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Item 7. Management’s Discussion and Analysis

2024-08-16 compared with 2023-08-17 · 136 added, 173 removed, 282 unchanged (52% of the section changed)

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

The following discussion and analysis summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and capital resources during the period ended July 1, 2023.

Unless otherwise noted, all references herein for the years 2023, 2022,and 2021 represent the fiscal years ended July 1, 2023, July 2, 2022, and July 3, 2021, respectively.

Unless otherwise noted, all references herein for the years 2024, 2023 and 2022 represent the fiscal years ended June 29, 2024, July 1, 2023 and July 2, 2022, respectively.

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

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

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

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

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

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.

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

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• Optical Security and Performance Products (OSP).

During fiscal 2023, we experienced a constrained demand outlook and continued inflationary pressures.

Weakness in CSP and NEM spending created headwinds for our NE segment.

Softening demand for anti-counterfeiting driven by fiscal tightening as central banks continue to normalize currency printing from elevated levels during the pandemic created pressure on OSP revenues.

Despite the slowdown in overall service provider spend, some service providers have begun to free up funds for network maintenance and optimization, which benefits VIAVI’s NSE business segment.

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 fiscal 2024, the VIAVI business environment continued to be challenging, particularly in the North American service provider and enterprise customer markets.

Field Instruments demand remained largely at the “maintenance” level due to the absence of major network build-outs and upgrades by Tier 1 service providers, particularly in North America.

NE product demand continues to be impacted by sharply reduced research and development (R&D) and production capital expenditure spend by major wireless network equipment manufacturers (NEMs), who have reduced investment in response to significant cutbacks in 5G deployment by wireless operators.

We expect the end market weakness in NE and SE to persist through the end of this calendar year and are executing on the previously announced restructuring plan initiated in the fourth quarter of fiscal 2024 to better align our business with the current environment.

OSP demand is expected to be similar in fiscal 2025 as compared to fiscal 2024.

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), intended to acquire the entire issued and to be issued ordinary share capital of 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 was to be implemented by way of a Court-sanctioned scheme of arrangement under Part 26 of the U.K.

Companies Act (the VIAVI Scheme), and was conditioned on, among other things, holding meetings of Spirent shareholders to approve the VIAVI Scheme (the VIAVI Scheme Meetings) on or before May 23, 2024.

The VIAVI Scheme Meetings were not held on or before May 23, 2024, and accordingly, the VIAVI Scheme lapsed, and on May 23, 2024, Bidco terminated the Co-operation Agreement, and the various previously disclosed financing arrangements were terminated or cancelled as a result.

Looking Ahead to 2025

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

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

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

As we look forward to fiscal 2025, we expect the conservative spend environment to persist for the remainder of calendar 2024 and a gradual demand recovery in the first half of calendar 2025.

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

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

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

FINANCIAL HIGHLIGHTS

Our fiscal 2024 results included the following notable items:

• Net revenues of $1.1 billion, down $186.3 million or 14.4% year-over-year

• Net revenue of $1.0 billion, down $105.7 million or 9.6% year-over-year

• GAAP operating margin of 2.1%, down 530 bps year-over-year

• Non-GAAP operating margin of 11.5%, down 410 bps year-over-year

• GAAP Diluted EPS of $0.11, up $0.04 or 57.1% year-over-year

• GAAP diluted EPS of $(0.12), down $0.23 or 209.1% year-over-year

• Non-GAAP diluted EPS of $0.33, down $0.22 or 40.0% year-over-year

In fiscal 2023, VIAVI experienced a constrained demand outlook and end market volatility.

Net revenue of $1.1 billion, down $186.3 million or 14.4%, demonstrated the challenging macro-economic environment faced by our NE and OSP segments.

VIAVI's fiscal 2023 GAAP operating margin of 7.4% was down 690 bps compared to fiscal 2022 due to the decline in revenues, partially offset by lower operating expenses.

Non-GAAP operating margin of 15.6% decreased 660 basis points largely due to a decline in revenue partially offset by lower operating expenses.

GAAP Diluted EPS of $0.11 increased 57.1%, or $0.04, from fiscal 2022 largely due to the loss incurred in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes in fiscal 2022.

Non-GAAP Diluted EPS of $0.55 decreased 42.1% or $0.40 from a record of $0.95 in fiscal 2022 due to the decline in revenues.

In fiscal 2023, we generated $114.1 million in operating cash flow and deployed $51.1 million or 4.6% of revenues towards capital expenditures.

We further improved our balance sheet by retiring the remaining 1.75% 2023 Senior Convertible Notes and partially exchanging the 1.0% 2024 Senior Convertible Notes at comparable terms into 1.625% 2026 Senior Convertible Notes.

We continued to execute our capital allocation strategy by deploying $72.3 million towards acquisitions and also repurchasing 7.3 million shares of our common stock for $83.9 million.

In fiscal 2024 VIAVI continued to experience constrained demand and end market volatility.

Net revenue of $1.0 billion was down $105.7 million compared to fiscal 2023, primarily due to conservative spend by service providers and NEMs.

VIAVI's fiscal 2024 GAAP operating margin of 2.1% was down 530 bps compared to fiscal 2023 primarily due to the decline in revenue and charges related to the proposed acquisition of Spirent, partially offset by the decrease in intangible amortization and the change in fair value of contingent liability.

Non-GAAP operating margin of 11.5% decreased 410 basis points largely due to the decline in revenue partially offset by lower operating expenses.

GAAP diluted EPS of $(0.12) decreased $0.23 from fiscal 2023 primarily due to the decrease in revenue and higher acquisition related charges.

Non-GAAP diluted EPS of $0.33 decreased $0.22 from fiscal 2023 due to the decline in revenue.

In fiscal 2024, we generated $116.4 million in operating cash flow and deployed $19.5 million or 1.9% of revenue towards capital expenditures.

We further improved our balance sheet by retiring the 2024 Senior Convertible Notes upon maturity and repurchasing 2.3 million shares of our common stock for $20.0 million.

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

July 1, 2023 July 2, 2022

June 29, 2024 July 1, 2023

Operating Income Operating Margin Operating Income Operating Margin

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Change in fair value of contingent liability (9.5) (1.0) % (4.6) (0.4) %

Other (benefits) charges unrelated to core operating performance (1)

Other charges (benefits) unrelated to core operating performance (1)

20.6 2.1 % (1.9) (0.2) %

Amortization of intangibles 20.1 2.0 % 33.3 3.0 %

Restructuring and related charges (benefits) 12.1 1.1 % (0.1) — %

Restructuring and related charges 13.6 1.4 % 12.1 1.1 %

Total related to Cost of Revenue and Operating Expenses 94.2 9.4 % 90.1 8.2 %

Non-GAAP measures $ 115.0 11.5 % $ 172.5 15.6 %

July 1, 2023 July 2, 2022

Net Income Diluted

June 29, 2024 July 1, 2023

Net (Loss) Income Diluted

EPS Net Income Diluted

GAAP measures $ (25.8) $ (0.12) $ 25.5 $ 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 49.4 0.22 51.2 0.23

Change in fair value of contingent liability (9.5) (0.04) (4.6) (0.02)

Other (benefits) charges unrelated to core operating performance (1)

Other charges (benefits) unrelated to core operating performance (2)

14.3 0.07 (1.9) (0.01)

Amortization of intangibles 20.1 0.09 33.3 0.15

Restructuring and related charges (benefits) 12.1 0.05 (0.1) —

Restructuring and related charges 13.6 0.06 12.1 0.05

Non-cash interest expense and other expense 4.9 0.02 3.9 0.02

3.9 0.02 102.2 0.43

Benefit from income taxes 5.2 0.02 5.8 0.02

Total related to Net income and EPS 99.2 0.44 209.8 0.88

Provision for income taxes 6.5 0.03 5.2 0.02

Total related to Net (Loss) Income and EPS 99.3 0.45 99.2 0.44

Non-GAAP measures $ 73.5 $ 0.33 $ 124.7 $ 0.55

Shares used in per share calculation for Non-GAAP EPS 224.1 226.6

(1) Other items include (benefits) charges 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) The Company incurred a loss of $2.2 million for the twelve months ended July 1, 2023 in connection with the modification of certain 1.00% Senior Convertible Notes.

The Company incurred a loss of $101.8M for the twelve months ended July 2, 2022 in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes.

The Company eliminates this in calculating non-GAAP net income and non-GAAP EPS, 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) For the year ended June 29, 2024, Other charges (benefits) unrelated to core operating performance consisted of $18.1 million of certain acquisition and integration related charges and $2.5 million of net losses primarily related to long-lived assets.

For the year ended July 1, 2023, Other charges (benefits) unrelated to core operating performance consisted of a $6.7 million gain on litigation settlement, offset by $2.5 million of certain acquisition and integration related charges and $2.3 million of net losses primarily related to long-lived assets.

(2) For the year ended June 29, 2024, Other charges (benefits) unrelated to core operating performance consisted of $18.1 million of certain acquisition and integration related charges and $2.5 million of net losses primarily related to long-lived assets, offset by a net gain on litigation settlement of $6.3 million.

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 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, 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 providing this additional information allows investors to see Company results through the eyes of management.

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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’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 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 (NOLs) 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.

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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RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses the results of operations for the fiscal year ended July 1, 2023 and July 2, 2022 and year-to-year comparisons between such fiscal years.

Discussions of the year-to-year comparisons between the fiscal year ended July 2, 2022 and July 3, 2021, that are not included in this Annual Report on Form 10-K, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 2, 2022 .

This section of this Annual Report on Form 10-K generally discusses the results of operations for the fiscal years ended June 29, 2024 and July 1, 2023 and year-to-year comparisons between such fiscal years.

Discussions of the year-to-year comparisons between the fiscal years ended July 1, 2023 and July 2, 2022, that are not included in this Annual Report on Form 10-K, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 1, 2023 .

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

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

July 1, 2023 July 2, 2022 July 3, 2021

June 29, 2024 July 1, 2023 July 2, 2022

Segment net revenue:

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Amortization of other intangibles 0.6 0.8 0.7

Restructuring and related charges (benefits) 1.2 — (0.1)

Restructuring and related charges 1.4 1.2 —

Total operating expenses 55.5 50.4 45.5

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Provision for income taxes 3.8 3.2 3.8

Net income 2.3 % 1.2 % 5.6 %

Net (loss) income (2.6) % 2.3 % 1.2 %

Financial Data for Fiscal 2024, 2023 and 2022

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

The following table summarizes selected Consolidated Statement of Operations items ( in millions ):

2024 2023 Change Percent Change 2023 2022 Change Percent Change

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Percentage of net revenue 33.3 % 29.7 % 29.7 % 28.3 %

Amortization of intangibles $ 8.7 $ 9.7 $ (1.0) (10.3) % $ 9.7 $ 33.3 $ (23.6) (70.9) %

Amortization of other intangibles $ 6.3 $ 8.7 $ (2.4) (27.6) % $ 8.7 $ 9.7 $ (1.0) (10.3) %

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

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Percentage of net revenue 1.4 % 1.2 % 1.2 % — %

Loss on convertible note settlement $ — $ (101.8) $ 101.8 NM $ (101.8) $ — $ (101.8) NM

Loss on convertible note settlement $ — $ — $ — —% $ — $ (101.8) $ — NM

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

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

Loss on convertible note modification $ — $ (2.2) $ 2.2 NM $ (2.2) $ — $ (2.2) NM

Percentage of net revenue — % (0.2) % (0.2) % — %

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Percentage of net revenue 3.8 % 3.2 % 3.2 % 3.8 %

NM - Percentage change not considered meaningful

Foreign Currency Impact on Results of Operations

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

Fiscal 2023 and 2022

If currency exchange rates had been constant in fiscal 2023 and 2022, our consolidated net revenue in “constant dollars” would have increased by approximately $23.0 million, or 2.1% of net revenue, which primarily impacted our NE and SE segments.

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

If currency exchange rates had been constant in fiscal 2023 and 2022, our consolidated operating expenses in “constant dollars” would have increased by approximately $17.5 million, or 1.6% of net revenue.

While management believes that these non-GAAP financial measures provide useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.

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

GAAP and not using constant dollars.

If currency exchange rates had been constant in fiscal 2024 and 2023, our consolidated net revenue in “constant dollars” would have decreased by approximately $3.3 million, or 0.3% of net revenue, which primarily impacted our NE and SE segments.

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

If currency exchange rates had been constant in fiscal 2024 and 2023, our consolidated operating expenses in “constant dollars” would have decreased by approximately $4.1 million, or 0.4% of net revenue.

Refer to Item 7A “Qualitative and Quantitative Disclosures about Market Risk” of this Annual Report on Form 10-K for further details on foreign currency instruments and our related risk management strategies.

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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.

Fiscal 2023 and 2022

Net revenue decreased $105.7 million, or 9.6%, during fiscal 2024 when compared to fiscal 2023.

This decrease was primarily driven by lower volumes in NE and OSP, partially offset by an increase in SE.

This decrease was primarily a result of the continued conservative service provider and NEM spend and lower anti-counterfeiting revenue.

Product revenues decreased $101.3 million, or 10.8%, during fiscal 2024 when compared to fiscal 2023, driven by volume decline in all segments.

Service revenues increased $13.1 million, or 8.3%, during fiscal 2023 when compared to fiscal 2022.

This increase was primarily due to increased support revenue from our NSE segment, offset by a declines in our OSP segment.

Service revenues decreased $4.4 million, or 2.6%, during fiscal 2024 when compared to fiscal 2023, driven by volume decline in all segments.

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

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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;

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

(e) chip component shortages, supply chain and shipping logistic constraints;

(f) the impact of ongoing global trade policies, tariffs and sanctions;

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

(e) the impact of ongoing global trade policies, tariffs and sanctions;

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

Revenue by Region

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

July 1, 2023 July 2, 2022 July 3, 2021

June 29, 2024 July 1, 2023 July 2, 2022

United States $ 325.4 32.5 % $ 362.9 32.8 % $ 388.9 30.1 %

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Total net revenue $ 1,000.4 100.0 % $ 1,106.1 100.0 % $ 1,292.4 100.0 %

Net revenue from customers outside the Americas for fiscal 2023, represented 60.4% of net revenue, a decrease of 2.0% year-over-year.

This decrease is due to larger declines in revenues from Asia-Pacific and EMEA compared to the decline in the Americas.

Net revenue from customers outside the Americas for fiscal 2024, represented 60.9% of net revenue, an increase of 0.5 percentage points year-over-year.

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.

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Amortization of acquired technologies within Cost of revenues for fiscal 2024 decreased $10.8 million, or 43.9%, to $13.8 million from $24.6 million in fiscal 2023.

This decrease is primarily due to intangible assets becoming fully amortized in fiscal 2022 offset by amortization of intangibles acquired through current year acquisitions.

Gross margin in fiscal 2023 declined 2.0% to 57.8% from 59.8% in fiscal 2022.

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 in fiscal 2024 declined 0.2 percentage points to 57.6% from 57.8% in fiscal 2023.

This decrease was primarily driven by lower volume and product mix.

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R&D expense decreased $5.0 million, or 2.4%, during fiscal 2024 compared to fiscal 2023.

This decrease was primarily driven by variable expense reductions.

As a percentage of net revenue, R&D increased 2.2% during fiscal 2023 when compared to fiscal 2022.

This decrease was primarily due to benefits from our restructuring activity initiated during fiscal 2023 to drive greater efficiencies.

As a percentage of net revenue, R&D increased 1.5 percentage points during fiscal 2024 when compared to fiscal 2023.

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 $37.0 million, or 10.1%, in fiscal 2023 compared to fiscal 2022.

This decrease was driven by the reversal of the U.K.

pension accrued liability, fair value adjustment of contingent consideration related to acquisitions, lower commission expense, variable pay and outside service expenses.

As a percentage of net revenue, SG&A increased 1.5% in fiscal 2023 when compared to 2022.

SG&A expense increased $4.6 million, or 1.4%, in fiscal 2024 compared to fiscal 2023.

This increase was primarily due to expenses related to the proposed acquisition of Spirent offset by benefits from our restructuring activity initiated during fiscal 2023 and the change in fair value of acquisition-related contingent consideration.

As a percentage of net revenue, SG&A increased 3.6 percentage points in fiscal 2024 when compared to 2023.

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

However, we have in the recent past experienced, and may continue to experience in the future, certain charges unrelated to our core operating performance, such as acquisitions and integration related expenses and litigation expenses, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.

Amortization of Intangibles (Operating expenses)

Amortization of Other Intangibles (Operating expenses)

Amortization of intangibles within Operating expenses for fiscal 2024 decreased $2.4 million, or 27.6%, to $6.3 million from $8.7 million in fiscal 2023.

This decrease is primarily due to intangible assets becoming fully amortized in fiscal 2022 offset by amortization of intangibles acquired through current year acquisitions.

Acquired In-Process Research and Development

In accordance with authoritative guidance, we recognize acquired in-process research and development (IPR&D) at fair value as of the acquisition date, and subsequently account for it as an indefinite-lived intangible asset until completion or abandonment of the associated R&D efforts.

We periodically review the stage of completion and likelihood of success of each IPR&D project.

The nature of the efforts required to develop IPR&D projects into commercially viable products principally relates to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet their design specifications, including functions, features and technical performance requirements.

Restructuring and Related Charges

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

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

During the fourth quarter of fiscal 2024, management approved a restructuring and workforce reduction plan (the Fiscal 2024 Plan) across various functions intended to improve operational efficiencies and better align the Company’s workforce with current business needs.

The Company expects approximately 6% of its global workforce to be affected, impacting all segments and corporate functions.

We estimate annualized gross cost savings of approximately $25.0 million excluding any one-time charges as a result of the restructuring activities initiated under the Fiscal 2024 Plan.

The Company anticipates the Fiscal 2024 Plan to be substantially complete by the end of fiscal 2025.

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

We estimate annualized gross cost savings of approximately $28.0 million excluding any one-time charges as a result of the restructuring activities initiated under the Plan.

The Fiscal 2023 Plan affected approximately 5% of the Company's workforce and resulted in an estimated annualized gross cost savings of approximately $25.0 million excluding any one-time charges.

The first phase of the Fiscal 2023 Plan impacted our Network and Service Enablement (NSE) and OSP segments and corporate functions and was substantially complete as of March 30, 2024.

The second phase of the Fiscal 2023 Plan primarily focused on reducing costs in our SE segment and was substantially complete as of June 29, 2024.

As of June 29, 2024, our total restructuring accrual was $14.9 million.

During fiscal 2024, we recorded charges of $14.8 million related to the Fiscal 2024 Plan and a benefit of $1.2 million related to the Fiscal 2023 Plan.

During fiscal 2023, we recorded restructuring charges of $12.1 million related to the Fiscal 2023 Plan.

Restructuring charges consisting of severance, benefit and outplacement costs were recorded to the Restructuring and related charges (benefits) line within our Consolidated Statements of Operations.

We estimate future cash payments of $14.6 million under the Fiscal 2024 Plan, funded by operating cash flow.

Future payments under the Fiscal 2023 Plan are not expected to be material.

Refer to “Note 13.

Restructuring and Related Charges” for more information.

As of July 1, 2023, our total restructuring accrual was $5.8 million.

During fiscal 2023, we recorded charges and other adjustments of $12.1 million related to the Fiscal 2023 Plan.

Restructuring charges consisting of severance, benefit and outplacement costs were recorded to the Restructuring and related charges (benefits) line within our Consolidated Statements of Operations.

These charges are primarily the result of the following:

The first phase of the Fiscal 2023 Plan impacted all segments and corporate functions.

The Company anticipates this phase of the Fiscal 2023 Plan to be substantially complete by the end of the first quarter of fiscal 2024.

The second phase of the Fiscal 2023 Plan is primarily focused on reducing costs in our SE segment.

The Company anticipates this phase of the Fiscal 2023 Plan to be substantially complete by the end of the second quarter of fiscal 2024.

We estimate future cash payments of $6.0 million under the Fiscal 2023 Plan during fiscal 2024, funded by operating cash flow.

Future charges under the Fiscal 2023 Plan are not expected to be material.

During fiscal 2022 and 2021, the Company recorded a benefit related to other restructuring actions of $0.1 million and $1.6 million, respectively.

Loss on Convertible Note Modification

During fiscal 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 and issued $118.0 million principal value of its 1.625% Senior Convertible Notes due 2026 for cash.

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

The Company incurred $4.2 million of issuance costs related to this exchange, of which $2.2 million of the issuance costs were recorded as Loss on convertible note modification in 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.

Loss on Convertible Note Settlement

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

The Company paid an aggregate of 10.6 million shares of its common stock, par value $0.001 per share, and $347.3 million in cash in exchange for $156.9 million principal amount of the 2023 Notes and $236.1 million principal amount of the 2024 Notes.

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

Interest and Other Income, Net

Interest and other income, net was $21.7 million in fiscal 2024 as compared to $7.6 million in fiscal 2023.

This $2.4 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.

This $14.1 million increase was primarily driven by higher interest income and a legal settlement in our favor in the amount of $7.3 million during fiscal 2024.

Interest Expense

Interest expense increased $3.8 million, or 14.0%, during fiscal 2024 compared to fiscal 2023.

This increase was primarily driven by full year interest expense on the Senior Notes due 2029 in the current period as a result of the issuance in September 2021 and the accretion of debt discount on the Senior Convertible Notes due 2026 as a result of the issuance in March 2023 offset by lower interest expense on our convertible notes as a result of convertible notes settlement transactions during fiscal 2022.

This increase was 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 Tax

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

During fiscal 2023, the valuation allowance for deferred tax assets increased by $30.7 million which was primarily due to the increase in capitalization of federal research expenditures in the U.S.

The decrease in income tax provision of $14.4 million or 29.0% during fiscal 2023 was due primarily to a reduction in foreign earnings in the current year as compared to the fiscal 2022 foreign earnings and a charge of $13.2 million related to internal intellectual properties restructuring.

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

During fiscal 2024, the valuation allowance for deferred tax assets decreased by $15.5 million which was primarily due to the amortization of intangibles assets, and utilization of federal NOLs in the U.S.

The increase in income tax provision of $2.2 million or 6.3% during fiscal 2024 was due primarily to an increase in foreign earnings in the current year as compared to the fiscal 2023 earnings.

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

We believe that adequate amounts have been provided for any adjustments that may result from these examinations.

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Network Enablement

NE net revenue decreased $148.3 million, or 17.5% during fiscal 2023 when compared to fiscal 2022, 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.

NE gross margin decreased by 1.2% during fiscal 2023 to 63.1% from 64.3% in fiscal 2022.

This decrease was primarily due to lower volumes.

NE net revenue decreased $91.5 million, or 12.9% during fiscal 2024 when compared to fiscal 2023.

This decrease was primarily driven by lower volume in Fiber and Access, Wireless and Lab and Production partially offset by higher AvComm revenue.

NE gross margin decreased by 1.2 percentage points during fiscal 2024 to 62.1% from 63.3% in fiscal 2023.

This decrease was primarily due to lower volume and unfavorable product mix.

Service Enablement

SE net revenue increased $0.4 million, or 0.4%, during fiscal 2023 when compared to fiscal 2022, primarily due to higher Growth Assurance revenue.

SE gross margin decreased by 1.6% during fiscal 2023 to 67.6% from 69.2% in fiscal 2022.

This decrease was primarily due to lower volumes.

SE net revenue decreased $7.7 million, or 8.2%, during fiscal 2024 when compared to fiscal 2023, primarily due to lower Assurance and Data Center revenue.

SE gross margin decreased by 0.2 percentage points during fiscal 2024 to 66.4% from 66.6% in fiscal 2023, primarily due to unfavorable product mix.

Network and Service Enablement

NSE operating margin decreased by 8.0% during fiscal 2023 to 7.6% from 15.6% in fiscal 2022.

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

NSE operating margin decreased by 6.5 percentage points during fiscal 2024 to 1.1% from 7.6% in fiscal 2023, primarily driven by lower volume.

Optical Security and Performance Products

OSP net revenue decreased $6.5 million, or 2.1%, during fiscal 2024 when compared to fiscal 2023.

This decrease was primarily driven by lower Anti-Counterfeiting and consumer and industrial revenues.

OSP gross margin decreased by 4.4% during fiscal 2023 to 52.0% from 56.4% in fiscal 2022.

This decrease was primarily due to unfavorable manufacturing variances associated with lower volumes and startup costs in our new Arizona facility.

OSP operating margin decreased by 4.0% during fiscal 2023 to 36.5% from 40.5% in fiscal 2022.

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

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

OSP gross margin decreased by 0.1 percentage point during fiscal 2024 to 51.9% from 52.0% in fiscal 2023.

OSP operating margin decreased by 0.6 percentage points during fiscal 2024 to 35.9% from 36.5% in fiscal 2023, 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, funding debt maturities, and execution of 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, funding debt maturities, and executing purchases under our share repurchase program over the next twelve months and beyond.

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

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

• Principal payment obligations of our 1.625% Senior Convertible Notes due 2026, and our 3.75% Senior Notes due 2029 (together the “Notes”) and covenants that restrict our debt level and credit facility capacity;

• 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;

• Factors beyond our control that may impact timing of and/or appropriation of government funding for certain of our strategic research and development programs;

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

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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 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.

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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 July 1, 2023, U.S.

As of June 29, 2024, U.S.

subsidiaries owned approximately 16.9% of our cash and cash equivalents, short-term investments and restricted cash.

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

As of June 29, 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 twelve months ended July 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.

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

During the twelve months ended June 29, 2024, 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 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 July 1, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $172.5 million, net of outstanding standby letters of credit of $4.1 million.

Refer to “Note 11.

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

Revolving Credit Facility

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

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

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

As of June 29, 2024, we had no borrowings under this facility and our available borrowing capacity was approximately $153.3 million, net of outstanding standby letters of credit of $4.1 million.

Refer to “Note 11.

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

Cash Flows Year Ended July 1, 2023

As of July 1, 2023, our combined balance of cash and cash equivalents and restricted cash decreased by $57.2 million to $515.6 million from a balance of $572.8 million as of July 2, 2022.

Cash provided by operating activities was $114.1 million, consisted of net income of $25.5 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation, amortization of debt issuance cost, loss on convertible note modification and accretion and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $138.3 million, offset by changes in operating assets and liabilities that used $49.7 million.

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $47.4 million due primarily to timing in payments of tax withholding and interest coupled with lower manufacturing accruals, a decrease in accrued payroll and related expenses of $25.8 million due primarily to lower commissions and variable pay, an increase in inventories of $10.7 million to meet demand, a decrease in accounts payable of $9.4 million driven by timing of purchases and related payments, a decrease in deferred revenue of $2.1 million due to timing of support billings and project acceptance and a decrease in income taxes payable of $2.0 million.

These were partially offset by a decrease in accounts receivable of $37.4 million due to collections outpacing billings and a decrease in other current and non-current assets of $10.3 million.

Cash used in investing activities was $127.1 million, primarily related to $67.3 million used for acquisitions, $51.1 million used for capital expenditures, $13.1 million used for purchases of short-term investments and $0.7 million purchase price adjustment related to business acquisition.

These were partially offset by $5.1 million proceeds from sales of assets.

Cash used in financing activities was $50.0 million, primarily resulting from $83.9 million cash paid to repurchase common stock under our share repurchase program, $68.1 million to retire 2023 Senior Convertible Notes upon maturity, $11.8 million in withholding tax payments on the vesting of restricted stock awards, $7.8 million payment of acquisition related contingent consideration and obligations and $4.3 million in other payments, primarily payments of debt issuance costs.

These were partially offset by $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.

Cash Flows Year Ended June 29, 2024

As of June 29, 2024, our combined balance of cash and cash equivalents and restricted cash decreased by $33.8 million to $481.8 million from a balance of $515.6 million as of July 1, 2023.

Cash provided by operating activities was $116.4 million, consisted of net loss of $25.8 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation, amortization of debt issuance cost, loss on convertible note modification and accretion and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $125.5 million and changes in operating assets and liabilities that generated $16.7 million.

Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $13.9 million due to collections outpacing billings, a decrease in inventory of $10.5 million related to demand changes, an increase in accounts payable of $3.2 million driven by timing of purchases and related payments, an increase in accrued expenses and other current and non-current liabilities of $3.0 million due primarily to timing in payments and an increase in income taxes payable of $1.6 million.

These were partially offset by a decrease in deferred revenue of $8.8 million due to timing of support billings and project acceptances, a decrease in accrued payroll and related expenses of $4.6 million due primarily to lower commissions and an increase in other current and non-current assets of $2.1 million.

Cash used in investing activities was $21.6 million, primarily resulting from $19.5 million used for capital expenditures and $5.5 million used for purchases of short-term investments, partially offset by $3.4 million proceeds from sales of assets.

Cash used in financing activities was $125.7 million, primarily resulting from $96.4 million to retire the 2024 Senior Convertible Notes upon maturity, $20.0 million cash paid to repurchase common stock under our share repurchase program, $11.1 million in withholding tax payments on the vesting of restricted stock awards and $4.3 million paid for acquisition related liabilities.

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

Material Contractual and Material Cash Obligations

The following summarizes our contractual obligations at July 1, 2023, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ):

The following summarizes our material contractual obligations at June 29, 2024, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years ( in millions ):

Payments due by period

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250.0 — 250.0 — —

2024 1.00% Senior Convertible Notes (1)

96.4 96.4 — — —

Estimated interest payments 91.3 18.8 35.0 30.0 7.5

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Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements.

Of the $124.0 million of purchase obligations as of July 1, 2023, $42.1 million are related to inventory and the other $81.9 million are non-inventory items.

As of July 1, 2023, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.

Of the $101.1 million of purchase obligations as of June 29, 2024, $34.2 million are related to inventory and the other $66.9 million are non-inventory items.

As of June 29, 2024, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.

Share Repurchase Program

During fiscal 2023 we repurchased 7.3 million shares of our common stock outstanding for $83.9 million pursuant to our 2019 and 2022 Share Repurchase Plans.

As of July 1, 2023, the Company had remaining authorization of $234.8 million for future share repurchases under the 2022 Repurchase Plan.

During fiscal 2024 we repurchased 2.3 million shares of our common stock outstanding for $20.0 million pursuant to our 2022 Share Repurchase Plan.

As of June 29, 2024, the Company had remaining authorization of $214.8 million for future share repurchases under the 2022 Repurchase Plan.

Refer to “Note 15.

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

As of July 1, 2023, the U.K.

As of June 29, 2024, the U.K.

plan is fully funded.

During fiscal 2023, we (amounts represented as £ and $ denote GBP and USD, respectively) contributed £1.0 million or approximately $1.2 million, while in fiscal 2022, we contributed £1.0 million or approximately $1.3 million to the U.K.

During fiscal 2024, we contributed £1.0 million or approximately $1.3 million, while in fiscal 2023, we contributed £1.0 million or approximately $1.2 million to the U.K.

pension plan.

These contributions allowed us to comply with regulatory funding requirements.

As of July 1, 2023, our German pension plans, which were initially established as unfunded or “pay-as-you-go” plans, were underfunded by $55.0 million since the Pension Benefit Obligation (PBO) exceeded the fair value of plan assets.

As of June 29, 2024, our German pension plans, which were initially established as unfunded or “pay-as-you-go” plans, were underfunded by $58.3 million since the projected benefit obligation (PBO) exceeded the fair value of plan assets.

We anticipate future annual outlays related to the German plans will approximate estimated future benefit payments.

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

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

For our Pension accounting, significant judgment is required in actuarial assumption used when establishing the discount rate for the net periodic cost and the PBO calculations.

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

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Increases in the discount rate tend to have the opposite effect.

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.

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis