What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-05-03 · 154 added, 205 removed, 220 unchanged (62% of the section changed)

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Forward-looking statements include statements, but are not limited to statements such as:

• Our expectations regarding demand for our products and services, including macroeconomic conditions, industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;

• Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies including through restructuring programs, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements, and our estimation of the potential impact and materiality of litigation;

• Our expectations regarding demand for our products and services, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;

• Our plans for growth and innovation opportunities;

• Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, including restructuring and workforce reduction plans and the anticipated cost and operational benefits associated with such plans, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition, pricing and demand pressures, the future impact of certain accounting pronouncements, and our estimation of the potential impact and materiality of litigation;

• Our plans for continued development, use and protection of our intellectual property;

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• Our plans or expectations relating to investments, execution of capital allocation and debt management strategies, acquisitions, partnerships and other strategic opportunities;

• Our expectations regarding the continuing impact of the coronavirus disease (COVID-19) pandemic on our business, financial condition, results of operations and liquidity;

• Our strategies for mitigating the risk of supply chain interruptions and inflationary impacts;

• Our research and development plans and the expected impact of such plans on our financial performance;

• Our research and development plans and investments and the expected impact of such plans on our financial performance;

• Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues;

• Our expectations related to macro-economic conditions, including the impact of inflation, fiscal tightening at central banks, changes in foreign exchange rates, the risk of increased tensions and trade actions between China and the U.S.

and the ongoing military conflict between Russia and Ukraine and escalating armed conflict between Israel and Hamas, on our business, operations and financial results.

Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements.

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

VIAVI is a global provider of network test, monitoring, and assurance solutions for communications service providers, hyperscalers, equipment manufacturers, enterprises, government and avionics.

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

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

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

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

Together with our customers and partners we are United in Possibility, finding innovative ways to solve real-world problems.

To serve our markets we operate the following business segments:

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• Optical Security and Performance Products (OSP).

During the third quarter, we continued to experience a constrained demand outlook and inflationary pressures.

Weakness in service provider and network equipment manufacturer spending continues to create headwinds for our NE segment.

Demand for anti-counterfeiting is softening driven by fiscal tightening as central banks continue to normalize currency printing from elevated levels during the pandemic, creating pressure on OSP revenues.

During the first quarter, our end markets spend environment continued to be challenging, particularly with the service providers in North America.

Weaker demand created headwinds for our Fiber, Cable and Wireless Lab product revenues in our Network and Service Enablement (NSE) segment.

In addition, OSP revenues continued to be impacted by the weaker demand for our anti-counterfeiting products as tight fiscal policies slowdown inventory consumption by customers.

Any prolonged disruption of manufacturing of our products, commerce and related activity or significant decrease in demand for our products could materially and adversely affect our results of business, operations, and financial conditions.

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.

Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating income, non-GAAP operating margin, 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.

Restructuring plan

On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the Plan) intended to reduce costs and better align the Company’s workforce with current business needs and strategic growth opportunities.

The Company expects approximately 5% of its global workforce to be affected.

The Company anticipates the Plan to be substantially complete by the end of fiscal 2023.

Looking Ahead

As we look ahead to the remainder of the fiscal year, we expect the macroeconomic headwinds and end market demand volatility to persist into the near future.

We remain positive on our long-term growth drivers in 5G Wireless, Fiber, 3D Sensing and Resilient PNT.

We will continue to focus on executing against our strategic priorities highlighted during our September 2022 Analyst Day Event such as:

We continue to be impacted by macroeconomic conditions and challenges.

As we look ahead to our second fiscal quarter of 2024, we expect revenue to be relatively flat sequentially primarily due to continued slow recovery in service provider spend coupled with lower anti-counterfeiting demand as our customers work to adjust their year-end inventories.

For calendar year 2024, in addition to the factors mentioned above, we anticipate:

• Beginning of recovery in Wireless Lab products as major wireless NEMs continue 5G product development and begin to increase 6G investment;

• Increased demand for our avionics, military, and Position, Navigation and Timing (PNT) products;

• Recovery in our Fiber and Lab and Production product demand driven by strong optical demand by data center, optical NEMs, optical module, and semiconductor customers;

• Increased SE products demand as our new architecture begins to gain traction and acceptance with major customers.

Despite near-term macroeconomic headwinds, our long-term focus remains on executing against our strategic priorities to drive revenue and earnings growth, capture market share and continue to optimize our capital structure.

We remain positive on our long-term growth drivers in Wireless, Fiber, 3D sensing and PNT.

We will continue to focus on executing against our strategic priorities over the long-term to:

• Defend and consolidate leadership in core business segments;

• Invest in secular trends to drive growth and expand Total Addressable Market (TAM);

• Extend VIAVI technologies and platforms into lucrative adjacent markets and applications;

• Continuous productivity improvement in Operations, Research & Development (R&D) and Selling, General and Administrative (SG&A).

Recent Global Events

We operate globally and sell our products in countries throughout the world.

Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between China and the US, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations.

Moreover, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions;

inflation, which could result in increases in the cost of manufacturing products, reduced customer purchasing power, increased price pressure, and reduced or cancelled orders;

increased risk of cybersecurity attacks;

and general market instability, all of which could adversely impact our financial results.

As a result of the restrictions on exports to Russia, we suspended transactions in the region effective February 2022, which has negatively impacted our business.

Foreign companies with a presence in China are facing increasing operational challenges and enhanced scrutiny from governmental entities in region.

We are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q.

However, these estimates may change, as new events occur and additional information becomes available.

Actual results may differ materially from these estimates, assumptions or conditions due to risks and uncertainties, including the ongoing geopolitical instability as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains.

The impact on our future operations and results remains uncertain.

COVID-19 Pandemic Update

While the Covid pandemic has abated and normal business operations have largely resumed, events have led, at times, to slowdowns in shipping and commercial activities.

Through lingering economic turbulence, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures.

While the Company expects that all of this could have a negative impact to its sales and its results of operations, the Company is not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities as of the date of issuance of this Quarterly Report on Form 10-Q.

These estimates may change, as new events occur and additional information becomes available.

Actual results may differ materially from these estimates, assumptions or conditions.

• Extend VIAVI technologies and platforms into adjacent markets and applications;

• Continued productivity improvements in Operations, Research & Development (R&D) and Selling, General and Administrative (SG&A).

Financial Highlights

Third quarter fiscal 2023 results included the following notable items:

First quarter fiscal 2024 results included the following notable items:

• Net revenue of $247.9 million, down $62.3 million or 20.1% year-over-year.

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• Non-GAAP operating margin of 12.4%, down 930 bps year-over-year.

• GAAP EPS of $(0.07), down $0.15 or 187.5% year-over-year.

• Non-GAAP EPS of $0.08, down $0.14 or 63.6% year-over-year.

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

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

Operating (Loss) Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin

• GAAP diluted EPS of $0.04, down $0.10 or 71.4% year-over-year.

• Non-GAAP diluted EPS of $0.09, down $0.14 or 60.9% year-over-year.

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

Three Months Ended

September 30, 2023 October 1, 2022

Operating Income Operating Margin Operating Income Operating Margin

GAAP measures $ 16.0 6.5 % $ 49.8 16.1 %

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Amortization of intangibles 5.6 2.2 % 9.3 3.0 %

Restructuring and related charges (benefits) 10.2 4.1 % — — % 10.2 1.2 % (0.1) — %

Restructuring and related benefits (0.8) (0.3) % — — %

Total related to Cost of Revenue and Operating Expenses 14.8 5.9 % 17.6 5.6 %

Non-GAAP measures $ 30.8 12.4 % $ 67.4 21.7 %

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

Net (loss) income Diluted EPS Net Income Diluted EPS Net Income Diluted

EPS Net (loss) income Diluted

Three Months Ended

September 30, 2023 October 1, 2022

Net Income Diluted EPS Net Income Diluted EPS

GAAP measures $ 9.8 $ 0.04 $ 32.6 $ 0.14

Items reconciling GAAP net (loss) income and EPS to non-GAAP net income and EPS:

Items reconciling GAAP Net income and EPS to Non-GAAP Net income and EPS:

Stock-based compensation 11.2 0.05 13.0 0.06

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Amortization of intangibles 5.6 0.02 9.3 0.04

Restructuring and related charges (benefits) 10.2 0.05 — — 10.2 0.05 (0.1) —

Non-cash interest expense and other expense (2)

Restructuring and related benefits (0.8) — — —

Litigation settlement (2)

(7.3) (0.03) — —

Provision for (benefit from) income taxes 0.4 — (0.6) — 2.7 0.01 (7.0) (0.03)

Non-cash interest expense and other expense 1.2 0.01 — —

Provision for income taxes 1.0 — 2.3 0.01

Total related to Net income and EPS 9.7 0.05 19.9 0.09

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Shares used in per share calculation for Non-GAAP EPS 224.2 230.4

Certain totals may not add due to rounding.

(1) Other items include charges (benefits) unrelated to core operating performance primarily consisted of certain acquisition and integration related charges, transformational initiatives such as site consolidations, reorganization, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.

(2) The Company incurred a loss of $2.2 million for the three and nine months ended April 1, 2023 in connection with the modification of certain 1.00% Senior Convertible Notes.

The Company incurred a loss of $6.4M and $98.7M for the three and nine months ended April 2, 2022, respectively, 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.

(1) Other items include charges (benefits) unrelated to core operating performance primarily consisting of certain acquisition and integration related charges, transformational initiatives such as site consolidations, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.

(2) Favorable litigation settlement recorded as a gain to Interest and other income, net in the Consolidated Statements of Operations for the three months ended September 30, 2023.

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 provides non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP EPS 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, stock-based compensation, legal settlements, restructuring, separation costs, changes in fair value of contingent consideration liabilities and certain investing expenses and other activities that management believes are not reflective of such ordinary, ongoing and core operating activities.

Specifically, management uses these items to further its own understanding of the Company’s core operating performance, which the Company believes represents 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, stock-based compensation, legal settlements, restructuring, changes in fair value of contingent consideration liabilities and certain investing expenses and other activities that management believes are not reflective of such ordinary, ongoing and core operating activities.

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

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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 release are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance.

The non-GAAP adjustments described in this Form 10-Q are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance.

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 of 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) amortization expense related to acquired intangibles, (vi) changes in fair value of contingent consideration liabilities and (vii) other charges unrelated to our core operating performance comprised mainly of acquisition related transaction costs, integration costs related to acquired entities, litigation and legal settlements 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’s GAAP presentation of 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) charges such as severance, benefits and outplacement costs related to 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) amortization expense related to acquired intangibles, (vi) changes in fair value of contingent consideration liabilities and (vii) other charges unrelated to our core operating performance comprised mainly of acquisition related transaction costs, integration costs related to acquired entities, litigation and legal settlements 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 EPS.

Non-cash interest expense and other expense:

The Company excludes certain investing expenses and non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities, in calculating non-GAAP net income and non-GAAP net income per share.

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.

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

The GAAP measure most directly comparable to non-GAAP operating income is operating income.

The GAAP measure most directly comparable to non-GAAP operating margin is operating margin.

The GAAP measure most directly comparable to non-GAAP net income is net income.

The GAAP measure most directly comparable to non-GAAP net income per share is net income per share.

The GAAP measure most directly comparable to non-GAAP EPS is net income per share.

The Company believes these GAAP measures alone are not fully indicative of its core operating expenses and performance and that providing non-GAAP financial measures in conjunction with GAAP measures provides valuable supplemental information regarding the Company’s overall performance.

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

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 Change Percent Change April 1, 2023 April 2, 2022 Change Percent Change

Three Months Ended

September 30, 2023 October 1, 2022 Change Percent Change

Segment net revenue:

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Percentage of net revenue 0.8 % 0.7 %

Restructuring and related charges (benefits) $ 10.2 $ — $ 10.2 100.0 % $ 10.2 $ (0.1) $ 10.3 NM

Percentage of net revenue 4.1 % — % 1.2 % — %

Loss on convertible note settlement $ — $ (6.4) $ 6.4 (100.0) % $ — $ (98.7) $ 98.7 (100.0) %

Percentage of net revenue — % 2.0 % — % 10.3 %

Loss on convertible note modification $ (2.2) $ — $ (2.2) 100.0 % $ (2.2) $ — $ (2.2) 100.0 %

Restructuring and related benefits $ (0.8) $ — $ (0.8) NM

Percentage of net revenue (0.3) % — %

Interest income and other income, net $ 1.6 $ 0.6 $ 1.0 166.7 % $ 4.9 $ 3.1 $ 1.8 58.1 %

Interest and other income, net $ 10.2 $ 1.1 $ 9.1 827.3 %

Percentage of net revenue 4.1 % 0.4 %

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Percentage of net revenue 3.5 % 3.9 %

2.4 % 3.0 % 3.4 % 2.6 %

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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Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.

Three months ended April 1, 2023 and April 2, 2022

Net revenue decreased by $67.7 million, or 21.5%, during the three months ended April 1, 2023 compared to the same period a year ago.

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

Product revenues decreased by $70.6 million, or 25.6%, during the three months ended April 1, 2023 compared to the same period a year ago, driven by revenue decreases in all segments.

Service revenues increased by $2.9 million, or 7.3%, during the three months ended April 1, 2023 compared to the same period a year ago.

This increase was due to revenue increases from our NE and SE segments.

NE net revenue decreased by $54.7 million, or 26.8%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower volumes in Field Instruments, Lab & Production and Wireless products compared to the prior year partially offset by PNT revenue not included in the same period a year ago.

SE net revenue increased by $1.2 million, or 4.5%, during the three months ended April 1, 2023 compared to the same period a year ago, primarily due to higher Assurance revenue.

OSP net revenue decreased by $14.2 million, or 16.8%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower Anti-Counterfeiting and consumer and industrial revenue compared to the same period a year ago.

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.

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

Three months ended September 30, 2023 and October 1, 2022

Net revenue decreased by $62.3 million, or 20.1%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease reflects the weakness in service provider spending and softness in anti-counterfeiting.

Product revenues decreased by $62.1 million, or 23.2%, during the three months ended September 30, 2023 compared to the same period a year ago, driven by decreases in all segments.

Service revenues remained relatively flat, decreasing $0.2 million, or 0.5%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease was driven by revenue decrease in our NE segment offset in part by revenue increase from our SE segment.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties.

For example, uncertainty around the timing of our customers procurement decisions on infrastructure maintenance and upgrades and decisions on new infrastructure investments or uncertainty about speed of adoption of 5G technology at a commercially viable scale.

This 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.

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

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(a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products;

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

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

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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 Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

Three Months Ended

September 30, 2023 October 1, 2022

United States $ 82.8 33.4 % $ 96.6 31.1 %

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Total Asia-Pacific $ 85.9 34.7 % $ 111.6 36.0 %

Switzerland $ 13.5 5.5 % $ 18.8 6.0 % $ 42.5 5.1 % $ 43.7 4.6 %

Other EMEA 58.3 23.5 % 73.4 23.2 % 178.0 21.1 % 225.6 23.5 %

Total EMEA $ 71.8 29.0 % $ 92.2 29.2 % $ 220.5 26.2 % $ 269.3 28.1 %

$ 61.5 24.8 % $ 75.6 24.4 %

Total net revenue $ 247.9 100.0 % $ 310.2 100.0 %

Net revenue from customers outside the Americas during the three and nine months ended April 1, 2023 represented 59.5% and 60.9% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended April 2, 2022 represented 65.5% and 62.8% of net revenue, respectively.

Net revenue from customers outside the Americas represented 59.5% and 60.4% of net revenue, respectively, during the three months ended September 30, 2023 and October 1, 2022.

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 decreased by 2.3 percentage points during the three months ended April 1, 2023 from 59.2% in the same period a year ago to 56.9% in the current period.

The decrease was primarily due to gross margin reduction from our NE and OSP segments, offset by gross margin increase in our SE segment, as discussed below in the Operating Segment Information section.

Gross margin decreased by 1.3 percentage points during the nine months ended April 1, 2023 from 59.8% in the same period a year ago to 58.5% in the current period.

The decrease was primarily driven by gross margin reduction in all segments as discussed below in the Operating Segment Information section.

Amortization of Acquired Technologies (Cost of revenues)

Amortization of acquired technologies within Cost of revenues decreased $3.6 million or 50.7% during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2023 offset in part by amortization of intangibles acquired through acquisitions in fiscal 2023.

Gross margin decreased by 1.4 percentage points during the three months ended September 30, 2023 from 59.6% in the same period a year ago to 58.2% in the current period.

The decrease was primarily due to gross margin reduction from our NE and OSP segments, partially offset by gross margin increase in our SE segment, as discussed below in the Operating Segment Information section.

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

We expect these factors to continue to result in variability of our gross margin.

Amortization of Acquired Technologies and Other Intangibles

Amortization of acquired technologies and other intangibles decreased $1.6M or 16.7% during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.

Amortization of acquired technologies and other intangibles decreased $5.0M or 16.6% during the nine months ended April 1, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.

Research and Development

R&D expense decreased by $4.1 million, or 7.5%, during the three months ended April 1, 2023 compared to the same period a year ago.

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

As a percentage of net revenue, R&D expense increased by 3.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.

R&D expense decreased by $3.7 million or 2.3%, during the nine months ended April 1, 2023 compared to the same period a year ago.

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

As a percentage of net revenue, R&D expense increased by 1.8 percentage points during the nine months ended April 1, 2023 compared to the same period a year ago.

R&D expense decreased by $2.7 million, or 5.1%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease was primarily due to benefits from our restructuring activities and variable expense reductions.

As a percentage of net revenue, R&D expense increased by 3.1 percentage points during the three months ended September 30, 2023 compared to the same period a year ago.

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

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Selling, General and Administrative

SG&A expense decreased by $9.0 million, or 10.1%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily due to fair value adjustment of contingent consideration related to acquisitions and variable expense reductions.

As a percentage of net revenue, SG&A increased 4.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.

SG&A expense decreased by $18.8 million, or 7.0%, during the nine months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily due to the reversal of the U.K.

pension accrued liability, lower commission expense and outside service expenses.

As a percentage of net revenue, SG&A increased 1.6 percentage points during the nine months ended April 1, 2023 compared to the same period a year ago.

Restructuring and related charges

SG&A expense decreased by $3.0 million, or 3.7%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease was primarily due to benefits from our restructuring activities, variable expense reductions including lower commissions, and the fair value adjustment of contingent consideration related to acquisitions.

As a percentage of net revenue, SG&A increased 5.2 percentage points during the three months ended September 30, 2023 compared to the same period a year ago.

Amortization of Intangibles (Operating expenses)

Amortization of intangibles within Operating expenses decreased $0.1 million or 4.5% during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2023 offset in part by amortization of intangibles acquired through acquisitions in fiscal 2023.

Restructuring

The Company restructuring events are primarily intended to reduce costs, consolidate operations, integrate various acquisitions, streamline product manufacturing and address market conditions.

On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the FY 2023 Plan) to better align the Company’s workforce with current business needs and strategic growth opportunities.

The Company expects approximately 5% of its global workforce to be affected with approximately $25.0 million of annual savings and anticipates to be substantially complete by the end of fiscal 2023.

During the three and nine months ended April 1, 2023, the Company recorded restructuring charges of $10.2 million related to the FY 2023 Plan.

The restructuring charges include severance, benefit and outplacement costs to eliminate a specified number of positions.

During the second quarter of fiscal 2023, Management approved a restructuring and workforce reduction plan (the Fiscal 2023 Plan) to better align the Company’s workforce with current business needs and strategic growth opportunities.

The Fiscal 2023 Plan, which affected approximately 5% of the Company's workforce, resulted in an estimated annualized gross cost savings of approximately $28.0 million excluding any one-time charges as a result of the restructuring activities.

The first phase of the Fiscal 2023 Plan impacted all segments and corporate functions and was substantially complete as of September 30, 2023.

The second phase of the Fiscal 2023 Plan is primarily focused on reducing costs in our SE segment and the Company anticipates this phase to be substantially complete by the end of the second quarter of fiscal 2024.

We estimate future cash payments of $1.5 million under the Fiscal 2023 Plan during the remainder of fiscal 2024, funded by operating cash flow.

During the three months ended September 30, 2023, the Company recorded restructuring benefits of $0.8 million related to the FY 2023 Plan.

Refer to “Note 13.

Restructuring and Related Charges” for more information.

Loss on convertible note settlement

During the three months ended April 2, 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 $64.7 million in cash in exchange for $23.2 million principal amount of the 2023 Notes and $26.8 million principal amount of the 2024 Notes.

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

During the nine months ended April 2, 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 $320.2 million in cash in exchange for $137.6 million principal amount of the 2023 Notes and $233.0 million principal amount of the 2024 Notes.

The Company recorded a loss of $98.7 million in connection with the settlement transactions.

Loss on convertible note modification

During the three months ended April 1, 2023, the Company exchanged $127.5 million principal value of its 1.00% Senior Convertible Notes due 2024 for $132.0 million principal value of its 1.625% Senior Convertible Notes due 2026.

The Company incurred $4.2 million of issuance costs related to the modification, of which $ 2.2 million of the issuance costs were recorded as loss on convertible note modification on the Consolidated Statements of Operations.

The remaining issuance costs of $ 2.0 million was capitalized within long-term debt (as a contra-balance) on the Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis until maturity.

Interest income and other income, net

Interest income and other income, net, was $1.6 million during the three months ended April 1, 2023 compared to $0.6 million during the same period a year ago.

This $1.0 million increase was primarily driven by higher interest income during the current period offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest income and other income, net, was $4.9 million during the nine months ended April 1, 2023 compared to $3.1 million during the same period a year ago.

This $1.8 million increase was primarily driven by higher interest income offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest and other income, net

Interest and other income, net, was $10.2 million during the three months ended September 30, 2023 compared to $1.1 million during the same period a year ago.

This $9.1 million increase was primarily driven by a legal settlement in our favor in the amount of $7.3 million and higher interest income during the current period partially offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest Expense

Interest expense increased by $0.3 million, or 4.7%, during the three months ended April 1, 2023 compared to the same period a year ago.

Interest expense increased by $1.7 million, or 27.9%, during the three months ended September 30, 2023 compared to the same period a year ago.

This increase was primarily driven by the accretion of debt discount on the Senior Convertible Notes due 2026 as a result of the issuance in March 2023.

Interest expense increased by $1.9 million, or 11.1%, during the nine months ended April 1, 2023 compared to the same period a year ago.

This increase was primarily driven by full nine month interest expense on the Senior Notes due 2029 in the current period as a result of the issuance in September 2021 offset by lower interest expense on our convertible notes as a result of convertible notes settlement transactions during September 2021, November 2021, March 2022 and June 2022.

Provision for Income Taxes

We recorded an income tax provision of $6.0 million and $28.7 million for the three and nine months ended April 1, 2023, respectively.

We recorded an income tax provision of $9.4 million and $25.3 million for the three and nine months ended April 2, 2022, respectively.

The income tax provision for the three and nine months ended April 1, 2023 and April 2, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss.

The income tax provision for the nine months ended April 2, 2022 includes a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.

We recorded an income tax provision of $8.6 million for the three months ended September 30, 2023.

We recorded an income tax provision of $12.2 million for the three months ended October 1, 2022.

The income tax provision for the three months ended September 30, 2023 and October 1, 2022 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 April 1, 2023, and July 2, 2022, our unrecognized tax benefits totaling $51.1 million and $49.7 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $2.8 million accrued for the payment of interest and penalties as of April 1, 2023.

As of September 30, 2023, and July 1, 2023, our unrecognized tax benefits totaling $50.7 million and $51.1 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $3.0 million accrued for the payment of interest and penalties as of September 30, 2023.

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 Nine Months Ended

April 1, 2023 April 2, 2022 Change Percentage Change April 1, 2023 April 2, 2022 Change Percentage Change

Three Months Ended

September 30, 2023 October 1, 2022 Change Percentage Change

Network Enablement

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Network Enablement

During the three months ended April 1, 2023, NE gross margin decreased by 1.8 percentage points from 63.8% in the same period a year ago to 62.0% in the current period due to lower volumes.

During the nine months ended April 1, 2023, NE gross margin decreased by 0.7 percentage points from 64.3% in the same period a year ago to 63.6% in the current period due to lower volumes.

NE net revenue decreased by $46.5 million, or 23.7%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower volumes in Wireless, Field Instruments and Lab and Production partially offset by PNT revenue not included in the comparable period.

NE gross margin decreased by 1.4 percentage points during the three months ended September 30, 2023 to 63.1% from 64.5% in the same period a year ago primarily due to lower volumes and unfavorable product mix.

Service Enablement

During the three months ended April 1, 2023, SE gross margin increased by 1.3 percentage points from 69.1% in the same period a year ago to 70.4% in the current period.

This increase was primarily due to higher volumes and improved product mix.

During the nine months ended April 1, 2023, SE gross margin decreased by 0.6 percentage points from 68.6% in the same period a year ago to 68.0% in the current period.

This decrease was primarily due to lower volumes.

SE net revenue decreased by $2.0 million, or 8.9%, during the three months ended September 30, 2023 compared to the same period a year ago primarily due to lower Assurance revenues offset in part by increased Data Center revenues.

SE gross margin increased by 1.1 percentage points during the three months ended September 30, 2023 to 67.2% from 66.1% in the same period a year ago primarily due to favorable product mix.

Network and Service Enablement

During the three months ended April 1, 2023, NSE operating margin decreased by 13.5 percentage points from 14.9% in the same period a year ago to 1.4% in the current period.

This decrease in operating margin was primarily driven by lower volumes.

During the nine months ended April 1, 2023, NSE operating margin decreased by 7.4 percentage points from 15.7% in the same period a year ago to 8.3% in the current period.

This decrease in operating margin was primarily driven by lower volumes.

NSE operating margin decreased by 12.3 percentage points during the three months ended September 30, 2023 to 0.9% from 13.2% in the same period a year ago primarily due to lower volumes.

Optical Security and Performance Products

During the three months ended April 1, 2023, OSP gross margin decreased by 4.9 percentage points from 55.5% in the same period a year ago to 50.6% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.

During the nine months ended April 1, 2023, OSP gross margin decreased by 3.1 percentage points from 56.6% in the same period a year ago to 53.5% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.

OSP operating margin decreased by 2.7 percentage points during the three months ended April 1, 2023 from 39.3% in the same period a year ago to 36.6% in the current period.

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

OSP operating margin decreased by 2.7 percentage points during the nine months ended April 1, 2023 from 41.1% in the same period a year ago to 38.4% in the current period.

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

OSP net revenue decreased by $13.8 million, or 15.1%, during the three months ended September 30, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower anti-counterfeiting and consumer and industrial revenue compared to the same period a year ago.

OSP gross margin decreased by 4.2 percentage points during the three months ended September 30, 2023 to 52.5% from 56.7% in the same period a year ago primarily due to unfavorable manufacturing variances and lower volumes.

OSP operating margin decreased by 4.5 percentage points during the three months ended September 30, 2023 to 37.8% from 42.3% in the same period a year ago primarily due to the aforementioned reduction in gross margin.

Liquidity and Capital Resources

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.

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 execution of 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:

• Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;

• Impact of the COVID-19 pandemic on our financial condition;

• Changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;

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

• While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, 1.625% Senior Convertible Notes due 2026 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, 2026 Notes and/or 2029 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 1.625% Senior Convertible Notes due 2026 and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and have covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt;

• Issuance or repurchase of debt which may include open market purchases of our 2024 Notes, 2026 Notes and/or 2029 Notes prior to their maturity;

• Issuance or repurchase of our common stock or other equity securities;

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

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Cash and Cash Equivalents and Short-Term Investments

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

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

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

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

As of April 1, 2023, U.S.

As of September 30, 2023, U.S.

subsidiaries owned approximately 32.9% of our cash and cash equivalents, short-term investments and restricted cash.

As of April 1, 2023, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

As of September 30, 2023, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

Nonetheless we could realize investment losses under adverse market conditions.

During the three months ended April 1, 2023, 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 September 30, 2023, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

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

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The Credit Agreement also provides that, under certain circumstances, we may 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 April 1, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $169.4 million.

As of September 30, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $152.1 million, net of outstanding standby letters of credit of $4.1 million.

Refer to “Note 11.

Debt” for more information.

Cash Flows for the Nine Months Ended April 1, 2023

As of April 1, 2023, our combined balance of cash and cash equivalents and restricted cash increased by $20.4 million to $593.2 million from $572.8 million as of July 2, 2022.

During the nine months ended April 1, 2023, Cash provided by operating activities was $90.6 million, consisting of net income of $25.6 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $106.6 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $41.6 million.

Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $35.1 million, a decrease in accrued expenses and other current and non-current liabilities of $27.3 million, an increase in inventory of $20.0 million, a decrease in accounts payable of $13.3 million, a decrease in deferred revenue of $6.3 million and a decrease in income taxes payable of $6.2 million.

These were partially offset by a decrease in accounts receivable of $47.6 million and a decrease in other current and non-current assets of $19.0 million.

During the nine months ended April 1, 2023, Cash used in investing activities was $105.3 million, primarily related to $64.4 million used for acquisitions, $43.7 million used for capital expenditures and $0.7 million for a purchase price adjustment related to business acquisition, offset by $3.5 million proceeds from sales of assets.

During the nine months ended April 1, 2023, Cash provided by financing activities was $29.3 million, primarily resulting from $118.0 million proceeds from the issuance of 2026 Senior Convertible Notes and $7.9 million in proceeds from the issuance of common stock under our employee stock purchase plan.

These were offset by $73.9 million cash paid to repurchase common stock under our share repurchase program, $11.4 million in withholding tax payments on the vesting of restricted stock awards, $7.4 million in other payments, primarily acquisition related and $3.9 million for payments of debt issuance costs.

Cash Flows for the Three Months Ended September 30, 2023

As of September 30, 2023, our combined balance of cash and cash equivalents and restricted cash increased by $12.3 million to $527.9 million from $515.6 million as of July 1, 2023.

During the three months ended September 30, 2023, Cash provided by operating activities was $50.3 million, consisting of net income of $9.8 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $27.7 million, including changes in deferred tax balances, and changes in operating assets and liabilities that provided $12.8 million.

Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $38.0 million due to collections outpacing billings and a decrease in other current and non-current assets of $3.9 million.

These were offset by a decrease in deferred revenue of $10.1 million due to timing of support billings and project acceptance, a decrease in accrued payroll and related expenses of $9.1 million due primarily to lower variable expenses and timing of payroll, a decrease in accounts payable of $7.6 million driven by timing of purchases and related payments, a decrease in accrued expenses and other current and non-current liabilities of $1.4 million, an increase in inventory of $0.3 million and a decrease in income taxes payable of $0.6 million.

During the three months ended September 30, 2023, Cash used in investing activities was $12.6 million, primarily resulting from $6.5 million net purchases of short-term investments and $6.7 million used for capital expenditures offset by $0.6 million proceeds from sales of assets.

During the three months ended September 30, 2023, Cash used in financing activities was $16.1 million, primarily resulting from $10.0 million cash paid to repurchase common stock under our share repurchase program and $9.1 million in withholding tax payments on the vesting of restricted stock awards and performance-based awards.

These were offset by $3.0 million in proceeds from the issuance of common stock under our employee stock purchase plan.

Share Repurchase Program

In September 2022 the Board of Directors authorized a new stock repurchase plan (“2022 Repurchase Plan”) of up to $300 million effective October 1, 2022 which will remain in effect until the amount authorized has been fully repurchased or until suspension or termination of the program.

Under the 2022 Repurchase Plan, the Company is authorized to repurchase shares through a variety of methods, including open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans.

The timing of repurchases under the plan will depend upon business and financial market conditions.

During the three months ended April 1, 2023, the Company repurchased 2.8 million shares of its common stock for $30.0 million under the 2022 Repurchase Plan.

During the nine months ended April 1, 2023, the Company repurchased 5.0 million shares of its common stock for $55.2 million under the 2022 Repurchase Plan.

As of April 1, 2023, the Company had remaining authorization of $244.8 million for future share repurchases under the 2022 Repurchase Plan.

The 2022 Repurchase Plan replaces the $200 million stock repurchase plan that the Board previously authorized in September 2019 (“2019 Repurchase Plan”) and expired on September 30, 2022.

During the three months ended October 1, 2022, the Company repurchased 1.3 million shares of its common stock for $18.7 million under the 2019 Repurchase Plan.

During the three months ended September 30, 2023, we repurchased 1.0 million shares of our common stock for $10.0 million pursuant to our 2022 Repurchase Plan.

As of September 30, 2023, the Company had remaining authorization of $224.8 million for future share repurchases under the 2022 Repurchase Plan.

Refer to “Note 15.

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Contractual Obligations

There were no material changes to our existing contractual commitments during the third quarter of fiscal 2023.

There were no material changes to our existing contractual commitments during the first quarter of fiscal 2024.

Off-Balance Sheet Arrangements

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Stock-Based Compensation” for more details.

Pension and Other Post-Retirement Benefits

We sponsor significant pension plans for certain past and present employees in the United Kingdom (U.K.) and Germany.

We are also responsible for the non-pension post-retirement benefit obligation (PBO) assumed from a past acquisition.

All of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition in fiscal 2010.

Employee Defined Benefit Plans and Other Post-retirement Benefits

We sponsor significant qualified and non-qualified pension plans for certain past and present employees in the U.K.

Most of these plans have been closed to new participants and no additional service costs are being accrued.

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

As of April 1, 2023, our pension plans were under-funded by $57.4 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.

As of September 30, 2023, our pension plans were under-funded by $52.0 million since the post-retirement benefit obligation (PBO) exceeded the fair value of plan assets.

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

As of April 1, 2023, the fair value of plan assets had increased approximately 2.1% since July 2, 2022, our most recent fiscal year end.

As of September 30, 2023, the fair value of plan assets had decreased approximately 4.9% since July 1, 2023, our most recent fiscal year end.

We are also responsible for the non-pension PBO assumed from a past acquisition of $0.4 million.

In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets.

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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 $4.0 million based upon data as of July 1, 2023.

Goodwill is recognized and initially measured as the excess of the purchase price paid over the net fair value of assets acquired and liabilities assumed in a business combination.

Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill.

The Company tests goodwill at the reporting unit level for impairment during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired.

First, we assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a quantitative goodwill impairment test comparing the fair value of the applicable reporting unit with its carrying value.

If the estimated fair value exceeds book value, goodwill is considered not to be impaired.

However, if the fair value of the reporting unit is less than book value, then goodwill will be impaired by the amount that the carrying amount of goodwill exceeds the fair value.

As part of the annual impairment test, the Company performed a quantitative assessment of goodwill impairment for all reporting units during the fourth quarter of fiscal 2023.

The Company estimated the fair value of each reporting unit by applying a combination of the income approach and the market approach.

The income approach used discounted future cash flows in which sales, operating income and cash flow projections were based on assumptions driven by current economic conditions.

In developing these assumptions, we relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data.

The market approach was based on trading multiples of companies comparable to each reporting unit and analysis of recent sales of comparable entities.

We corroborated the fair value estimates by comparing the sum of the fair values of the reporting units and corporate net assets to VIAVI’s market capitalization as of the valuation date.

The Company believes the assumptions used in the goodwill impairment test were reasonable, but future changes in the underlying assumptions could occur due to the inherent uncertainty in making such estimates.

Further declines in the Company’s operating results due to challenging economic conditions, an unfavorable industry or macroeconomic development or other adverse changes in market conditions could change one of the key assumptions the Company used in the goodwill impairment assessment, which could result in a further decline in fair value and require the Company to record an impairment charge in future periods.

Based on our testing, the fair value of each of the Company’s reporting units was at least two times the carrying value, and therefore no impairment was identified.

Quantitative and Qualitative Disclosure About Market Risks

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What changed 10-Q

Item 2. Management’s Discussion and Analysis