What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-03 compared with 2024-02-02 · 141 added, 119 removed, 266 unchanged (49% of the section changed)

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• 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 future tax liabilities resulting from future tax legislation;

• 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.

and the ongoing military conflict between Russia and Ukraine and 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 (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 a global provider of network test, monitoring and assurance solutions for telecommunications, cloud, enterprises, first responders, military, aerospace and railway.

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

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• Optical Security and Performance Products (OSP).

During the second quarter we continued to see lower capital expenditure spend by NEMs and weaker spend by service providers, which impacted our Field, Fiber and Wireless Lab products.

Partially offsetting this was increased demand for our Avionics, PNT and SE products.

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.

During the third quarter of fiscal 2024, the VIAVI business environment continued to be challenging, particularly in the service provider and enterprise customer markets, partially offset by stronger OSP demand.

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.

Proposed Acquisition of Spirent

On March 5, 2024, we announced a transaction under which the Company and VIAVI Solutions Acquisitions Limited, our wholly-owned subsidiary (Bidco), intends to acquire the entire issued and to be issued ordinary share capital o f Spirent Communications plc, a public company incorporated in England and Wales and a global provider of automated test and assurance solutions for networks, cybersecurity and positioning (Spirent, and such transaction, the Proposed Acquisition).

The Proposed Acquisition is to be implemented by means of a court-sanctioned scheme of arrangement under the United Kingdom (U.K.) Companies Act 2006, as amended (the VIAVI Offer Scheme).

Under the terms of the Proposed Acquisition, Spirent shareholders, in connection with the consummation of the VIAVI Offer Scheme, would receive 172.5 pence per ordinary Spirent share in cash and would also be entitled to retain a special dividend of 2.5 pence per ordinary Spirent share .

The Proposed Acquisition was approved by our Board of Directors and was recommended by the board of directors of Spirent.

The Proposed Acquisition is conditioned upon, among other things, (i) certain meetings of the shareholders of Spirent to approve the VIAVI Offer Scheme being held no later than May 23, 2024, (ii) the VIAVI Offer Scheme being approved by the requisite majorities of Spirent shareholders at such meetings, (iii) the receipt of applicable antitrust and other regulatory clearances, and, following the satisfaction or waiver of all other conditions, (iv) the sanction of the VIAVI Offer Scheme by the High Court of Justice in England and Wales.

On March 28, 2024, Spirent announced that it had received from another bidder a competing offer (the Competing Offer) at a higher nominal price per share of Spirent than that reflected in the Proposed Acquisition and that the board of directors of Spirent had withdrawn its recommendation of the Proposed Acquisition and instead had recommended Spirent shareholders vote in favor of the Competing Offer.

The Competing Offer is conditioned on, among other things, the receipt of applicable antitrust and other regulatory clearances.

On April 17, 2024, Spirent announced the indefinite adjournment of the meetings of the shareholders of Spirent relating to the VIAVI Offer Scheme, which were scheduled to be held on May 1, 2024.

If those meetings are not held by May 23, 2024, the VIAVI Offer Scheme will lapse, unless VIAVI elects to waive the relevant condition to the Proposed Acquisition or such deadline is extended with the consent of the U.K.

Panel on Takeovers and Mergers.

For more information on the risks related to the Proposed Acquisition, see Part II, Item 1A, Risk Factors, of this Quarterly Report.

Looking Ahead

We continue to be impacted by macroeconomic conditions and end market demand volatility.

As we look ahead to the third fiscal quarter of fiscal 2024, we expect revenue to be relatively flat sequentially primarily due to continued slow recovery in service provider spend and reduced seasonal demand in 3D sensing.

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:

We continue to be impacted by macroeconomic conditions and volatility in end market demand.

As we look ahead to the fourth quarter of fiscal 2024, we expect revenue to be flat to slightly higher as our normal seasonal growth is expected to be adversely impacted by a continued conservative spend environment.

Despite near-term macroeconomic headwinds, our long-term focus remains on executing 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 Position, Navigation and Timing (PNT).

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

• Defend and consolidate leadership in core business segments;

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Financial Highlights

Second quarter fiscal 2024 results included the following notable items:

Third quarter fiscal 2024 results included the following notable items:

• Net revenue of $246.0 million, down $1.8 million or 0.7% year-over-year.

• GAAP operating margin of 8.8%, up 80 bps year-over-year.

• GAAP operating margin of (4.8)%, down 400 bps year-over-year.

• Non-GAAP operating margin of 9.3%, down 210 bps year-over-year.

• GAAP diluted EPS of $0.05, up $0.01 or 25.0% year-over-year.

• GAAP diluted EPS of $(0.11), down $0.04 or 57.1% year-over-year.

• Non-GAAP diluted EPS of $0.06, down $0.02 or 25.0% 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 Six Months Ended

December 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022

Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin

Three Months Ended Nine Months Ended

March 30, 2024 April 1, 2023 March 30, 2024 April 1, 2023

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

GAAP measures $ (11.9) (4.8) % $ (2.1) (0.8) % $ 26.5 3.5 % $ 70.6 8.4 %

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Amortization of intangibles 5.0 2.0 % 8.0 3.2 % 15.4 2.1 % 25.2 3.0 %

Restructuring and related benefits (0.1) — % — — % (0.9) (0.2) % — — %

Restructuring and related charges (benefits) 0.1 — % 10.2 4.1 % (0.8) (0.1) % 10.2 1.2 %

Total related to Cost of Revenue and Operating Expenses 34.9 14.1 % 30.4 12.2 % 61.0 8.2 % 71.1 8.4 %

Non-GAAP measures $ 23.0 9.3 % $ 28.3 11.4 % $ 87.5 11.7 % $ 141.7 16.8 %

Three Months Ended Six Months Ended

December 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022

Net Income Diluted EPS Net Income Diluted EPS Net Income Diluted

Three Months Ended Nine Months Ended

March 30, 2024 April 1, 2023 March 30, 2024 April 1, 2023

Net (Loss) Income Diluted EPS Net (Loss) Income Diluted EPS Net (Loss) Income Diluted

EPS Net Income Diluted

GAAP measures $ (24.6) $ (0.11) $ (15.4) $ (0.07) $ (4.1) $ (0.02) $ 25.6 $ 0.11

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

Items reconciling GAAP Net (Loss) Income and EPS to Non-GAAP Net Income and EPS:

Stock-based compensation 12.8 0.06 12.7 0.06 36.6 0.16 38.8 0.17

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Amortization of intangibles 5.0 0.02 8.0 0.04 15.4 0.07 25.2 0.11

Restructuring and related benefits (0.1) — — — (0.9) (0.01) — —

Litigation settlement (2)

Restructuring and related charges (benefits) 0.1 — 10.2 0.04 (0.8) (0.01) 10.2 0.05

Gain on litigation settlement (2)

— — — — (7.3) (0.03) — —

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Provision for income taxes 0.9 0.01 0.4 — 2.1 0.01 2.7 0.01

Total related to Net income and EPS 13.0 0.06 23.1 0.10 22.7 0.10 43.0 0.19

Total related to Net (Loss) Income and EPS 37.8 0.17 33.4 0.15 60.5 0.27 76.4 0.34

Non-GAAP measures $ 13.2 $ 0.06 $ 18.0 $ 0.08 $ 56.4 $ 0.25 $ 102.0 $ 0.45

Shares used in per share calculation for Non-GAAP EPS 224.6 225.3 224.1 227.6

(1) Other items include charges (benefits) unrelated to core operating performance primarily consisting of certain acquisition and integration related charges, legal settlement, accretion of debt discount and losses on disposal of long-lived assets.

(2) Unfavorable (favorable) litigation settlement recorded to Interest and other income, net in the Consolidated Statements of Operations for the three and six months ended December 30, 2023.

(1) Other charges (benefits) unrelated to core operating performance primarily consisting of certain acquisition and integration related charges, legal costs, accretion of debt discount and loss on disposal of long-lived assets.

During the three and nine months ended March 30, 2024, Other charges include expenses related to the proposed acquisition of Spirent.

(2) Gain on litigation settlement recorded to Interest and other income, net in the Consolidated Statements of Operations for the nine months ended March 30, 2024.

Use of Non-GAAP (Adjusted) Financial Measures

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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.

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 and acquisition related 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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Non-cash interest expense and other expense:

The Company excludes certain investing expenses, including accretion of debt discount, and other 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 EPS.

The Company excludes certain investing expenses, including accretion of debt discount and other non-cash activities that management believes are not reflective of such ordinary, ongoing and core operating activities, when calculating non-GAAP net income and non-GAAP EPS.

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 EPS.

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 when calculating non-GAAP net income and non-GAAP EPS.

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

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

Three Months Ended Six Months Ended

December 30, 2023 December 31, 2022 Change Percent Change December 30, 2023 December 31, 2022 Change Percent Change

Three Months Ended Nine Months Ended

March 30, 2024 April 1, 2023 Change Percent Change March 30, 2024 April 1, 2023 Change Percent Change

Segment net revenue:

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Percentage of net revenue 0.6 % 0.8 % 0.7 % 0.8 %

Restructuring and related benefits $ (0.1) $ — $ (0.1) NM $ (0.9) $ — $ (0.9) NM

Restructuring and related charges (benefits) $ 0.1 $ 10.2 $ (10.1) (99.0) % $ (0.8) $ 10.2 $ (11.0) (107.8) %

Percentage of net revenue — % 4.1 % 0.1 % 1.2 %

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

Percentage of net revenue — % 0.9 % — % 0.3 %

Interest and other income, net $ 4.0 $ 1.6 $ 2.4 150.0 % $ 18.0 $ 4.9 $ 13.1 267.3 %

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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 December 30, 2023 and December 31, 2022

Net revenue decreased by $30.0 million, or 10.5%, during the three months ended December 30, 2023 compared to the same period a year ago.

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

Product revenues decreased by $30.6 million, or 12.7%, during the three months ended December 30, 2023 compared to the same period a year ago, driven by decreases in all segments.

Service revenues increased by $0.6 million, or 1.4%, during the three months ended December 30, 2023 compared to the same period a year ago.

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

Three and Nine Months Ended March 30, 2024 and April 1, 2023

Net revenue decreased by $1.8 million, or 0.7%, during the three months ended March 30, 2024 compared to the same period a year ago.

This decrease reflects the continuing weakness in service provider spending partially offset by higher anti-counterfeiting revenue.

Net revenue decreased by $94.1 million, or 11.2%, during the nine months ended March 30, 2024 compared to the same period a year ago.

This decrease reflects the continuing weakness in service provider spending and lower anti-counterfeiting revenue.

Product revenues increased by $2.1 million, or 1.0%, during the three months ended March 30, 2024 compared to the same period a year ago, driven by revenue increases in our OSP and NE segments offset by revenue decrease in our SE segment.

Product revenues decreased by $90.6 million, or 12.7%, during the nine months ended March 30, 2024 compared to the same period a year ago, driven by revenue decreases in all segments.

Service revenues decreased by $3.9 million, or 9.2% and $3.5 million, or 2.7% during the three and nine months ended March 30, 2024, respectively, compared to the same periods a year ago.

This was driven by revenue decreases from our NE and SE segments.

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

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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 Six Months Ended

December 30, 2023 December 31, 2022 December 30, 2023 December 31, 2022

Three Months Ended Nine Months Ended

March 30, 2024 April 1, 2023 March 30, 2024 April 1, 2023

United States $ 76.3 31.0 % $ 82.5 33.3 % $ 243.8 32.6 % $ 271.6 32.2 %

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Total net revenue $ 246.0 100.0 % $ 247.8 100.0 % $ 748.4 100.0 % $ 842.5 100.0 %

Net revenue from customers outside the Americas represented 59.5% of net revenue during the three and six months ended December 30, 2023.

Net revenue from customers outside the Americas during the three and six months ended December 31, 2022 represented 62.6% and 61.4% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended March 30, 2024 represented 64.1% and 61.0% of net revenue, respectively.

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.

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.

Amortization of Acquired Technologies (Cost of revenues)

Amortization of acquired technologies within Cost of revenues decreased $2.3 million or 40.4% and $5.9 million or 46.1% during the three and six months ended December 30, 2023, respectively, compared to the same periods a year ago.

Amortization of acquired technologies within Cost of revenues decreased $2.4 million or 40.7% and $8.3 million or 44.4% during the three and nine months ended March 30, 2024, respectively, compared to the same periods a year ago.

These decreases are 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 0.5 percentage points during the three months ended December 30, 2023 from 58.7% 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.

Gross margin decreased by 1.0 percentage point during the six months ended December 30, 2023 from 59.2% in the same period a year ago to 58.2% in the current period.

Gross margin decreased by 0.8 percentage points during the three months ended March 30, 2024 from 56.9% in the same period a year ago to 56.1% in the current period.

The decrease was primarily due to gross margin reduction in all segments, as discussed below in the Operating Segment Information section.

Gross margin decreased by 1.0 percentage point during the nine months ended March 30, 2024 from 58.5% in the same period a year ago to 57.5% in the current period.

The decrease was primarily due to gross margin reduction in all segments, as discussed below in the Operating Segment Information section.

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

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Research and Development

R&D expense decreased by $2.4 million, or 4.6% and $5.1 million, or 4.9% during the three and six months ended December 30, 2023, respectively, compared to the same periods a year ago.

These decreases were primarily due to benefits from our restructuring activities and variable expense reductions.

As a percentage of net revenue, R&D expense increased by 1.2 percentage points during the three and six months ended December 30, 2023 compared to the same periods a year ago.

R&D expense decreased by $0.8 million, or 1.6% during the three months ended March 30, 2024 compared to the same period a year ago.

This decrease was primarily due to benefits from our restructuring activities.

As a percentage of net revenue, R&D expense decreased by 0.2 percentage points during the three months ended March 30, 2024 compared to the same period a year ago.

R&D expense decreased by $5.9 million, or 3.8% during the nine months ended March 30, 2024 compared to the same period a year ago.

This decrease was primarily due to benefits from our restructuring activities.

As a percentage of net revenue, R&D expense increased by 1.6 percentage points during the nine months ended March 30, 2024 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 $15.2 million, or 16.9%, during the three months ended December 30, 2023 compared to the same period a year ago.

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

As a percentage of net revenue, SG&A decreased 2.2 percentage points during the three months ended December 30, 2023 compared to the same period a year ago.

SG&A expense decreased by $18.2 million, or 10.7%, during the six months ended December 30, 2023 compared to the same period a year ago.

As a percentage of net revenue, SG&A increased 1.7 percentage points during the six months ended December 30, 2023 compared to the same period a year ago.

SG&A expense increased by $18.2 million, or 22.8%, during the three months ended March 30, 2024 compared to the same period a year ago.

This increase was due to expenses related to the proposed acquisition of Spirent, the change in fair value of acquisition-related contingent consideration and reversal of variable compensation that benefited the same period a year ago.

These increases were partially offset by benefits from our restructuring activities.

As a percentage of net revenue, SG&A increased 7.6 percentage points during the three months ended March 30, 2024 compared to the same period a year ago.

SG&A expense of $250.2 million during the nine months ended March 30, 2024 was flat when compared to the same period a year ago.

This was primarily due to expenses related to the proposed acquisition of Spirent offset by benefits from our restructuring activities and the change in fair value of acquisition-related contingent consideration.

As a percentage of net revenue, SG&A increased 3.7 percentage points during the nine months ended March 30, 2024 compared to the same period a year ago.

Amortization of Intangibles (Operating expenses)

Amortization of intangibles within Operating expenses decreased $0.8 million or 36.4% and $0.9 million or 20.5% during the three and six months ended December 30, 2023, respectively, compared to the same periods a year ago.

Amortization of intangibles within Operating expenses decreased $0.6 million or 28.6% and $1.5 million or 23.1% during the three and nine months ended March 30, 2024, respectively, compared to the same periods a year ago.

These decreases are 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.

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The Fiscal 2023 Plan, which affected approximately 5% of the Company's workforce, resulted in an estimated annualized gross cost savings of approximately $25.0 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 December 30, 2023.

The first phase of the Fiscal 2023 Plan impacted all segments and corporate functions and was substantially complete as of March 30, 2024.

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 fiscal 2024.

We estimate future cash payments of $1.2 million under the Fiscal 2023 Plan during the remainder of fiscal 2024, funded by operating cash flow.

During the three and six months ended December 30, 2023, the Company recorded restructuring benefits of $0.1 million and $0.9 million, respectively, related to the Fiscal 2023 Plan.

We estimate future cash payments of $0.8 million under the Fiscal 2023 Plan, funded by operating cash flow.

During the three and nine months ended March 30, 2024, the Company recorded restructuring charges of $0.1 million and benefits of $0.8 million, respectively, related to the Fiscal 2023 Plan.

Refer to “Note 13.

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Interest and other income, net

Interest and other income, net, was $3.8 million during the three months ended December 30, 2023 compared to $2.2 million during the same period a year ago.

This $1.6 million increase was primarily driven by 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 and other income, net, was $14.0 million during the six months ended December 30, 2023 compared to $3.3 million during the same period a year ago.

This $10.7 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 and other income, net, was $4.0 million during the three months ended March 30, 2024 compared to $1.6 million during the same period a year ago.

This $2.4 million increase was primarily driven by higher interest income during the current period.

Interest and other income, net, was $18.0 million during the nine months ended March 30, 2024 compared to $4.9 million during the same period a year ago.

This $13.1 million increase was primarily driven by higher interest income during the current period and a legal settlement in our favor in the amount of $7.3 million 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 $1.7 million, or 27.4% and $3.4 million, or 27.6% during the three and six months ended December 30, 2023, respectively, compared to the same periods a year ago.

Interest expense increased by $1.0 million, or 14.9% and $4.4 million, or 23.2% during the three and nine months ended March 30, 2024, respectively, compared to the same periods a year ago.

These increases were primarily driven by the accretion of debt discount and interest expense on the Senior Convertible Notes due 2026 as a result of the issuance in March 2023.

Provision for Income Taxes

We recorded an income tax provision of $7.6 million and $16.2 million for the three and six months ended December 30, 2023, respectively.

We recorded an income tax provision of $10.5 million and $22.7 million for the three and six months ended December 31, 2022, respectively.

The income tax provision for the three and six months ended December 30, 2023 and December 31, 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 December 30, 2023, and July 1, 2023, our unrecognized tax benefits totaling $50.8 million and $51.1 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $3.3 million accrued for the payment of interest and penalties as of December 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.

We recorded an income tax provision of $9.0 million and $25.2 million for the three and nine months ended March 30, 2024, respectively.

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.

The income tax provision for the three and nine months ended March 30, 2024 and April 1, 2023 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 changes in the valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations.

As of March 30, 2024, and July 1, 2023, our unrecognized tax benefits totaling $51.1 million are included in deferred taxes and other non-current tax liabilities, net.

We had $3.4 million accrued for the payment of interest and penalties as of March 30, 2024.

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

Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

Operating Segment Information

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

Three Months Ended Six Months Ended

December 30, 2023 December 31, 2022 Change Percentage Change December 30, 2023 December 31, 2022 Change Percentage Change

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

Three Months Ended Nine Months Ended

March 30, 2024 April 1, 2023 Change Percentage Change March 30, 2024 April 1, 2023 Change Percentage Change

Network Enablement

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Net revenue $ 169.8 $ 177.3 $ (7.5) (4.2) % $ 519.8 $ 603.3 $ (83.5) (13.8) %

Operating income 6.4 18.5 (12.1) (65.4) % 7.9 47.3 (39.4) (83.3) %

Operating (loss) income (3.1) 2.5 (5.6) (224.0) % 4.8 49.8 (45.0) (90.4) %

Operating margin (1.8) % 1.4 % 0.9 % 8.3 %

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Network Enablement

NE net revenue decreased by $27.8 million, or 15.2% during the three months ended December 30, 2023 compared to the same period a year ago, primarily driven by lower volumes in Fiber and Access, Wireless and Lab and Production partially offset by higher AvComm revenue.

NE net revenue decreased by $74.3 million, or 19.6% during the six months ended December 30, 2023 compared to the same period a year ago, primarily driven by lower volumes in Fiber and Access, Wireless and Lab and Production partially offset by higher AvComm revenue.

NE gross margin decreased by 1.9 percentage points during the three months ended December 30, 2023 to 62.5% from 64.4% in the same period a year ago primarily due to lower volumes and unfavorable product mix.

NE gross margin decreased by 1.7 percentage points during the six months ended December 30, 2023 to 62.8% from 64.5% in the same period a year ago primarily due to lower volumes and unfavorable product mix.

NE net revenue decreased by $0.2 million, or 0.1% during the three months ended March 30, 2024 compared to the same period a year ago, primarily driven by lower volume in Fiber and Access and Lab and Production, partially offset by higher Wireless and AvComm revenue.

NE net revenue decreased by $74.5 million, or 14.0% during the nine months ended March 30, 2024 compared to the same period a year ago, primarily driven by lower volume in Wireless, Fiber and Access and Lab and Production partially offset by higher AvComm revenue.

NE gross margin decreased by 0.7 percentage points during the three months ended March 30, 2024 to 61.5% from 62.2% in the same period a year ago primarily due to lower volume and unfavorable product mix.

NE gross margin decreased by 1.4 percentage points during the nine months ended March 30, 2024 to 62.4% from 63.8% in the same period a year ago primarily due to lower volume and unfavorable product mix.

Service Enablement

SE net revenue increased by $0.3 million, or 1.3%, during the three months ended December 30, 2023 compared to the same period a year ago primarily due to higher Assurance revenue offset in part by lower Data Center revenue.

SE net revenue decreased by $1.7 million, or 3.7%, during the six months ended December 30, 2023 compared to the same period a year ago primarily due to lower Assurance revenue offset in part by higher Data Center revenue.

SE gross margin increased by 4.6 percentage points during the three months ended December 30, 2023 to 68.9% from 64.3% in the same period a year ago primarily due to favorable product mix.

SE gross margin increased by 2.9 percentage points during the six months ended December 30, 2023 to 68.1% from 65.2% in the same period a year ago primarily due to favorable product mix.

SE net revenue decreased by $7.3 million, or 28.7%, during the three months ended March 30, 2024 compared to the same period a year ago primarily due to lower Data Center and Assurance revenue.

SE net revenue decreased by $9.0 million, or 12.6%, during the nine months ended March 30, 2024 compared to the same period a year ago primarily due to lower Data Center and Assurance revenue.

SE gross margin decreased by 9.3 percentage points during the three months ended March 30, 2024 to 60.8% from 70.1% in the same period a year ago primarily due to lower volume.

SE gross margin decreased by 0.9 percentage points during the nine months ended March 30, 2024 to 66.0% from 66.9% in the same period a year ago primarily due to unfavorable product mix.

Network and Service Enablement

NSE operating margin decreased by 5.3 percentage points during the three months ended December 30, 2023 to 3.6% from 8.9% in the same period a year ago primarily due to lower volumes.

NSE operating margin decreased by 8.8 percentage points during the six months ended December 30, 2023 to 2.3% from 11.1% in the same period a year ago primarily due to lower volumes.

NSE operating margin decreased by 3.2 percentage points during the three months ended March 30, 2024 to (1.8)% from 1.4% in the same period a year ago primarily due to lower volume.

NSE operating margin decreased by 7.4 percentage points during the nine months ended March 30, 2024 to 0.9% from 8.3% in the same period a year ago primarily due to lower volume.

Optical Security and Performance Products

OSP net revenue decreased by $2.5 million, or 3.2%, during the three months ended December 30, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower anti-counterfeiting revenue partially offset by higher consumer and industrial and government revenues.

OSP net revenue decreased by $16.3 million, or 9.7%, during the six months ended December 30, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower anti-counterfeiting and consumer and industrial revenues partially offset by higher government revenue.

OSP gross margin decreased by 0.2 percentage points during the three months ended December 30, 2023 to 52.1% from 52.3% in the same period a year ago primarily due to lower volumes.

OSP gross margin decreased by 2.4 percentage points during the six months ended December 30, 2023 to 52.3% from 54.7% in the same period a year ago primarily due to unfavorable manufacturing variances and lower volumes.

OSP operating margin increased by 0.9 percentage points during the three months ended December 30, 2023 to 36.4% from 35.5% in the same period a year ago primarily due to lower operating expenses.

OSP operating margin decreased by 2.1 percentage points during the three months ended December 30, 2023 to 37.1% from 39.2% in the same period a year ago primarily due to the aforementioned reduction in gross margin.

OSP net revenue increased by $5.7 million, or 8.1%, during the three months ended March 30, 2024 compared to the same period a year ago.

This increase was primarily driven by higher anti-counterfeiting and consumer and industrial revenues partially offset by lower government revenue.

OSP net revenue decreased by $10.6 million, or 4.4%, during the nine months ended March 30, 2024 compared to the same period a year ago.

This decrease was primarily driven by lower anti-counterfeiting, consumer and industrial and government revenues.

OSP gross margin decreased by 0.5 percentage points during the three months ended March 30, 2024 to 50.1% from 50.6% in the same period a year ago primarily due to the reversal of variable compensation that benefited the year ago period.

OSP gross margin decreased by 1.9 percentage points during the nine months ended March 30, 2024 to 51.6% from 53.5% in the same period a year ago primarily due to lower volume and unfavorable manufacturing variances.

OSP operating margin decreased by 2.3 percentage points during the three months ended March 30, 2024 to 34.3% from 36.6% in the same period a year ago primarily due to the aforementioned reduction in gross margin.

OSP operating margin decreased by 2.2 percentage points during the nine months ended March 30, 2024 to 36.2% from 38.4% in the same period a year ago primarily due to the aforementioned reduction in gross margin.

Liquidity and Capital Resources

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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 1.625% 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;

• While the principal payment obligations of 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 2026 Notes and/or 2029 Notes prior to their maturity;

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

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Cash and Cash Equivalents and Short-Term Investments

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.

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

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

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

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

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

As of December 30, 2023, U.S.

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

As of March 30, 2024, U.S.

subsidiaries owned approximately 17.9% of our cash and cash equivalents, short-term investments and restricted cash.

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

As of March 30, 2024, 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 December 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.

During the three months ended March 30, 2024, we have not realized material investment losses but we can provide no assurance that the value or liquidity of our investments will not be impacted by adverse conditions in the financial markets.

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

These balances in the U.S.

may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits.

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.

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

Senior Secured Asset-Based Revolving Credit Facility

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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 December 30, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $159.0 million, net of outstanding standby letters of credit of $4.1 million.

As of March 30, 2024, we had no borrowings under this facility and our available borrowing capacity was approximately $147.5 million, net of outstanding standby letters of credit of $4.1 million.

Refer to “Note 11.

Debt” for more information.

Cash Flows for the Six Months Ended December 30, 2023

As of December 30, 2023, our combined balance of cash and cash equivalents and restricted cash increased by $37.0 million to $552.6 million from $515.6 million as of July 1, 2023.

During the six months ended December 30, 2023, Cash provided by operating activities was $70.7 million, consisting of net income of $20.5 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $53.5 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $3.3 million.

Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $22.8 million due to collections outpacing billings and a decrease in other current and non-current assets of $1.3 million.

These were offset by a decrease in deferred revenue of $17.5 million primarily due to timing of support billings and project acceptances, a decrease in accrued payroll and related expenses of $4.4 million due primarily to lower variable expenses and reduced headcount from restructuring activities, a decrease in accounts payable of $2.4 million driven by timing of purchases and related payments, a decrease in accrued expenses and other current and non-current liabilities of $2.1 million, an increase in inventory of $0.7 million and a decrease in income taxes payable of $0.3 million.

During the six months ended December 30, 2023, Cash used in investing activities was $20.3 million, primarily resulting from $12.5 million used for capital expenditures and $9.7 million net purchases of short-term investments offset by $1.9 million proceeds from sales of assets.

During the six months ended December 30, 2023, Cash used in financing activities was $18.3 million, primarily resulting from $10.0 million cash paid to repurchase common stock under our share repurchase program, $9.3 million in withholding tax payments on the vesting of restricted stock and performance-based awards and $1.9 million paid for acquisition related liabilities.

Cash Flows for the Nine Months Ended March 30, 2024

As of March 30, 2024, our combined balance of cash and cash equivalents and restricted cash decreased by $52.5 million to $463.1 million from $515.6 million as of July 1, 2023.

During the nine months ended March 30, 2024, Cash provided by operating activities was $90.2 million, consisting of net loss of $4.1 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) totaling $77.5 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $16.8 million.

Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $17.4 million due to collections outpacing billings, an increase in accrued expenses and other current and non-current liabilities of $14.6 million primarily due to expenses related to the proposed acquisition of Spirent, a decrease in inventory of $6.7 million, a decrease in other current and non-current assets of $3.7 million and an increase in income taxes payable of $2.3 million.

These were offset by a decrease in deferred revenue of $15.7 million primarily due to timing of support billings and project acceptances, a decrease in accrued payroll and related expenses of $8.1 million due primarily to lower variable expenses and reduced headcount from restructuring activities and a decrease in accounts payable of $4.1 million driven by timing of purchases and related payments.

During the nine months ended March 30, 2024, Cash used in investing activities was $27.2 million, primarily resulting from $15.7 million used for capital expenditures and $14.1 million net purchases of short-term investments offset by $2.6 million proceeds from sales of assets.

During the nine months ended March 30, 2024, Cash used in financing activities was $115.3 million, primarily resulting from $96.4 million to retire 2024 Senior Convertible Notes upon maturity, $11.0 million in withholding tax payments on the vesting of restricted stock and performance-based awards, $10.0 million cash paid to repurchase common stock under our share repurchase program and $4.0 million paid for acquisition related liabilities.

These were offset by $6.3 million in proceeds from the issuance of common stock under our employee stock purchase plan.

Share Repurchase Program

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

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

During the nine months ended March 30, 2024, we repurchased 1.0 million shares of our common stock for $10.0 million pursuant to our 2022 Repurchase Plan.

As of March 30, 2024, 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 second quarter of fiscal 2024.

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

Off-Balance Sheet Arrangements

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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 December 30, 2023, our pension plans were under-funded by $54.4 million since the post-retirement benefit obligation (PBO) exceeded the fair value of plan assets.

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

As of March 30, 2024, our pension plans were under-funded by $50.6 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 December 30, 2023, the fair value of plan assets had increased approximately 5.6% since July 1, 2023, our most recent fiscal year end.

As of March 30, 2024, the fair value of plan assets had increased approximately 4.5% 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.

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

Post-retirement benefit obligation (PBO)

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

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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 Impairment

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.

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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-Q

Item 2. Management’s Discussion and Analysis