What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-08-19 compared with 2021-08-23 · 210 added, 259 removed, 220 unchanged (68% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

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

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the period ended July 2, 2022.

Unless otherwise noted, all references herein for the years 2022, 2021, and 2020 represent the fiscal years ended July 2, 2022, July 3, 2021, and June 27, 2020, respectively.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements.

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

Our Industries and Developments

Viavi Solutions Inc.

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

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

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

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

This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America.

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

We are a global provider of network test, monitoring, and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics.

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

VIAVI is also a leader in light management solutions for the anti-counterfeiting, consumer electronics, industrial, government, and automotive markets.

To serve our markets, we operate in the following business segments:

• Network Enablement (NE);

1 unchanged sentence

• Optical Security and Performance Products (OSP).

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

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.

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

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

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

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

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

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

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

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

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

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

We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has 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.

NSE has experienced some impact to customer demand.

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

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

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

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

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

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

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.

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

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

While capital markets and worldwide economies have stabilized and recovered since being significantly impacted by the COVID-19 pandemic, on June 8, 2020 the National Bureau of Economic Research announced that the U.S.

was in a recession.

As the pandemic spread across the globe in Spring 2020, there was a tightening of the credit markets.

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

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

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

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

Recently Issued Accounting Pronouncements

Refer to “Note 2.

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

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.

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

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

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

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

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

Revenue Recognition

We derive revenue from a diverse portfolio of network solutions and optical technology products and services, as follows:

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

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

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

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

We account for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue:

Identify the contract with a customer:

Generally, we consider 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 we consider 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.

We exercise reasonable 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 that we implement.

Identify the performance obligations in the contract:

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

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

proprietary pigment;

optical filters;

proprietary software licenses;

and support and maintenance, which includes hardware support that extends beyond our standard warranties, software maintenance, installation, professional and implementation services, and training.

Identifying and evaluating whether products and services are considered distinct performance obligations may require significant judgment particularly in NSE due to the underlying nature of the product and service offerings.

We 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.

Determine the transaction price:

Transaction price reflects the amount of consideration to which we expect to be entitled in exchange for transferring goods or services to the customer.

Our 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.

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 our 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 us, 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, we allocate 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 we sell 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.

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 we have 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 we perform the services and the customers receive and/or consume the benefits.

Business Combinations

We use the acquisition method of accounting under the authoritative guidance on business combinations.

Each acquired company’s operating results are included in our Consolidated Financial Statements beginning on the date of acquisition.

The purchase price is equivalent to the fair value of consideration transferred.

Tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition are recorded at their estimated fair values as of the acquisition date.

Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.

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

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

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

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

Goodwill Valuation

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

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

The accounting guidance provides us 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 our 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 our 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.

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

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

Our significant estimates in the income approach include our weighted average cost of capital, long-term rate of growth and profitability of the reporting unit’s business and working capital effects.

The market approach estimates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business.

Significant estimates in the market approach include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit.

We base our estimates on historical experience and on various assumptions about the future that we believe are reasonable based on available information.

Unanticipated events and circumstances may occur that affect the accuracy of our assumptions, estimates and judgments.

For example, if the price of our common stock were to significantly decrease combined with other adverse changes in market conditions, thus indicating that the underlying fair value of our reporting units may have decreased, we might be required to reassess the value of our goodwill in the period such circumstances were identified.

In the fourth quarter of fiscal 2021, we performed the goodwill impairment test in accordance with the authoritative guidance for NE, SE and OSP reporting units, and determined no indicator of impairment.

Refer to “Note 9.

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

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

This approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our 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, we have 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 our ability to utilize our net operating loss carryforwards before they expire.

Accordingly, we have established a valuation allowance for such deferred tax assets.

If there is a change in our ability to realize our deferred tax assets for which a valuation allowance has been established, then our tax provision may decrease in the period in which we determine that realization is more likely than not.

Likewise, if we determine that it is not more likely than not that our deferred tax assets will be realized, then a valuation allowance may be established for such deferred tax assets and our tax provision may increase in the period in which we make 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.

We are subject to income tax audits by the respective tax authorities in all of the jurisdictions in which we operate.

The determination of tax liabilities in each of these jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations.

We recognize liabilities based on our estimate of whether, and the extent to which, additional tax liabilities are more likely than not.

If we ultimately determine that the payment of such a liability is not necessary, then we reverse the liability and recognize a tax benefit during the period in which the determination is made that the liability is no longer necessary.

The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we make certain estimates and judgments.

Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.

Contingencies

We are subject to various potential loss contingencies arising in the ordinary course of business.

In determining a loss contingency, we consider 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.

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

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

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

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

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

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

During fiscal 2022, we experienced global supply chain disruptions, increased raw material costs, higher shipping-related charges, and inflationary pressures.

Nevertheless, our ability to secure critical components, build inventory and meet customer demands has helped enable us to grow revenue and market share.

We saw strong revenue growth in our NE business segment driven by fiber and wireless, as North American service providers upgraded and expanded their networks with fiber optic, and wireless demand increased in fiscal 2022.

Our SE business segment also experienced an increase in revenue year over year as we saw strong growth in assurance solutions and data center products, in part due to increased market demand for 5G and growth in network traffic.

Revenue from our OSP business segment did decrease, primarily driven by a decrease in demand for our consumer electronics and industrial products.

However, any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of business, operations, and financial conditions.

It may also have the effect of heightening many of the other risks such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.

Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating profit, non-GAAP diluted earnings per share (EPS) and cash flow from operations.

We believe these key operating metrics are useful to investors because management uses these metrics to assess the growth of our business and the effectiveness of our marketing and operational strategies.

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We continue to make strategic investments to support our three-year strategic plan highlighted during our September 2019 Analyst Day Event such as:

• Continued to invest in R&D to revamp product portfolio and enable the business to leverage secular trends in 5G, Fiber and 3D Sensing.

• Enhanced the sales team to continue expanding Total Addressable Market (TAM), gain market share and execute successfully against our competitors.

• Successfully completed four acquisitions, consistent with our acquisition strategy.

Looking Ahead to 2023

As we look forward to the year ahead, our focus remains on executing against our strategic priorities to drive revenue and earnings growth, capture market share and continue to optimize our capital structure.

Our emphasis is to continue to execute successfully despite supply chain shortages.

Our ability to secure critical components, build inventory and meet customer demands has been a great differentiator and enabled us to grow revenue and market share.

We plan to improve profitably driven by operating leverage in the business model as we grow both organically and inorganically.

FINANCIAL HIGHLIGHTS

Our fiscal 2022 results included the following notable items:

• Net revenues of $1.3 billion, up $93.5 million or 7.8% year-over-year

• GAAP operating margin of 14.3%, up 240 bps year-over-year

• Non-GAAP operating margin of 22.2%, up 110 bps year-over-year

• GAAP Diluted EPS of $0.07, down $0.22 or 75.9% year-over-year

• Non-GAAP Diluted EPS of $0.95, up $0.12 or 14.5% year-over-year

In fiscal 2022, VIAVI achieved new highs despite the COVID-19 related supply chain issues and inflationary pressures.

Net revenue of $1.3 billion, up $93.5 million or 7.8%, was led by our NSE segment, which reached a record revenue of $949.1 million, up 13.3% year-over-year.

VIAVI's fiscal 2022 GAAP operating margin of 14.3% was up 240bps over fiscal 2021 due to leverage on revenue growth.

Non-GAAP operating margin of 22.2% expanded 110 basis points largely due to revenue growth and a lower intangible amortization.

GAAP Diluted EPS of $0.07 decreased 75.9%, or $0.22, from fiscal 2021 largely due to the loss incurred in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes (the Original Senior Convertible Notes).

Non-GAAP Diluted EPS of $0.95 increased 14.5% or $0.12 from $0.83 in fiscal 2021 as a result of the operating performance and an improved tax rate.

In fiscal 2022, we generated $178.1 million in operating cash flow and deployed $72.5 million or 5.6% of revenues towards capital expenditures.

We completed a $400.0 million high-yield 2029 notes offering at an attractive rate of 3.75% interest which allowed us to retire about 40% of the Original Senior Convertible Notes during Q1, and subsequent redemption transactions the remainder of the year allowed for additional retirements of approximately 17% of the Original Senior Convertible Notes.

At the end of fiscal 2022, 43% of the original principal value of the Original Senior Convertible Notes remain outstanding.

Also during fiscal 2022 we repurchased 14.8 million shares of our common stock for $235.5 million.

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A reconciliation of Non-GAAP financial measures to GAAP financial measures is provided below (in millions, except EPS amounts):

July 2, 2022 July 3, 2021

Operating Income Operating Margin Operating Income Operating Margin

GAAP measures $ 185.0 14.3 % $ 142.2 11.9 %

Stock-based compensation 52.3 4.1 % 48.3 3.9 %

Change in fair value of contingent liability 0.3 — % (5.3) (0.4) %

Other charges unrelated to core operating performance (1)

9.6 0.7 % 3.4 0.3 %

Amortization of intangibles 39.7 3.1 % 66.5 5.5 %

Restructuring and related benefits (0.1) — % (1.6) (0.1) %

Total related to Cost of Revenue and Operating Expenses 101.8 7.9 % 111.3 9.2 %

Non-GAAP measures $ 286.8 22.2 % $ 253.5 21.1 %

July 2, 2022 July 3, 2021

Net income Diluted

EPS Net Income Diluted

GAAP measures $ 15.5 $ 0.07 $ 67.5 $ 0.29

Items reconciling GAAP net income and EPS to non-GAAP net income and EPS:

Stock-based compensation 52.3 0.22 48.3 0.21

Change in fair value of contingent liability 0.3 — (5.3) (0.02)

Other charges unrelated to core operating performance (1)

9.6 0.04 3.4 0.01

Amortization of intangibles 39.7 0.17 66.5 0.28

Restructuring and related benefits (0.1) — (1.6) (0.01)

Non-cash interest expense and other expense 102.2 0.43 0.2 —

Benefit from income taxes 5.8 0.02 16.2 0.07

Total related to net income and EPS 209.8 0.88 127.7 0.54

Non-GAAP measures $ 225.3 $ 0.95 $ 195.2 $ 0.83

Shares used in per share calculation for Non-GAAP EPS 238.2 236.3

(1) Other items include charges unrelated to core operating performance primarily consisting of acquisition and integration related charges, transformational initiatives such as site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

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Use of Non-GAAP (Adjusted) Financial Measures

The Company provides non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share financial measures as supplemental information regarding the Company’s operational performance.

The Company uses the measures disclosed in this Report to evaluate the Company’s historical and prospective financial performance, as well as its performance relative to its competitors.

Specifically, management uses these items to further its own understanding of the Company’s core operating performance, which the Company believes represent its performance in the ordinary, ongoing and customary course of its operations.

Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition-related intangibles and inventory step-up, stock-based compensation, restructuring, separation costs, changes in fair value of contingent consideration liabilities and certain investing expenses and non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities.

Non-GAAP financial measures are not in accordance with, preferable to, or an alternative for, generally accepted accounting principles in the United States.

The Company believes providing this additional information allows investors to see Company results through the eyes of management and that providing non-GAAP financial measures in conjunction with GAAP measures provides valuable supplemental information regarding the Company’s overall performance.

The Company further believes that providing this information allows investors to better understand the Company’s financial performance and, importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.

The non-GAAP adjustments described in this Report are excluded by the Company from its GAAP financial measures.

The non-GAAP adjustments are outlined below.

Cost of revenues, costs of research and development and costs of selling, general and administrative :

The Company’s GAAP presentation operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, equipment and intangibles that have been identified for disposal but remained in use until the date of disposal, (ii) workforce related charges such as severance, retention bonuses and employee relocation costs related to formal restructuring plans, (iii) costs for facilities not required for ongoing operations, and costs related to the relocation of certain equipment from these facilities and/or contract manufacturer facilities, (iv) stock-based compensation, (v) changes in fair value of contingent consideration liabilities and (vi) other charges unrelated to our core operating performance comprising mainly of acquisition related transaction costs, amortization of acquisition related inventory step-up, integration costs related to acquired entities, litigation and other costs and contingencies unrelated to current and future operations, including transformational initiatives such as the implementation of simplified automated processes, site consolidations, and reorganizations.

The Company excludes these items in calculating non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share.

The Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance.

Amortization of intangibles :

The Company includes amortization expense related to intangibles in its GAAP presentation of cost of revenues and operating expense.

The Company excludes these significant non-cash items in calculating non-GAAP operating margin, non-GAAP net income and non-GAAP net income per share.

Non-cash interest expense and other expense :

The Company incurred a loss of $101.8M for fiscal 2022 in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes.

The Company eliminates this in calculating non-GAAP net income and non-GAAP net income per share, because it believes that in so doing, it can provide investors a clearer and more consistent view of the Company’s core operating performance.

Income tax expense or benefit:

The Company excludes certain non-cash tax expense or benefit items, such as the utilization of net operating losses where valuation allowances were released, intra-period tax allocation benefit and the tax effect for amortization of non-tax deductible intangible assets, in calculating non-GAAP net income and non-GAAP net income per share.

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RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses the results of operations for the fiscal year ended July 2, 2022 and July 3, 2021 and year to-year comparisons between such fiscal years.

Discussions of the year to-year comparisons between the fiscal year ended July 3, 2021 and June 27, 2020, that are not included in this Annual Report on Form 10-K, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 3, 2021 .

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

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

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

July 2, 2022 July 3, 2021 June 27, 2020

Segment net revenue:

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Income from operations 14.3 11.8 10.4

Interest income and other income, net 0.3 0.8 0.6

Loss on convertible note settlement (7.9) — —

Interest and other (loss) income, net 0.4 0.3 0.9

Interest expense (1.8) (1.2) (1.2)

Income from continuing operations before income taxes 9.1 8.3 3.5

Income before income taxes 5.0 10.9 10.1

Provision for income taxes 3.8 5.3 5.8

Income from continuing operations, net of taxes 3.8 2.5 0.7

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

Net income 1.2 % 5.6 % 4.3 %

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Financial Data for Fiscal 2022, 2021 and 2020

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

Loss on convertible note exchange $(101.8) $— $(101.8) 100.0% $— $— $— —%

Percentage of net revenue (7.9)% —% —% —%

Interest and other income, net $5.2 $3.3 $1.9 57.6% $3.3 $9.6 $(6.3) (65.6)%

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GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses.

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Fiscal 2022 and 2021

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

If currency exchange rates had been constant in fiscal 2022 and 2021, our consolidated net revenue in “constant dollars” would have increased by approximately $10.8 million, or 0.8% of net revenue, which primarily impacted our NE and SE segments.

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

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

If currency exchange rates had been constant in fiscal 2022 and 2021, our consolidated operating expenses in “constant dollars” would have increased by approximately $4.8 million, or 0.4% of net revenue.

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

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Fiscal 2022 and 2021

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

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

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

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

Net revenue increased $93.5 million, or 7.8%, during fiscal 2022 when compared to fiscal 2021.

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

Product revenues increased $84.1 million, or 8.0%, during fiscal 2022 when compared to fiscal 2021.

During the period we realized strength from our NE and SE segments, which was offset by a decline in our OSP segment.

Service revenues increased $9.4 million, or 6.4%, during fiscal 2022 when compared to fiscal 2021.

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

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

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

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

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

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

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

This increase was primarily due to increased support revenue from our NE segments, offset by declines in our SE and OSP segments.

NE net revenue increased $99.2 million, or 13.3% during fiscal 2022 when compared to fiscal 2021, reflecting continued strength in our Wireless and Optical Lab & Production products.

SE net revenue increased $12.0 million, or 13.1%, during fiscal 2022 when compared to fiscal 2021.

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

OSP net revenue decreased $17.7 million, or 4.9%, during fiscal 2022 when compared to fiscal 2021.

This was primarily driven by a decrease in revenues from our 3D Sensing products.

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

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dollar relative to foreign currencies could negatively impact reported revenue.

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

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

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

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

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

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

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

(e) the impact of ongoing global trade policies, political tensions between the U.S.

and China, tariffs and sanctions;

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

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Revenue by Region

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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) :

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

July 2, 2022 July 3, 2021 June 27, 2020

United States $ 388.9 30.1 % $ 330.0 27.5 % $ 341.6 30.1 %

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Total net revenue $ 1,292.4 100.0 % $ 1,198.9 100.0 % $ 1,136.3 100.0 %

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

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

Net revenue from customers outside the Americas for fiscal 2022, represented 62.4% of net revenue, a decrease of 2.9% year-over-year.

This decrease is primarily due to lower revenues from EMEA and strong NSE North America revenues.

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

Gross margin in fiscal 2021 increased by 1.1% to 59.6% from 58.5% in fiscal 2020.

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

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

Gross margin in fiscal 2022 improved by 0.2% to 59.8% from 59.6% in fiscal 2021.

This increase was primarily driven by higher revenue volume and favorable product mix.

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 $9.4 million, or 4.9%, during fiscal 2021 compared to fiscal 2020.

R&D expense increased $10.2 million, or 5.0%, during fiscal 2022 compared to fiscal 2021.

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

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

As a percentage of net revenue, R&D slightly decreased during fiscal 2022 when compared to fiscal 2021.

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 $22.5 million, or 7.1%, in fiscal 2021 compared to fiscal 2020.

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

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

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

SG&A expense increased $28.2 million, or 8.4%, in fiscal 2022 compared to fiscal 2021.

This increase was driven by higher sales commissions, increased travel and variable pay.

As a percentage of net revenue, SG&A increased slightly to 28.3% in fiscal 2022 when compared to 2021.

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

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Amortization of acquired technologies and intangibles for fiscal 2022 decreased $26.8 million, or 40.3%, to $39.7 million from $66.5 million in fiscal 2021.

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

This decrease is primarily due to intangible assets becoming fully amortized.

Acquired In-Process Research and Development

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

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

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

During fiscal 2022, we recorded a net restructuring benefit of $0.1 million and made final remaining payments of $0.4 million, after which the plan was closed.

We estimate annualized gross cost savings of approximately $16.8 million excluding any one-time charges as a result of the recent restructuring activities.

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

Interest Income and Other Income, Net

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

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

Loss on Convertible Note Exchange

During fiscal 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 $347.3 million in cash in exchange for $156.9 million principal amount of the 2023 Notes and $236.1 million principal amount of the 2024 Notes.

The Company recorded a loss of $101.8 million in connection with the settlement transactions.

Interest and Other Income, Net

Interest and other income, net was $5.2 million in fiscal 2022 as compared to $3.3 million in fiscal 2021.

This $1.9 million increase was primarily driven by $1.4 million favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures for fiscal 2022 and an increase of $0.5 million in interest income due to rising interest rates during fiscal 2022.

Interest Expense

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

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

Interest expense increased $8.6 million, or 58.5%, during fiscal 2022 compared to fiscal 2021.

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

Provision for Income Tax

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

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

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

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

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

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

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

We recorded an income tax provision of $49.6 million for fiscal 2022.

The expected tax provision derived by applying the federal statutory rate to our income before income taxes for fiscal 2022 differed from the income tax expense recorded primarily due to valuation allowances in addition to the foreign tax impact of the internal intellectual property restructuring transaction and withholding taxes offset by a tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.

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On July 2, 2022, the Company completed a planned internal transaction moving certain of VIAVI’s intellectual properties out of a foreign jurisdiction where tax rates are scheduled to increase to the U.S.

entity established in fiscal 2021 to own and manage VIAVI’s other intellectual properties.

The Company recorded foreign tax expense of $13.2 million related to this transaction.

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

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

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

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

During fiscal 2022, the valuation allowance for deferred tax assets increased by $11.9 million which was primarily due to the increase in capitalization of federal research expenditures in the U.S.

The decrease in income tax provision of $13.7 million or 21.6% during fiscal 2022 was due primarily to an $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction coupled with the decrease in the impact of the aforementioned fiscal 2022 transaction of $13.2 million as compared to the fiscal 2021 charge of $19.1 million related to internal transactions restructuring certain of our intellectual properties.

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

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Network Enablement

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

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

NE gross margin increased by 0.8% during fiscal 2022 to 64.3% from 63.5% in fiscal 2021.

This increase is due to leverage on growth and a more favorable product mix.

Service Enablement

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

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

SE gross margin increased by 3.6% during fiscal 2022 to 69.2% from 65.6% in fiscal 2021.

This increase is due to a more favorable product mix.

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Network and Service Enablement

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

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

NSE operating margin increased by 4.6% during fiscal 2022 to 15.6% from 11.0% in fiscal 2021.

The increase in operating margin was primarily driven by gross margin expansion offset by higher sales commissions.

Optical Security and Performance Products

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

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

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

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

OSP gross margin decreased by 4.0% during fiscal 2022 to 56.4% from 60.4% in fiscal 2021.

This decrease was primarily due to higher input costs and startup costs in our new Arizona facility.

OSP operating margin decreased by 4.2% during fiscal 2022 to 40.5% from 44.7% in fiscal 2021.

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

Liquidity and Capital Resources

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.

We believe our existing liquidity and sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet our liquidity needs, including but not limited to, contractual obligations, working capital and capital expenditure requirements, financing strategic initiatives, fund debt maturities, and execute purchases under our share repurchase program over the next twelve months and beyond.

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

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

• Volatility in credit markets which would impact our ability to obtain additional financing on favorable terms or at all;

• Volatility in foreign exchange market which impacts our financial results;

• Possible investments or acquisitions of complementary businesses, products or technologies;

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

• While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt;

• Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes and/or 2029 Notes prior to their maturity or of our common stock;

• Potential funding of pension liabilities either voluntarily or as required by law or regulation;

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

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Cash and Cash Equivalents and Short Term Investments

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subsidiaries owned approximately 40.3% of our cash and cash equivalents, short-term investments and restricted cash.

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

As of July 2, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

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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.

Senior Secured Asset-Based Revolving Credit Facility

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 $300.0 million, which matures on December 30, 2026.

The Credit Agreement also provides that, under certain circumstances, we may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100.0 million so long as certain conditions are met.

As of July 2, 2022, we had no borrowings under this facility and our available borrowing capacity was approximately $206.4 million.

Refer to “Note 11.

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

Revolving Credit Facility

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

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

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

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

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

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

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

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

On May 5, 2020, we entered into a credit agreement with Wells Fargo as administrative agent, and other lender related parties.

We borrowed $150.0 million and repaid $150.0 million under this credit agreement during the first quarter of fiscal 2022.

In connection with the entry into the senior secured asset-based revolving credit facility noted above, we terminated this facility.

Refer to “Note 11.

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

Year Ended July 3, 2021

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

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

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

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

Cash Flows Year Ended July 2, 2022

As of July 2, 2022, our combined balance of cash and cash equivalents and restricted cash decreased by $135.6 million to $572.8 million from a balance of $708.4 million as of July 3, 2021.

Cash provided by operating activities was $178.1 million, consisted of net income of $15.5 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost, loss on convertible note settlement and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $226.1 million, offset by changes in operating assets and liabilities that used $63.5 million.

Changes in our operating assets and liabilities related primarily to an increase in deferred revenue of $13.2 million, an increase in accrued payroll and related expenses of $3.0 million and an increase in accrued expenses and other current and non-current liabilities of $1.4 million.

This was partially offset by cash outflows from an increase in inventories of $27.7 million, a decrease in income taxes payable of $18.2 million, an increase in accounts receivable of $18.3 million, an increase in other current and non-current assets of $11.3 million and a decrease in accounts payable of $5.6 million driven by timing of purchases and related payments.

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Cash used in investing activities was $71.0 million, primarily related to $72.5 million of cash used for capital expenditures and $8.3 million cash used for acquisitions.

This was partially offset by $9.8 million proceeds from sales of assets.

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

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

Contractual Obligations

Cash used in financing activities was $210.4 million, primarily resulting from $351.6 million paid connection with the repurchase of certain Original Senior Convertible Notes, $235.9 million of cash used to repurchase common stock under our share repurchase program, $14.1 million in withholding tax payment on vesting of restricted stock awards, $10.5 million debt issuance costs paid in the period and $6.1 million in other payments.

These were partially offset by $400 million gross proceeds from issuance of the 3.75% Notes due in 2029 and $7.8 million in proceeds from the issuance of common stock under our employee stock purchase plan.

Material Contractual and Material Cash Obligations

The following summarizes our contractual obligations at July 2, 2022, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ):

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Asset retirement obligations—expected cash payments $ 4.2 $ 0.5 $ 1.1 $ 0.9 $ 1.7

2029 3.75% Senior Notes

400.0 — — — 400.0

2023 1.75% Senior Convertible Notes 68.1 68.1 — — —

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As of July 2, 2022, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.

Off-Balance Sheet Arrangements

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

Share Repurchase Program

During fiscal 2022 we repurchased 14.8 million shares of our common stock outstanding for $235.5 million pursuant to our 2019 and 2021 Share Repurchase Plans.

As of July 2, 2022, the 2019 plan had $67.3 million of the authorized amount remaining;

the 2021 plan had no authorized amount remaining.

Refer to “Note 15.

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

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Employee Defined Benefit Plans and Other Post-retirement Benefits

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These contributions allowed us to comply with regulatory funding requirements.

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

Recently Issued Accounting Pronouncements

Refer to “Note 2.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S.

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

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

Refer to “Note 1.

Basis of Presentation” under Item 8 of this Annual Report on Form 10-K, for a discussion of the estimates used in preparation our Consolidated Financial Statements.

For our Pension accounting, significant judgment is required i n actuarial assumption used when establishing the discount rate for the net periodic cost and the projected benefit obligation (PBO) calculations.

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

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We estimate a 50-basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $5.0 million based upon data as of July 2, 2022.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis