What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-02-07 compared with 2021-11-08 · 115 added, 91 removed, 265 unchanged (44% of the section changed)

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AvComm solutions encompass a full spectrum of instrumentation from turnkey systems, stand-alone instruments or modular components that provide customers with highly reliable, customized, innovative and cost-effective testing tools.

NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage device manufacturers, storage network and switch vendors, radio and avionics commercial companies, OEMs, civil, state and federal agencies.

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

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COVID-19 Pandemic Update

The COVID-19 pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, temporary business closures among others.

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

The ongoing COVID-19 pandemic, the emergence of new variants, and these aforementioned measures, continue to have an impact on businesses and economies worldwide.

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

Worldwide distribution by central governments of the vaccines commenced in late 2020.

There have been logistical and operational challenges with the rollout and global demand for the vaccine has far exceeded supply.

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

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

There have been logistical and operational challenges with the rollout and global demand for the vaccine, particularly in developing nations, has far exceeded supply.

New and potentially more contagious variants of the virus have developed in several countries and regions in which we operate.

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

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

We continue to follow COVID-19 pandemic protocols as required by local, state and federal guidelines.

These COVID-19 pandemic protocols have not thus far had a substantial net impact on our liquidity position.

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

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

In addition, we have experienced and may continue to experience shipping and logistics challenges and delays.

NSE has experienced some impact to customer demand.

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

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

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

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

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

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

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

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

Nonetheless, surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner.

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

While our industry faced supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and materials shortages resulted in extended lead-times, increased logistics costs, and product volume impact these factors did not materially impact our business in fiscal years 2021 and 2022.

In the first quarter of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure.

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

In the first six months of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure.

We expect these high costs to continue through the remainder of fiscal year 2022.

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We entered into a $300 million secured credit facility in May 2020 to strengthen our liquidity position.

In December 2021, we terminated this facility and entered into a $300 million asset-based secured credit facility.

While capital markets and worldwide economies have stabilized and recovered since being significantly impacted by the COVID-19 pandemic, in the event of a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.

We intend to comply with US Federal and other governmental vaccine mandates.

US federal vaccine mandates for federal contractors or OSHA requirements, could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner.

Such mandates could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner.

Additional vaccine mandates may be announced in other countries in which we operate or source inputs.

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

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

We expect 5G Wireless and Fiber to continue driving growth and profitability in fiscal 2022.

Recently Issued Accounting Pronouncements

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

Three Months Ended

October 2, 2021 October 3, 2020 Change Percent Change

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 Change Percent Change January 1, 2022 January 2, 2021 Change Percent Change

Segment net revenue:

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Percentage of net revenue 28.0 % 26.5 % 28.1 % 27.5 %

Restructuring and related benefits $ — $ 0.6 $ 0.6 100.0 %

Restructuring and related charges (benefits) $ (0.1) $ 0.2 $ (0.3) (150.0) % $ (0.1) $ (0.4) $ 0.3 (75.0) %

Percentage of net revenue — % 0.1 % — % (0.1) %

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Percentage of net revenue

0.7 % 4.2 % 2.5 % 3.6 %

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

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

Three months ended October 2, 2021 and October 3, 2020

Net revenue increased by $42.1 million, or 14.8%, during the three months ended October 2, 2021 compared to the same period a year ago.

Three months ended January 1, 2022 and January 2, 2021

Net revenue increased by $14.9 million, or 5.0%, during the three months ended January 1, 2022 compared to the same period a year ago.

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

Product revenues increased by $41.2 million, or 16.6%, during the three months ended October 2, 2021 compared to the same period a year ago.

Product revenues increased by $15.3 million, or 5.8%, during the three months ended January 1, 2022 compared to the same period a year ago.

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

Service revenues increased by $0.9 million, or 2.4%, during the three months ended October 2, 2021 compared to the same period a year ago.

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

NE net revenue increased by $42.8 million, or 26.4%, during the three months ended October 2, 2021 compared to the same period a year ago.

This increase was primarily driven by increased revenue volume from our Field Instruments and Lab & Production Equipment, including Fiber, Cable and Wireless products.

SE net revenue increased by $1.6 million, or 7.5%, during the three months ended October 2, 2021 compared to the same period a year ago.

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

OSP net revenue decreased by $2.3 million, or 2.3%, during the three months ended October 2, 2021 compared to the same period a year ago.

This decrease was primarily driven by decreased revenue from our government business.

Service revenues decreased by $0.4 million, or 1.1%, during the three months ended January 1, 2022 compared to the same period a year ago.

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

NE net revenue increased by $33.5 million, or 18.5%, during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily driven by increased revenue volume from our Field Instruments and Lab and Production Equipment, including Fiber and Wireless products.

SE net revenue increased by $4.0 million, or 15.5%, during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily driven by increased revenue from our Growth Assurance and Data Center products.

OSP net revenue decreased by $22.6 million, or 24.2%, during the three months ended January 1, 2022 compared to the same period a year ago.

This decrease was primarily driven by decreased revenue from our 3D Sensing and Anti-Counterfeiting Product lines.

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

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

Three Months Ended

October 2, 2021 October 3, 2020

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 January 1, 2022 January 2, 2021

United States $ 100.2 31.8 % $ 88.6 29.5 % $ 193.5 30.2 % $ 166.4 28.5 %

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Total net revenue $ 314.8 100.0 % $ 299.9 100.0 % $ 641.6 100.0 % $ 584.6 100.0 %

Net revenue from customers outside the Americas during the three months ended October 2, 2021 and October 3, 2020 represented 62.8% and 66.5% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and six months ended January 1, 2022 represented 60.1% and 61.5% of net revenue, respectively.

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

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

Gross margin increased by 0.2 percentage points during the three months ended October 2, 2021 from 59.5% in the same period a year ago to 59.7% in the current period.

This increase was primarily driven by higher revenue volume and favorable product mix within our NE segments.

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

Gross margin increased by 0.4 percentage points during the three months ended January 1, 2022 from 60.1% in the same period a year ago to 60.5% in the current period.

This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments.

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

Gross margin increased by 0.3 percentage points during the six months ended January 1, 2022 from 59.8% in the same period a year ago to 60.1% in the current period.

This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments.

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

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

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Research and Development

R&D expense increased by $4.8 million, or 9.8%, during the three months ended October 2, 2021 compared to the same period a year ago.

R&D expense increased by $0.5 million, or 1.0%, during the three months ended January 1, 2022 compared to the same period a year ago.

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

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

As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.

R&D expense increased by $5.3 million, or 5.4%, during the six months ended January 1, 2022 compared to the same period a year ago.

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

As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.

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

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Selling, General and Administrative

SG&A expense increased by $10.4 million, or 12.8%, during the three months ended October 2, 2021 compared to the same period a year ago.

SG&A expense increased by $8.7 million, or 10.9%, during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily due to targeted investments in people, processes and technology.

As a percentage of net revenue, SG&A decreased 0.5 percentage points during the three months ended October 2, 2021 compared to the same period a year ago.

As a percentage of net revenue, SG&A increased 1.5 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.

SG&A expense increased by $19.1 million, or 11.9%, during the six months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily due to targeted investments in people, processes and technology.

As a percentage of net revenue, SG&A increased 0.6 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.

Restructuring and Related Charges

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

As of October 2, 2021 and July 3, 2021, the Company’s total restructuring accrual was $0.2 million and $0.5 million, respectively.

During the three months ended October 2, 2021 and October 3, 2020, the Company recorded restructuring and related benefits of $0 million and $(0.6) million, respectively.

As of January 1, 2022 the Company did not have a restructuring accrual compared to an accrual of $0.5 million as of July 3, 2021.

During the three and six months ended January 1, 2022, the Company recorded restructuring and related benefits of $(0.1) million and $(0.1) million, respectively.

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

Refer to “Note 13.

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Loss on convertible note exchange

During the three months ended October 2, 2021, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

During the three months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

The Company paid $59.0 million in cash in exchange for $20.6 million principal amount of the 2023 Notes and $25.0 million principal amount of the 2024 Notes.

The Company recorded a loss of $6.4 million in connection with the transactions.

During the six months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

The Company paid an aggregate of 10.6 million shares of its common stock, par value $0.001 per share, and $255.5 million in cash in exchange for $114.3 million principal amount of the 2023 Notes and $206.3 million principal amount of the 2024 Notes.

The Company recorded a loss of $85.9 million in connection with the settlement transaction, which included a loss on induced conversion of $9.5 million, a loss on debt extinguishment of $72.7 million and third-party fees of $3.7 million.

The Company recorded a loss of $92.3 million in connection with the settlement transactions.

Interest income and other income, net

Interest income and other income, net, was $1.4 million during the three months ended October 2, 2021 compared to $0.6 million the same period a year ago.

This $0.8 million increase was primarily driven by a favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest income and other income, net, was $1.1 million during the three months ended January 1, 2022 and January 2, 2021, respectively.

Interest income and other income, net, was $2.5 million during the six months ended January 1, 2022 compared to $1.7 million the same period a year ago.

This $0.8 million increase was primarily driven by higher interest income and foreign exchange gains.

Interest Expense

Interest expense during the three months ended October 2, 2021 and October 3, 2020 remained flat at $3.6 million.

Interest expense increased by $3.5 million or 97.2% during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily due to higher debt levels, higher interest rate on Senior Notes due 2029 and amortization of issuance costs as a result of the issuance of Senior Notes due 2029 in September 2021.

Interest expense increased by $3.5 million or 48.6% during the six months ended January 1, 2022 compared to the same period a year ago.

Provision for Income Taxes

We recorded an income tax expense of $13.6 million and $8.6 million for the three months ended October 2, 2021 and October 3, 2020, respectively.

The income tax expense for the three months ended October 2, 2021 and October 3, 2020 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.

We recorded an income tax expense of $2.3 million and $15.9 million for the three and six months ended January 1, 2022, respectively.

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

The income tax expense for the three and six months ended January 1, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year offset by a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.

The income tax expense for the three and six months ended January 2, 2021 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss.

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

As of October 2, 2021, and July 3, 2021 , our unrecognized tax benefits totaled $59.2 million and $59.1 million respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $4.1 million accrued for the payment of interest and penalties as of October 2, 2021.

As of January 1, 2022, and July 3, 2021 , our unrecognized tax benefits totaled $50.0 million and $55.5 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $1.7 million accrued for the payment of interest and penalties as of January 1, 2022.

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

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

Three Months Ended

October 2, 2021 October 3, 2020 Change

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 Change

Percentage Change

January 1, 2022 January 2, 2021 Change Percentage Change

Network Enablement

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Network Enablement

During the three months ended October 2, 2021, NE gross margin increased by 1.0 percentage points from 63.8% in the same period a year ago to 64.8% in the current period, reflecting higher revenue volumes and favorable product mix.

During the three months ended January 1, 2022, NE gross margin increased by 1.8 percentage points from 62.6% in the same period a year ago to 64.4% in the current period, reflecting higher revenue volumes and favorable product mix.

During the six months ended January 1, 2022, NE gross margin increased by 1.4 percentage points from 63.2% in the same period a year ago to 64.6% in the current period, reflecting higher revenue volumes and favorable product mix.

Service Enablement

During the three months ended October 2, 2021, SE gross margin decreased by 2.9 percentage points from 66.8% in the same period a year ago to 63.9% in the current period.

This decrease was primarily due to unfavorable product mix in our Growth Assurance products.

During the three months ended January 1, 2022, SE gross margin increased by 3.6 percentage points from 68.2% in the same period a year ago to 71.8% in the current period.

This increase was primarily due to higher revenue and favorable product mix.

During the six months ended January 1, 2022, SE gross margin increased by 0.8 percentage points from 67.6% in the same period a year ago to 68.4% in the current period.

This increase was primarily due to higher revenue and favorable product mix.

Network and Service Enablement (NSE)

During the three months ended October 2, 2021, NSE operating margin increased by 6.3 percentage points from 7.2% in the same period a year ago to 13.5% in the current period.

During the three months ended January 1, 2022, NSE operating margin increased by 8.0 percentage points from 10.7% in the same period a year ago to 18.7% in the current period.

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

During the six months ended January 1, 2022, NSE operating margin increased by 7.1 percentage points from 9.1% in the same period a year ago to 16.2% in the current period.

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

Optical Security and Performance Products

During the three months ended October 2, 2021 OSP gross margin decreased by 2.6 percentage points from 60.3% in the same period a year ago to 57.7% in the current period.

This decrease was primarily due to unfavorable manufacturing variances.

OSP operating margin decreased by 2.6 percentage points during the three months ended October 2, 2021 from 46.7% in the same period a year ago to 44.1% in the current period.

During the three months ended January 1, 2022, OSP gross margin decreased by 6.5 percentage points from 62.7% in the same period a year ago to 56.2% in the current period.

This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.

During the six months ended January 1, 2022, OSP gross margin decreased by 4.3 percentage points from 61.4% in the same period a year ago to 57.1% in the current period.

This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.

OSP operating margin decreased by 8.7 percentage points during the three months ended January 1, 2022 from 47.9% in the same period a year ago to 39.2% in the current period.

The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.

OSP operating margin decreased by 5.2 percentage points during the six months ended January 1, 2022 from 47.3% in the same period a year ago to 42.1% in the current period.

The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.

Liquidity and Capital Resources

As of October 2, 2021 and July 3, 2021, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $921.7 million and $703.7 million, respectively.

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

As of October 2, 2021, U.S.

As of January 1, 2022 and July 3, 2021, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $738.5 million and $703.7 million, respectively.

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our Form 10-K for the fiscal year ended July 3, 2021.

As of January 1, 2022, U.S.

entities owned approximately 53.3% of our cash and cash equivalents, short-term investments and short-term restricted cash.

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

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

As of January 1, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

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

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

During the three months ended January 1, 2022, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

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

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

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

The Credit Agreement provides for a $300 million senior secured revolving credit facility, which matures on March 1, 2023.

The Credit Agreement also provides that, under certain circumstances, we may incur term loans or increase the aggregate principal amount of revolving commitments by an aggregate amount of up to $200 million plus additional amounts so long as our secured net leverage ratio, determined on a pro forma basis does not exceed 1.50:1.00.

On December 30, 2021, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties.

The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300 million, which matures on December 30, 2026.

The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100 million so long as certain conditions are met.

The proceeds from the credit facility established under the Credit Agreement will be used for working capital and other general corporate purposes.

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

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

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

As of October 2, 2021, we had no amounts outstanding under the Credit Agreement.

Three Months Ended October 2, 2021

As of October 2, 2021, our combined balance of cash and cash equivalents and restricted cash increased by $218.3 million to $926.7 million from $708.4 million as of July 3, 2021.

During the three months ended October 2, 2021, Cash provided by operating activities was $53.4 million, consisting of net loss of $54.8 million adjusted for non-cash charges (e.g., loss on convertible note settlement, depreciation, amortization, stock-based compensation and other non-cash items) which totaled $121.0 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $12.8 million.

Changes in our operating assets and liabilities related primarily to an increase in inventory of $10.3 million, a decrease of accrued payroll and related expenses of $9.6 million, an increase in other current and non-current assets of $7.4 million, and a decrease in deferred revenue of $3.8 million.

These were partially offset by a decrease in accounts receivable of $10.9 million, an increase in accrued expenses and other current and non-current liabilities of $4.0 million and an increase in accounts payable of $3.4 million.

During the three months ended October 2, 2021, Cash used in investing activities was $14.8 million, primarily related to $15.7 million of cash used for capital expenditures and $1.2 million of cash used for acquisitions, offset by $2.1 million proceeds from sales of assets.

During the three months ended October 2, 2021, Cash provided by financing activities was $182.8 million, primarily resulting from $400.0 million gross proceeds from issuance of the 3.75% Notes due 2029, proceeds of $150.0 million from drawing down our revolving credit facility, and $3.7 million in proceeds from the issuance of common stock under our employee stock purchase plan.

These were partially offset by $200.0 million paid in connection with the Convertible Note Exchange transaction, $150.0 million repaid to our revolving credit facility, $8.8 million cash paid to repurchase common stock under our share repurchase program, $7.2 million in withholding tax payments on the vesting of restricted stock awards and $4.9 million debt issuance costs paid in the period.

Three Months Ended October 3, 2020

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

During the three months ended October 3, 2020, Cash provided by operating activities was $63.9 million, consisting of net income of $19.7 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $38.1 million, including changes in deferred tax balances, and changes in operating assets and liabilities that provided $6.1 million.

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

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

During the three months ended October 3, 2020, Cash used in investing activities was $7.5 million, primarily related to $8.0 million of cash used for capital expenditures;

offset by $0.5 million proceeds from sales of assets.

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

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

The obligations under the Credit Agreement are secured by substantially all of the assets of the Company and those of its subsidiaries that are borrowers and guarantors under the Credit Agreement.

Amounts outstanding under the Credit Agreement accrue interest as follows:

(i) if the amounts outstanding are denominated in US Dollars, at a per annum rate equal to either, at the Company’s election, Term SOFR plus a margin of 1.35% to 1.85% per annum, or a specified base rate plus a margin of 0.25% to 0.75%, in each case, depending on the average excess availability under the facility, (ii) if the amounts outstanding are denominated in Sterling, at a per annum rate equal to SONIA plus a margin of 1.2825% to 1.7825%, depending on the average excess availability under the facility, (iii) if the amounts outstanding are denominated in Euros, at a per annum rate equal to the Euro Interbank Offered Rate plus a margin of 1.25% to 1.75%, depending on the average excess availability under the facility, or (iv) if the amounts outstanding are denominated in Canadian Dollars, at a per annum rate equal to either, at the Company’s election, the Canadian Dollar Offered Rate plus a margin of 1.25% to 1.75%, or a specified base rate plus a margin of 0.25% to 0.75%, in each case, depending on the average excess availability under the facility.

The covenants of the Credit Agreement include customary restrictive covenants that, among other things, restrict the Company’s ability to incur additional indebtedness, grant liens and make certain acquisitions, investments, asset dispositions and restricted payments.

In addition, the Credit Agreement contains certain financial covenants that require the Company to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 if excess availability under the facility is less than the greater of 10% of the lesser of maximum revolver amount and borrowing base and $20 million.

As of January 1, 2022, we had no amounts outstanding under the Credit Agreement.

In connection with the entry into the Credit Agreement described above, the Company terminated its existing $300 million revolving credit agreement, dated May 5, 2020.

Six Months Ended January 1, 2022

As of January 1, 2022, our combined balance of cash and cash equivalents and restricted cash increased by $35.3 million to $743.7 million from $708.4 million as of July 3, 2021.

During the six months ended January 1, 2022, Cash provided by operating activities was $75.6 million, consisting of net loss of $20.2 million adjusted for non-cash charges (e.g., loss on convertible note settlement, depreciation, amortization, stock-based compensation and other non-cash items) which totaled $156.4 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $60.6 million.

Changes in our operating assets and liabilities related primarily to an increase in inventory of $24.3 million, a decrease in income taxes payable of $21.1 million, an increase in other current and non-current assets of $9.4 million, a decrease in deferred revenue of $6.9 million and an increase in accounts receivable of $6.0 million.

These were partially offset by an increase in accounts payable of $5.4 million and increase in accrued payroll and related expenses of $2.2 million.

During the six months ended January 1, 2022, Cash used in investing activities was $32.5 million, primarily related to $34.1 million of cash used for capital expenditures and $1.2 million of cash used for acquisitions, offset by $2.8 million proceeds from sales of assets.

During the six months ended January 1, 2022, Cash used in financing activities was $2.9 million, primarily resulting from $259.3 million paid in connection with the Convertible Note Exchange transactions, $125.6 million cash paid to repurchase common stock under our share repurchase program, $10.9 million in withholding tax payments on the vesting of restricted stock awards and $9.6 million debt issuance costs paid in the period.

These were partially offset by $400.0 million gross proceeds from issuance of the 3.75% Notes due 2029, and $3.7 million in proceeds from the issuance of common stock under our employee stock purchase plan.

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

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Contractual Obligations

There were no material changes to our existing contractual commitments during the first quarter of fiscal 2022.

There were no material changes to our existing contractual commitments during the second quarter of fiscal 2022.

Off-Balance Sheet Arrangements

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

As of October 2, 2021, our pension plans were under funded by $101.2 million since the PBO exceeded the fair value of plan assets.

As of January 1, 2022, our pension plans were under funded by $98 million since the PBO exceeded the fair value of plan assets.

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

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

As of October 2, 2021, the fair value of plan assets had increased approximately 1.1% since July 3, 2021, our most recent fiscal year end.

As of January 1, 2022, the fair value of plan assets had increased approximately 2.1% since July 3, 2021, our most recent fiscal year end.

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

10 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis