VIAVI SOLUTIONS INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Statements contained in this Quarterly Report on Form 10-Q, which we also refer to as the Report, which are not historical facts, are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipate,” “believe,” “can,” “can impact,” “could,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements, but are not limited to statements such as: • Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies including through restructuring programs, the effects of seasonality on certain business units, the consolidation of the communication industry and continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements, and our estimation of the potential impact and materiality of litigation; • Sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, stock repurchases, debt repayments and other matters; • Our expectations regarding demand for our products and services, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements; • Our plans for growth and innovation opportunities; • Our plans for continued development, use and protection of our intellectual property; • Our strategies for achieving our current business objectives, including related risks and uncertainties; • Our plans or expectations relating to investments, execution of capital allocation and debt management strategies, acquisitions, partnerships and other strategic opportunities; • Our research and development plans and investments and the expected impact of such plans on our financial performance; • Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues; • Our expectations related to future tax liabilities resulting from future tax legislation; and • Our expectations related to macro-economic conditions, including the impact of inflation, fiscal tightening at central banks, changes in foreign exchange rates, the risk of increased tensions and trade actions between China and the U.S., the ongoing conflict between Russia and Ukraine and the ongoing conflict between Israel and Hamas and the expansion of conflict in the Middle East, including in Lebanon and with Iran, on our business, operations and financial results. Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S. Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations. In addition, Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 29, 2024. 31 Table of Contents You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors” and “Forward-Looking Statements.” 32 Table of Contents 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 the first quarter of fiscal 2025, the VIAVI business environment continued to be challenging, particularly in the North American service provider and enterprise customer markets. NE product demand continues to be impacted by reduced research and development (R&D) and production capital expenditure spend by major wireless network equipment manufacturers (NEMs), offset by OSP performance. 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. Looking Ahead As we look forward to the second quarter of fiscal 2025, we are seeing many of our end markets show signs of stabilization which we believe indicates the beginning of a gradual recovery and expect this to continue in the second half of fiscal 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 improvements in Operations, R&D and Selling, General and Administrative (SG&A). Financial Highlights First quarter fiscal 2025 results included the following notable items: • Net revenue of $238.2 million, down $9.7 million or 3.9% year-over-year. • GAAP operating margin of 4.8%, down 170 bps year-over-year. • Non-GAAP operating margin of 10.0%, down 240 bps year-over-year. • GAAP net loss of $1.8 million, down $11.6 million or 118.4% year-over-year. • Non-GAAP net income of $12.4 million, down $7.1 million or 36.4% year-over-year. • GAAP diluted EPS of $(0.01), down $0.05 or 125.0% year-over-year. • Non-GAAP diluted EPS of $0.06, down $0.03 or 33.3% year-over-year. 33 Table of Contents A reconciliation of GAAP financial measures to Non-GAAP financial measures is provided below (in millions, except EPS amounts) : Three Months Ended September 28, 2024 September 30, 2023 Operating Income Operating Margin Operating Income Operating Margin GAAP measures $ 11.5 4.8 % $ 16.0 6.5 % Stock-based compensation 12.7 5.3 % 11.2 4.5 % Change in fair value of contingent liability (3.5) (1.5) % (1.4) (0.6) % Acquisition and integration related charges 0.6 0.3 % — — % Other (benefits) charges unrelated to core operating performance (1) (0.5) (0.2) % 0.2 0.1 % Amortization of intangibles 4.4 1.8 % 5.6 2.2 % Restructuring and related benefits — — % (0.8) (0.3) % Litigation settlement (1.3) (0.5) % — — % Total related to Cost of Revenue and Operating Expenses 12.4 5.2 % 14.8 5.9 % Non-GAAP measures $ 23.9 10.0 % $ 30.8 12.4 % Three Months Ended September 28, 2024 September 30, 2023 Net (Loss) Income Diluted EPS Net Income Diluted EPS GAAP measures $ (1.8) $ (0.01) $ 9.8 $ 0.04 Items reconciling GAAP Net (Loss) Income and EPS to Non-GAAP Net Income and EPS: Stock-based compensation 12.7 0.06 11.2 0.05 Change in fair value of contingent liability (3.5) (0.01) (1.4) — Acquisition and integration related charges 0.6 — — — Other (benefits) charges unrelated to core operating performance (1) (0.5) — 0.2 — Amortization of intangibles 4.4 0.02 5.6 0.02 Restructuring and related benefits — — (0.8) — Litigation settlement (1.3) (0.01) (7.3) (0.03) Non-cash interest expense and other expense 1.1 0.01 1.2 0.01 Provision for income taxes 0.7 — 1.0 — Total related to Net (Loss) Income and EPS 14.2 0.07 9.7 0.05 Non-GAAP measures $ 12.4 $ 0.06 $ 19.5 $ 0.09 Shares used in per share calculation for Non-GAAP EPS 224.0 224.2 (1) Included in the three months ended September 28, 2024 is a gain of $0.9 million on the sale of assets previously classified as held for sale and other charges unrelated to core operating performance of $0.4 million. 34 Table of Contents 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 represents its performance in the ordinary, ongoing and customary course of its operations. Accordingly, management excludes from core operating performance items such as those relating to certain purchase price accounting adjustments, amortization of acquisition-related intangibles, stock-based compensation, legal settlements, restructuring, changes in fair value of contingent consideration liabilities and certain investing 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 Form 10-Q are excluded by the Company from its GAAP financial measures because the Company believes excluding these items enables investors to evaluate more clearly and consistently the Company’s core operational performance. The non-GAAP adjustments are outlined below. Cost of revenues, costs of research and development and costs of selling, general and administrative: The Company’s GAAP presentation of operating expenses may include (i) additional depreciation and amortization from changes in estimated useful life and the write-down of certain property, equipment and intangibles that have been identified for disposal but remained in use until the date of disposal, (ii) 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 where valuation allowances were released, intra-period tax allocation benefit and the tax effect for amortization of non-tax deductible intangible assets when calculating non-GAAP net income and non-GAAP EPS. Non-GAAP financial measures are not in accordance with, preferable to, or an alternative for, generally accepted accounting principles in the United States. 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. 35 Table of Contents RESULTS OF OPERATIONS 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 ( in millions, except for percentages ): Three Months Ended September 28, 2024 September 30, 2023 Change Percent Change Segment net revenue: NE $ 141.6 $ 150.0 $ (8.4) (5.6) % SE 17.8 20.4 (2.6) (12.7) % OSP 78.8 77.5 1.3 1.7 % Total net revenue $ 238.2 $ 247.9 $ (9.7) (3.9) % Amortization of acquired technologies $ 3.3 $ 3.5 $ (0.2) (5.7) % Percentage of net revenue 1.4 % 1.4 % Gross profit $ 136.1 $ 144.4 $ (8.3) (5.7) % Gross margin 57.1 % 58.2 % Research and development $ 49.4 $ 49.9 $ (0.5) (1.0) % Percentage of net revenue 20.7 % 20.1 % Selling, general and administrative $ 74.1 $ 77.2 $ (3.1) (4.0) % Percentage of net revenue 31.1 % 31.1 % Amortization of other intangibles $ 1.1 $ 2.1 $ (1.0) (47.6) % Percentage of net revenue 0.5 % 0.8 % Restructuring and related benefits $ — $ (0.8) $ 0.8 (100.0) % Percentage of net revenue — % 0.3 % Interest and other income, net $ 3.2 $ 10.2 $ (7.0) (68.6) % Percentage of net revenue 1.3 % 4.1 % Interest expense $ (7.5) $ (7.8) $ 0.3 3.8 % Percentage of net revenue 3.1 % 3.1 % Provision for income taxes $ 9.0 $ 8.6 $ 0.4 4.7 % Percentage of net revenue 3.8 % 3.5 % 36 Table of Contents 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. Three Months Ended September 28, 2024 and September 30, 2023 Net revenue decreased by $9.7 million, or 3.9%, during the three months ended September 28, 2024 compared to the same period a year ago. This decrease reflects the continuing weakness in service provider spending partially offset by higher consumer and industrial, government and anti-counterfeiting revenue. Product revenues decreased by $8.1 million, or 3.9%, during the three months ended September 28, 2024 compared to the same period a year ago, driven by revenue decreases in our NE and SE segments partially offset by revenue increases in our OSP segment. Service revenues decreased by $1.6 million, or 3.8% during the three months ended September 28, 2024, respectively, compared to the same periods a year ago. This was driven by revenue decreases from our NE and SE segments. Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties. For example, uncertainty around the timing of our customers’ procurement decisions on infrastructure maintenance and upgrades and decisions on new infrastructure investments or uncertainty about speed of adoption of 5G technology at a commercially viable scale. This may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period-over-period variability in our financial measures and present foreign exchange rate risks. We cannot predict when or to what extent these uncertainties will be resolved. 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) strategic execution challenges arising from competition with larger and more well-resourced competitors; (c) product mix variability in our markets, which affects revenue and gross margin; (d) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (e) 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; (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. 37 Table of Contents Revenue by Region We operate in three geographic regions: 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 ): Three Months Ended September 28, 2024 September 30, 2023 Americas: United States $ 73.0 30.6 % $ 82.8 33.4 % Other Americas 15.7 6.6 % 17.7 7.1 % Total Americas $ 88.7 37.2 % $ 100.5 40.5 % Asia-Pacific: Greater China $ 53.8 22.6 % $ 51.1 20.6 % Other Asia-Pacific 32.1 13.5 % 34.8 14.1 % Total Asia-Pacific $ 85.9 36.1 % $ 85.9 34.7 % EMEA: $ 63.6 26.7 % $ 61.5 24.8 % Total net revenue $ 238.2 100.0 % $ 247.9 100.0 % Net revenue from customers outside the Americas represented 62.8% and 59.5% of net revenue, respectively, during the three months ended September 28, 2024 and September 30, 2023. We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities. Amortization of Acquired Technologies (Cost of revenues) Amortization of acquired technologies within Cost of revenues decreased $0.2 million or 5.7% during the three months ended September 28, 2024 compared to the same period a year ago. This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2024. Gross Margin Gross margin decreased by 1.1 percentage points during the three months ended September 28, 2024 from 58.2% in the same period a year ago to 57.1% in the current period. The decrease was primarily due to gross margin reduction in NE and SE, partially offset by gross margin increase in OSP, as discussed below in the Operating Segment Information section. As discussed in more detail under “Net Revenue” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin. 38 Table of Contents Research and Development R&D expense decreased by $0.5 million, or 1.0% during the three months ended September 28, 2024 compared to the same period a year ago. This decrease was primarily due to benefits from our restructuring activities. As a percentage of net revenue, R&D expense increased by 0.6 percentage points during the three months ended September 28, 2024 compared to the same period a year ago. We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace. One such investment is the VIAVI Automated Lab-as-a-Service for Open RAN (VALOR), which became fully operational in the second quarter of fiscal 2025. Selling, General and Administrative SG&A expense decreased by $3.1 million, or 4.0%, during the three months ended September 28, 2024 compared to the same period a year ago. This decrease was primarily due to the change in fair value of acquisition-related contingent consideration and the gain on litigation settlement partially offset by higher variable expenses. As a percentage of net revenue, SG&A was flat during the three months ended September 28, 2024 compared to the same period a year ago. Amortization of Intangibles (Operating expenses) Amortization of intangibles within Operating expenses decreased $1.0 million or 47.6% during the three months ended September 28, 2024 compared to the same period a year ago. This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2024. 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. The restructuring and workforce reduction plan initiated in the second quarter of fiscal 2023 (the Fiscal 2023 Plan) across various functions to better align the Company’s workforce with current business needs and strategic growth opportunities was completed in the first quarter of fiscal 2025. 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. As of September 28, 2024, our total restructuring accrual was $6.8 million. During the three months ended September 28, 2024, the Company recorded restructuring charges of $0.2 million related to the Fiscal 2024 Plan and benefits of $0.2 million related to the Fiscal 2023 Plan. During the three months ended September 30, 2023, the Company recorded benefits of $0.8 million related to the Fiscal 2023 Plan. We estimate future cash payments of $6.8 million under the Fiscal 2024 Plan, funded by operating cash flow. Refer to “Note 13. Restructuring and Related Charges” for more information. 39 Table of Contents Interest and other income, net Interest and other income, net, was $3.2 million during the three months ended September 28, 2024 compared to $10.2 million during the same period a year ago. This $7.0 million decrease was primarily driven by a legal settlement in our favor in the amount of $7.3 million in the prior period. Interest Expense Interest expense decreased by $0.3 million, or 3.8% during the three months ended September 28, 2024 compared to the same period a year ago. This decrease was primarily driven by lower outstanding debt when compared to the prior period. Provision for Income Taxes We recorded an income tax provision of $9.0 million and $8.6 million for the three months ended September 28, 2024 and September 30, 2023, respectively. The income tax provision for the three months ended September 28, 2024 and September 30, 2023 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss. The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to changes in the valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations. As of September 28, 2024, and June 29, 2024, our unrecognized tax benefits (net of Federal benefits) totaled $50.8 million and $50.7 million, respectively, and are included in deferred taxes and other non-current tax liabilities. We had $4.0 million accrued for the payment of interest and penalties as of September 28, 2024. The timing and resolution of income tax examinations are uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance. 40 Table of Contents Operating Segment Information Information related to our operating segments was as follows (in millions) : Three Months Ended September 28, 2024 September 30, 2023 Change Percentage Change Network Enablement Net revenue $ 141.6 $ 150.0 $ (8.4) (5.6) % Gross profit 86.3 94.6 (8.3) (8.8) % Gross margin 60.9 % 63.1 % Service Enablement Net revenue $ 17.8 $ 20.4 $ (2.6) (12.7) % Gross profit 10.8 13.7 (2.9) (21.2) % Gross margin 60.7 % 67.2 % Network and Service Enablement Net revenue $ 159.4 $ 170.4 $ (11.0) (6.5) % Operating (loss) income (7.3) 1.5 (8.8) (586.7) % Operating margin (4.6) % 0.9 % Optical Security and Performance Net revenue $ 78.8 $ 77.5 $ 1.3 1.7 % Gross profit 43.6 40.7 2.9 7.1 % Gross margin 55.3 % 52.5 % Operating income $ 31.2 $ 29.3 $ 1.9 6.5 % Operating margin 39.6 % 37.8 % Network Enablement NE net revenue decreased by $8.4 million, or 5.6% during the three months ended September 28, 2024 compared to the same period a year ago, primarily driven by lower volume in Fiber and Access and Lab and Production and Wireless, partially offset by higher AvComm revenue. NE gross margin decreased by 2.2 percentage points during the three months ended September 28, 2024 to 60.9% from 63.1% in the same period a year ago primarily due to lower volume and unfavorable product mix. Service Enablement SE net revenue decreased by $2.6 million, or 12.7%, during the three months ended September 28, 2024 compared to the same period a year ago primarily due to lower Data Center and Assurance revenue. SE gross margin decreased by 6.5 percentage points during the three months ended September 28, 2024 to 60.7% from 67.2% in the same period a year ago primarily due to lower volume. Network and Service Enablement NSE operating margin decreased by 5.5 percentage points during the three months ended September 28, 2024 to (4.6)% from 0.9% in the same period a year ago primarily due to lower volume. 41 Table of Contents Optical Security and Performance Products OSP net revenue increased by $1.3 million, or 1.7%, during the three months ended September 28, 2024 compared to the same period a year ago. This increase was primarily driven by higher consumer and industrial, government and anti-counterfeiting revenue. OSP gross margin increased by 2.8 percentage points during the three months ended September 28, 2024 to 55.3% from 52.5% in the same period a year ago primarily due to manufacturing volume. OSP operating margin increased by 1.8 percentage points during the three months ended September 28, 2024 to 39.6% from 37.8% in the same period a year ago primarily due to the aforementioned increase 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 Quarterly Report on Form 10-Q. 42 Table of Contents Cash and Cash Equivalents and Short-Term Investments Our cash and cash equivalents and short-term investments mainly consist of investments in institutional money market funds and short-term deposits at major global financial institutions. Our strategy is focused on capital preservation and supporting our liquidity requirements that meet high credit quality standards, as specified in our investment policy approved by the Audit Committee of our Board of Directors. Our investments in debt securities and marketable equity securities are primarily classified as available for sale or trading assets and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses on available-for-sale investments are recorded as Other comprehensive (loss) income and reported as a separate component of stockholders’ equity. As of September 28, 2024, U.S. subsidiaries owned approximately 19.9% of our cash and cash equivalents, short-term investments and restricted cash. As of September 28, 2024, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Nonetheless we could realize investment losses under adverse market conditions. During the three months ended September 28, 2024, we have not realized material investment losses but we can provide no assurance that the value or liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts with third-party financial institutions. These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust 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 September 28, 2024, we had no borrowings under this facility and our available borrowing capacity was approximately $143.7 million, net of outstanding standby letters of credit of $4.2 million. Refer to “Note 11. Debt” for more information. Cash Flows for the Three Months Ended September 28, 2024 As of September 28, 2024, our combined balance of cash and cash equivalents and restricted cash decreased by $3.7 million to $478.1 million from $481.8 million as of June 29, 2024. During the three months ended September 28, 2024, Cash provided by operating activities was $13.5 million, consisting of net loss of $1.8 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) totaling $20.2 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $4.9 million. Changes in our operating assets and liabilities related primarily to a decrease in accounts receivable of $13.2 million due to collections outpacing billings, a decrease in inventory of $2.9 million and an increase in income taxes payable of $2.6 million. These were offset by a decrease in accrued expenses and other current and non-current liabilities of $7.5 million, a decrease in accrued payroll and related expenses of $5.1 million due primarily to timing of payroll, reduced headcount from restructuring activities and lower vacation accrual due to higher usage, a decrease in deferred revenue of $4.6 million primarily due to timing of support billings and project acceptances and a decrease in accounts payable of $4.0 million driven by timing of purchases and related payments. During the three months ended September 28, 2024, Cash used in investing activities was $11.5 million, primarily resulting from $7.3 million used for capital expenditures, $4.7 million net purchases of short-term investments and $3.0 million investment in non-marketable equity security offset by $3.5 million in proceeds from the sale of assets. 43 Table of Contents During the three months ended September 28, 2024, Cash used in financing activities was $21.0 million, primarily resulting from $16.4 million cash paid to repurchase common stock under our share repurchase program and $7.3 million in withholding tax payments on the vesting of restricted stock and performance-based awards. These were offset by $2.7 million in proceeds from the issuance of common stock under our employee stock purchase plan. Share Repurchase Program During the three months ended September 28, 2024, we repurchased 2.0 million shares of our common stock for $16.4 million pursuant to our 2022 Repurchase Plan. As of September 28, 2024, the Company had remaining authorization of $198.4 million for future share repurchases under the 2022 Repurchase Plan. Refer to “Note 15. Stockholders Equity” for more information. Contractual Obligations There were no material changes to our existing contractual commitments during the first quarter of fiscal 2025. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in “Note 18. Commitments and Contingencies.” Employee Equity Incentive Plan Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. Refer to “Note 16. Stock-Based Compensation” for more details. 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. The U.K. plan is fully funded, and the other German plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of September 28, 2024, our pension plans were under-funded by $53.1 million since the post-retirement benefit obligation (PBO) exceeded the fair value of plan assets. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of September 28, 2024, the fair value of plan assets had increased approximately 7.1% since June 29, 2024, our most recent fiscal year end. We are also responsible for the non-pension PBO assumed from a past acquisition of $0.3 million. In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details. 44 Table of Contents Recently Issued Accounting Pronouncements Refer to “Note 2. Recently Issued Accounting Pronouncements” 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. Post-retirement benefit obligation (PBO) A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. 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. Item 3. Quantitative and Qualitative Disclosure About Market Risks The Company’s market risk has not changed materially from the foreign exchange and interest rate risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2024.