurchase of common stock ( 3.7 ) — — ( 44.4 ) — ( 44.4 )
Balance at June 27, 2020 228.3 $ 0.2 $ 70,274.3 $ ( 69,397.2 ) $ ( 165.9 ) $ 711.4
Net income — — — 46.1 — 46.1
Other comprehensive income — — — — 68.7 68.7
Shares issued under employee stock plans, net of tax effects 3.0 — ( 11.5 ) — — ( 11.5 )
Stock-based compensation — — 48.5 — — 48.5
Repurchase of common stock ( 3.0 ) — — ( 42.6 ) — ( 42.6 )
Reclassification between equity and temporary equity for senior convertible notes — — ( 45.8 ) — — ( 45.8 )
Balance at July 3, 2021 228.3 $ 0.2 $ 70,265.5 $ ( 69,393.7 ) $ ( 97.2 ) $ 774.8
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Description of Business
Viavi Solutions, Inc. (VIAVI, also referred to as the Company), is a global provider of network test, monitoring and assurance solutions to communications service providers, enterprises, network equipment manufacturers, original equipment manufacturers, government and avionics. VIAVI is also a leader in management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, aerospace, automotive and medical applications.
Fiscal Years
The Company utilizes a 52-53-week fiscal year ending on the Saturday closest to June 30th. The Company’s 2021 fiscal year is a 53-week year ending on July 3, 2021. The Company’s 2020 and 2019 fiscal years were 52-week years ending on June 27, 2020 and June 29, 2019, respectively. The Company’s first quarter of fiscal year 2021 was a 14-week quarter compared to the standard 13-week quarters.
Principles of Consolidation
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.
Use of Estimates
The preparation of the Company’s Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that effect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. Estimates are based on historical factors, current circumstances and the experience and judgment of management. Under changed conditions the Company’s reported financial positions or results of operations may be materially impacted when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect more readily available information. Actual results may differ from these estimates due to the uncertainty around the magnitude, duration and effects of the COVID-19 pandemic, as well as other factors.
COVID-19
The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity which is likely to decrease demand for a broad variety of goods and services, including from our customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time until the disease is contained. While this may have a negative impact to our sales and our results of operations, the Company is not aware of any specific events or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Annual Report on Form 10-K. These estimates may change, as new events occur and additional information becomes available. Actual results may differ materially from these estimates assumptions or conditions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.
Cash and Cash Equivalents
The Company considers highly liquid instruments such as treasury bills, commercial paper and other money market instruments with original maturities of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents also include certain term deposits with financial institutions that the Company can liquidate with 30 days’ advance notice without incurring penalties.
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Cash
At July 3, 2021 and June 27, 2020, the Company’s short-term restricted cash balances were $ 4.3 million and $ 3.5 million, respectively. The Company’s long-term restricted cash balances, included in other non-current assets in the Company’s Consolidated Balance Sheets, were $ 6.3 million and $ 4.9 million as of July 3, 2021 and June 27, 2020, respectively. These balances primarily include interest-bearing investments in bank certificates of deposit and money market funds which act as collateral supporting the issuance of letters of credit and performance bonds for the benefit of third parties. Refer to “Note 18. Commitments and Contingencies” for more information.
Investments
The Company’s investments in debt securities are classified as available for sale investments, recorded at fair value. The cost of securities sold is based on the specific identified method. Unrealized gains and losses resulting from changes in fair value on available-for-sale investments, net of tax, are reported within accumulated other comprehensive loss.
The Company periodically reviews investments in debt securities for impairment. If a debt security’s fair value is below amortized cost and the Company either intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the Company records an other-than-temporary impairment charge to current earnings for the entire amount of the impairment. If a debt security’s fair value is below amortized cost and the Company does not expect to recover the entire amortized cost of the security, the Company separates the other-than-temporary impairment into: (i) the portion of the loss related to credit factors, or the credit loss portion; and, (ii) the portion of the loss that is not related to credit factors, or the non-credit loss portion. The credit loss portion is recorded as an allowance to credit loss through interest and other income, net, and the non-credit loss portion is recorded as a separate component of other comprehensive loss.
Fair Value of Financial Instruments
For assets and liabilities measured at fair value, fair value is the price to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. When determining fair value, the Company considers the principle or most advantageous market in which it would transact, and the Company considers assumptions that market participants would use when pricing asset or liabilities.
The three levels of inputs that may be used to measure fair value are:
• Level 1 : Includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds, U.S. Treasury securities and marketable equity securities as they are traded with sufficient volume and frequency of transactions.
• Level 2 : Includes financial instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 instruments of the Company include asset-backed securities, foreign currency forward contracts and debt. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events.
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
• Level 3 : Includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and significant to the overall fair value measurement. As of July 3, 2021 and June 27, 2020, the Company did not hold any Level 3 investment securities. The Company’s Level 3 liabilities as of July 3, 2021 and June 27, 2020 consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its business and asset acquisitions completed during fiscal 2021 and 2020. The fair value of earn-out liabilities was determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-adjusted discount rate, gross profit volatility, and projected financial forecast of acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value recognized in the Selling, General and Administrative (SG&A) expense of the Consolidated Statements of Operations.
Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Inventories
The Company’s inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of net realizable value. On a quarterly basis, the Company assesses the value of its inventory and writes down those inventories determined to be obsolete or in excess of its forecasted usage to their market value. The Company’s estimates of realizable value are based upon management analysis and assumptions including, but not limited to, forecasted sales levels by product, expected product life cycle, product development plans and future demand requirements. The Company’s product line management personnel play a key role in its excess review process by providing updated sales forecasts, managing product transitions and working with manufacturing to minimize excess inventory. Differences between actual market conditions and customer demand to the Company’s forecasts, may create favorable or unfavorable inventory positions, and may result in additional inventory write-downs or higher than expected income from operations. The Company’s inventory amounts include material, labor, and manufacturing overhead costs.
Leases
The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. If the rate implicit in the lease is not readily determinable for our operating leases, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. Operating right-of-use (ROU) assets are recognized at commencement based on the amount of the initial measurement of the lease liability. Operating ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.
Operating ROU assets are included in other non-current assets and lease liabilities are included in other current liabilities and other non-current liabilities in the Company’s Consolidated Balance Sheets. Lease and non-lease components for all leases are accounted for separately. The Company does not recognize ROU assets and lease liabilities for leases with a lease term of twelve months or less.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using a straight-line method, over the estimated useful lives of the assets: building and improvements 10 to 50 years; machinery and equipment 2 to 20 years; and furniture, fixtures, software and office equipment 2 to 10 years.
Leasehold improvements are amortized on the straight-line method over the lesser of the estimated useful lives of the asset or the initial lease term.
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Demonstration units are amortized on the straight-line method and are Company products used for demonstration purposes for existing and prospective customers. These assets are generally not intended to be sold and have an estimated useful life of 3 to 5 years.
Costs related to software acquired, developed or modified solely to meet the Company’s internal requirements and for which there are no substantive plans to market are capitalized in accordance with the authoritative guidance on accounting for the costs of computer software developed or obtained for internal use. Only costs incurred after the preliminary planning stage of the project and after management has authorized and committed funds to the project are eligible for capitalization. Costs capitalized for computer software developed or obtained for internal use are included in Property, plant and equipment, net, on the Company’s Consolidated Balance Sheets.
Goodwill
Goodwill represents the excess of the purchase price paid over the net fair value of assets acquired and liabilities assumed. The Company tests goodwill for impairment at the reporting unit level at least annually, during the fourth quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the asset may be impaired.
The accounting guidance provides the Company with the option to perform a qualitative assessment to determine whether further impairment testing is necessary. The qualitative assessment considers events and circumstances that might indicate that a reporting unit’s fair value is less than its carry amount. These events and circumstances include, macro-economic conditions, such as a significant adverse change in the Company’s operating environment, industry or market considerations; entity-specific events such as increasing costs, declining financial performance, or loss of key personnel, or other events, such as the sale of a reporting unit, adverse regulatory developments or a sustained decrease in the Company’s stock price.
If it is determined, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative test is required. Otherwise, no further testing is required.
Under the quantitative test, if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recorded in the Consolidated Statements of Operations as impairment of goodwill. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures: (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. Refer to “Note 9. Goodwill” for more information.
Intangible Assets
In connection with the Company’s acquisitions, the Company generally recognize assets for customer relationships, acquired developed technologies, patents, proprietary know-how, trade secrets, in-process research and development (IPR&D) and trademarks and trade names. Finite lived intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets, which is the period during which expected cash flows support the fair value of such intangible assets. Refer to “Note 10. Acquired Developed Technology and Other Intangibles” for more information.
Long-lived Assets
Long-lived assets, including intangible assets and property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of any asset or asset group may not be recoverable. Such an evaluation is performed at the lowest identifiable level of cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows generated from the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset or asset group over its estimated fair value. Estimates of future cash flow require significant judgment based on anticipated future and operating results, which are subject to variability and change.
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pension and Other Postretirement Benefits
The funded status of the Company’s retirement-related benefit plans is recognized on the Consolidated Balance Sheets. The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal year end, the measurement date. For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO) and for the non-pension postretirement benefit plan the benefit obligation is the accumulated postretirement benefit obligation (APBO). The PBO represents the actuarial present value of benefits expected to be paid upon its employee’s retirement. The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered. Unfunded or partially funded plans, with the benefit obligation exceeding the fair value of plan assets, are aggregated and recorded as a retirement and non-pension postretirement benefit obligation equal to this excess. The current portion of the retirement-related benefit obligation represents the actuarial present value of benefits payable in the next 12 months in excess of the fair value of plan assets, measured on a plan-by-plan basis. This liability is recorded in other current liabilities in the Consolidated Balance Sheets.
Net periodic pension cost is recorded in the Consolidated Statements of Operations and includes service cost, interest cost, expected return on plan assets, amortization of prior service cost or credit, and gains or losses previously recognized as a component of accumulated other comprehensive loss. Service cost represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year. Interest cost represents the time value of money cost associated with the passage of time. Gains or losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions. Prior service cost or credit represents the cost of benefit improvements attributable to prior service granted in plan amendments. Gains or losses and prior service cost or credit not recognized as a component of net periodic pension cost in the Consolidated Statements of Operations are recognized as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets, net of tax. Those gains or losses and prior service cost or credit are subsequently recognized as a component of net periodic pension cost pursuant to the recognition and amortization provisions of the authoritative guidance.
The measurement of the benefit obligation and net periodic pension cost is based on the Company’s estimates and actuarial valuations provided by third-party actuaries and are approved by management. These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions, including estimates of discount rates, expected return on plan assets, rate of compensation increases and mortality rates. The Company evaluates these assumptions periodically but not less than annually. In estimating the expected return on plan assets, the Company considers historical returns on plan assets, diversification of plan investments, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plan’s invested assets.
The Company measures its benefit obligation and plan assets using the month-end date of June 30, which is closest to the Company’s fiscal year-end.
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments, restricted cash, trade receivables and foreign currency forward contracts. The Company’s cash and cash equivalents and short-term investments are held in safekeeping by large, creditworthy financial institutions. The Company invests its excess cash primarily in institutional money market funds, short-term deposits and similar short duration high quality, investment grade instruments.
The Company has established guidelines relative to credit ratings, diversification and maturities that seek to maintain the safety and liquidity of these investments. The Company’s foreign exchange derivative instruments expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreements. The Company seeks to mitigate such risk by limiting its counterparties to major financial institutions and by spreading such risk across several major financial institutions. Potential risk of loss with any one counterparty resulting from such risk is monitored by the Company on an ongoing basis.
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The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. When the Company becomes aware that a specific customer is unable to meet its financial obligations, the Company records a specific allowance to reflect the level of credit risk in the customer’s outstanding receivable balance. In addition, the Company records additional allowances based on certain percentages of aged receivable balances. These percentages consider a variety of factors including, but not limited to, current economic trends, historical payment and bad debt write-off experience. The Company classifies bad debt expenses as SG&A expense.
The Company is not able to predict changes in the financial stability of its customers. Any material changes in the financial status of any one customer or a group of customers could have a material adverse effect on the Company’s results of operations and financial condition. Although such losses have been within management’s expectations to date, there can be no assurance that such allowances will continue to be adequate. The Company has significant trade receivables concentrated in the telecommunications industry. While the Company’s allowance for doubtful accounts balance is based on historical loss experience along with anticipated economic trends, unanticipated financial instability in the telecommunications industry could lead to higher than anticipated losses.
As of July 3, 2021 two customers represented 10 % or more of the Company’s total accounts receivable, net. As of June 27, 2020, no customer represented 10% or more of the Company’s total accounts receivable, net.
During fiscal 2021, 2020 and 2019, one customer generated 10 % or more of total net revenues. Refer to “Note 19. Operating Segments and Geographic Information” for more information.
The Company relies on a limited number of suppliers and contract manufacturers for a number of key components and sub-assemblies contained in the Company’s products.
The Company generally uses a rolling twelve-month forecast based on anticipated product orders, customer forecasts, product order history and backlog to determine its materials requirements for any one period. Lead times for the parts and components that the Company orders may vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at any given time. If the forecast does not meet actual demand, the Company may have surplus or dearth of some materials and components, as well as excess inventory purchase commitments. The Company could experience reduced or delayed product shipments or incur additional inventory write-downs and cancellation charges or penalties, which may result in increased costs and have a material adverse impact on the Company’s results of operations.
Foreign Currency Forward Contracts
The Company conducts its business and sells its products to customers primarily in North America, Europe, Asia and South America. In the normal course of business, the Company’s financial position is routinely subject to market risks associated with foreign currency rate fluctuations due to balance sheet positions in foreign currencies. The Company evaluates foreign exchange risks and utilizes foreign currency forward contracts to reduce such risks, hedging the gains or losses generated by the re-measurement of significant foreign currency denominated monetary assets and liabilities. The fair value of these contracts is reflected as other current assets or liabilities and the change in fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The gain or loss from the change in fair value of these foreign currency forward contracts largely offsets the change in fair value of the foreign currency denominated monetary assets or liabilities, which is also recorded as a component of interest and other income, net.
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Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where that local currency is the functional currency, are translated into U.S. dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments directly recorded as a component of Accumulated other comprehensive loss on the Consolidated Balance Sheets. Income and expense accounts are translated at exchange rates from the prior month end, which are deemed to approximate the exchange rate when the income and expense is recognized. Gains and losses from re-measurement of monetary assets and liabilities that are denominated in currencies other than the respective functional currencies are included in the Consolidated Statements of Operations as a component of interest and other income, net .
Revenue Recognition
The Company derives revenue from a diverse portfolio of network solutions and optical technology products and services, as follows:
• Products: Network Enablement (NE) and Service Enablement (SE) products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. NE and SE are collectively referred to as Network and Service Enablement (NSE). The Company’s Optical Security and Performance (OSP) products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications.
• Services: The Company also offers a range of product support and professional services designed to comprehensively address customer requirements. These include repair, calibration, extended warranty, software support, technical assistance, training and consulting services. Implementation services provided in conjunction with hardware or software solution projects include sale of the products along with project management, set-up and installation.
Steps of revenue recognition
The Company accounts for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue:
1. Identify the contract with a customer: Generally, the Company considers customer purchase orders which, in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before the Company considers an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable; and, (v) the agreement has commercial substance. The Company utilizes judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures implemented by the Company.
2. Identify the performance obligations in the contract: The Company assesses whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and, (ii) the Company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The Company's performance obligations consist of a variety of products and services offerings which include networking equipment; proprietary pigment, optical filters, proprietary software licenses; support and maintenance which includes hardware support that extends beyond the Company's standard warranties, software maintenance, installation, professional and implementation services, and training.
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Identifying and evaluating whether products and services are considered distinct performance obligations may require significant judgment particularly in NSE due to the nature of the product and service offerings. The Company may enter into contracts that involve a significant level of integration and interdependency between a software license and installation services. Judgment may be required to determine whether the software license is considered distinct in the context of the contract and accounted for separately, or not distinct in the context of the contract and accounted for together with the installation service.
3. Determine the transaction price: Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to the customer. The Company’s contracts may include terms that could cause variability in the transaction price including rebates, sales returns, market incentives and volume discounts. Variable consideration is generally accounted for at the portfolio level and estimated based on historical information. If a contract includes a variable amount, the price adjustments are estimated at contract inception. In both cases, estimates are updated at the end of each reporting period as additional information becomes available.
4. Allocate the transaction price to performance obligations in the contract: If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Many of the Company’s contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training. Contracts may also include rights or options to acquire future products and/or services, which are accounted for as separate performance obligations by the Company, only if the right or option provides the customer with a material right that it would not receive without entering into the contract. For contracts with multiple performance obligations, the Company allocates the total transaction value to each distinct performance obligation based on relative standalone selling price (SSP). Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when the Company sells that good or service separately under similar circumstances to similar customers. If a directly observable price is not available, the SSP must be estimated based on multiple factors including, but not limited to, historical pricing practices, internal costs, and profit objectives as well as overall market conditions.
5. Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and solution contracts or in instances where software is sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if the Company has evidence that all acceptance provisions will be, or have been, satisfied. For fixed-price support and extended warranty contracts, or certain software arrangements which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services outside of an extended warranty or support contract is recognized at the time of completion of the related service. For other professional services or time-based labor contracts, revenue is recognized as the Company performs the services and the customers receive and/or consume the benefits.
Revenue policy and practical expedients
The following policy and practical expedient elections have been made by the Company under the revenue standard:
• Revenue-based taxes as assessed by governmental authorities have been excluded from the measurement of transaction price.
• Shipping and handling activities performed after the customer obtains control of the good are treated as activities to fulfill the promise (cost of fulfillment). Therefore, the Company does not evaluate whether the shipping and handling activities are promised services.
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• Incremental costs of obtaining contracts that would have been recognized within one year or less are recognized as an expense when incurred. These costs are included in SG&A expense. The costs of obtaining contracts where the amortization period for recognition of the expense is beyond a year are capitalized and recognized over the revenue recognition period of the original contract.
• The portfolio approach is used for certain types of variable consideration for contracts with similar characteristics. The methodology is used when the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
• If at contract inception, the expected period between the transfer of promised goods or services and payment is within one year or less, the Company forgoes adjustment for the impact of significant financing component for the contract.
Disaggregation of Revenue
The Company's revenue is presented on a disaggregated basis on the Consolidated Statements of Operations and in “Note 19. Operating Segments and Geographic Information”. This information includes revenue from reportable segments and a break-out of products and services for which the nature and timing of the revenue as characterized above is generally at a point in time and over time, respectively.
Warranty
The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. Warranty cost estimates are based on historical experience of known product failure rates, use of materials to repair or replace defective products, and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.
Shipping and Handling Costs
The Company records costs related to shipping and handling of revenue in cost of sales for all periods presented.
Advertising Expense
The Company expenses advertising costs as incurred. Advertising costs totaled $ 2.7 million, $ 3.7 million and $ 2.6 million in fiscal 2021, 2020 and 2019, respectively.
Research and Development Expense
Costs related to Research and Development (R&D), which primarily consists of labor and benefits, supplies, facilities, consulting and outside service fees, are charged to expense as incurred. The authoritative guidance allows for capitalization of software development costs incurred after a product’s technological feasibility has been established until the product is available for general release to the public. The Company believes its software development process is completed concurrent with the establishment of technological feasibility. As such, software development costs have been expensed as incurred.
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Stock-Based Compensation
The Company's stock-based compensation includes a combination of time-based restricted stock awards and performance-based awards. Restricted stock awards are granted without an exercise price and are converted to shares immediately upon vesting. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.
For performance-based awards, shares attained over target upon vesting are reflected as awards granted during the period.
Time-based restricted stock awards will generally vest in annual or quarterly installments over a period of three to four years subject to the employees’ continuing service to the Company. The Company's performance-based awards may include performance conditions, market conditions, time-based service conditions or a combination there of and are generally expected to vest over one to four years . In addition, the actual number of shares awarded upon vesting of performance-based grants may vary from the target shares depending upon the achievement of the relevant performance or market-based conditions.
The Company estimates the fair value of stock options and Employee Stock Purchase Plan (ESPP) purchase rights using the Black-Scholes Merton (BSM) option-pricing model. This option-pricing model requires the input of assumptions, including the award’s expected life and the price volatility of the underlying stock.
The Company does not apply expected forfeiture rate and accounts for forfeitures as they occur. The total fair value of the equity awards is recorded on a straight-line basis, over the requisite service period of the awards for each separate vesting period of the award, except for certain performance-based awards which are amortized based upon the graded vesting method.
Income Taxes
In accordance with the authoritative guidance on accounting for income taxes, the Company recognizes income taxes using an asset and liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated.
The authoritative guidance provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur based on an evaluation of both positive and negative evidence and the relative weight of the evidence. With the exception of certain international jurisdictions, the Company has determined that at this time it is more likely than not that deferred tax assets attributable to the remaining jurisdictions will not be realized, primarily due to uncertainties related to its ability to utilize its net operating loss carryforwards before they expire. Accordingly, the Company has established a valuation allowance for such deferred tax assets. If there is a change in the Company’s ability to realize its deferred tax assets for which a valuation allowance has been established, then its tax provision may decrease in the period in which it determines that realization is more likely than not. Likewise, if the Company determines that it is not more likely than not that its deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and the Company’s tax provision may increase in the period in which the Company makes the determination.
The authoritative guidance on accounting for uncertainty in income taxes prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, it provides guidance on recognition, classification, and disclosure of tax positions. The Company is subject to income tax audits by the respective tax authorities in the jurisdictions in which it operates. The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The Company recognizes liabilities based on its estimate of whether, and the extent to which, additional tax liabilities are more likely than not. If the Company ultimately determines that the payment of such a liability is not necessary, then it reverses the liability and recognizes a tax benefit during the period it is determined no longer necessary.
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The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that the Company make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on the Company’s tax provision in a future period.
Restructuring Accrual
In accordance with authoritative guidance on accounting for costs associated with exit or disposal activities, generally costs associated with restructuring activities are recognized when they are incurred. A liability for post-employment benefits for workforce reductions related to restructuring activities is recorded when payment is probable, and the amount is reasonably estimable. The Company continually evaluates the adequacy of the remaining liabilities under its restructuring initiatives. Although the Company believes that these estimates accurately reflect the costs of its restructuring plans, actual results may differ, thereby requiring the Company to record additional liabilities or reverse a portion of existing liabilities.
Contingencies
The Company is subject to various potential loss contingencies arising in the ordinary course of business. In determining a loss contingency, the Company considers the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss. An estimated loss is accrued when it is probable that an asset has been impaired, a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required.
Contingent liabilities include contingent consideration in connection with the Company’s acquisitions, which represent earn-out payments and is recognized at fair value on the acquisition date and is remeasured each reporting period with subsequent adjustments recognized in the SG&A expense of the Company’s Consolidated Statements of Operations. While the Company believes the estimates and assumptions are reasonable, there is significant judgment and uncertainty involved.
Asset Retirement Obligations
Asset Retirement Obligations (ARO) are legal obligations associated with the retirement of long-lived assets pertaining to leasehold improvements. These liabilities are initially recorded at fair value and the related asset retirement costs are capitalized by increasing the asset carrying value and ARO by the same amount. Asset retirement costs are subsequently depreciated over the useful lives of the related assets. Subsequent to initial recognition, the Company records period-to-period changes in the ARO liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. The Company derecognizes ARO liabilities when the related obligations are settled. As of July 3, 2021, and June 27, 2020, the Consolidated Balance Sheets included ARO of $ 1.3 million and $ 0.9 million, respectively, in other current liabilities and $ 2.4 million and $ 3.1 million, respectively, in other non-current liabilities.
Balance at Beginning of Period Liabilities Incurred Liabilities Settled Accretion Expense Revisions to Estimates Balance at End of Period
Year ended July 3, 2021 $ 4.0 $ 0.3 $ ( 0.7 ) $ 0.1 $ — $ 3.7
Year ended June 27, 2020 3.6 0.3 — 0.1 — 4.0
Note 2. Recently Issued Accounting Pronouncements
Recent Accounting Pronouncements Adopted
In June 2016, the FASB issued guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial assets are estimated based on expected losses. In the first quarter of fiscal 2021 the Company adopted the accounting standard using the modified retrospective approach. The adoption of the new standard did not have a material impact on the Company’s Consolidated Financial Statements.
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In the first quarter of fiscal 2020 the Company adopted ASC 842 - Leases using the modified retrospective approach. The Company elected to apply the optional transition approach of not adjusting comparative period financial information for the adoption impact.The Company also elected the package of practical expedients to not reassess whether a contract contains a leas, lease classification and accounting for initial direct costs. For additional information refer to “Note 12. Leases.”
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments with characteristics of liability and equity. This new guidance removes separation models for certain convertible debt instruments which will now be accounted for as a single liability measured at amortized cost. In addition, the interest expense recognized for these instruments will typically be closer to the coupon interest rate due to the removal of the separation model's non-cash discount amortization. ASU 2020-06 is effective for the Company in the first quarter of fiscal 2023, with early adoption permitted for the first quarter of fiscal 2022. Adoption of this new guidance can either be on a modified retrospective or full retrospective basis.
The Company will adopt the new guidance in the first quarter of fiscal 2022, on a full retrospective basis, reflecting the application of the new standard in each prior reporting period. The elimination of the separation model for the convertible debt instruments is expected to reduce additional paid in capital by approximately $ 80 million and $ 130 million as of July 3, 2021 and June 27, 2020, respectively. The removal of the non-cash debt discount amortization will reduce interest expense and increase net income by approximately $ 20 million for the each of the fiscal years ended 2021 and 2020. In addition, the adoption will eliminate the temporary equity balance for the convertible senior notes as of July 3, 2021 of $ 45.8 million. These adjustments will result in the reported balance of the convertible notes being more consistent with the par value offset only by the unamortized issuance costs.
We currently expect the adoption of ASU 2020-06 will result in the reduction of non-cash interest expense for fiscal 2022 and until the affected notes have been settled with a corresponding increase in income attributable to common stockholders for both basic and diluted earnings per share. The adoption will have no impact on the Consolidated Statement of Cash Flows.
In December 2019, the FASB issued guidance which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes , and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal year 2022. The Company does not believe adoption of this new accounting guidance will have a material impact on its Consolidated Financial Statements.
In August 2018, the FASB issued guidance to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period, and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This guidance is effective for the Company in the first quarter of fiscal 2022. The Company does not believe adoption of this new accounting guidance will have a material impact on its Consolidated Financial Statements.
Note 3. Earnings Per Share
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. If dilutive, the effect of outstanding Employee Stock Purchase Program (ESPP) purchase rights, restricted stock units (RSUs), performance-based stock units (PSUs), market-based stock units (MSUs), options and senior convertible notes is reflected in diluted net income per share by application of the treasury stock method and/or the if-converted method, as applicable. The calculation of diluted net income per share excludes all anti-dilutive common shares.
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The following table sets forth the computation of basic and diluted net income per share ( in millions, except per share data ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Numerator:
Income from continuing operations, net of taxes $ 46.1 $ 28.7 $ 7.8
Loss from discontinued operations, net of taxes — — ( 2.4 )
Net income $ 46.1 $ 28.7 $ 5.4
Denominator:
Weighted-average shares outstanding:
Basic 228.7 229.4 228.1
Shares issuable assuming conversion of convertible notes (1)
4.6 1.2 —
Effect of dilutive securities from stock-based benefit plans 2.6 3.1 3.1
Diluted 235.9 233.7 231.2
Net income per share from - basic:
Continuing operations $ 0.20 $ 0.13 $ 0.03
Discontinued operations — — ( 0.01 )
Net income $ 0.20 $ 0.13 $ 0.02
Net income per share from - diluted:
Continuing operations $ 0.20 $ 0.12 $ 0.03
Discontinued operations — — ( 0.01 )
Net income $ 0.20 $ 0.12 $ 0.02
(1) Represents the dilutive impact under the if-converted method for the Company's 1.75 % Senior Convertible Notes due 2023 and the 1.00 % Senior Convertible Notes due 2024. As of July 3, 2021, the if-converted value in excess of outstanding principal of the 1.75 % Senior Convertible Notes due 2023 and the 1.00 % Senior Convertible Notes due 2024 was $ 13.8 million and $ 54.8 million, respectively. Refer to “Note 11. Debt” for more information.
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net income per share because their effect would have been anti-dilutive ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Stock options and ESPP — — 0.1
Full Value Awards 0.4 0.2 0.4
Total potentially dilutive securities 0.4 0.2 0.5
Note 4. Accumulated Other Comprehensive Loss
The Company’s accumulated other comprehensive loss consists of the accumulated net unrealized gains and losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.
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Changes in accumulated other comprehensive loss by component, net of tax, were as follows ( in millions ):
Unrealized gains
on available-for-sale
investments Foreign currency translation adjustments Change in unrealized components of defined benefit
obligations, net of tax (1) Total
Beginning balance as of June 27, 2020 $ ( 5.1 ) $ ( 129.6 ) $ ( 31.2 ) $ ( 165.9 )
Other comprehensive income before reclassification — 61.5 4.1 65.6
Amounts reclassified from accumulated other comprehensive income — — 3.1 3.1
Net current period other comprehensive income — 61.5 7.2 68.7
Ending balance as of July 03, 2021 $ ( 5.1 ) $ ( 68.1 ) $ ( 24.0 ) $ ( 97.2 )
(1) Activity before reclassifications to the Consolidated Statements of Operations during the fiscal year ended July 3, 2021 relates to the unrealized actuarial gain of $ 6.3 million, net of income tax effect of $ 2.2 million. The amount reclassified out of accumulated other comprehensive loss represents the amortization of actuarial losses included as a component of SG&A in the Consolidated Statement of Operations for the year ended July 3, 2021. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.
Note 5. Acquisitions
3Z Telecom, Inc. Acquisition
On May 31, 2019, the Company acquired all of the equity of 3Z Telecom, Inc. (3Z) for approximately $ 23.2 million in cash and contingent consideration (earn-out) liability of up to $ 7.0 million in cash based on the achievement of certain net revenue targets over approximately a two year period. The $ 23.2 million cash consideration is subject to final cash and net working capital adjustments and includes escrow payments of $ 4.3 million, which are reserved for potential breaches of representations and warranties. The acquisition of 3Z expands the Company’s Field Instrument offerings.
The 3Z acquisition meets the definition of a business and has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were not material.
The fair value of consideration transferred for the 3Z acquisition consists of the following (in millions) :
Cash consideration paid at closing $ 18.9
Escrow payments 4.3
Fair value of contingent consideration 5.5
Total purchase consideration $ 28.7
The fair value of the earn-out payments on the 3Z acquisition date was determined by applying a risk-neutral framework using a Monte Carlo Simulation.
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The identified tangible and intangible assets acquired, on the acquisition date, were as follows (in millions) :
Tangible assets acquired $ 4.1
Intangible assets acquired:
Developed technology 4.4
Customer relationships 7.9
Customer backlog 0.1
Goodwill 12.2
Total consideration transferred $ 28.7
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed, was as follows (in millions) :
Cash $ 2.2
Total other assets 3.6
Total liabilities ( 1.7 )
Net tangible assets acquired $ 4.1
Acquired intangible assets fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives, which range from five to six years . Customer backlog will be fully amortized within one year .
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of 3Z. Goodwill has been assigned to the NE segment and is not deductible for tax purposes.
Results of operations of 3Z have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
RPC Photonics, Inc. Acquisition
On October 30, 2018, the Company acquired all of the equity interest of RPC Photonics, Inc. (RPC) for approximately $ 33.4 million in cash and an additional earn-out of up to $ 53.0 million in cash based on the achievement of certain gross profit targets over an approximate four year period. The $ 33.4 million cash consideration includes escrow payments of $ 3.5 million, which are reserved for potential breaches of representations and warranties. The acquisition of RPC expands the Company’s 3D Sensing offerings.
The RPC acquisition met the definition of a business and the acquisition has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were not material.
The fair value of consideration transferred for the RPC acquisition consists of the following (in millions) :
Cash consideration paid at closing $ 29.9
Escrow payments 3.5
Fair value of contingent consideration 36.2
Total purchase consideration $ 69.6
The fair value of the earn-out payments on the RPC acquisition date was determined by applying a risk-neutral framework using a Monte Carlo Simulation.
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The identified tangible and intangible assets, on the acquisition date, were as follows (in millions) :
Tangible assets acquired: $ 5.7
Intangible assets acquired:
Developed technology 15.7
Customer relationships 14.0
Customer backlog 0.3
Goodwill 33.9
Total consideration transferred $ 69.6
The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed, was as follows (in millions) :
Cash $ 1.8
Other current assets 1.8
Property and equipment 2.6
Total liabilities ( 0.5 )
Net tangible assets acquired $ 5.7
The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives that range from six to seven years . Customer backlog will be fully amortized within one year .
Goodwill arising from this acquisition is primarily attributed to sales of future products and services of RPC. Goodwill has been assigned to the OSP segment and is not deductible for tax purposes.
Results of operations of RPC have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.
Other Acquisitions:
During the twelve months ended June 27, 2020, the Company completed an asset acquisition for total consideration of approximately $ 5.2 million in cash paid at close and an earn-out liability of up to $ 5.5 million cash to be paid based on the occurrence or achievement of certain agreed upon targets. In connection with this acquisition, the Company recorded $ 6.2 million of developed technology and customer relationships and $ 1.4 million of deferred tax liability resulting from the acquisitions. The acquired developed technology and customer relationship assets are being amortized over their estimated useful lives of six years .
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a reconciliation of changes in fair value of the Company’s earn-out liabilities for the years ended July 3, 2021 and June 27, 2020, as follows ( in millions ):
RPC Other (1)
Total
Balance: June 29, 2019 $ 30.3 $ 8.1 $ 38.4
Additions to Contingent Consideration — 3.7 3.7
Change in Fair Value measurement ( 29.6 ) ( 1.9 ) ( 31.5 )
Payments of Contingent Consideration ( 0.7 ) — ( 0.7 )
Balance: June 27, 2020 $ — $ 9.9 $ 9.9
Change in Fair Value measurement — ( 4.7 ) ( 4.7 )
Payments of Contingent Consideration — ( 1.2 ) ( 1.2 )
Balance July 3, 2021 $ — $ 4.0 $ 4.0
(1) See Note 5. Acquisitions and of the Notes to the Company’s Consolidated Financial Statements for more detail.
Note 6. Balance Sheet and Other Details
Contract Balances
Unbilled Receivables: The Company records a receivable when an unconditional right to consideration exists and transfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of customer invoicing. Payment terms vary based on product or service offerings and payment is generally required within 30 to 90 days from date of invoicing. Certain performance obligations may require payment before delivery of the service to the customer .
Contract assets: A Contract Asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract Assets include fixed fee professional services, where the transfer of services has occurred in advance of the Company's right to invoice. Contract Assets, included in accounts receivable, net, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. Contract Asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.
Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of July 3, 2021 and June 27, 2020, the Company had total Unbilled Receivables/Contract Assets of $ 6.2 million and $ 3.8 million, respectively.
Deferred revenue: Deferred revenue consists of contract liabilities primarily related to support, solution deployment services, software maintenance, product, professional services, and training when the Company has a right to invoice or payments have been received and transfer of control has not occurred. Revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. Contract liabilities are included in other current liabilities on the Consolidated Balance Sheets.
The Company also has short-term and long-term deferred revenues related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as the Company's performance obligations under the contract are completed and accepted by the customer.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables summarize the activity related to deferred revenue, for the year ended July 3, 2021 ( in millions ):
July 3, 2021
Deferred revenue:
Balance at beginning of period $ 74.6
Revenue deferrals for new contracts (1)
125.7
Revenue recognized during the period (2)
( 110.8 )
Balance at end of period (3)
$ 89.5
Short-term deferred revenue $ 69.7
Long-term deferred revenue $ 19.8
(1) Included in these amounts is the impact from foreign currency exchange rate fluctuations.
(2) Revenue recognized during the period represents releases from the balance at the beginning of the period as well as releases from the following period quarter-end deferrals.
(3) The long-term portion of deferred revenue is included as a component of Other non-current liabilities.
Remaining performance obligations: Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations not delivered or are incomplete, as of July 3, 2021. Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded. The aggregate amount of the transaction price allocated to remaining performance obligations does not include amounts owed under cancellable contracts where there is no substantive termination penalty.
Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidation, adjustments for revenue that has not materialized, and adjustments for currency.
The value of the transaction price allocated to remaining performance obligations as of July 3, 2021, was $ 283.1 million. The Company expects to recognize 92 % of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.
Accounts Receivable Allowances
The table below presents the activities and balances for allowance for doubtful accounts, as follows ( in millions ):
Balance at Beginning of Period Charged to Costs and Expenses Deduction (1) Balance at
End of Period
Year Ended July 3, 2021 $ 3.0 $ 1.1 $ ( 2.1 ) $ 2.0
Year Ended June 27, 2020 2.0 2.0 ( 1.0 ) 3.0
Year Ended June 29, 2019 2.4 1.4 ( 1.8 ) 2.0
(1) Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.
Inventories, net
The following table presents the components of inventories, net, as follo ws ( in millions ):
July 3, 2021 June 27, 2020
Finished goods $ 41.0 $ 30.0
Work in process 16.6 22.5
Raw materials 37.3 30.8
Inventories, net $ 94.9 $ 83.3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Prepayments and Other Current Assets
The following table presents the components of prepayments and other current assets, as follo ws ( in millions ):
July 3, 2021 June 27, 2020
Prepayments $ 13.4 $ 10.9
Assets held for sale 6.5 2.5
Advances to contract manufacturers 10.1 7.3
Refundable income taxes 5.9 10.8
Transaction tax receivables 13.2 10.6
Other current assets 7.9 8.7
Prepayments and other current assets $ 57.0 $ 50.8
Property, Plant and Equipment, net
The following table presents the components of property, plant and equipment, net, as follows ( in millions ):
July 3, 2021 June 27, 2020
Land $ 19.9 $ 16.8
Buildings and improvements 34.8 22.9
Machinery and equipment 325.3 298.5
Furniture, fixtures, software and office equipment 74.3 74.3
Leasehold improvements 69.5 66.8
Construction in progress 30.1 15.6
Property, plant and equipment, gross 553.9 494.9
Less : Accumulated depreciation and amortization
( 357.9 ) ( 322.4 )
Property, plant and equipment, net $ 196.0 $ 172.5
Other current liabilities
The following table presents the components of other current liabilities, as follows ( in millions ):
July 3, 2021 June 27, 2020
Customer prepayments $ 0.4 $ 0.5
Restructuring accrual 0.5 6.5
Income tax payable 22.6 10.7
Warranty accrual 4.3 4.6
Transaction tax payable 4.9 3.2
Operating lease liabilities (Note 12)
11.6 11.7
Other 12.8 11.2
Other current liabilities $ 57.1 $ 48.4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Non-current Liabilities
The following table presents the components of other non-current liabilities, as follo ws ( in millions ):
July 3, 2021 June 27, 2020
Pension and post-employment benefits $ 97.0 $ 102.7
Deferred tax liability 24.3 23.9
Financing obligation 16.1 16.2
Fair value of contingent consideration (1)
— 9.4
Long-term deferred revenue 19.8 20.0
Operating lease liabilities (Note 12)
30.8 28.1
Uncertain tax position 18.3 11.6
Warranty accrual 5.4 4.8
Other 14.3 14.5
Other non-current liabilities $ 226.0 $ 231.2
(1) See “Note 5. Acquisitions” and “Note 8. Fair Value Measurements” of the Notes to the Company’s Consolidated Financial Statements for more detail.
Interest Income and Other Income, net
The following table presents the components of interest income and other income, net, as follows ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Interest income $ 2.9 $ 7.1 $ 8.1
Foreign exchange gain (loss), net — 2.1 ( 2.9 )
Other income, net 0.4 0.5 1.5
Loss on sale of investments — ( 0.1 ) ( 0.5 )
Interest income and other income, net $ 3.3 $ 9.6 $ 6.2
Note 7. Investments and Forward Contracts
Short-Term Investments
As of July 3, 2021, the Company’s short-term investments of $ 1.6 million were comprised primarily of trading securities related to the deferred compensation plan, of which $ 0.3 million was invested in debt securities, $ 1.0 million was invested in equity securities and $ 0.3 million was invested in money market instruments. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
As of June 27, 2020, the Company’s short-term investments of $ 1.5 million were comprised primarily of trading securities related to the deferred compensation plan, of which $ 0.3 million was invested in debt securities, $ 0.9 million was invested in equity securities and $ 0.3 million was invested in money market instruments and other. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.
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Non-Designated Foreign Currency Forward Contracts
The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions. The Company does not use these foreign currency forward contracts for trading purposes.
As of July 3, 2021, the Company had forward contracts that were effectively closed but not settled with the counterparties by year end. Therefore, the fair value of these contracts of $ 2.6 million and $ 1.4 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of June 27, 2020, the fair value of these contracts of $ 2.2 million and $ 1.5 million is reflected as prepayments and other current assets and other current liabilities, respectively.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near year end; therefore, the fair value of the contracts is not significant. As of July 3, 2021 and June 27, 2020, the notional amounts of the forward contracts that Company held to purchase foreign currencies were $ 114.0 million and $ 146.4 million, respectively, and the notional amounts of forward contracts that Company held to sell foreign currencies were $ 27.8 million and $ 22.0 million, respectively.
The change in the fair value of these foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The cash flows related to the settlement of foreign currency forward contracts are classified as operating activities. The foreign exchange forward contracts incurred a gain of $ 14.5 million and a loss of $ 0.8 million for the years ended July 3, 2021 and June 27, 2020, respectively.
Note 8. Fair Value Measurements
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Assets and liabilities are classified under a fair value hierarchy in three levels of inputs as described in “Note 1. Basis of Presentation.” This includes: Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs; and, Level 3—Unobservable inputs for the asset or liability.
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The Company’s assets and liabilities measured at fair value for the periods presented are as follows ( in millions ):
July 3, 2021 June 27, 2020
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Assets:
Debt available-for-sale securities:
Asset-backed securities $ 0.4 $ — $ 0.4 $ — $ 0.5 $ — $ 0.5 $ —
Total debt available-for-sale securities 0.4 — 0.4 — 0.5 — 0.5 —
Money market funds 408.9 408.9 — — 334.6 334.6 — —
Trading securities 1.6 1.6 — — 1.4 1.4 — —
Foreign currency forward contracts (1)
2.6 — 2.6 — 2.2 — 2.2 —
Total assets (2)
$ 413.5 $ 410.5 $ 3.0 $ — $ 338.7 $ 336.0 $ 2.7 $ —
Liability:
Foreign currency forward contracts (3)
$ 1.4 $ — $ 1.4 $ — $ 1.5 $ — $ 1.5 $ —
Contingent consideration (4)
4.0 — — 4.0 9.9 — — 9.9
Total liabilities $ 5.4 $ — $ 1.4 $ 4.0 $ 11.4 $ — $ 1.5 $ 9.9
(1) $ 2.6 million and $ 2.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of July 3, 2021 and June 27, 2020, respectively.
(2) Includes as of July 3, 2021, $ 401.0 million in cash and cash equivalents, $ 1.6 million in short-term investments, $ 2.7 million in restricted cash, $ 2.6 million in prepayments and other current assets, and $ 5.6 million in other non-current assets on the Company’s Consolidated Balance Sheets. Includes as of June 27, 2020, $ 327.2 million in cash and cash equivalents, $ 1.4 million in short-term investments, $ 3.4 million in restricted cash, $ 2.2 million in prepayments and other current assets and $ 4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets.
(3) Includes $ 1.4 million and $ 1.5 million in other current liabilities on the Company’s Consolidated Balance Sheets as of July 3, 2021 and June 27, 2020, respectively.
(4) Includes $ 0.0 million and $ 9.4 million in other non-current liabilities and $ 4.0 million and $ 0.5 million in other current liabilities as of July 3, 2021 and June 27, 2020, respectively.
Note 9. Goodwill
Changes in the carry value of goodwill allocated segment are as follows (in millions) :
Network
Enablement Service
Enablement Optical Security
and Performance
Products Total
Balance as of June 29, 2019 (1)
$ 338.9 $ — $ 42.2 $ 381.1
Acquisitions (2)
— 4.3 — 4.3
Currency translation and other adjustments ( 4.0 ) — — ( 4.0 )
Balance as of June 27, 2020 (3)
$ 334.9 $ 4.3 $ 42.2 $ 381.4
Currency translation 14.8 0.3 — 15.1
Balance as of July 03, 2021 (4)
$ 349.7 $ 4.6 $ 42.2 $ 396.5
(1) Gross goodwill balances for NE, SE and OSP were $ 640.8 million, $ 272.6 million and $ 126.7 million, respectively as of June 29, 2019. Accumulated impairment for NE, SE and OSP was $ 301.9 million, $ 272.6 million and $ 84.5 million, respectively as of June 29, 2019.
(2) See “Note 5. Acquisitions” of the Notes to Consolidated Financial Statement for additional information related to the Company’s acquisitions.
(3) Gross goodwill balances for NE, SE and OSP were $ 636.8 million, $ 276.9 million and $ 126.7 million, respectively as of June 27, 2020. Accumulated impairment for NE, SE and OSP was $ 301.9 million, $ 272.6 million and $ 84.5 million, respectively as of June 27, 2020.
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(4) Gross goodwill balances for NE, SE and OSP were $ 651.6 million, $ 277.2 million and $ 126.7 million, respectively as of July 3, 2021. Accumulated impairment for NE, SE and OSP was $ 301.9 million, $ 272.6 million and $ 84.5 million, respectively as of July 3, 2021.
Impairment of Goodwill
The Company tests goodwill at the reporting unit level for impairment annually, during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired. The Company determined that, based on its organizational structure and the financial information that is provided to and reviewed by the Company’s Chief Operating Decision Maker (CODM) during fiscal 2021, 2020 and 2019 and its reporting units were NE, SE and OSP.
No indications of impairment were identified for fiscal years ending on July 3, 2021, June 27, 2020 and June 29, 2019.
Note 10. Acquired Developed Technology and Other Intangibles
The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles as of July 3, 2021, and June 27, 2020, ( in millions ):
As of July 03, 2021 Weighted-Average Remaining Useful Life Gross Carrying Amount Accumulated Amortization Net
Acquired developed technology 3.2 years $ 423.8 $ ( 356.9 ) $ 66.9
Customer relationships 3.5 years 195.4 ( 180.8 ) 14.6
Other (1)
1.1 years 37.9 ( 31.4 ) 6.5
Total intangibles $ 657.1 $ ( 569.1 ) $ 88.0
As of June 27, 2020 Weighted-Average Remaining Useful Life Gross Carrying Amount Accumulated Amortization Net
Acquired developed technology 3.7 years $ 437.1 $ ( 341.6 ) $ 95.5
Customer relationships 2.6 years 194.7 ( 154.1 ) 40.6
Other (1)
2.0 years 35.7 ( 23.7 ) 12.0
Total intangibles $ 667.5 $ ( 519.4 ) $ 148.1
(1) Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.
The following table presents details of the Company’s amortization of acquired technology and other intangibles, ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Cost of revenues $ 33.2 $ 32.7 $ 34.4
Operating expense 33.3 35.1 38.1
Total $ 66.5 $ 67.8 $ 72.5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of July 3, 2021, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows ( in millions ):
Fiscal Years
2022 $ 39.5
2023 25.5
2024 10.3
2025 6.8
2026 3.1
Thereafter 2.8
Total amortization $ 88.0
Note 11. Debt
As of July 3, 2021 and June 27, 2020, the Company’s debt on the Consolidated Balance Sheets was as follows, including the carrying amounts of the liability and equity components of the Senior Convertible Notes ( in millions ):
July 3, 2021 June 27, 2020
Principal amount of 1.00 % Senior Convertible Notes due 2024
$ 460.0 $ —
Unamortized discount of Senior Convertible Notes liability component, short-term ( 42.9 ) —
Unamortized Senior Convertible Notes debt issuance cost, short-term ( 2.9 ) —
Other short-term debt — 2.8
Short-term debt 414.2 2.8
Principal amount of 1.00 % Senior Convertible Notes due 2024
— 460.0
Principal amount of 1.75 % Senior Convertible Notes due 2023
225.0 225.0
Unamortized discount of Senior Convertible Notes liability component, long-term ( 14.4 ) ( 79.1 )
Unamortized Senior Convertible Notes debt issuance cost, long-term ( 0.8 ) ( 5.0 )
Long-term debt 209.8 600.9
Temporary equity 1.00% Convertible Notes due 2024 45.8 —
Carrying amount of Senior Convertible Notes equity component (1)
$ 91.0 $ 136.8
(1) Included in additional paid-in-capital on the Consolidated Balance Sheets.
Revolving Credit Facility
On May 5, 2020, the Company entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties. The Credit Agreement provides for a $ 300 million senior secured revolving credit facility, which matures on March 1, 2023. The Credit Agreement also provides that, under certain circumstances, the Company may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $ 200 million plus additional amounts so long as our secured net leverage ratio, determined on a pro forma basis does not exceed 1.50 :1.00. The proceeds from the credit facility established under the Credit Agreement will be used for working capital and other general corporate purposes. The obligations under the Credit Agreement are secured by substantially all of our assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The Company is 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 July 3, 2021, the Company had no amounts outstanding under the Credit Agreement.
Short-Term Debt
The short-term debt balance of $ 414.2 million as of July 3, 2021 represents the current redeemable status of our 1.00 % Senior Convertible Notes. See further discussion below under the section "1.00% Senior Convertible Notes (2024 Notes)" as it relates to reclassification of these notes from long-term debt to short-term debt at the end of fiscal 2021. The short-term debt of $ 2.8 million as of June 27, 2020 was assumed as part of an acquisition completed in fiscal 2020 and was paid in full during fiscal 2021.
1.75 % Senior Convertible Notes (2023 Notes)
On May 29, 2018, the Company issued $ 225.0 million aggregate principal amount of 1.75 % Senior Convertible Notes due 2023 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $ 155.5 million aggregate principal of the 2023 Notes to certain holders of the 2033 Notes in exchange for $ 151.5 million principal of the 2033 Notes (the Exchange Transaction) and issued and sold $ 69.5 million aggregate principal amount of the 2023 Notes in a private placement to accredited institutional buyers (the Private Placement). The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.3 % based on the 5 -year swap rate plus credit spread as of the issuance date. As of July 3, 2021, the expected remaining term of the 2023 Notes is 1.9 years.
The proceeds from the 2023 Notes Private Placement amounted to $ 67.3 million after issuance costs. The 2023 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.75 % payable in cash semi-annually in arrears on June 1st and December 1st of each year, beginning December 1, 2018. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.
The 2023 Notes may be converted under certain circumstances, based on an initial conversion rate of 71.7231 shares (equivalent to an initial conversion price of approximately $ 13.94 per share), at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances. The initial conversion price represents a 37.5 % premium to the closing sale price of the Company’s common stock on the pricing date, May 22, 2018, which will be subject to customary anti-dilution adjustments. Holders may convert the 2023 Notes at any time on or prior to the close of business on the business day immediately preceding March 1, 2023 in multiples of $1,000 principal amount, under the following circumstances:
• On any date during any calendar quarter beginning after September 30, 2018 (and only during such calendar quarter) if the closing price of the Company’s common stock was more than 130 % of the then current conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period ending the last trading day of the previous calendar quarter;
• Upon the occurrence of specified corporate events;
• If the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the indenture of the 2023 Notes); or
• During the five consecutive business-day period immediately following any ten consecutive trading-day period in which the trading price per $1,000 principal amount of the 2023 Notes for each day of such ten consecutive trading-day period was less than 98 % of the product of the closing sale price of VIAVI common stock and the applicable conversion rate on such date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the periods from, and including, March 1, 2023, until the close of business on the business day immediately preceding June 1, 2023, holders may convert the 2023 Notes at any time, regardless of the foregoing circumstances.
Holders of the 2023 Notes may require the Company to purchase all or a portion of the 2023 Notes upon the occurrence of a fundamental change at a price equal to 100 % of the principal amount of the 2023 Notes to be purchased, plus accrued and unpaid interest to, but excluding the fundamental repurchase date. The Company may redeem all or a portion of the 2023 Notes for cash at any time on or after June 1, 2021, at a redemption price equal to 100 % of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date under certain conditions.
In accordance with the authoritative accounting guidance, the Company separated the 2023 Notes into liability and equity components. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2023 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.3 % over the period from the issuance date through June 1, 2023 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $ 190.1 million, and the equity component, or debt discount, of the 2023 Notes was determined to be $ 34.9 million.
In connection with the issuance of the 2023 Notes, the Company incurred $ 2.2 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $ 1.9 million and the equity issuance costs, attributable to the equity component of $ 0.3 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through June 1, 2023. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of July 3, 2021, the unamortized portion of the debt issuance costs related to the 2023 Notes was $ 0.8 million, which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
Based on quoted market prices as of July 3, 2021 and June 27, 2020, the fair value of the 2023 Notes was approximately $ 300.7 million and $ 251.4 million, respectively. The 2023 Notes are classified within Level 2 as they are not actively traded in markets.
1.00 % Senior Convertible Notes (2024 Notes)
On March 3, 2017, the Company issued $ 400 million aggregate principal amount of 1.00 % Senior Convertible Notes due 2024 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On March 22, 2017, the Company issued an additional $ 60 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $ 451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00 % payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased.
The 2024 Notes may be converted under certain circumstances, based on an initial conversion rate of 75.6229 shares (equivalent to an initial conversion price of approximately $ 13.22 per share), at the option of the holders into cash up to the principal amount, with the remaining amount converted into cash, shares of the Company’s common stock, or a combination of cash and shares of the Company’s common stock at the Company’s election. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances. The initial conversion price represents a 32.5 % premium to the closing sale price of the Company’s common stock on the pricing date, February 27, 2017, which will be subject to customary anti-dilution adjustments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2024 Notes may be converted at any time on or prior to the close of business on the business day immediately preceding December 1, 2023, in multiples of $1,000 principal amount, at the option of the holder only under the following circumstances:
• On any date during any calendar quarter beginning after June 30, 2017 (and only during such calendar quarter) if the closing price of the Company’s common stock was more than 130 % of the then current conversion price for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading-day period ending on the last trading day of the previous calendar quarter;
• If the Company distributes to all or substantially all holders of its common stock rights or warrants (other than pursuant to a stockholder rights plan) entitling them to purchase, for a period of 45 calendar days or less, shares of VIAVI’s common stock at a price less than the average closing sale price of VIAVI’s common stock for the ten trading days preceding the declaration date for such distribution;
• If the Company distributes to all or substantially all holders of its common stock, cash or other assets, debt securities or rights to purchase our securities (other than pursuant to a stockholder rights plan), at a per share value exceeding 10 % of the closing sale price of the Company’s common stock on the trading day preceding the declaration date for such distribution;
• If the Company is party to a specified transaction, a fundamental change or a make-whole fundamental change (each as defined in the Indenture of the 2024 Notes); or
• During the five consecutive business-day period immediately following any ten consecutive trading-day period in which the trading price per $1,000 principal amount of the 2024 Notes for each day of such ten consecutive trading-day period was less than 98 % of the product of the closing sale price of VIAVI’s common stock and the applicable conversion rate on such date.
During the periods from, and including December 1, 2023 until the close of business on the business day immediately preceding March 1, 2024, holders may convert the 2024 Notes at any time regardless of the foregoing circumstances.
Holders of the 2024 Notes may require the Company to purchase all or a portion of the 2024 Notes upon the occurrence of a fundamental change at a purchase price equal to 100 % of the principal amount of the 2024 Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental repurchase date.
The Indenture provides for customary events of default, including payment defaults, breaches of covenants, failure to pay certain judgments and certain events of bankruptcy, insolvency and reorganization. If an event of default occurs and is continuing, the principal amount of the 2024 Notes, plus accrued and unpaid interest, if any, may be declared immediately due and payable, subject to certain conditions set forth in the Indenture. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs.
In accordance with the authoritative accounting guidance, the Company separated the 2024 Notes into liability and equity components. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 4.8 % based on the 7 -year swap rate plus credit spread as of the issuance date. The difference between the 2024 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 4.8 % over the period from the issuance date through March 1, 2024 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $ 358.1 million, and the equity component, or debt discount, of the 2024 Notes was determined to be $ 101.9 million. As of July 3, 2021, the expected remaining term of the 2024 Notes is 2.7 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In connection with the issuance of the 2024 Notes, the Company incurred $ 8.9 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $ 6.9 million and the equity issuance costs, attributable to the equity component of $ 2.0 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through March 1, 2024. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of July 3, 2021, the unamortized portion of the debt issuance costs related to the 2024 Notes was $ 2.9 million, which was included as a direct reduction from the carrying amount of the debt on the Consolidated Balance Sheets.
During the fourth quarter of fiscal 2021, the closing price of our common stock exceeded the 130 % of the applicable conversion price of the 2024 Notes, on at least 20 of the last 30 consecutive trading days of the calendar quarter, causing the 2024 Notes to be convertible by their holders for the period of July 1, 2021 to September 30, 2021. As the settlement of conversion of the 2024 Notes is in cash for the principal amount and, if applicable, cash and/or shares of our common stock for any conversion premium at the Company’s election. As a result, $ 414.2 million in book value of the Notes has been reclassified to short-term debt and the difference in the book value and the face value of the 2024 Notes, of $ 45.8 million, has been reclassified from permanent equity to temporary equity. The Company is not aware of, nor expects, any conversion requests by holders as the market price of the 2024 Notes exceeds its conversion value.
Based on quoted market prices as of July 3, 2021 and June 27, 2020, the fair value of the 2024 Notes was approximately $ 646.9 million and $ 523.3 million, respectively. The 2024 Notes are classified within Level 2 as they are not actively traded in markets.
The Company was in compliance with all debt covenants as of July 3, 2021 and June 27, 2020.
Interest Expense
The following table presents the interest expense for contractual interest, amortization of debt issuance cost and accretion of debt discount ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Interest expense-contractual interest $ 9.5 $ 8.5 $ 8.8
Amortization of debt issuance cost 2.0 1.4 1.4
Accretion of debt discount 21.7 20.8 21.3
Note 12. Leases
The Company is a lessee in several operating leases, primarily real estate facilities for office space. The Company's lease arrangements are composed of operating leases with various expiration dates through March 31, 2042. The Company's leases do not contain any material residual value guarantees.
During the fiscal year ending on July 3, 2021, the total operating lease costs were $ 13.9 million. Total variable lease costs were immaterial during the fiscal year ending on July 3, 2021. The total operating costs were included in cost of revenues, research and development, and selling, general and administrative in the Company’s Consolidated Statements of Operations.
As of July 3, 2021, the weighted-average remaining lease term was 7.7 years, and the weighted-average discount rate was 4.7 %.
During the fiscal year ending on July 3, 2021, cash paid for amounts included in the measurement of operating lease liabilities was $ 15.1 million; and operating ROU assets obtained in exchange of new operating lease liabilities was $ 15.4 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The balance sheet information related to our operating leases is as follows ( in millions ):
July 3, 2021
Other non-current assets $ 45.1
Total operating ROU assets $ 45.1
Other current liabilities $ 11.6
Other non-current liabilities 30.8
Total operating lease liabilities $ 42.4
Future minimum operating lease payments as of July 3, 2021 are as follows ( in millions ):
Operating Leases
Fiscal 2022 $ 11.7
Fiscal 2023 9.4
Fiscal 2024 6.8
Fiscal 2025 4.9
Fiscal 2026 3.8
Thereafter 13.7
Total lease payments 50.3
Less: Interest ( 7.9 )
Present value of lease liabilities $ 42.4
Future minimum operating lease payments as of June 27, 2020, were as follows ( in millions ):
Operating Leases
Fiscal 2021 $ 12.8
Fiscal 2022 10.2
Fiscal 2023 6.0
Fiscal 2024 4.6
Fiscal 2025 3.6
Thereafter 7.5
Total lease payments 44.7
Less: Interest ( 4.9 )
Present value of lease liabilities $ 39.8
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Note 13. Restructuring and Related Charges
The Company's restructuring events are primarily intended to reduce costs, consolidate operations, streamline product manufacturing and address market conditions. During fiscal year 2021, the Company recorded a benefit related to restructuring actions of $ 1.6 million, and in fiscal years 2020 and 2019, restructuring and related charges of $ 3.5 million and $ 15.4 million, respectively. A summary of the activity in the remaining restructuring plan is outlined below ( in millions ):
Balance as of June 27, 2020 Fiscal Year 2021 Charges Cash
Settlements Non-cash
Settlements
and Other
Adjustments Balance as of July 3, 2021
Fiscal 2019 NSE, including AW $ 6.5 $ ( 1.6 ) $ ( 4.3 ) $ ( 0.1 ) $ 0.5
The NSE, including AW Restructuring Plan was approved by Management during the first quarter of fiscal 2019. The plan is part of a strategy to improve overall profitability in the NSE business segment and included actions related to consolidation, integration and workforce reduction. The plan was re-approved in the third quarter of fiscal 2019 and the fourth quarter of fiscal 2020 to include additional headcount. The balances of $ 0.5 million and $ 6.5 million as of July 3, 2021 and June 27, 2020, respectively, are included in other current liabilities on the Consolidated Balance Sheets. Payments related to the remaining severance and benefits accrual will be paid in fiscal 2022.
Note 14. Income Taxes
The Company’s income (loss) before income taxes consisted of the following ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Domestic $ ( 43.1 ) $ ( 35.1 ) $ ( 66.9 )
Foreign 152.5 129.2 106.2
Income before income taxes $ 109.4 $ 94.1 $ 39.3
The Company’s income tax expense (benefit) consisted of the following ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Federal:
Current $ — $ — $ —
Deferred — — —
Total federal income tax expense — — —
State:
Current 20.1 2.7 0.1
Deferred — — —
Total state income tax expense 20.1 2.7 0.1
Foreign:
Current 44.8 50.1 33.3
Deferred ( 1.6 ) 12.5 ( 1.9 )
Total foreign income tax (benefit) expense 43.2 62.6 31.4
Total income tax expense $ 63.3 $ 65.3 $ 31.5
The state current expense primarily relates to state taxes incurred as a result of the internal intellectual property restructuring which, was undertaken in the fourth quarter of the fiscal year 2021.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions and withholding tax paid on the repatriation of foreign earnings during the year. The foreign deferred tax (benefit) expense relates to the release of valuation allowance in a foreign jurisdiction and the amortization of purchased intangible assets.
A reconciliation of the Company’s income tax expense at the federal statutory rate to the income tax expense at the effective tax rate is as follows ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Income tax expense computed at federal statutory rate $ 23.0 $ 19.8 $ 8.3
Withholding Taxes 8.7 34.2 1.5
US Inclusion of foreign earnings 3.6 12.8 16.0
Valuation allowance 5.5 0.7 1.0
Foreign rate differential 3.9 4.5 4.8
Reserves 8.6 2.3 3.5
Permanent items 0.8 ( 0.3 ) ( 1.4 )
Fair value change of the earn-out liability ( 1.5 ) ( 6.6 ) ( 1.3 )
Reversal of previously accrued taxes ( 2.1 ) ( 3.7 ) ( 1.2 )
Research and experimentation benefits and other tax credits ( 0.5 ) ( 0.2 ) —
State taxes 12.9 2.1 0.1
Other 0.4 ( 0.3 ) 0.2
Income tax expense $ 63.3 $ 65.3 $ 31.5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company’s net deferred taxes consisted of the following ( in millions ):
Balance as of
July 3, 2021 June 27, 2020 June 29, 2019
Gross deferred tax assets:
Tax credit carryforwards $ 135.7 $ 159.5 $ 164.3
Net operating loss carryforwards 536.1 1,118.6 1,206.9
Capital loss carryforwards 1.1 63.9 63.9
Inventories 28.9 20.3 9.6
Accruals and reserves 66.5 61.6 55.6
Intangibles including acquisition-related items 632.4 45.1 42.1
Capitalized research costs 15.7 72.0 —
Other 66.1 44.6 43.1
Gross deferred tax assets 1,482.5 1,585.6 1,585.5
Valuation allowance ( 1,295.9 ) ( 1,405.5 ) ( 1,405.3 )
Deferred tax assets 186.6 180.1 180.2
Gross deferred tax liabilities:
Acquisition-related items ( 29.1 ) ( 31.8 ) ( 33.5 )
Tax on unrepatriated earnings ( 18.4 ) ( 15.6 ) ( 1.8 )
Foreign branch taxes ( 22.3 ) ( 21.4 ) ( 22.0 )
Other ( 31.9 ) ( 29.8 ) ( 29.1 )
Deferred tax liabilities ( 101.7 ) ( 98.6 ) ( 86.4 )
Total net deferred tax assets $ 84.9 $ 81.5 $ 93.8
As of July 3, 2021, the Company had federal, state and foreign tax net operating loss carryforwards of $ 2,078.8 million, $ 521.7 million and $ 532.9 million, respectively, and federal, state and foreign research and other tax credit carryforwards of $ 85.9 million, $ 49.0 million and $ 0.1 million, respectively. The federal tax net operating loss carryforwards start to expire in fiscal year 2023 and at various dates through 2038 if not utilized. The federal credit carryforwards start to expire fiscal year 2022 and at various dates through fiscal year 2042 if not utilized. The state tax net operating loss carryforwards start to expire in fiscal year 2022 and at various dates through 2041 if not utilized. The state research credit start to expire in fiscal year 2023 but a majority of the state credits have an indefinite carryforward period. In addition, a portion of the foreign tax net operating loss, tax credit and capital loss carryforwards have an indefinite carryforward period. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses.
On July 2, 2021, the Company completed a planned series of internal transactions restructuring certain of VIAVI’s 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, the Company 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 the Company’s US deferred tax assets, the change in the deferred taxes as a result of the transaction does not have material impact on the financial statements. The Company recorded state tax expense including reserves for uncertain tax positions of $ 19.1 million related to this transaction .
Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $ 11.2 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $ 2.1 million of foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During fiscal year 2020, in light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considered a majority of its earnings to be permanently reinvested resulting in a $ 32.5 million charge for withholding taxes expected to be paid on the repatriation of $ 324.0 million of foreign earnings that the Company does not consider to be permanently reinvested. During the third quarter of fiscal 2020, which included changing the Company’s intent with regard to the indefinite reinvestment of such foreign earnings, the Company initially accrued $ 31.6 million for withholding taxes expected to be paid on the repatriation of $ 316.4 million of accumulated foreign earnings that it no longer considers to be permanently reinvested as of the third quarter. During fiscal year 2020, the Company paid $ 19.5 million withholding income tax on the repatriation of foreign earnings. The repatriation of these earnings increases available cash in the U.S. and provides greater U.S. financial flexibility to assist the Company in navigating the expected downturn in the economy. The foreign earnings are being repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense.
On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The provisions of the legislation did not have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
The valuation allowance decreased by $ 109.6 million in fiscal 2021, increased by $ 0.2 million in fiscal 2020, and increased by $ 23.2 million in fiscal 2019. The decrease during fiscal 2021 was primarily due to the expiration of federal net operating losses, federal capital losses, and federal research credits. The increase during fiscal 2020 was primarily due to the business acquired during the year. The increase during fiscal 2019 was primarily due to the net increase of deferred tax assets resulting from the inclusion of the Company’s foreign subsidiaries in the U.S. tax return as a consequence of the U.S. Tax Cuts and Jobs Act. The following table provides information about the activity of our deferred tax valuation allowance (in millions) :
Deferred Tax Valuation Allowance Balance at
Beginning
of Period Additions Charged
to Expenses or
Other Accounts (1) Deductions Credited to Expenses or Other Accounts (2) Balance at
End of
Period
Year Ended July 3, 2021 $ 1,405.5 $ 622.0 $ ( 731.6 ) $ 1,295.9
Year Ended June 27, 2020 $ 1,405.3 $ 95.1 $ ( 94.9 ) $ 1,405.5
Year Ended June 29, 2019 $ 1,382.1 $ 72.8 $ ( 49.6 ) $ 1,405.3
(1) Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, other adjustments.
(2) Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and increases in deferred tax liabilities .
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of unrecognized tax benefits between June 30, 2018 and July 3, 2021 is as follows ( in millions ):
Balance at June 30, 2018 $ 48.6
Additions based on tax positions related to current year 1.7
Additions based on tax positions related to prior year 7.3
Reduction based on tax positions related to prior year ( 2.8 )
Reductions for lapse of statute of limitations ( 0.6 )
Balance at June 29, 2019 54.2
Additions based on tax positions related to current year 2.2
Additions based on tax positions related to prior year 0.3
Reduction based on tax positions related to prior year ( 3.8 )
Reduction related to settlement ( 0.4 )
Reductions for lapse of statute of limitations ( 0.5 )
Balance at June 27, 2020 52.0
Additions based on tax positions related to current year 14.8
Reduction based on tax positions related to prior year ( 6.8 )
Reduction related to settlement ( 0.5 )
Reductions for lapse of statute of limitations ( 0.4 )
Balance at July 3, 2021 $ 59.1
The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at July 3, 2021 are $ 14.2 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at July 3, 2021 are $ 41.3 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance.
The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within th e income tax provision. The amount of interest and penalties accrued as of July 3, 2021, June 27, 2020 and June 29, 2019 was approximately $ 4.0 million, $ 2.7 million, and $ 3.7 million, respectively. During fiscal 2021, the Company’s accrued interest and penalties increased by $ 1.3 million. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.
The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of July 3, 2021:
Tax Jurisdictions Tax Years
United States* 2002 and onward
Canada 2020 and onward
China 2016 and onward
France 2018 and onward
Germany 2016 and onward
Korea 2016 and onward
United Kingdom 2019 and onward
* Although the Company is generally subject to a three-year statute of limitations in the U.S., tax authorities maintain the ability to adjust tax attribute carryforwards generated in earlier years.
Note 15. Stockholders' Equity
Repurchase of Common Stock
In September 2019, the Board of Directors authorized a stock repurchase program of up to $ 200 million of the Company’s common stock through open market or private transactions before September 30, 2021. As of July 3, 2021, the Company had approximately $ 112.9 million remaining under the program. On August 18, 2021, the Board of Directors approved to extend the program until September 30, 2022.
The following table summarizes share repurchase activity related to the Company’s stock repurchase program (in millions, except per share amounts) :
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Total number of shares repurchased 3.0 3.7 1.1
Average price per share $ 14.21 $ 11.99 $ 10.14
Total purchase price $ 42.6 $ 44.4 $ 11.3
Remaining authorization at end of period $ 112.9 $ 155.6 $ 51.4
The total purchase price of these repurchases was reflected as a decrease to common stock based on the stated par value per share with the remainder charged to accumulated deficit. All common shares repurchased during fiscal 2021, 2020 and 2019 have been canceled and retired.
Preferred Stock
The Company’s Board of Directors has authority to issue up to 1,000,000 shares of undesignated preferred stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without the consent of the Company’s stockholders. The preferred stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of common stock. Subsequent issuance of any preferred stock by the Company’s Board of Directors, under some circumstances, could have the effect of delaying, deferring or preventing a change in control.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16. Stock-Based Compensation
Stock-Based Benefit Plans
Stock Option Plans
On November 13, 2019, the Company's stockholders approved the amendment and restatement of the Company’s Amended and Restated 2003 Equity Incentive Plan (the 2003 Plan, as most recently amended and restated, the Amended and Restated 2003 Plan). An additional 10.5 million shares were authorized under the re-approved 2003 plan effective as of November 13, 2019. The Amended and Restated 2003 Plan provides for the granting of stock options, stock appreciation rights (SARs), dividend equivalent rights, restricted stocks, restricted stock units, performance units and performance shares, the vesting of which may be time-based or upon satisfaction of performance criteria or other conditions.
As of July 3, 2021, the Company had 7.5 million shares subject to (i) stock options and Full Value Awards (defined below) issued and outstanding under the Amended and Restated 2003 Plan, (ii) inducement grants made in connection with the appointment of new CEO in fiscal 2016 and (iii) stock options and Full Value Awards issued and outstanding under various other plans the Company assumed through acquisitions. The exercise price for stock options is equal to the fair value of the underlying stock at the date of grant. The Company issues new shares of common stock upon exercise of stock options. Options generally become exercisable over a three - or four -year period and, if not exercised, expire from five to ten years after the date of grant.
As of July 3, 2021, 13.8 million shares of common stock, primarily under Amended and Restated 2003 Plan, were available for grant.
Employee Stock Purchase Plans
In June 1998, the Company adopted the ESPP, which became effective August 1, 1998 and provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a discounted purchase price as well as a look-back period. The ESPP is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. The ESPP will terminate upon the earlier of November 15, 2027 or the date on which all shares available for issuance have been sold. As of July 3, 2021, 2.3 million shares remained available for issuance. The ESPP as adopted provided for a 5 % discount with a look-back period of six months . In May 2019, the ESPP was amended to provide for a 15 % discount.
Full Value Awards
The Company's stock-based compensation includes a combination of time-based RSUs and performance based MSUs and PSUs. RSUs are granted without an exercise price and are converted to shares immediately upon vesting. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes. For performance-based awards, shares attained over target upon vesting are reflected as awards granted during the period.
Time-based RSU awards will generally vest in annual or quarterly installments over a period of three to four years subject to the employees’ continuing service to the Company. The Company's performance-based MSU and PSU awards may include performance conditions, market conditions, time-based service conditions or a combination thereof and are generally expected to vest over one to four years . In addition, the actual number of shares awarded upon vesting of performance-based grants may vary from the target shares depending upon the achievement of the relevant performance or market-based conditions.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
The impact on the Company’s results of operations of recording stock-based compensation expense by function for fiscal 2021, 2020 and 2019 was as follows ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Cost of revenue $ 4.8 $ 4.3 $ 3.8
Research and development 8.9 7.7 6.1
Selling, general and administrative 34.6 32.6 28.3
Total stock-based compensation expense $ 48.3 $ 44.6 $ 38.2
Approximately $ 1.5 million of stock-based compensation expense was capitalized to inventory at July 3, 2021.
Stock Option Activity
The following is a summary of stock option activities ( in millions, except per share amounts ):
Options Outstanding
Number of Shares Weighted-Average
Exercise Price
Balance as of June 30, 2018 1.3 $ 6.42
Exercised ( 0.1 ) 10.54
Balance as of June 29, 2019 1.2 5.95
Exercised — —
Balance as of June 27, 2020 1.2 5.95
Exercised — —
Balance as of July 03, 2021 1.2 $ 5.95
Expected to vest 1.2 $ 5.95
As of July 3, 2021, stock-based compensation expense related to stock options have been fully amortized and recognized.
The following table summarizes outstanding and exercisable options as of July 3, 2021.
Options Outstanding Options Exercisable
Exercise Price Number of Shares Weighted Average Remaining Contractual Term
(years) Weighted Average Exercise Price Aggregate Intrinsic Value
(millions) Number of Shares Weighted Average Remaining Contractual Term
(years) Weighted Average Exercise Price Aggregate Intrinsic Value
(millions)
$5.95 1,180,257 2.62 $ 5.95 $ 13.6 1,180,257 2.62 $ 5.95 $ 13.6
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value, based on the Company’s closing stock price of $ 17.47 as of July 3, 2021, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of July 3, 2021 was 1.2 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan Activity
The expense related to the ESPP is recorded on a straight-line basis over the relevant subscription period. During fiscal 2021, the Company issued shares of 261,683 and 296,121 on January 31, 2021 and July 31, 2020, respectively, as part of the ESPP. As of July 3, 2021, there was $ 0.2 million of unrecognized stock-based compensation cost related to the ESPP that remains to be amortized. The cost will be recognized in the first quarter of fiscal 2022.
Full Value Awards Activity
A summary of the status of the Company’s non-vested Full Value Awards as of July 3, 2021 and changes during the same period is presented below ( amount in millions, except per share amounts ):
Full Value Awards
Performance Shares (1) Non-Performance Shares Total Number of Shares Weighted-average Grant-dated Fair Value
Non-vested at June 30, 2018 1.1 5.3 6.4 $ 8.93
Awards granted 0.5 3.9 4.4 $ 11.52
Awards vested ( 0.6 ) ( 3.2 ) ( 3.8 ) $ 8.61
Awards forfeited — ( 0.3 ) ( 0.3 ) $ 9.63
Non-vested June 29, 2019 1.0 5.7 6.7 $ 10.81
Awards granted 0.7 3.2 3.9 $ 13.76
Awards vested ( 0.7 ) ( 3.4 ) ( 4.1 ) $ 10.40
Awards forfeited — ( 0.4 ) ( 0.4 ) $ 11.44
Non-vested June 27, 2020 1.0 5.1 6.1 $ 12.97
Awards granted 1.3 3.3 4.6 $ 14.15
Awards vested ( 0.6 ) ( 3.1 ) ( 3.7 ) $ 12.58
Awards forfeited ( 0.2 ) ( 0.5 ) ( 0.7 ) $ 13.83
Non-vested July 3, 2021 1.5 4.8 6.3 $ 13.98
(1) Performance Shares refer to the Company’s MSU and PSU awards, where the actual number of shares awarded upon vesting may be higher or lower than the target amount depending on the achievement of the relevant market conditions and performance goal achievement. The majority of MSUs vest in equal annual installments over three to four years based on the attainment of certain total shareholder performance measures and the employee’s continued service through the vest date. The aggregate grant-date fair value of MSUs granted during fiscal 2021, 2020 and 2019 was estimated to be $ 15.6 million, $ 7.7 million and $ 6.2 million, respectively, and was calculated using a Monte Carlo simulation. The fair value of PSU awards granted in fiscal 2021 was $ 2.0 million. The Company did no t grant any PSU awards in fiscal 2020 and 2019. PSU awards vest based on the attainment of certain performance measures and the employee’s continued service through the vest date.
As of July 3, 2021, $ 63.7 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.0 years.
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Valuation Assumptions
The Company generally estimates the fair value of time-based RSU awards based on the closing market price of the Company’s common stock on the date of grant. In the case of, PSUs that are performance-based awards without a market condition, the Company will estimate the fair value of the awards using a probability weighted model. In the case of MSUs or PSUs, that are performance based awards and include a market condition, the Company will estimate the fair value of the award using a combination of the closing market price of the Company’s common stock on the grant date and the Monte Carlo simulation model. The weighted-average assumptions used to measure fair value were as follows:
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Volatility of common stock 38.5 % 30.4 % 28.9 %
Average volatility of peer companies 65.7 % 52.5 % 31.0 %
Average correlation coefficient of peer companies 0.3653 0.1842 0.1383
Risk-free interest rate 0.3 % 1.5 % 2.6 %
The Company did no t issue stock option grants during the fiscal years ended July 3, 2021, June 27, 2020 and June 29, 2019. The Company estimates the fair value ESPP purchase rights using a BSM valuation model. The fair value is estimated on the date of grant using the BSM option valuation model with the following weighted-average assumptions:
Employee Stock Purchase Plans
July 3, 2021 June 27, 2020 June 29, 2019
Expected term (in years) 0.5 0.5 0.5
Expected volatility 44.9 % 27.6 % 33.2 %
Risk-free interest rate 0.1 % 1.8 % 2.3 %
Expected Term: The Company's expected term for stock options was calculated utilizing the simplified method in accordance with the authoritative guidance. The Company used the simplified method as the Company does not have sufficient historical share option exercise data due to the limited number of shares granted as well as changes in the Company's business following the separation from Lumentum, rendering existing historical experience less reliable in formulating expectations for current grants. The Company’s purchase right period is six months under the ESPP.
Expected Volatility: The expected volatility for stock options was based on the historical volatility of the Company's common stock and its peers. The expected volatility for ESPP purchase rights was based on the historical volatility of its stock price with similar expected term.
Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the BSM valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend: The BSM valuation model calls for a single expected dividend yield as an input. The Company has not paid and does not anticipate paying any dividends in the near future.
Note 17. Employee Pension and Other Benefit Plans
Employee 401(k) Plans
The Company sponsors the Viavi Solutions 401(k) Plan (the 401(k) Plan), a defined contribution plan under ERISA, which provides retirement benefits for its eligible employees through tax deferred salary deductions. The 401(k) Plan allows employees to contribute up to 50 % of their annual compensation, with contributions limited to $ 19,500 in calendar year 2021 as set by the Internal Revenue Service.
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For all eligible employees, the Company offers a 401(k) Plan that provides a 100 % match of employees’ contributions up to the first 3 % of annual compensation and 50 % match on the next 2 % of compensation. All matching contributions are made in cash and vest immediately. The Company’s matching contributions to the 401(k) Plan were $ 4.7 million, $ 4.9 million and $ 4.9 million in fiscal 2021, 2020 and 2019, respectively.
Employee Defined Benefit Plans
The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany including the plan assumed from AW acquisition. The Company also is responsible for the non-pension postretirement benefit obligation assumed from a past acquisition.
Most of the plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition during fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service. As of July 3, 2021, the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the postretirement benefits when due. Future estimated benefit payments are summarized under the Future Benefit Payments’ section below. No other required contributions are expected in fiscal 2022, but the Company, at its discretion, can make contributions to one or more of the defined benefit plans.
The Company accounts for its obligations under these pension plans in accordance with the authoritative guidance which requires the Company to record its obligation to the participants, as well as the corresponding net periodic cost. The Company determines its obligation to the participants and its net periodic cost principally using actuarial valuations provided by third-party actuaries. The obligation the Company records on its Consolidated Balance Sheets is reflective of the total PBO and the fair value of plan assets.
The following table presents the components of the net periodic benefit cost for the pension and benefits plans ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Service cost $ 0.2 $ 0.3 $ 0.2
Interest cost 1.5 1.9 2.5
Expected return on plan assets ( 1.7 ) ( 1.5 ) ( 1.6 )
Recognized net actuarial losses 3.1 2.8 1.8
Net periodic cost $ 3.1 $ 3.5 $ 2.9
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The Company’s accumulated other comprehensive income includes unrealized net actuarial (gains)/losses. The amount expected to be recognized in net periodic benefit cost during fiscal 2022 is $ 3.1 million. Refer to “Note 18. Commitments and Contingencies” for further information on the provision for legal proceeding. The changes in the benefit obligations and plan assets of the pension and benefits plans were ( in millions ):
Pension Benefit Plans
July 3, 2021 June 27, 2020
Change in benefit obligation
Benefit obligation at beginning of year $ 138.9 $ 140.0
Service cost 0.2 0.3
Interest cost 1.5 1.9
Actuarial (gains) losses ( 4.8 ) 4.6
Benefits paid ( 6.1 ) ( 5.1 )
Foreign exchange impact 10.8 ( 2.8 )
Benefit obligation at end of year $ 140.5 $ 138.9
Change in plan assets
Fair value of plan assets at beginning of year $ 29.0 $ 29.9
Actual return on plan assets 2.9 0.2
Employer contributions 6.9 4.8
Benefits paid ( 6.0 ) ( 5.0 )
Foreign exchange impact 3.4 ( 0.9 )
Fair value of plan assets at end of year 36.2 29.0
Funded status ( 104.3 ) ( 109.9 )
Accumulated benefit obligation $ 140.5 $ 138.6
Pension Benefit Plans
July 3, 2021 June 27, 2020
Amount recognized in the Consolidated Balance Sheets at end of year:
Current liabilities $ 7.9 $ 7.6
Non-current liabilities 96.4 102.3
Net amount recognized at end of year $ 104.3 $ 109.9
Amount recognized in accumulated other comprehensive (loss) income at end of year:
Actuarial losses, net of tax $ ( 24.0 ) $ ( 31.2 )
Net amount recognized at end of year $ ( 24.0 ) $ ( 31.2 )
Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income:
Net actuarial gain (loss) $ 4.1 $ ( 5.4 )
Amortization of accumulated net actuarial losses 3.1 2.8
Total recognized in other comprehensive income (loss) $ 7.2 $ ( 2.6 )
As of July 3, 2021 and June 27, 2020, the liability balances related to the post retirement benefit plan were $ 0.4 million. The liability balances were included in other non-current liabilities on the Consolidated Balance Sheets.
During fiscal 2021, the Company (amounts represented as £ and $ denote GBP and USD, respectively) contributed £ 1.5 million or approximately $ 2.0 million, while in fiscal 2020, the Company contributed £ 0.5 million or approximately $ 0.6 million to its U.K. pension plan. These contributions allowed the Company to comply with regulatory funding requirements.
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Assumptions
Underlying both the calculation of the PBO and net periodic cost are actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.
The discount rate reflects the estimated rate at which the pension benefits could be effectively settled. In developing the discount rate, the Company considered the yield available on an appropriate AA corporate bond index, adjusted to reflect the term of the scheme’s liabilities as well as a yield curve model developed by the Company’s actuaries.
The expected return on assets was estimated by using the weighted average of the real expected long-term return (net of inflation) on the relevant classes of assets based on the target asset mix and adding the chosen inflation assumption.
The following table summarizes the weighted average assumptions used to determine net periodic cost and benefit obligation for the Company’s U.K. and German pension plans:
Pension Benefit Plans
July 3, 2021 June 27, 2020 June 29, 2019
Used to determine net period cost at end of year:
Discount rate 1.2 % 1.1 % 1.4 %
Expected long-term return on plan assets 5.4 % 5.6 % 5.6 %
Rate of pension increase 2.2 % 2.3 % 2.3 %
Used to determine benefit obligation at end of year:
Discount rate 1.2 % 1.0 % 1.4 %
Rate of pension increase 2.3 % 2.2 % 2.3 %
Investment Policies and Strategies
The Company’s investment objectives for its funded pension plan are to ensure that there are sufficient assets available to pay out members’ benefits as and when they arise and that, should the plan be discontinued at any point in time, there would be sufficient assets to meet the discontinuance liabilities.
To achieve these objectives, the trustees of the U.K. pension plan are responsible for regularly monitoring the funding position and managing the risk by investing in assets expected to outperform the increase in value of the liabilities in the long term and by investing in a diversified portfolio of assets in order to minimize volatility in the funding position. The trustees invest in a range of frequently traded funds (pooled funds) rather than direct holdings in individual securities to maintain liquidity, achieve diversification and reduce the potential for risk concentration. The funded plan assets are managed by professional third-party investment managers.
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Fair Value Measurement of Plan Assets
The following table sets forth the plan assets at fair value and the percentage of assets allocations as of July 3, 2021 ( in millions, except percentage data ):
Fair value as of
July 3, 2021
Target Allocation Total Percentage of Plan Assets Level 1 Level 2
Assets:
Global equity 40 % $ 14.0 38.7 % $ — $ 14.0
Fixed income 40 % 12.8 35.4 % — 12.8
Other 20 % 7.9 21.8 % — 7.9
Cash 1.5 4.1 % 1.5 —
Total assets $ 36.2 100.0 % $ 1.5 $ 34.7
The following table sets forth the plan’s assets at fair value and the percentage of assets allocations as of June 27, 2020 ( in millions, except percentage data ).
Fair value as of
June 27, 2020
Target Allocation Total Percentage of Plan Assets Level 1 Level 2
Assets:
Global equity 40 % $ 11.6 40.0 % $ — $ 11.6
Fixed income 40 % 10.9 37.6 % — 10.9
Other 20 % 6.4 22.1 % — 6.4
Cash 0.1 0.3 % 0.1 —
Total assets $ 29.0 100.0 % $ 0.1 $ 28.9
The Company’s pension assets consist of multiple institutional funds (pension funds) of which the fair values are based on the quoted prices of the underlying funds. Pension funds are classified as Level 2 assets since such funds are not directly traded in active markets.
Global equity consists of several index funds that invest primarily in U.K. equities and other overseas equities.
Fixed income consists of several funds that invest primarily in index-linked Gilts (over 5 year), sterling-denominated investment grade corporate bonds, and overseas government bonds.
Other consists of several funds that primarily invest in global equities, bonds, private equity, global real estate and infrastructure funds.
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Future Benefit Payments
The following table reflects the total expected benefit payments to defined benefit pension plan participants. These payments have been estimated based on the same assumptions used to measure the Company’s PBO at fiscal year end and include benefits attributable to estimated future compensation increases ( in millions ).
Pension Benefit Plans
2022 $ 9.2
2023 7.1
2024 6.7
2025 6.3
2026 6.3
2027-2030 28.1
Thereafter 40.6
Total $ 104.3
Note 18. Commitments and Contingencies
Royalty payments
The Company is obligated to make future minimum royalty payments of $ 2.8 million measured as of July 3, 2021 for the use of certain licensed technologies. Future minimum payments are expected to be paid through the third quarter of fiscal 2026, as follows ( in millions):
Royalty Payments
2022 $ 1.3
2023 0.4
2024 0.4
2025 0.4
2026 0.3
Total $ 2.8
Purchase Obligations
Purchase obligations of $ 187.6 million as of July 3, 2021, represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on the Company’s business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year .
The Company depends on a limited number of contract manufacturers, subcontractors, and suppliers for raw materials, packages and standard components. The Company generally purchases these single or limited source products through standard purchase orders or one-year supply agreements and has no significant long-term guaranteed supply agreements with such vendors. While the Company seeks to maintain a sufficient safety stock of such products and maintains on-going communications with its suppliers to guard against interruptions or cessation of supply, the Company’s business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of such supplies, or the Company’s inability to obtain reduced pricing from its suppliers in response to competitive pressures.
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Financing Obligations
On August 21, 2007, the Company entered into a sale and lease-back of certain buildings and land in Santa Rosa, California (the Santa Rosa Transactions), under which we leased back certain buildings. The net cash proceeds received from the transaction were $ 32.2 million. The lease terms range from a one-year lease with multiple renewal options to a ten-year lease with two five-year renewal options. These buildings did not qualify for sale and lease back accounting due to various forms of continuing involvement and as a result, they were accounted for as financing transactions.
In August 2012 and May 2019, the Company entered into two lease amendments to extend the term of the lease to August 31, 2032 with a ten-year renewal option. In the first quarter of fiscal 2020, the Company reassessed whether a sale would have occurred on the date of adoption of ASC 842 and at which time, concluded that the buildings did not qualify for sale and lease back accounting in accordance with ASC 842. As a result, they were continuously accounted for as financing transactions.
As of July 3, 2021, $ 0.1 million was included in Other current liabilities , and $ 16.1 million was included in Other non-current liabilities . As of June 27, 2020, $ 0.1 million was included in Other current liabilities , and $ 16.2 million was included in Other non-current liabilities .
As of July 3, 2021, future minimum annual lease payments of Santa Rosa’s non-cancelable leaseback agreements were as follows (in millions) :
2022 $ 2.9
2023 2.4
2024 2.4
2025 2.4
2026 2.5
Thereafter 16.2
Total minimum leaseback payments $ 28.8
Guarantees
Authoritative guidance requires upon issuance of a guarantee the guarantor must recognize a liability for the fair value of the obligation that it assumes under the guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.
The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on the Consolidated Balance Sheets as of July 3, 2021 and June 27, 2020.
Pursuant to the Separation and Distribution Agreement and Tax Matter Agreement, dated as of July 31, 2015 between the Company and Lumentum Holdings Inc. (Lumentum), the Company is required to indemnify Lumentum and its subsidiaries for certain specified tax liabilities. During the second quarter of fiscal 2019, the Ontario Ministry of Finance denied the Company’s appeal of an assessment of the applicable tax liabilities at which time the Company recorded a charge of $ 2.4 million to its discontinued operations.
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Outstanding Letters of Credit and Performance Bonds
As of July 3, 2021, the Company had standby letters of credit of $ 7.8 million, and and other claims of $ 2.8 million collateralized by restricted cash.
Product Warranties
The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. In general, the Company offers its customers warranties up to three years and has accrued a reserve for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
The following table presents the changes in the Company’s warranty reserve during fiscal years 2021 and 2020 ( in millions ):
Year Ended
July 3, 2021 June 27, 2020
Balance as of beginning of period $ 9.4 $ 8.7
Provision for warranty 3.0 3.1
Utilization of reserve ( 2.5 ) ( 3.4 )
Adjustments related to pre-existing warranties (including changes in estimates) ( 0.2 ) 1.0
Balance as of end of period $ 9.7 $ 9.4
Legal Proceedings
In June 2016, the Company received a court decision regarding the validity of an amendment to a pension deed of trust related to one of its foreign subsidiaries which the Company contends contained an error requiring the Company to increase the pension plan’s benefit. The Company had subsequently further amended the deed to rectify the error. The court ruled that the amendment increasing the pension plan benefit was valid until the subsequent amendment. The Company estimated the liability to range from (amounts represented as £ denote GBP) £ 5.7 million to £ 8.4 million. The Company determined that the likelihood of loss to be probable and accrued £ 5.7 million as of July 2, 2016 in accordance with authoritative guidance on contingencies. The accrual is included as a component of other non-current liabilities, in the Company’s Consolidated Balance Sheets, respectively.
The Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company is pursuing a deed of rectification claim and continues to pursue a claim against the U.K. law firm responsible for the error. As of July 3, 2021, the related accrued pension liability was £ 7.0 million or $ 9.6 million.
The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of its business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.
Note 19. Operating Segments and Geographic Information
The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer, the Company’s Chief Operating Decision Maker (CODM) uses operating segment financial information to evaluate segment performance and to allocate resources.
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The Company’s reportable segments are:
(i) Network Enablement:
NE provides testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. The Company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for its products. NE’s avionics products provide test and measuring solutions for aviation, aerospace, government, defense, communications and public safety.
(ii) Service Enablement:
SE solutions are embedded systems that yield network, service and application performance data. These solutions—including instruments, microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.
(iii) Optical Security and Performance Products:
OSP provides innovative, precision, high performance optical products for anti-counterfeiting, consumer and industrial, government, automotive, industrial and other markets.
Segment Reporting
The CODM manages the Company in two broad business categories: NSE and OSP. The CODM evaluates segment performance of the NSE business based on the combined segment gross and operating margins. Operating expenses associated with the NSE business are not allocated to the individual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on segment operating margin. The Company allocates corporate-level operating expenses to its segment results, except for certain non-core operating and non-operating activities as discussed below.
The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related charges, impairment of goodwill, non-operating income and expenses, changes in fair value of contingent consideration liabilities, or other charges unrelated to core operating performance to its segments because management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.
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Information on the Company’s reportable segments is as follows ( in millions ):
Year Ended July 3, 2021
Network and Service Enablement
Network Enablement Service Enablement Network and
Service
Enablement Optical Security and Performance Products Other Items Consolidated GAAP Measures
Product revenue $ 650.5 $ 40.6 $ 691.1 $ 360.3 $ — $ 1,051.4
Service revenue 96.1 50.7 146.8 0.7 — 147.5
Net revenue $ 746.6 $ 91.3 $ 837.9 $ 361.0 $ — $ 1,198.9
Gross profit 474.2 59.9 534.1 218.1 ( 37.8 ) 714.4
Gross margin 63.5 % 65.6 % 63.7 % 60.4 % 59.6 %
Operating income 92.2 161.3 ( 111.3 ) 142.2
Operating margin 11.0 % 44.7 % 11.9 %
Year Ended June 27, 2020
Network and Service Enablement
Network Enablement Service Enablement Network and
Service
Enablement Optical Security and Performance Products Other Items Consolidated GAAP Measures
Product revenue $ 669.1 $ 49.9 $ 719.0 $ 286.2 $ — $ 1,005.2
Service revenue 77.6 52.8 130.4 0.7 — 131.1
Net revenue $ 746.7 $ 102.7 $ 849.4 $ 286.9 $ — $ 1,136.3
Gross profit 482.4 68.8 551.2 153.0 ( 38.9 ) 665.3
Gross margin 64.6 % 67.0 % 64.9 % 53.3 % 58.5 %
Operating income 108.8 102.1 ( 92.8 ) 118.1
Operating margin 12.8 % 35.6 % 10.4 %
Year Ended June 29, 2019
Network and Service Enablement
Network Enablement Service Enablement Network and
Service
Enablement Optical Security and Performance Products Other Items Consolidated GAAP Measures
Product revenue $ 666.2 $ 49.7 $ 715.9 $ 288.3 $ — $ 1,004.2
Service revenue 71.6 53.7 125.3 0.8 — 126.1
Net revenue $ 737.8 $ 103.4 $ 841.2 $ 289.1 $ — $ 1,130.3
Gross profit 473.3 71.0 544.3 145.8 ( 38.7 ) 651.4
Gross margin 64.2 % 68.7 % 64.7 % 50.4 % 57.6 %
Operating income 99.6 98.0 ( 130.2 ) 67.4
Operating margin 11.8 % 33.9 % 6.0 %
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Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Corporate reconciling items impacting gross profit:
Total segment gross profit $ 752.2 $ 704.2 $ 690.1
Stock-based compensation ( 4.8 ) ( 4.3 ) ( 3.8 )
Amortization of intangibles ( 33.2 ) ( 32.7 ) ( 34.4 )
Other charges unrelated to core operating performance 0.2 ( 1.9 ) ( 0.5 )
GAAP gross profit $ 714.4 $ 665.3 $ 651.4
Corporate reconciling items impacting operating income:
Total segment operating income $ 253.5 $ 210.9 $ 197.6
Stock-based compensation ( 48.3 ) ( 44.6 ) ( 38.2 )
Amortization of intangibles ( 66.5 ) ( 67.8 ) ( 72.5 )
Change in fair value of contingent liability (3)
5.3 31.5 5.9
Other charges unrelated to core operating performance (1)(2)
( 3.4 ) ( 8.4 ) ( 10.0 )
Restructuring and related charges 1.6 ( 3.5 ) ( 15.4 )
GAAP operating income from continuing operations $ 142.2 $ 118.1 $ 67.4
(1) During the years ended June 27, 2020, other charges unrelated to core operating performance primarily consisted of $ 1.4 million in acquisition related costs.
(2) During the years ended June 29, 2019, other charges unrelated to core operating performance primarily consisted of a $ 5.0 million in acquisition related costs.
(3) Refer to “Note 8. Fair Value Measurements” for further detail.
The Company operates primarily in three geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where the Company’s product is initially shipped. For example, certain customers may request shipment of product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions the Company operates in and net revenue from countries that exceeded 10% of the Company’s total net revenue (in millions):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
Product Revenue Service Revenue Total Product Revenue Service Revenue Total Product Revenue Service Revenue Total
Americas:
United States $ 275.8 $ 54.2 $ 330.0 $ 288.3 $ 53.3 $ 341.6 $ 287.1 $ 55.0 $ 342.1
Other Americas 72.7 12.9 85.6 57.8 15.4 73.2 69.4 14.8 84.2
Total Americas $ 348.5 $ 67.1 $ 415.6 $ 346.1 $ 68.7 $ 414.8 $ 356.5 $ 69.8 $ 426.3
Asia-Pacific:
Greater China $ 265.8 $ 11.2 $ 277.0 $ 238.2 $ 7.5 $ 245.7 $ 209.4 $ 7.2 $ 216.6
Other Asia 118.5 15.0 133.5 108.0 14.5 122.5 142.3 13.3 155.6
Total Asia-Pacific $ 384.3 $ 26.2 $ 410.5 $ 346.2 $ 22.0 $ 368.2 $ 351.7 $ 20.5 $ 372.2
EMEA:
Switzerland $ 76.2 $ 0.4 $ 76.6 $ 64.5 $ 0.1 $ 64.6 $ 97.0 $ — $ 97.0
Other EMEA 242.4 53.8 296.2 248.4 40.3 288.7 199.0 35.8 234.8
Total EMEA $ 318.6 $ 54.2 $ 372.8 $ 312.9 $ 40.4 $ 353.3 $ 296.0 $ 35.8 $ 331.8
Total net revenue $ 1,051.4 $ 147.5 $ 1,198.9 $ 1,005.2 $ 131.1 $ 1,136.3 $ 1,004.2 $ 126.1 $ 1,130.3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SICPA Holding SA Company (SICPA), served by the Company’s OSP segment, generated more than 10% of VIAVI net revenue from continuing operations during fiscal 2021, 2020 and 2019 as summarized below ( in millions ):
Years Ended
July 3, 2021 June 27, 2020 June 29, 2019
SICPA - OSP customer $ 193.9 $ 139.9 $ 161.1
Property, plant and equipment, net was identified based on the operations in the corresponding geographic areas ( in millions ):
Years Ended
July 3, 2021 June 27, 2020
United States $ 109.4 $ 85.0
Other Americas 2.0 1.6
China 45.4 43.8
Other Asia-Pacific 5.4 5.8
United Kingdom 27.3 30.1
Other EMEA 6.5 6.2
Total property, plant and equipment, net $ 196.0 $ 172.5
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VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 20. Selected Quarterly Financial Information (unaudited)
The following table presents the Company’s selected quarterly financial information from the Consolidated Statements of Operations for fiscal 2021 and 2020 ( in millions, except per share data ):
July 3, 2021 April 3, 2021 January 2, 2021 October 3, 2020 June 27, 2020 March 28, 2020 December 28, 2019 September 28, 2019
Net revenue $ 310.9 $ 303.4 $ 299.9 $ 284.7 $ 266.6 $ 256.2 $ 313.7 $ 299.8
Gross profit 182.9 182.0 180.1 169.4 154.6 146.8 189.5 174.4
Net (loss) income $ ( 1.9 ) $ 11.8 $ 21.9 $ 14.3 $ 26.7 $ ( 32.8 ) $ 28.0 $ 6.8
Net (loss) income per share - basic:
Net/ (loss) income (1)
$ ( 0.01 ) $ 0.05 $ 0.10 $ 0.06 $ 0.12 $ ( 0.14 ) $ 0.12 $ 0.03
Net (loss) income per share - diluted:
Net (loss) income (1)
$ ( 0.01 ) $ 0.05 $ 0.09 $ 0.06 $ 0.12 $ ( 0.14 ) $ 0.12 $ 0.03
Shares used in per-share calculation:
Basic 228.4 228.7 228.8 228.8 228.1 230.0 230.0 229.4
Diluted 228.4 240.2 231.1 231.8 230.3 230.0 238.3 236.4
(1) Net (loss) income per share is computed independently for each of the fiscal quarters presented. Therefore, the sum of the quarterly basic and diluted Net (loss) income per share amounts may not equal the annual basic and diluted Net (loss) income per share amount for the full fiscal years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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