Item 7. Management’s Discussion and Analysis
ITEM 7. 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 June 29, 2024. 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. Factors that could cause or contribute to these differences include those discussed below and in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.”
This discussion should be read in conjunction with our consolidated financial statements and notes to the consolidated financial statements included in this Annual Report that have been prepared in accordance with accounting principles generally accepted in the United States of America. Our actual results could differ materially from those discussed in the forward-looking statements.
OVERVIEW
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:
• Network Enablement (NE);
• Service Enablement (SE); and
• Optical Security and Performance Products (OSP).
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.
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Looking Ahead to 2025
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;
• Invest in secular trends to drive growth and expand Total Addressable Market (TAM);
• Extend VIAVI technologies and platforms into adjacent markets and applications; and
• 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 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 $(0.12), 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 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.
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A reconciliation of GAAP financial measures to Non-GAAP financial measures is provided below ( in millions, except EPS amounts ):
Years Ended
June 29, 2024 July 1, 2023
Operating Income Operating Margin Operating Income Operating Margin
GAAP measures $ 20.8 2.1 % $ 82.4 7.4 %
Stock-based compensation 49.4 4.9 % 51.2 4.7 %
Change in fair value of contingent liability (9.5) (1.0) % (4.6) (0.4) %
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 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 %
Years Ended
June 29, 2024 July 1, 2023
Net (Loss) Income Diluted
EPS Net Income Diluted
EPS
GAAP measures $ (25.8) $ (0.12) $ 25.5 $ 0.11
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 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 13.6 0.06 12.1 0.05
Non-cash interest expense and other expense 4.9 0.02 3.9 0.02
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) 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. 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.
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Use of Non-GAAP (Adjusted) Financial Measures
The Company provides non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP EPS financial measures as supplemental information regarding the Company’s operational performance. The Company uses the measures disclosed in this report to evaluate the Company’s historical and prospective financial performance, as well as its performance relative to its competitors. Specifically, management uses these items to further its own understanding of the Company’s core operating performance, which the Company believes represent its performance in the ordinary, ongoing and customary course of its operations. Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition-related intangibles, stock-based compensation, legal settlements, restructuring, 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. The Company further believes that providing this information allows investors to better understand the Company’s financial performance and, importantly, to evaluate the efficacy of the methodology and information used by management to evaluate and measure such performance.
The non-GAAP adjustments described in this report are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance. The non-GAAP adjustments are outlined below.
Cost of revenues, costs of research and development and costs of selling, general and administrative : The Company’s GAAP presentation of operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, equipment and intangibles that have been identified for disposal but remained in use until the date of disposal, (ii) 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, 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 (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. The GAAP measure most directly comparable to non-GAAP operating income is operating income. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net income is net income. The GAAP measure most directly comparable to non-GAAP EPS is earnings per share. The Company believes these GAAP measures alone are not fully indicative of its core operating expenses and performance and that providing non-GAAP financial measures in conjunction with GAAP measures provides valuable supplemental information regarding the Company’s overall performance.
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RESULTS OF OPERATIONS
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:
Years Ended
June 29, 2024 July 1, 2023 July 2, 2022
Segment net revenue:
Network Enablement 61.6 % 63.9 % 66.2 %
Service Enablement 8.6 8.5 7.2
Optical Security and Performance 29.8 27.6 26.6
Net revenue 100.0 100.0 100.0
Cost of revenues 41.0 40.0 37.9
Amortization of acquired technologies 1.4 2.2 2.3
Gross profit 57.6 57.8 59.8
Operating expenses:
Research and development 20.2 18.7 16.5
Selling, general and administrative 33.3 29.7 28.3
Amortization of other intangibles 0.6 0.8 0.7
Restructuring and related charges 1.4 1.2 —
Total operating expenses 55.5 50.4 45.5
Income from operations 2.1 7.4 14.3
Loss on convertible note settlement — — (7.9)
Loss on convertible note modification — (0.2) —
Interest and other income, net 2.2 0.7 0.4
Interest expense (3.1) (2.4) (1.8)
Income before income taxes 1.2 5.5 5.0
Provision for income taxes 3.8 3.2 3.8
Net (loss) income (2.6) % 2.3 % 1.2 %
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Financial Data for Fiscal 2024, 2023 and 2022
The following table summarizes selected Consolidated Statement of Operations items ( in millions ):
2024 2023 Change Percent Change 2023 2022 Change Percent Change
Segment net revenue:
NE $ 615.7 $ 707.2 $ (91.5) (12.9) % $ 707.2 $ 855.7 $ (148.5) (17.4) %
SE 86.3 94.0 (7.7) (8.2) % 94.0 93.4 0.6 0.6 %
OSP 298.4 304.9 (6.5) (2.1) % 304.9 343.3 (38.4) (11.2) %
Net revenue $ 1,000.4 $ 1,106.1 $ (105.7) (9.6) % $ 1,106.1 $ 1,292.4 $ (186.3) (14.4) %
Amortization of acquired technologies $ 13.8 $ 24.6 $ (10.8) (43.9) % $ 24.6 $ 30.0 $ (5.4) (18.0) %
Percentage of net revenue 1.4 % 2.2 % 2.2 % 2.3 %
Gross profit $ 575.9 $ 638.8 $ (62.9) (9.8) % $ 638.8 $ 773.5 $ (134.7) (17.4) %
Gross margin 57.6 % 57.8 % 57.8 % 59.8 %
Research and development $ 201.9 $ 206.9 $ (5.0) (2.4) % $ 206.9 $ 213.2 $ (6.3) (3.0) %
Percentage of net revenue 20.2 % 18.7 % 18.7 % 16.5 %
Selling, general and administrative $ 333.3 $ 328.7 $ 4.6 1.4 % $ 328.7 $ 365.7 $ (37.0) (10.1) %
Percentage of net revenue 33.3 % 29.7 % 29.7 % 28.3 %
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 %
Restructuring and related charges (benefits) $ 13.6 $ 12.1 $ 1.5 12.4 % $ 12.1 $ (0.1) $ 12.2 NM
Percentage of net revenue 1.4 % 1.2 % 1.2 % — %
Loss on convertible note settlement $ — $ — $ — —% $ — $ (101.8) $ — NM
Percentage of net revenue — % — % — % (7.9) %
Loss on convertible note modification $ — $ (2.2) $ 2.2 NM $ (2.2) $ — $ (2.2) NM
Percentage of net revenue — % (0.2) % (0.2) % — %
Interest and other income, net $ 21.7 $ 7.6 $ 14.1 185.5 % $ 7.6 $ 5.2 $ 2.4 46.2 %
Percentage of net revenue 2.2 % 0.7 % 0.7 % 0.4 %
Interest expense $ (30.9) $ (27.1) $ (3.8) 14.0 % $ (27.1) $ (23.3) $ (3.8) 16.3 %
Percentage of net revenue (3.1) % (2.4) % (2.4) % (1.8) %
Provision for income taxes $ 37.4 $ 35.2 $ 2.2 6.3 % $ 35.2 $ 49.6 $ (14.4) (29.0) %
Percentage of net revenue 3.8 % 3.2 % 3.2 % 3.8 %
NM - Percentage change not considered meaningful
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Foreign Currency Impact on Results of Operations
While the majority of our net revenue and operating expenses are denominated in U.S. dollar, a portion of our international operations are denominated in currencies other than the U.S. dollar. Changes in foreign exchange rates may significantly affect revenue and expenses. While we use foreign currency hedging contracts to mitigate some foreign currency exchange risk, these activities are limited in the protection that they provide us and can themselves result in losses. We have presented below “constant dollar” comparisons of our net sales and operating expenses which exclude the impact of currency exchange rate fluctuations. Constant dollar net revenue and operating expenses are non-GAAP financial measures, which is information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. GAAP. Our management believes these non-GAAP measures, when considered in conjunction with the corresponding U.S. GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses. 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.
Net Revenue
Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net revenue, gross profit and operating income and not the product or service categories. 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.
Net revenue decreased $105.7 million, or 9.6%, during fiscal 2024 when compared to fiscal 2023. 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 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. For example, uncertainty around the timing of our customers procurement decisions on infrastructure maintenance and upgrades and decisions on new infrastructure investments or uncertainty about speed of adoption of 5G technology at a commercially viable scale. This may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period-over-period variability in our financial measures and present foreign exchange rate risks.
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We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, 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 markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) the impact of ongoing global trade policies, 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
We operate in three geographic regions, including the Americas, Asia-Pacific and Europe Middle East and Africa (EMEA). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers.
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) :
Years Ended
June 29, 2024 July 1, 2023 July 2, 2022
Americas:
United States $ 325.4 32.5 % $ 362.9 32.8 % $ 388.9 30.1 %
Other Americas 65.3 6.6 % 75.2 6.8 % 96.8 7.5 %
Total Americas $ 390.7 39.1 % $ 438.1 39.6 % $ 485.7 37.6 %
Asia-Pacific:
Greater China $ 194.0 19.4 % $ 210.9 19.1 % $ 256.4 19.8 %
Other Asia-Pacific 152.5 15.2 % 166.6 15.0 % 205.3 15.9 %
Total Asia-Pacific $ 346.5 34.6 % $ 377.5 34.1 % $ 461.7 35.7 %
EMEA: $ 263.2 26.3 % $ 290.5 26.3 % $ 345.0 26.7 %
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 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 (Cost of revenues)
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 certain intangible assets becoming fully amortized in fiscal 2023 offset in part by amortization of intangibles acquired through acquisitions in fiscal 2023.
Gross Margin
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.
As discussed in more detail under “Net Revenue” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.
Research and Development
R&D expense decreased $5.0 million, or 2.4%, during fiscal 2024 compared to fiscal 2023. 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. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.
Selling, General and Administrative
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 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 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 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.
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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.
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 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.
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 $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 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
We recorded an income tax provision of $37.4 million for fiscal 2024 . The expected tax provision derived by applying the federal statutory rate to our income before income taxes for fiscal 2024 differed from the income tax expense recorded primarily due to valuation allowances in addition to withholding taxes, foreign tax rates higher than the federal statutory rate and the U.S. inclusion of foreign earnings.
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 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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Operating Segment Information ( in millions ):
2024 2023 Change Percentage Change 2023 2022 Change Percentage Change
NE
Net revenue $ 615.7 $ 707.2 $ (91.5) (12.9) % $ 707.2 $ 855.7 $ (148.5) (17.4) %
Gross profit 382.3 447.6 (65.3) (14.6) % 447.6 550.8 (103.2) (18.7) %
Gross margin 62.1 % 63.3 % 63.3 % 64.4 %
SE
Net revenue $ 86.3 $ 94.0 $ (7.7) (8.2) % $ 94.0 $ 93.4 $ 0.6 0.6 %
Gross profit 57.3 62.6 (5.3) (8.5) % 62.6 64.3 (1.7) (2.6) %
Gross margin 66.4 % 66.6 % 66.6 % 68.8 %
NSE
Net revenue $ 702.0 $ 801.2 $ (99.2) (12.4) % $ 801.2 $ 949.1 $ (147.9) (15.6) %
Operating income 8.0 61.2 (53.2) (86.9) % 61.2 147.8 (86.6) (58.6) %
Operating margin 1.1 % 7.6 % 7.6 % 15.6 %
OSP
Net revenue $ 298.4 $ 304.9 $ (6.5) (2.1) % $ 304.9 $ 343.3 $ (38.4) (11.2) %
Gross profit 154.9 158.6 (3.7) (2.3) % 158.6 193.6 (35.0) (18.1) %
Gross margin 51.9 % 52.0 % 52.0 % 56.4 %
Operating income $ 107.0 $ 111.3 $ (4.3) (3.9) % $ 111.3 $ 139.0 $ (27.7) (19.9) %
Operating margin 35.9 % 36.5 % 36.5 % 40.5 %
Network Enablement
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 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 6.5 percentage points during fiscal 2024 to 1.1% from 7.6% in fiscal 2023, primarily driven by lower volume.
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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 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 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:
• Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;
• Changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;
• Increase in capital expenditure to support the revenue growth opportunity of our business;
• Changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;
• Timing of payments to our suppliers;
• Factoring or sale of accounts receivable;
• Volatility in fixed income and credit markets which impact the liquidity and valuation of our investment portfolios;
• Volatility in credit markets which would impact our ability to obtain additional financing on favorable terms or at all;
• Volatility in foreign exchange markets which impacts our financial results;
• Possible investments or acquisitions of complementary businesses, products or technologies;
• 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;
• Compliance with covenants and other terms and conditions related to our financing arrangements; and
• The risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K.
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Cash and Cash Equivalents and Short-Term Investments
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 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 June 29, 2024, U.S. subsidiaries owned approximately 16.9% of our cash and cash equivalents, short-term investments and restricted cash.
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 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 as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
Senior Secured Asset-Based Revolving Credit Facility
On December 30, 2021, we entered into a credit agreement (the Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo) as administrative agent, and other lender related parties. The Credit Agreement provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300.0 million, which matures on December 30, 2026. The Credit Agreement also provides that, under certain circumstances, we may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100.0 million so long as certain conditions are met.
As of 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 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.
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Material Contractual and Material Cash Obligations
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
Total Less than
1 year 1 - 3 years 3 - 5 years More than
5 years
Asset retirement obligations—expected cash payments $ 4.2 $ 1.1 $ 1.0 $ 0.9 $ 1.2
Debt:
2029 3.75% Senior Notes (1)
400.0 — — — 400.0
2026 1.625% Senior Convertible Notes (1)
250.0 — 250.0 — —
Estimated interest payments 91.3 18.8 35.0 30.0 7.5
Purchase obligations (2)
101.1 93.4 7.5 0.1 0.1
Operating lease obligations (3)
42.8 10.2 16.0 8.1 8.5
Non-cancelable leaseback obligations (2)
23.0 3.1 6.3 5.3 8.3
Royalty payment 0.8 0.6 0.2 — —
Pension and post-retirement benefit payments (4)
53.7 8.5 11.9 10.2 23.1
Total $ 966.9 $ 135.7 $ 327.9 $ 54.6 $ 448.7
(1) Refer to “Note 11. Debt” for more information.
(2) Refer to “Note 18. Commitments and Contingencies” for more information.
(3) Refer to “Note 12. Leases” for more information.
(4) Refer to “Note 17. Employee Pension and Other Benefit Plans” for more information.
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 $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 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. Stockholders Equity” under Item 8 of this Annual Report on Form 10-K for more information.
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Employee Defined Benefit Plans and Other Post-retirement Benefits
We sponsor significant qualified and non-qualified pension plans for certain past and present employees in the U.K. and Germany. Most of these plans have been closed to new participants and no additional service costs are being accrued.
As of June 29, 2024, the U.K. plan is fully funded. 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 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. These future benefit payments have been estimated based on the same actuarial assumptions used to measure our projected benefit obligation and currently are forecasted to range between $4.0 million and $7.6 million per annum.
We also are responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition with a liability of $0.3 million.
Recently Issued Accounting Pronouncements
Refer to “Note 2. Recently Issued Accounting Pronouncements” under Item 8 of this Annual Report on Form 10-K, regarding the effect of certain recent accounting pronouncements on our Consolidated Financial Statements.
Critical Accounting Estimates
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), which require management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material. Refer to “Note 1. Basis of Presentation” under Item 8 of this Annual Report on Form 10-K, for a discussion of the estimates used in preparation our Consolidated Financial Statements.
For our Pension accounting, significant judgment is required 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. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. 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 June 29, 2024.
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