What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-01-31 compared with 2024-11-01 · 120 added, 92 removed, 265 unchanged (44% of the section changed)

14 unchanged sentences

• Our expectations related to future tax liabilities resulting from future tax legislation;

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

• 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, including potential global tariffs, ongoing geopolitical tensions including the conflict between Russia and Ukraine, the instability in the Middle East and the sustainability of recent cease-fire agreements, on our business, operations and financial results.

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

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• 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.

During the second quarter of fiscal 2025, the Network and Service Enablement (NSE) business environment began showing signs of stabilization and heading towards a gradual recovery in fiscal 2025, driven by recovering spend from service providers and enterprise customer markets.

OSP performance was marginally impacted by slower demand for 3D sensing products.

We continue to monitor the near-term demand for anti-counterfeiting products as the end customers work down their inventories.

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.

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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.

As we look forward to the third quarter of fiscal 2025, we are seeing many of our end markets stabilize, 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.

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

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

• Continue productivity improvements in Operations, Research and Development (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.

Second quarter fiscal 2025 results included the following notable items:

• Net revenue of $270.8 million, up $16.3 million or 6.4% year-over-year.

• GAAP operating margin of 8.2%, down 60 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.

• Non-GAAP operating margin of 14.9%, up 170 bps year-over-year.

• GAAP net income of $9.1 million, down $1.6 million or 15.0% year-over-year.

• Non-GAAP net income of $29.4 million, up $5.7 million or 24.1% year-over-year.

• GAAP diluted EPS of $0.04, down $0.01 or 20.0% year-over-year.

• Non-GAAP diluted EPS of $0.06, down $0.03 or 33.3% year-over-year.

• Non-GAAP diluted EPS of $0.13, up $0.02 or 18.2% year-over-year.

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

Three Months Ended

September 28, 2024 September 30, 2023

Operating Income Operating Margin Operating Income Operating Margin

Three Months Ended Six Months Ended

December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023

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

GAAP measures $ 22.2 8.2 % $ 22.4 8.8 % $ 33.7 6.6 % $ 38.4 7.6 %

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Acquisition and integration related charges 2.8 1.0 % 0.6 0.2 % 3.4 0.7 % 0.6 0.1 %

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

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

0.1 — % 0.5 0.2 % (0.4) (0.1) % 0.7 0.2 %

Amortization of intangibles 4.3 1.6 % 4.8 1.9 % 8.7 1.7 % 10.4 2.1 %

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

Restructuring and related charges (benefits) 1.2 0.4 % (0.1) — % 1.2 0.2 % (0.9) (0.2) %

Litigation settlement — — % — — % (1.3) (0.3) % — — %

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Non-GAAP measures $ 40.4 14.9 % $ 33.7 13.2 % $ 64.3 12.6 % $ 64.5 12.8 %

Three Months Ended

September 28, 2024 September 30, 2023

Net (Loss) Income Diluted

Three Months Ended Six Months Ended

December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023

Net Income Diluted EPS Net Income Diluted EPS Net Income Diluted

EPS Net Income Diluted

GAAP measures $ 9.1 $ 0.04 $ 10.7 $ 0.05 $ 7.3 $ 0.03 $ 20.5 $ 0.09

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

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

Stock-based compensation 13.7 0.06 12.5 0.06 26.4 0.12 23.7 0.10

1 unchanged sentence

Acquisition and integration related charges 2.8 0.01 0.6 — 3.4 0.02 0.6 —

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

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

0.1 — 0.5 — (0.4) (0.01) 0.7 0.01

Amortization of intangibles 4.3 0.02 4.8 0.02 8.7 0.04 10.4 0.05

Restructuring and related benefits — — (0.8) —

Restructuring and related charges (benefits) 1.2 0.01 (0.1) — 1.2 0.01 (0.9) (0.01)

Litigation settlement — — 0.3 — (1.3) (0.01) (7.0) (0.03)

1 unchanged sentence

Provision for income taxes 1.0 — 0.2 — 1.7 0.01 1.2 0.01

Total related to Net (Loss) Income and EPS 14.2 0.07 9.7 0.05

Total related to Net Income and EPS 20.3 0.09 13.0 0.06 34.5 0.16 22.7 0.10

Non-GAAP measures $ 29.4 $ 0.13 $ 23.7 $ 0.11 $ 41.8 $ 0.19 $ 43.2 $ 0.19

Shares used in per share calculation for Non-GAAP EPS 224.8 223.5 224.4 223.9

(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.

(1) Included in the six months ended December 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 $0.5 million.

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 and believes providing this additional information allows investors to see Company results through the eyes of management, better understand its financial performance and evaluate the efficacy of the methodology used by management to measure such 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.

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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.

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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

Three Months Ended Six Months Ended

December 28, 2024 December 30, 2023 Change Percent Change December 28, 2024 December 30, 2023 Change Percent Change

Segment net revenue:

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Percentage of net revenue 0.4 % 0.6 % 0.4 % 0.7 %

Restructuring and related benefits $ — $ (0.8) $ 0.8 (100.0) %

Restructuring and related charges (benefits) $ 1.2 $ (0.1) $ 1.3 1,300.0 % $ 1.2 $ (0.9) $ 2.1 233.3 %

Percentage of net revenue 0.4 % — % 0.2 % 0.2 %

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

Three Months Ended 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.

Three and Six Months Ended December 28, 2024 and December 30, 2023

Net revenue increased by $16.3 million, or 6.4%, during the three months ended December 28, 2024 compared to the same period a year ago.

This increase reflects higher spend by service providers and Network Equipment Manufacturers (NEMs), partially offset by lower anti-counterfeiting revenue.

Net revenue increased by $6.6 million, or 1.3%, during the six months ended December 28, 2024 compared to the same period a year ago.

This increase reflects higher spend by NEMs and avionic customers, partially offset by lower consumer and industrial revenue.

Product revenues increased by $14.8 million, or 7.0%, during the three months ended December 28, 2024 compared to the same period a year ago, driven by revenue increases in our NE segment, partially offset by revenue decreases in our SE and OSP segments.

Product revenues increased by $6.7 million, or 1.6%, during the six months ended December 28, 2024 compared to the same period a year ago, driven by revenue increases in our NE segment, partially offset by revenue decreases in our SE and OSP segments.

Service revenues increased by $1.5 million, or 3.4% during the three months ended December 28, 2024, respectively, compared to the same periods a year ago.

This was driven by a revenue increase in our NE segment, partially offset by a revenue decrease in our SE segment.

Service revenues remained relatively flat during the six months ended December 28, 2024 compared to the same period a year ago, driven by a revenue increase in our NE segment offset by a revenue decrease in our SE segment.

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

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

Three Months Ended

September 28, 2024 September 30, 2023

Three Months Ended Six Months Ended

December 28, 2024 December 30, 2023 December 28, 2024 December 30, 2023

United States $ 98.5 36.4 % $ 84.7 33.3 % $ 171.5 33.7 % $ 167.5 33.3 %

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Total net revenue $ 270.8 100.0 % $ 254.5 100.0 % $ 509.0 100.0 % $ 502.4 100.0 %

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.

Net revenue from customers outside the Americas represented 57.1% and 59.8% of net revenue, respectively, during the three and six months ended December 28, 2024.

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

Amortization of acquired technologies within Cost of revenues decreased $0.1 million or 2.9% and $0.3 million or 4.3% during the three and six months ended December 28, 2024, respectively, compared to the same periods a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2024.

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.

Gross margin increased by 1.2 percentage points during the three months ended December 28, 2024 from 58.2% in the same period a year ago to 59.4% in the current period.

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

Gross margin increased by 0.1 percentage points during the six months ended December 28, 2024 from 58.2% in the same period a year ago to 58.3% in the current period.

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

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

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Research and Development

R&D expense decreased by $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.

R&D expense increased by $2.6 million, or 5.3% during the three months ended December 28, 2024 compared to the same period a year ago.

This increase was primarily due to higher variable expenses.

As a percentage of net revenue, R&D expense decreased by 0.2 percentage points during the three months ended December 28, 2024 compared to the same period a year ago.

R&D expense increased by $2.1 million, or 2.1% during the six months ended December 28, 2024 compared to the same period a year ago.

This increase was primarily due to higher variable expenses.

As a percentage of net revenue, R&D expense increased by 0.1 percentage points during the six months ended December 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.

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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.

SG&A expense increased by $9.5 million, or 12.7%, during the three months ended December 28, 2024 compared to the same period a year ago.

This increase was primarily due to higher variable expenses, the change in fair value of acquisition-related contingent consideration and acquisition and integration related charges.

As a percentage of net revenue, SG&A expense increased 1.7 percentage points during the three months ended December 28, 2024 compared to the same period a year ago.

SG&A expense increased by $6.4 million, or 4.2%, during the six months ended December 28, 2024 compared to the same period a year ago.

This increase was primarily due to higher variable expenses and acquisition and integration related charges.

As a percentage of net revenue, SG&A expense increased 0.8 percentage points during the six months ended December 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.

Amortization of intangibles within Operating expenses decreased $0.4 million or 28.6% and $1.4 million or 40.0% during the three and six months ended December 28, 2024, respectively, compared to the same periods a year ago.

These decreases are primarily due to certain intangible assets becoming fully amortized in fiscal 2024.

Restructuring

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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.

During the second quarter of fiscal 2025, the headcount impacted by this plan increased by approximately 30 employees.

The Company expects approximately 7% of its global workforce to be affected, impacting all segments and corporate functions.

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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.

As of December 28, 2024, our total restructuring accrual was $5.7 million.

During the three and six months ended December 28, 2024, the Company recorded restructuring charges of $1.2 million and $1.4 million, respectively, related to the Fiscal 2024 Plan.

During the six months ended December 28, 2024, the Company recorded restructuring benefits of $0.2 million related to the Fiscal 2023 Plan.

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

We estimate future cash payments of $5.7 million under the Fiscal 2024 Plan, funded by operating cash flow.

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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.

Interest and other income, net, was $3.9 million during the three months ended December 28, 2024 compared to $3.8 million during the same period a year ago.

The increase was primarily driven by foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures in the current period offset by a decrease in interest income due to lower cash balances and lower yields compared to the prior period.

Interest and other income, net, was $7.1 million during the six months ended December 28, 2024 compared to $14.0 million during the same period a year ago.

This $6.9 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.

Interest expense decreased by $0.4 million, or 5.1% during the three months ended December 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.

Interest expense decreased by $0.7 million, or 4.5% during the six months ended December 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.

We recorded an income tax provision of $9.5 million and $18.5 million for the three and six months ended December 28, 2024, respectively.

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

The income tax provision for the three and six months ended December 28, 2024 and December 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.

As of December 28, 2024, and June 29, 2024, our unrecognized tax benefits (net of Federal benefits) totaled $51.1 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 December 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.

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

Three Months Ended

September 28, 2024 September 30, 2023 Change Percentage Change

Three Months Ended Six Months Ended

December 28, 2024 December 30, 2023 Change Percentage Change December 28, 2024 December 30, 2023 Change Percentage Change

Network Enablement

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Net revenue $ 199.9 $ 179.6 $ 20.3 11.3 % $ 359.3 $ 350.0 $ 9.3 2.7 %

Operating (loss) income (7.3) 1.5 (8.8) (586.7) %

Operating income 17.4 6.4 11.0 171.9 % 10.1 7.9 2.2 27.8 %

Operating margin 8.7 % 3.6 % 2.8 % 2.3 %

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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.

NE net revenue increased by $23.5 million, or 15.1% during the three months ended December 28, 2024 compared to the same period a year ago, primarily driven by higher volume in Lab and Production, Fiber and Access, AvComm and Wireless revenue.

NE net revenue increased by $15.1 million, or 4.9% during the six months ended December 28, 2024 compared to the same period a year ago, primarily driven by higher volume in Lab and Production, AvComm and Fiber and Access.

NE gross margin increased by 2.0 percentage points during the three months ended December 28, 2024 to 64.5% from 62.5% in the same period a year ago primarily due to higher volume.

NE gross margin increased by 0.1 percentage points during the six months ended December 28, 2024 to 62.9% from 62.8% in the same period a year ago primarily due to higher volume, partially offset by 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.

SE net revenue decreased by $3.2 million, or 13.3%, during the three months ended December 28, 2024 compared to the same period a year ago primarily due to lower Assurance revenue, partially offset by higher Wireless Enterprise Solutions revenue.

SE net revenue decreased by $5.8 million, or 13.0%, during the six months ended December 28, 2024 compared to the same period a year ago primarily due to lower Assurance revenue.

SE gross margin decreased by 1.4 percentage points during the three months ended December 28, 2024 to 67.5% from 68.9% in the same period a year ago primarily due to lower volume.

SE gross margin decreased by 3.8 percentage points during the six months ended December 28, 2024 to 64.3% from 68.1% 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.

NSE operating margin increased by 5.1 percentage points during the three months ended December 28, 2024 to 8.7% from 3.6% in the same period a year ago primarily due to higher volume.

NSE operating margin increased by 0.5 percentage points during the six months ended December 28, 2024 to 2.8% from 2.3% in the same period a year ago primarily due to higher volume.

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.

OSP net revenue decreased by $4.0 million, or 5.3%, during the three months ended December 28, 2024 compared to the same period a year ago.

This decrease was primarily driven by lower consumer and industrial and government revenue offset in part by an increase in anti-counterfeiting revenue.

OSP net revenue decreased by $2.7 million, or 1.8%, during the six months ended December 28, 2024 compared to the same period a year ago.

This decrease was primarily driven by lower consumer and industrial revenue offset in part by higher anti-counterfeiting revenue.

OSP gross margin decreased by 1.5 percentage points during the three months ended December 28, 2024 to 50.6% from 52.1% in the same period a year ago primarily due to lower volume.

OSP gross margin increased by 0.8 percentage points during the six months ended December 28, 2024 to 53.1% from 52.3% in the same period a year ago primarily due to favorable product mix.

OSP operating margin decreased by 4.0 percentage points during the three months ended December 28, 2024 to 32.4% from 36.4% in the same period a year ago primarily due to lower volume and higher operating expenses.

OSP operating margin decreased by 0.9 percentage points during the six months ended December 28, 2024 to 36.2% from 37.1% in the same period a year ago primarily due to lower volume and higher operating expenses.

Liquidity and Capital Resources

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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;

• Global economic conditions that 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 that affect our working capital;

• Increase in capital expenditure to support the revenue growth opportunity of our business;

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• 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 fixed income and credit markets that impact the liquidity and valuation of our investment portfolios;

• Volatility in credit markets that impact our ability to obtain additional financing on favorable terms or at all;

• Volatility in foreign exchange markets, which impacts our financial results;

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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.

As of December 28, 2024, U.S.

subsidiaries owned approximately 49.1% 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.

As of December 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.

During the three months ended December 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.

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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 provides for a senior secured asset-based revolving credit facility in a maximum aggregate amount of $300.0 million and 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.

As of December 28, 2024, we had no borrowings under this facility and our available borrowing capacity was approximately $153.5 million, net of outstanding standby letters of credit of $4.4 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.

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.

Cash Flows for the Six Months Ended December 28, 2024

As of December 28, 2024, our combined balance of cash and cash equivalents and restricted cash increased by $14.6 million to $496.4 million from $481.8 million as of June 29, 2024.

During the six months ended December 28, 2024, Cash provided by operating activities was $58.2 million, consisting of net income of $7.3 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) totaling $44.1 million, including changes in deferred tax balances, and changes in operating assets and liabilities that provided $6.8 million.

Changes in our operating assets and liabilities related to an increase in accrued payroll and related expenses of $10.6 million due primarily to variable pay accrual and timing of payroll, an increase in accounts payable of $5.9 million driven by timing of purchases and related payments, an increase in income taxes payable of $3.4 million and a decrease in other current and non-current assets of $1.9 million.

These were offset by a decrease in deferred revenue of $6.9 million primarily due to timing of support billings and project acceptances, a decrease in accrued expenses and other current and non-current liabilities of $5.7 million, a decrease in accounts receivable of $2.3 million and a decrease in inventory of $0.1 million.

During the six months ended December 28, 2024, Cash used in investing activities was $15.8 million, primarily resulting from $15.5 million used for capital expenditures, $3.0 million investment in a non-marketable equity security and $1.6 million net purchases of short-term investments offset by $4.3 million in proceeds from the sale of assets.

During the six months ended December 28, 2024, Cash used in financing activities was $21.9 million, primarily resulting from $16.4 million cash paid to repurchase common stock under our share repurchase program and $8.3 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.

During the six months ended December 28, 2024, we repurchased 2.0 million shares of our common stock for $16.4 million pursuant to our 2022 Repurchase Plan.

As of December 28, 2024, the Company had remaining authorization of $198.4 million for future share repurchases under the 2022 Repurchase Plan.

Refer to “Note 15.

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Contractual Obligations

There were no material changes to our existing contractual commitments during the first quarter of fiscal 2025.

There were no material changes to our existing contractual commitments during the second quarter of fiscal 2025.

Off-Balance Sheet Arrangements

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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.

As of December 28, 2024, our pension plans were under-funded by $48.8 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.

As of December 28, 2024, the fair value of plan assets had decreased approximately 5.2% 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis