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What changed in VIAVI SOLUTIONS INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of VIAVI SOLUTIONS INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+332 added−401 removedSource: 10-K (2022-08-19) vs 10-K (2021-08-23)

Top changes in VIAVI SOLUTIONS INC.'s 2023 10-K

332 paragraphs added · 401 removed · 215 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

77 edited+34 added−30 removed22 unchanged
Biggest changeThe telecommunications (Telecom) and cable industries are experiencing a major evolution in technology that is likely to last for the next decade as wireless communications expand and evolve from 4G to 5G technology with its promise of greater bandwidth capacity, faster transmission speeds and lower latency response time. 5G is a disruptive technology that is being gradually deployed by service providers using millimeter wave and sub-6 GHz technologies. 5G has broader applications beyond smart mobile devices. 5G’s increased bandwidth capacity and speed, as well as lower latency, should enable numerous devices, referred to as the “Internet of Things” (IOT), to have greater device-to-device connectivity to enable smart homes, smart cities, smart grid, smart and autonomous cars, factory automation and other applications that are yet to be conceptualized. 3 Table of Contents Wireless communications connectivity at the edge, or the “last mile” or “last hundred yards”, will bring gigahertz speeds and capacity to the home as well as to “all devices” and to “all connected things” (e.g.
Biggest changeIndustry Trends for NSE The telecommunications industry is experiencing a major evolution in technology as wireless communications expand and evolve from 4G to 5G technology. 5G’s increased bandwidth capacity and speed, as well as lower latency will expand applications beyond mobile devices. 5G is expected to enable numerous use cases including greater device-to-device connectivity, smart applications, autonomous cars, factory automation and other applications that are yet to be conceptualized.
In addition, our segments share common corporate services that provide capital, infrastructure, resources and functional support, allowing them to focus on core technological strengths to compete and innovate in their markets. Network Enablement Our NE segment provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks.
In addition, our segments share common corporate services that provide capital, legal, infrastructure, resources and functional support, allowing them to focus on core technological strengths to compete and innovate in their markets. Network Enablement Our NE segment provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks.
Customers NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, radio and avionics commercial companies, OEMs, civil, state and federal agencies, utilities, law enforcement, military contractors and the armed forces and deployed private enterprise customers.
Customers NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage-device manufacturers, storage-network and switch vendors, radio and avionics commercial companies, OEMs, state and federal agencies, utilities, law enforcement, military contractors and the armed forces and deployed private enterprise customers.
Lab Instruments : Primarily consisting of (a) Fiber Optic Production Lab Test; (b) Optical Transport products; (c) Computing and Storage Network Test products; and (d) Wireless products. Service Enablement SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data.
Lab Instruments : Primarily consisting of (a) fiber optic production lab tests; (b) optical transport products; (c) computing and storage network test products; and (d) wireless products. Service Enablement SE provides embedded systems and enterprise performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data.
Industrial and Other Markets: We provide multicavity and linear variable optical filters on a variety of substrates for applications, including thermal imaging, spectroscopy and pollution monitoring. We also develop and manufacture miniature handheld and process near infrared spectrometers that leverage our linear variable optical filters for use in applications for agriculture, pharmaceutical and other markets.
We provide multicavity and linear variable optical filters on a variety of substrates for applications, including thermal imaging, spectroscopy and pollution monitoring. We also develop and manufacture miniature handheld and process near infrared spectrometers that leverage our linear variable optical filters for use in applications for agriculture, pharmaceutical and other markets.
Seasonality Our business is seasonal, as is typical for our competitors and many large companies. For NSE, revenue is typically higher in the second and fourth fiscal quarter, all else being equal. There is typically a modest end of calendar year customer spending budget flush that benefits our second fiscal quarter.
Seasonality Our business is seasonal, as is typical for our competitors and many large companies. For NSE, revenue is typically higher in the second and fourth fiscal quarter, all else being equal. There is typically a modest end of calendar year customer spending budget that benefits our second fiscal quarter.
Through the development of multiple generations of products for 3D sensing and by delivering improved performance and competitive value with each iteration, we believe we have established ourselves as the industry’s leading supplier of high-performance filters enabling depth-sensing systems in consumer electronics.
Through the development of multiple generations of products for 3D sensing and by delivering improved performance and competitive value with each iteration, we believe we have established ourselves as one of the industry’s leading supplier of high-performance filters enabling depth-sensing systems in consumer electronics.
OSP sales and marketing efforts are targeted primarily toward customers in the consumer electronics, government, industrial, medical and automotive markets. We have a dedicated direct global sales force focused on understanding customers’ requirements and building market awareness and acceptance of our products.
OSP sales and marketing efforts are targeted primarily toward customers in the consumer electronics, government, automotive and industrial markets. We have a dedicated direct global sales force focused on understanding customers’ requirements and building market awareness and acceptance of our products.
Offerings Our SE solutions are embedded network systems, including microprobes and software that collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams. These solutions provide our customers enhanced network management, control, optimization and differentiation.
Offerings Our SE solutions are embedded network systems, including instruments, microprobes and software that collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization. These solutions provide our customers enhanced network management, control, optimization and differentiation.
We leverage a combination of the National Institute of Standards and Technology (NIST) Cybersecurity Framework, International Organization for Standardization and Center for Internet Security best practice standards to measure security posture, deliver risk management and provide effective security controls.
We leverage a combination of the National Institute of Standards and Technology Cybersecurity Framework, the International Organization for Standardization and the Center for Internet Security best practice standards to measure security posture, deliver risk management and provide effective security controls.
Consumer and Industrial: Our OSP business manufactures and sells optical filters for 3D sensing products that separate out ambient light from incoming data to allow devices to be controlled by a person’s movements or gestures. Our Engineered Diffusers TM shape light emitted for 3D sensing applications and also enhance eye safety.
Consumer Electronics and Industrial : Our OSP business manufactures and sells optical filters for 3D sensing products that separate out ambient light from incoming data to allow devices to be controlled by a person’s movements or gestures. Our Engineered Diffusers shape light emitted for 3D sensing applications and also enhance eye safety.
We drive talent conversations at all levels, which is complemented by Everyday Development, our performance management check-in process. Check-ins ensure that teams are being coached and supported throughout the year with relevant and timely discussions on expectations, feedback and development.
We seek to drive talent conversations at all levels, which is complemented by Everyday Development, our performance management check-in process. Check-ins ensure that teams are being coached and supported throughout the year with relevant and timely discussions on expectations, feedback, and development.
Such actions are intended to further drive our strategy for organizational alignment and consolidation as part of its continued commitment to a more cost effective and agile organization and to improve overall profitability in our business segments. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and “Note 13.
Such actions are intended to further drive our strategy for organizational alignment and consolidation as part of our continued commitment to a more cost effective and agile organization and to improve overall profitability in our business segments. For further information refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and “Note 13.
For product differentiation and brand enhancement, we provide custom color solutions for a variety of applications using our ChromaFlair® and SpectraFlair® pigments to create color effects that emphasize body contours, create dynamic environments, or enhance products in motion. These pigments are added to paints, plastics or textiles for automotive, packaging, and other applications.
Automotive : For product differentiation and brand enhancement, we provide custom color solutions for a variety of applications using our ChromaFlair® and SpectraFlair® pigments to create color effects that emphasize body contours, create dynamic environments, or enhance products in motion. These pigments are added to paints, plastics or textiles for automotive, sports apparel, and other applications.
In our OSP segment, our R&D efforts concentrate on developing more innovative technologies and products for customers in the anti-counterfeiting, consumer electronics, government, healthcare and automotive markets. Our strength in the banknote anti-counterfeiting market is complemented by our advances in developing novel pigments and foils for a variety of applications.
In our OSP segment, our R&D efforts concentrate on developing more innovative technologies and products for customers in the anti-counterfeiting, consumer electronics, industrial, government and automotive markets. Our strength in the banknote anti-counterfeiting market is complemented by our advances in developing novel pigments for a variety of applications.
We have a dedicated sales force organized around each of the markets that we serve that works directly with customers’ executive, technical, manufacturing and purchasing personnel to determine design, performance and cost requirements. We are also supported by a worldwide channel community, including our Velocity Solution Partners who support our NE and SE segments.
We have a dedicated sales force organized around each of the markets that we serve that works directly with customers’ executive, technical, manufacturing and purchasing personnel to determine design, performance and cost requirements. We are also supported by a worldwide channel community, including our Velocity Solution Partners, who support our NSE segment.
Our information security practices include development, implementation, and improvement of policies and procedures to safeguard information and ensure availability of critical data and systems. Our Information Security team conducts annual information security awareness training for employees involved in our systems and processes that handle customer data and audits of our systems and enhanced training for specialized personnel.
Our information security program includes development, implementation, and improvement of policies and procedures to safeguard information and ensure availability of critical data and systems. Our Information Security team conducts annual information security awareness training for employees involved in our systems and processes that handle customer data and audits of our systems and enhanced training for specialized personnel.
This functionality has become more critical as organizations have been forced to adopt remote working procedures, increasing network challenges and security risks. Markets Our SE segment provides solutions and services primarily for CSPs and enterprises that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications.
This functionality has become more critical as organizations continue to operate under remote working procedures, increasing network challenges and security risks. Markets Our SE segment provides solutions and services primarily for CSPs and enterprises that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications.
Government: Our products are used in a variety of aerospace and defense applications, including optics for guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application.
Government : Our products are used in a variety of government and aerospace applications, including optics for inter-satellite laser communications, guidance systems, laser eye protection and night vision systems. These products, including coatings and optical filters, are optimized for each specific application.
Sales and Marketing CSPs make up the majority of NE and SE revenues. We also market and sell products to NEMs, OEMs, enterprises, governmental organizations, distributors and strategic partners worldwide.
Sales and Marketing CSPs make up the majority of our NSE revenues. We also market and sell products to NEMs, OEMs, enterprises, governmental organizations, distributors and strategic partners worldwide.
In support of our business segments, we are pursuing a corporate strategy that we believe will best position us for future opportunities as follows: • Market leadership in physical and virtualized test and measurement instruments with opportunity to grow market share; • Market leadership in Anti-Counterfeiting pigments, 3D sensing optical filters and Engineered Diffusers TM ; • Market leadership in 5G wireless, public safety radio and navigation/communication transponder test instruments; • Increase the benefit from the use of our net operating loss carryforwards (NOL) by improving our profitability organically and inorganically; and • Greater flexibility in capital structure in support of our strategic plans.
In support of our business segments, we are pursuing a corporate strategy that we believe will best position us for future opportunities as follows: • Market leadership in physical and virtualized test and measurement instruments and assurance systems with opportunity to grow market share; • Market leadership in anti-counterfeiting pigments, 3D sensing optical filters and other light management technologies; • Market leadership in 5G wireless, public safety radio and navigation/communication transponder test instruments as well as passive optical components for 3D sensing and other optical sensors; • Increase benefit from the use of our net operating loss carryforwards (NOL) by improving our profitability organically and inorganically; and • Greater flexibility in capital structure in support of our strategic plans.
VIAVI is committed to respecting human rights and acknowledges the fundamental principles contained in the Universal Declaration of Human Rights, the tenets of the United Nations Guiding Principles on Business and Human Rights, core International Labor Organization Conventions and the laws of countries in which we operate.
VIAVI is committed to respecting human rights and acknowledges the fundamental principles contained in the Universal Declaration of Human Rights, the tenets of the United Nations Guiding Principles on Business and Human Rights, core International Labor Organization Conventions and the laws of countries in which we operate, to the extent they are applicable and important to our business.
Many of our employees are participating in mandatory training courses covering data privacy, cyber-security, health and safety as well as the prevention of sexual harassment in the workplace. 12 Table of Contents Talent Rewards Our compensation and benefit programs are designed to recognize our employees' individual performance and contributions to our business results, including competitive base salaries and variable pay for all employees, share-based equity award grants, health and welfare benefits, time-off, development programs and training, and opportunities to give back to our communities.
Our employees regularly participate in mandatory training courses covering data privacy, cyber-security, health and safety as well as the prevention of sexual harassment in the workplace. 11 T a b le of Contents Talent Rewards Our compensation and benefit programs are designed to recognize our employees' individual performance and contributions to our business results, including competitive base salaries and variable pay for all employees, share-based equity award grants, health and welfare benefits, time-off, development programs and training, and opportunities to give back to our communities.
Acquisitions” under Item 8 of this Annual Report on Form 10-K for additional information related to our acquisitions. 10 Table of Contents Restructuring Programs We may continue to engage in targeted restructuring events, to consolidate our operations and align our businesses in response to market conditions and our current investment strategy.
For further information related to our acquisitions, refer to “Note 5. Acquisitions” under Item 8 of this Annual Report on Form 10-K. Restructuring Programs We may continue to engage in targeted restructuring events, to consolidate our operations and align our businesses in response to market conditions and our current investment strategy.
ITEM 1. BUSINESS GENERAL Overview Viavi Solutions Inc. (VIAVI, also referred to as the Company, we, our, and us) is a global provider of network test, monitoring and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics.
ITEM 1. BUSINESS GENERAL Overview Viavi Solutions Inc. (VIAVI, also referred to as the Company, we, our, and us) is a global provider of network test, monitoring and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization.
Other OSP product lines include custom color solutions and spectral sensing. Custom color solutions include innovative special effects pigments that provide product enhancement for brands in the automotive and other industries. Spectral sensing solutions include handheld and process miniature near infrared spectrometers for pharmaceutical, agriculture, food, feed, and industrial applications.
Other OSP product lines include custom color solutions and spectral sensing. Custom color solutions include innovative special effects pigments for the automotive market. Spectral sensing solutions include handheld and process miniature near infrared spectrometers for pharmaceutical, agriculture, food, feed, and industrial applications.
Offerings Our NE solutions include instruments and software that support the development and production of network systems in the lab. These solutions activate, certify, troubleshoot and optimize networks that are differentiated through superior efficiency, reliable performance and greater customer satisfaction. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks.
These solutions activate, certify, troubleshoot and optimize networks that are differentiated through superior efficiency, reliable performance and greater customer satisfaction. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks.
Our security offerings for the anti-counterfeiting market include OVP® and OVMP®. OVP® enables color-shifting effects and OVMP® enables depth and motion effects in addition to color-shifting effects. Both OVP® and OVMP® are formulated into inks used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents.
OVP enables color-shifting effects and OVMP enables depth and motion effects in addition to color-shifting effects. Both OVP and OVMP are formulated into inks used by banknote issuers and security printers worldwide for anti-counterfeiting applications on banknotes and other high-value documents. Our technologies are deployed on the banknotes of more than 100 countries today.
We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services.
We also offer a range of product support and professional services designed to comprehensively address our customers’ requirements. These services include repair, calibration, software support and technical assistance for our products. We offer product and technology training as well as consulting services. Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation.
The Audit Committee regularly briefs the full Board on these matters, and the Board receives regular updates on the status of the Information Security Program, including but not limited to relevant cyber threats, roadmap and key initiative updates, and the management of information security risk. 13 Table of Contents
The Audit Committee or, at the Audit Committee’s instruction, the Cybersecurity Steering Committee regularly briefs the full Board on these matters, and the Board receives regular updates on the status of the information security program, including but not limited to relevant cyber threats, roadmap and key initiative updates, and the identification and management of information security risks.
We are subject to the requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), under which we file annual, quarterly and periodic reports, proxy statements and other information with the SEC. The SEC maintains a website, www.sec.gov , which contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
We are subject to the requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act), under which we file annual, quarterly and periodic reports, proxy statements and other information with the SEC, which can be accessed on www.sec.gov.
Other areas of R&D focus for OSP include our efforts to leverage our optical coating technology expertise to develop applications for the government and defense markets as well as efforts related to new products for 3D sensing and smart phone sensors. OSP has also introduced an innovative hand-held spectrometer solution with applications in the agriculture, healthcare and defense markets.
Other areas for OSP include our efforts to leverage our optical coating technology expertise to develop applications for the government and defense markets as well as efforts related to new products for 3D sensing and smart phone sensors. OSP also develops, manufactures and sells a line of miniature hand-held spectrometers with applications in the agriculture, healthcare and defense markets.
Competition Our SE segment competitors include NetScout Systems, Inc., Riverbed Technology, Inc. and Spirent Communications plc. While we face multiple competitors for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless monitoring solutions available in the service enablement industry.
While we face multiple competitors for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless monitoring solutions available in the service enablement industry.
We plan to leverage major secular growth trends in 5G Wireless, Fiber and 3D Sensing to achieve higher levels of revenue and profitability. 5 Table of Contents Our long-term capital allocation strategy, which supports our corporate strategy, is as follows: • Maintenance and run-rate investments to support operations; • Organic investments in initiatives to support revenue growth and productivity; • Return capital to shareholders through share buybacks and execute on capital allocation and debt management strategy; and • Mergers and acquisitions that are synergistic to company strategy and business segments.
Our long-term capital allocation strategy, which supports our corporate strategy, is as follows: • Maintenance and run-rate investments to support operations; • Organic investments in initiatives to support revenue growth and productivity; • Return capital to shareholders through share buybacks and execute on capital allocation and debt management strategy; and • Mergers and acquisitions that are synergistic to company strategy and business segments.
NSE operates in two reportable segments, NE and SE, whereas OSP operates as a single segment. Our NSE and OSP businesses are each organized with its own engineering, manufacturing and dedicated sales and marketing groups focused on each of the markets we serve to better support our customers and respond quickly to market needs.
Our NSE and OSP businesses are each organized with their own engineering, manufacturing and dedicated sales and marketing groups focused on each of the markets we serve to better support our customers and respond quickly to market needs.
While faced with the ongoing COVID-19 pandemic, we have come together to institute a set of global policies, a global COVID-19 Committee at the executive level, regional and local Pandemic Response Teams, Return to Work guidelines and flexible workplace practices to help our employees and their families stay healthy and safely navigate the challenging and changing environment.
Our global COVID-19 Committee at the executive level, regional and local Pandemic Response Teams, Return to Work guidelines and flexible workplace practices all enable us to help our employees and their families stay healthy and safely navigate the challenging and changing environment.
Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation. 7 Table of Contents Our NE products and associated services are, as follows: Field Instruments : Primarily consisting of (a) Access and Cable products; (b) Avionics products; (c) Fiber Instrument products; (d) Metro products; (e) RF Test products; and (f) Radio Test products.
Our NE products and associated services are, as follows: Field Instruments : Primarily consisting of (a) access and cable products; (b) avionics products; (c) fiber instrument products; (d) metro products; (e) RF test products; and (f) radio test products.
Service and support are provided through our offices and those of our partners worldwide. Corporate Strategy Our objective is to continue to be a leading provider in the markets and industries we serve.
Corporate Strategy Our objective is to continue to be a leading provider in the markets and industries we serve.
For further information related to our customers, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K.
Operating Segments and Geographic Information” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. For further information related to our customers, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Annual Report on Form 10-K.
The information contained on any of the websites referenced in this Annual Report on Form 10-K are not part of or incorporated by reference into this or any other report we file with, or furnish to, the SEC. Industry Trends NE and SE NE and SE (collectively referred to as Network and Service Enablement (NSE)).
The information contained on any of the websites referenced in this Annual Report on Form 10-K are not part of or incorporated by reference into this or any other report we file with, or furnish to, the SEC. 13 T a b le of Contents
These capabilities allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, and help to make necessary repairs faster, which lowers costs while providing higher quality and more reliable services. 8 Table of Contents Our SE products and associated services are, as follows: Data Center : Consisting of our Network Performance Monitoring and Diagnostic tools (Apex, GigaStor, Observer).
These capabilities allow network operators to initiate service to new customers faster, decrease the need for technicians to make on-site service calls, and help to make necessary repairs faster, which lowers costs while providing higher quality and more reliable services.
Diversity, Equity, and Inclusion (DEI) VIAVI is committed to fostering, cultivating, and preserving a culture of diversity, equity and inclusion. Our human capital is one of our most valuable assets. We believe the collective sum of our individual differences, life experiences, knowledge, innovation, business acumen, self-expression, and unique capabilities contribute to a culture that enhances our reputation and achievement.
We believe the collective sum of our individual differences, life experiences, knowledge, innovation, business acumen, self-expression, and unique capabilities contributes to a culture that enhances our reputation and achievement.
Acquisitions As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products, technologies or businesses that are complementary to, or strengthen, our existing products. On May 31, 2019, we completed the acquisition of 3Z, a provider of antenna alignment installation and monitoring solutions.
Service and support are provided through our offices and those of our partners worldwide. Acquisitions As part of our strategy, we are committed to the ongoing evaluation of strategic opportunities and, where appropriate, the acquisition of additional products, technologies or businesses that are complementary to, or strengthen, our existing products.
For our OSP business, given our recent exposure to the consumer market, namely our 3D Sensing products into the smart phone market, OSP revenue is expected to be seasonally higher in the first and second fiscal quarter followed by seasonal demand declines in the third and fourth fiscal quarters. 11 Table of Contents Human Capital Management As of July 3, 2021, we had approximately 3,600 employees worldwide representing more than 30 self-identified nationalities working across approximately 30 countries.
For our OSP business, given our exposure to the consumer market, namely our 3D sensing products into the smart phone market, OSP revenue is expected to be seasonally higher in the first and second fiscal quarter followed by seasonal demand declines in the third and fourth fiscal quarters.
Business Values & Standards The VIAVI business values articulate the internal cultural identity for VIAVI employees and provide a shared understanding of expectations across the Company. They represent the principles that will help guide us to achieve our objectives globally and the desired operating environment of the employees and management.
They represent the principles that will help guide us to achieve our objectives globally and the desired operating environment of the employees and management.
We are a member of the Responsible Business Alliance, which further strengthens our efforts and commitment. We realize that being a responsible global citizen is about more than just complying with local regulations. It’s about how we do business, and how our organization’s activities affect the people and communities where we live and work.
We are a member of the Responsible Business Alliance, which further strengthens our efforts and commitment. 10 T a b le of Contents We realize that being a responsible global citizen is important to the sustainability and commercial success of our business and encompasses more than just complying with local regulations.
AvComm solutions encompass a full spectrum of instrumentation from turnkey systems, stand-alone instruments or modular components that provide customers with highly reliable, customized, innovative and cost-effective testing tools. 6 Table of Contents Markets Our NE segment provides solutions for CSPs, as well as NEMs and data center providers that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications.
Markets Our NE segment provides solutions for CSPs, as well as NEMs and data center providers that deliver and/or operate broadband/IP networks (fixed and mobile) supporting voice, video and data services as well as a wide range of applications.
Our program further includes review and assessment by external, independent third-parties, who assess and report on our internal incident response preparedness and help identify areas for continued focus and improvement. As set forth in its charter, our Audit Committee, comprised fully of independent directors, is responsible for oversight of risk, including cybersecurity and information security risk.
Our information security program further includes review and assessment by external, independent third-parties, who assess, validate and report on our internal incident response preparedness, compliance with our information security program and other applicable security standards, and help identify areas for continued focus and improvement.
Notably, our patented low angle shift technology enables our customers to significantly improve the signal-to-noise ratio of their systems and deliver reliable system performance.
Our filters play an important role in those applications, separating out ambient light from the incoming data used by sensors to make precise measurements. Notably, our patented low angle shift technology enables our customers to significantly improve the signal-to-noise ratio of their systems and deliver reliable system performance.
Markets Our OSP segment delivers overt and covert features to protect banknotes and documents of value against counterfeiting, with a primary focus on the currency market. OSP also produces precise, high-performance, optical thin-film coatings for a variety of applications in consumer electronics, government, automotive, industrial, and other markets.
Markets Our OSP segment delivers overt and covert technologies to protect banknotes and documents of value against counterfeiting, with a primary focus on the currency market.
Assurance : Primarily consisting of our (a) Growth Products (Location Intelligence and NITRO Mobile products) and (b) Mature Products (Legacy Assurance and Legacy Wireline). Optical Security and Performance Products Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell products targeting anti-counterfeiting, consumer and industrial, government, automotive, industrial and other markets.
Optical Security and Performance Products Our OSP segment leverages its core optical coating technologies and volume manufacturing capability to design, manufacture, and sell technologies for the anti-counterfeiting, consumer electronics, industrial, government and automotive markets. Our technologies targeting anti-counterfeiting applications include Optical Variable Pigment (OVP®) and Optical Variable Magnetic Pigment (OVMP®).
Competition OSP’s competitors include the following: providers of anti-counterfeiting features such as Giesecke & Devrient, De La Rue plc; special-effect pigments like Merck KGA; coating companies such as Nidek, Toppan and Toray; optics companies such as Materion; and, optical filter companies such as II-VI Inc. and AMS.
Competition OSP competitors include providers of anti-counterfeiting technologies such as Giesecke & Devrient, De La Rue plc; special-effect pigments such as Merck KGA; coating companies such as Nidek, Toppan and Toray; optics companies such as Materion; and manufacturers of passive and other optical components such as II-VI Inc. and AMS. 7 T a b le of Contents Offerings Our OSP business provides innovative light management technologies for the anti-counterfeiting, consumer electronics, industrial, government and automotive markets.
In October 2018, we broadened our portfolio of 3D sensing technologies when we acquired RPC Photonics (RPC), a technology leader in engineered optical diffusers, marketed under the trademark “Engineered Diffusers TM .” Engineered Diffusers TM diffuse the infrared laser light transmitted by a smartphone in 3D sensing applications, enabling reliable system performance while also guarding eye safety.
Similarly Engineered Diffusers, diffuse the infrared laser light transmitted by a smartphone in 3D sensing applications, enabling reliable system performance while also guarding eye safety.
We detail our overall ESG strategy and progress on our ESG web page and in our annual Corporate Social Responsibility Report, which can both be found at www.viavisolutions.com/csr . Information Security Information security is the responsibility of our Information Security team, overseen by the Chief Information Security Officer.
We detail our approach to ESG, including the results of our ESG Priority Assessment in our ESG Report, which can be found at www.viavisolutions.com/esg . 12 T a b le of Contents Information Security Information security is the responsibility of our Information Security team, overseen by the Chief Information Security Officer.
Cars, Drones, Bots, etc.). The 5G transition is being deployed globally and is expected to be disruptive to businesses, consumers and potentially create new applications and vertical industries. The adoption of 5G also requires increased bandwidth, high speed, and low latency backhaul capability from the network edge to the network core.
The 5G transition is being deployed globally and is expected to be disruptive to businesses, consumers and potentially create new applications and vertical industries.
Sources and Availability of Raw Materials We use various suppliers and contract manufacturers to supply parts and components for the manufacture and support of multiple product lines. Although we intend to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements.
Although we intend to establish at least two sources of supply for materials whenever possible, for certain components we have sole or limited source supply arrangements. Patents and Proprietary Rights Intellectual property rights apply to our various products include patents, trade secrets and trademarks.
The CEO and the SVP Human Resources are responsible for the development of the People Strategy and execute this with the support of the Executive Management Team. We regularly update the Compensation Committee on human capital matters.
We seek to empower our employees to learn and develop their skills to accelerate their career and to attract best in class talent. The CEO and the SVP Human Resources are responsible for the development of our People Strategy and execute on this with the support of the Executive Management Team.
Although we are working to successfully implement our strategy, internal and/or external factors could impact our ability to meet any, or all, of our objectives. These factors are discussed under Item 1A “Risk Factors” of this Annual Report on Form 10-K. Business Segments We operate in two broad business categories: NSE and OSP.
Although we are working to successfully implement our strategy, internal and/or external factors could impact our ability to meet any, or all, of our objectives.
These technologies deliver a range of intuitive overt effects that enable the rapid verification of banknotes without requiring a specialized device or reader.
Anti-Counterfeiting : Our OVP and OVMP technologies are incorporated into inks used by many government and state-owned security printers worldwide for banknote protection. These technologies deliver a range of intuitive overt effects that enable the rapid verification of banknotes without requiring a specialized device or reader.
Manufacturing As of July 3, 2021, we have significant manufacturing facilities for our NE, SE and OSP segments located in China, France, Germany, United Kingdom and the United States. Our most significant contract manufacturing partners are located in China and Mexico.
Restructuring and Related Charges” under Item 8 of this Annual Report on Form 10-K. 9 T a b le of Contents Manufacturing As of July 2, 2022, we have significant manufacturing facilities for our NE, SE and OSP segments located in China, France, Germany, Mexico, United Kingdom and the United States.
As of July 3, 2021, we owned approximately 831 U.S. patents and 1,528 foreign patents and have 1,004 patent applications pending throughout the world. The average age of the patents we hold is 9.1 years, which is slightly younger than the midpoint of the average 20-year life of a patent.
The average age of the patents we hold is 8.9 years, which is younger than the midpoint of the average 20-year life of a patent.
While we face multiple competitors for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless products available in the network enablement industry. In Aerospace and Tactical Communications, AvComm competes against Anritsu Corporation, Astronics DME Corp., General Dynamics and Tel Instruments.
While we face multiple competitors for each of our product families, we continue to have one of the broadest portfolios of wireline and wireless products available in the network enablement industry. 4 T a b le of Contents Offerings Our NE solutions include instruments and software that support the development and production of network systems in the lab.
Our near-term strategy, and next transformation phase, will be more focused on growth, both organic and inorganic.
Our near-term strategy, and next transformation phase, will be more focused on growth, both organic and inorganic. We plan to leverage major secular growth trends in 5G wireless, fiber and 3D sensing to achieve higher levels of revenue and profitability.
Patents and Proprietary Rights Intellectual property rights apply to our various products include patents, trade secrets and trademarks. We do not intend to broadly license our intellectual property rights unless we can obtain adequate consideration or enter into acceptable patent cross-license agreements.
We do not intend to broadly license our intellectual property rights unless we can obtain adequate consideration or enter into acceptable intellectual property cross-licensing agreements. As of July 2, 2022, we own 890 U.S. patents and 1,607 foreign patents and have 1,090 patent applications pending throughout the world.
These solutions - which primarily consist of instruments, microprobes and software - monitor, collect and analyze network data to reveal the actual customer experience and identify opportunities for new revenue streams and network optimization. Our assurance solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network.
Our assurance solutions let carriers remotely monitor performance and quality of network, service and applications performance throughout the entire network.
To serve our markets, we operate in the following business segments: • Network Enablement (NE); • Service Enablement (SE); and • Optical Security and Performance Products (OSP). Corporate Information The Company was incorporated in California in 1979 as Uniphase Corporation and reincorporated in Delaware in 1993.
VIAVI is also a leader in light management solutions for the anti-counterfeiting, consumer electronics, industrial, government and automotive markets. To serve our markets, we operate in the following business segments: • Network Enablement (NE); • Service Enablement (SE); and • Optical Security and Performance Products (OSP).
For example, we manufacture and sell optical filters for 3D sensing applications that allow consumers to interact with their devices more naturally by enabling electronic devices to accurately measure depth and motion. Our filters play an important role in those applications, separating out ambient light from the incoming data used by sensors to make precise measurements.
Our OVP, and OVMP technologies enable intuitive overt optical effects that consumers can easily recognize but counterfeiters find very difficult to reproduce. We also design, manufacture and sell optical filters for 3D sensing applications that allow consumers to interact with their devices more naturally by enabling electronic devices to accurately measure depth and motion.
Environmental, Social and Governance All stakeholders are essential to our business, including stockholders, customers, suppliers, employees, communities as well as the environment and society. We are working on making our workforce more inclusive, our business more sustainable, and our communities more engaged by maintaining strong environmental, social and governance (ESG) practices.
Environmental, Social and Governance Matters We believe that serving our stakeholders including our stockholders, customers, suppliers, employees, communities and the environment drives commercial success, and that implementing environmental, social and governance (ESG) practices makes our business more sustainable. We take immense pride in the progress we are making within our ESG initiatives.
The VIAVI Code of Business Conduct captures the broad principles of legal and ethical business conduct embraced by the Company as part of its commitment to integrity. VIAVI expects that all employees will act in a manner that complies both with the letter and spirit of this code of conduct.
It’s about how we do business, and how our organization’s activities affect the people and communities where we live and work. The VIAVI Code of Business Conduct captures the broad principles of legal and ethical business conduct embraced by the Company as part of its commitment to integrity.
As service providers face pricing pressure on their average revenue per user (ARPU) metrics, they are turning to our NE products solutions to both reduce the need for physical customer service visits through faster installation and repair completion and improve user satisfaction.
While traditional services providers, in recent years, have continued to consolidate to gain scale and capital spending in physical networks has been declining, it also creates additional opportunities as service providers deploy NE products and solutions to improve average revenue per user (ARPU) metrics by reducing the need for physical customer service visits through faster installation and repair completion.
For example, we design and produce optical filters and Engineered Diffusers™, which are used in 3D sensing products and other applications. Customers OSP serves customers such as SICPA Holding SA Company (SICPA), STMicroelectronics Holding N.V., Lockheed Martin Corporation and Seiko Epson Corporation.
OSP also produces precise, high-performance, optical thin-film coatings and light shaping optics capabilities for a variety of applications including, for example, optical filters and Engineered Diffusers, marketed under the trademark “Engineered Diffusers®.”, for 3D sensing applications. Customers OSP customers include SICPA Holding SA Company (SICPA), STMicroelectronics Holding N.V., Lockheed Martin Corporation and Seiko Epson Corporation.
These investments will extend fiber connectivity beyond the office and home and permeate “fiber-to-the-everywhere.” While new networks are deploying 5G wireless and advanced optical fiber technology, existing network infrastructure that is not otherwise being upgraded is still expected to be modernized with new cable and access technologies.
Existing network infrastructure that is not otherwise being upgraded is also expected to be modernized with new cable and access technologies. Cable providers are investing in DOCSIS 3.1 to enhance existing cable networks while DSL copper lines are being upgraded to GFast.
Our professional services, provided in conjunction with system integration projects, include project management, installation and implementation. Our AvComm products are a global leader in T&M instrumentation for communication and safety in the government, civil, aerospace and military markets.
Our Radio Access Network (RAN) to Core test and validation product addresses the various communications infrastructure market segments. Our AvComm products are a global leader in test and measurement (T&M) instrumentation for communication and safety in the government, aerospace and military markets.
As consumer communication, service provider network operations, and enterprise networks increasingly migrate to the cloud, hyperscale services have become significant drivers of technology innovation, including optical fiber up to 800GbE. The scale and complexity of these technology shifts are also challenging service providers to rearchitect their networks, becoming more automated, virtualized and optimized based on real-time intelligence.
The scale and complexity of these technology shifts are also challenging service providers to rearchitect their networks, becoming more virtualized, and optimized based on real-time intelligence. We believe these investments will extend fiber connectivity beyond the office and home and permeate “fiber-to-the-everywhere” leading to potential new business opportunities for VIAVI.
Our NE and SE products and solutions are well positioned to meet these rapidly changing industry trends, given our technology and products, as well as customer installed base. NE’s Avionics Communications (AvComm) products, further expand NSE’s Test & Measurement (T&M) opportunity into the government, civil, aerospace and military markets for communications and public safety testing.
In addition, the new cloud service providers and virtualized networks create new NSE opportunities. We believe our NSE products and solutions are well positioned to meet these rapidly changing industry trends, given our technology and products, as well as customer installed base.
For our avionics products, many governments across the globe are increasing their military and public safety budgets to upgrade communication infrastructure. Competition Our NE segment competes against various companies, including Anritsu Corporation, EXFO Inc., Keysight Technologies Inc., Rohde & Schwarz, VeEX Inc., Spirent Communications plc. and Artiza Networks, Inc.
For our avionics products, many governments across the globe are increasing their military and public safety budgets to upgrade communication infrastructure. 6 T a b le of Contents The convergence of network technologies requires significant investments from both traditional carriers and cloud service providers.
Enabling critical leadership practices was a top priority in 2021, as we instituted our global Leadership Development Program with over 230 of our managers joining the Manager Development and Strategic Leadership Series.
We continue to deliver our global Leadership Development Program, with over 70% of our managers joining the Manager Development and Strategic Leadership Series in fiscal 2022. We intend for this to create alignment across the organization on the expectations of leaders, and how we can continue to develop leadership capabilities.
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We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network . VIAVI is also a leader in management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, aerospace, automotive and medical applications.
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These factors are discussed under Item 1A “Risk Factors” of this Annual Report on Form 10-K. 3 T a b le of Contents Business Segments We operate in two broad business categories: Network and Service Enablement (NSE) and Optical Security and Performance Products (OSP). NSE operates in two reportable segments, NE and SE, whereas OSP operates as a single segment.
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Our heritage includes several significant mergers and acquisitions including, among others, the combination of Uniphase Corporation and JDS FITEL in 1999 (JDSU). In August 2015, JDSU completed the separation of our Lumentum business (the Separation) to gain greater strategic flexibility to address rapidly changing market dynamics. At the same time, we changed our name to Viavi Solutions Inc.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeStrategic transactions of this nature involve numerous risks, including the following: • The impact of the recent COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and both our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns; • Inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or business’s procedures and controls; • Diversion of management’s attention from normal daily operations of the business; • Potential difficulties in completing projects associated with in-process R&D; • Difficulties in entering markets in which we have no or limited prior experience and where competitors have stronger market positions; • Difficulties in obtaining or providing sufficient transition services and accurately projecting the time and cost associated with providing these services; • An acquisition may not further our business strategy as we expected or we may overpay for, or otherwise not realize the expected return on, our investments; • Expected earn-outs may not be achieved in the time frame or at the level expected or at all; • We may not be able to recognize or capitalize on expected growth, synergies or cost savings; • Insufficient net revenue to offset increased expenses associated with acquisitions; • Potential loss of key employees of the acquired companies; and • Difficulty in forecasting revenues and margins.
Biggest changeStrategic transactions of this nature involve numerous risks, including the following: • Diversion of management’s attention from normal daily operations of the business; • Potential difficulties in completing projects associated with in-process R&D; • Difficulties in entering markets in which we have no or limited prior experience and where competitors have stronger market positions; 17 T a b le of Contents • Difficulties in obtaining or providing sufficient transition services and accurately projecting the time and cost associated with providing these services; • An acquisition may not further our business strategy as we expected or we may overpay for, or otherwise not realize the expected return on, our investments; • Expected earn-outs may not be achieved in the time frame or at the level expected or at all; • We may not be able to recognize or capitalize on expected growth, synergies or cost savings; • Insufficient net revenue to offset increased expenses associated with acquisitions; • Potential loss of key employees of the acquired companies; • Difficulty in forecasting revenues and margins; • The impact of the COVID-19 pandemic, and any other adverse public health developments, epidemic disease or other pandemic in the countries in which we operate or our customers are located, including regional quarantines restricting the movement of people or goods, reductions in labor supply or staffing, the closure of facilities to protect employees, including those of our customers, disruptions to global supply chains and both our and our suppliers’ ability to deliver materials and products on a timely or cost-effective basis, shipment, acceptance or verification delays, the resulting overall significant volatility and disruption of financial markets, and economic instability affecting customer spending patterns; and • Inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or business’s procedures and controls.
To the extent that any disruption, degradation, downtime or other security event results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential or personal information, it could adversely impact us and our clients, potentially resulting in, among other things, financial losses, our inability to transact business on behalf of our clients, adverse impact on our brand and reputation, violations of applicable privacy and other laws, regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs.
To the extent that any disruption, degradation, downtime or other security event results in a loss or damage to our data or systems, or in inappropriate disclosure of confidential or personal information, it could adversely impact us and our clients, potentially resulting in, among other things, financial losses, loss of customers or business, our inability to transact business on behalf of our clients, adverse impact on our brand and reputation, violations of applicable privacy and other laws, regulatory fines, penalties, litigation, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs.
The manufacture, quality and distribution of our products, as well as our customer relations, may be affected by several factors, including the rapidly changing market for our products, supply issues and internal restructuring efforts. We expect the impact of these issues will become more pronounced as we continue to introduce new product offerings and when overall demand increases.
The manufacture, quality and distribution of our products, as well as our customer relations, may be affected by several factors, including the rapidly changing market for our products, supply chain issues and internal restructuring efforts. We expect the impact of these issues will become more pronounced as we continue to introduce new product offerings and when overall demand increases.
Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable cost to our customers. The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry.
Our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at an acceptable cost to our customers. The markets for our products are characterized by rapid technological change, frequent new product introductions, substantial capital investment, changes in customer requirements and a constantly evolving industry.
In response to the COVID-19 pandemic, we have prioritized employee, customer and partner safety and have temporarily shut down, slowed or limited activity in certain locations, including limiting production in certain locations to essential business needs, all in conjunction with federal, state and local health and safety regulations and shelter-in-place orders.
In response to the COVID-19 pandemic, we prioritized employee, customer and partner safety and temporarily shut down, slowed or limited activity in certain locations, including limiting production in certain locations to essential business needs, all in conjunction with federal, state and local health and safety regulations and shelter-in-place orders.
However, any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of operations and financial conditions.
Any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of operations and financial conditions.
In addition, the holders of the Notes are entitled to convert the Notes into shares of our common stock or a combination of cash and shares of common stock under certain circumstances which would dilute our existing stockholders and lower our reported per share earnings.
In addition, the holders of the 2023 and 2024 Notes are entitled to convert the Notes into shares of our common stock or a combination of cash and shares of common stock under certain circumstances which would dilute our existing stockholders and lower our reported per share earnings.
In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States. 22 Table of Contents Any patents issued to us may be challenged, invalidated or circumvented.
In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Any patents issued to us may be challenged, invalidated or circumvented.
As a result, our profitability in a particular period will be impacted by revenue, product mix and operational costs that vary significantly across our product portfolio and business segments.
Our profitability in a particular period will be impacted by revenue, product mix and operational costs that vary significantly across our product portfolio and business segments.
If we are unable to attract and retain qualified executives and employees, or to successfully integrate any newly hired personnel within our organization, we may be unable to achieve our operating objectives, which could negatively impact our financial performance and results of operations. 24 Table of Contents Risks Related to our Liquidity and Indebtedness Any deterioration or disruption of the capital and credit markets may adversely affect our access to sources of funding.
If we are unable to attract and retain qualified executives and employees, or to successfully integrate any newly hired personnel within our organization, we may be unable to achieve our operating objectives, which could negatively impact our financial performance and results of operations. 24 T a b le of Contents Risks Related to our Liquidity and Indebtedness Any deterioration or disruption of the capital and credit markets may adversely affect our access to sources of funding.
Specific factors that may undermine our profit and financial objectives include, among others: • Uncertain future telecom carrier and cable operator capital and R&D spending levels, which particularly affects our NE and SE segments; • Adverse changes to our product mix, both fundamentally (resulting from new product transitions, the declining profitability of certain legacy products and the termination of certain products with declining margins, among other things) and due to quarterly demand fluctuations; • Pricing pressure across our NSE product lines due to competitive forces and to a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements; • Our OSP operating margin may experience some downward pressure as a result of a higher mix of 3D Sensing products and increased operating expenses; • Limited availability of components and resources for our products which leads to higher component prices; • Increasing commoditization of previously differentiated products, and the attendant negative effect on average selling prices and profit margins; • Execution challenges, which limit revenue opportunities and harm profitability, market opportunities and customer relations; • Decreased revenue associated with terminated or divested product lines; • Redundant costs related to periodic transitioning of manufacturing and other functions to lower-cost locations; • Ongoing costs associated with organizational transitions, consolidations and restructurings, which are expected to continue in the nearer term; • Cyclical demand for our currency products; • Changing market and economic conditions, including the impacts due to tariffs, the COVID-19 pandemic and inflationary pressures; • Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic; • Financial stability of our customers, including the solvency of private sector customers and statutory authority for government customers to purchase goods and services; and 15 Table of Contents • Factors beyond our control resulting from pandemics and similar outbreaks such as the COVID-19 pandemic, manufacturing restrictions, travel restrictions and shelter-in-place orders to control the spread of a disease regionally and globally, and limitations on the ability of our employees and our suppliers’ and customers’ employees to work and travel.
Specific factors that may undermine our profit and financial objectives include, among others: • Uncertain future telecom carrier and cable operator capital and R&D spending levels, which particularly affects our NE and SE segments; • Adverse changes to our product mix, both fundamentally (resulting from new product transitions, the declining profitability of certain legacy products and the termination of certain products with declining margins, among other things) and due to quarterly demand fluctuations; • Pricing pressure across our NSE product lines due to competitive forces, advanced chip component shortages, and a highly concentrated customer base for many of our product lines, which may offset some of the cost improvements; • Our OSP operating margin may experience some downward pressure as a result of a higher mix of 3D sensing products and increased operating expenses; • Limited availability of components and resources for our products which leads to higher component prices; • Resource rationing, including rationing of utilities like electricity by governments and/or service providers; • Increasing commoditization of previously differentiated products, and the attendant negative effect on average selling prices and profit margins; • Execution challenges, which limit revenue opportunities and harm profitability, market opportunities and customer relations; • Decreased revenue associated with terminated or divested product lines; • Redundant costs related to periodic transitioning of manufacturing and other functions to lower-cost locations; • Ongoing costs associated with organizational transitions, consolidations and restructurings, which are expected to continue in the nearer term; • Cyclical demand for our currency products; • Changing market and economic conditions, including the impacts due to tariffs, the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, supply chain constraints, pricing and inflationary pressures; • Ability of our customers, partners, manufacturers and suppliers to purchase, market, sell, manufacture and/or supply our products and services, including as a result of disruptions arising from the COVID-19 pandemic; • Financial stability of our customers, including the solvency of private sector customers and statutory authority for government customers to purchase goods and services; and • Factors beyond our control resulting from pandemics and similar outbreaks such as the COVID-19 pandemic, manufacturing restrictions, travel restrictions and shelter-in-place orders to control the spread of a disease regionally and globally, and limitations on the ability of our employees and our suppliers’ and customers’ employees to work and travel.
Our international presence exposes us to certain risks, including the following: • Fluctuations in exchange rates between the U.S. dollar and among the currencies of the countries in which we do business may adversely affect our operating results by negatively impacting our revenues or increasing our expenses; • Our ability to comply with a wide variety of laws and regulations of the countries in which we do business, including, among other things, customs, import/export, anti-bribery, anti-competition, tax and data privacy laws, which may be subject to sudden and unexpected changes; • Difficulties in establishing and enforcing our intellectual property rights; • Tariffs and other trade barriers; • Political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and product development facilities; • Strained or worsening relations between the United States and China or other countries; • Difficulties in staffing and management; • Language and cultural barriers; • Seasonal reductions in business activities in the countries where our international customers are located; • Integration of foreign operations; • Longer payment cycles; • Difficulties in management of foreign distributors; and • Potential adverse tax consequences. 19 Table of Contents The spread of COVID-19 has and is likely to continue to affect the manufacturing and shipment of goods globally.
Our international presence exposes us to certain risks, including the following: • Fluctuations in exchange rates between the U.S. dollar and among the currencies of the countries in which we do business may adversely affect our operating results by negatively impacting our revenues or increasing our expenses; • Our ability to comply with a wide variety of laws and regulations of the countries in which we do business, including, among other things, customs, import/export, anti-bribery, anti-competition, tax and data privacy laws, which may be subject to sudden and unexpected changes; • Difficulties in establishing and enforcing our intellectual property rights; • Tariffs and other trade barriers; • Political, legal and economic instability in foreign markets, particularly in those markets in which we maintain manufacturing and product development facilities; • Strained or worsening relations between the United States, Russia and China and related impacts on other countries; • Difficulties in staffing and management; • Language and cultural barriers; • Seasonal reductions in business activities in the countries where our international customers are located; • Integration of foreign operations; • Longer payment cycles; • Difficulties in management of foreign distributors; and • Potential adverse tax consequences.
Ltd. and 68 designated non-U.S. affiliates (collectively, Huawei) were added to the Entity List of the Bureau of Industry and Security of the U.S. Department of Commerce (BIS), which imposes limitations on the supply of certain U.S. items and product support to Huawei.
On May 16, 2019, Huawei Technologies Co. Ltd. and 68 designated non-U.S. affiliates (collectively, Huawei) were added to the Entity List of the Bureau of Industry and Security of the U.S. Department of Commerce (BIS), which imposes limitations on the supply of certain U.S. items and product support to Huawei.
Even if the 5G infrastructure market and rate of adoption develop in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G platforms and systems, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Even if the markets and rates of adoption develop in the manner or in the time periods we anticipate, if we do not have timely, competitively priced, market-accepted products available to meet our customers’ planned roll-out of 5G platforms and systems, 3D sensing products and other technologies, we may miss a significant opportunity and our business, financial condition, results of operations and cash flows could be materially and adversely affected.
In the event future iterations of open-source software are made available under a revised license, such license revisions may adversely affect our ability to use such future iterations. 23 Table of Contents Environmental, Social and Governance Risks We may be subject to environmental liabilities which could increase our expenses and harm our operating results.
Additionally, open-source licenses are subject to occasional revision. In the event future iterations of open-source software are made available under a revised license, such license revisions may adversely affect our ability to use such future iterations. Environmental, Social and Governance Risks We may be subject to environmental liabilities which could increase our expenses and harm our operating results.
If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, overall spending on 5G infrastructure may be reduced, which would adversely impact demand for our products in these markets.
If domestic and global economic conditions worsen, including as a result of the COVID-19 pandemic, pricing and inflationary pressures, overall spending on 5G infrastructure, 3D sensing and other developing technologies may be reduced, which would adversely impact demand for our products in these markets.
Any such failure could have a material impact on our ability to meet customers’ expectations and may materially impact our operating results. • New product programs and introductions involve changing product specifications and customer requirements, unanticipated engineering complexities, difficulties in reallocating resources and overcoming resource limitations and increased complexity, which expose us to yield and product risk internally and with our suppliers. 16 Table of Contents These factors have caused considerable strain on our execution capabilities and customer relations.
Any such failure could have a material impact on our ability to meet customers’ expectations and may materially impact our operating results. • New product programs and introductions involve changing product specifications and customer requirements, unanticipated engineering complexities, difficulties in reallocating resources and overcoming resource limitations and increased complexity, which expose us to yield and product risk internally and with our suppliers.
The issuance of the Notes substantially increased our principal payment obligations. The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.
The degree to which we are leveraged could materially and adversely affect our ability to successfully obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures.
While we have not experienced damage to our facilities or a material disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward. Management Transitions and Talent Retention Create Uncertainties and Could Harm our Business. Amar Maletira became our Chief Financial Officer in September 2015. Mr.
While we have not experienced damage to our facilities or a material disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward. Management transitions and talent retention create uncertainties and could harm our business.
We also rely on contract manufacturers around the world to manufacture certain of our products. Our business and results of operations have been, and could continue to be, adversely affected by this dependency.
We also rely on contract manufacturers around the world to manufacture certain products. Our business could continue to be adversely affected by this dependency.
When and as normal business operations resume, we will need to expand globally the safety measures we have already undertaken at sites conducting essential business, such as enhanced sanitation procedures, health checks and social distancing protocols, none of which can completely eliminate the risk of exposure or spread of COVID-19.
As normal business operations resume and we transition to a hybrid work model, we are expanding globally the safety measures we have already undertaken at sites conducting essential business, such as enhanced sanitation procedures, health checks and social distancing protocols, none of which can completely eliminate the risk of exposure or spread of COVID-19.
In addition, our growth and ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy and expansion of 3D sensing and other applications for consumer electronics.
Our growth and ability to serve a significant portion of these markets is subject to many factors, including our success in implementing our business strategy and market adoption and expansion of 5G infrastructure, 3D sensing and other applications for consumer electronics.
Moreover, in October 2019, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region, commenced planned widespread blackouts during the peak wildfire season to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failure.
Moreover, Pacific Gas and Electric (PG&E), the public electric utility in our Northern California region, has previously implemented and may continue to implement widespread blackouts during the peak wildfire season to avoid and contain wildfires sparked during strong wind events by downed power lines or equipment failure.
Acquisitions may also cause us to: • Issue common stock that would dilute our current stockholders’ percentage ownership and may decrease earnings per share; • Assume liabilities, some of which may be unknown at the time of the acquisitions; • Record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; • Incur additional debt to finance such acquisitions; • Incur amortization expenses related to certain intangible assets; or • Acquire, assume, or become subject to litigation related to the acquired businesses or assets. 18 Table of Contents Operational Risks Restructuring We continue to restructure and realign our cost base with current and anticipated future market conditions.
Acquisitions may also cause us to: • Issue common stock that would dilute our current stockholders’ percentage ownership and may decrease earnings per share; • Assume liabilities, some of which may be unknown at the time of the acquisitions; • Record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges; • Incur additional debt to finance such acquisitions; • Incur amortization expenses related to certain intangible assets; or • Acquire, assume, or become subject to litigation related to the acquired businesses or assets.
Our new corporate headquarters are located in Scottsdale, Arizona, a desert climate, subject to extreme heat and drought. The geographic location of our Northern California offices and production facilities subject them to earthquake and wildfire risks.
We operate in geographic regions which face a number of climate and environmental challenges. Our new corporate headquarters are located in Chandler, Arizona, a desert climate, subject to extreme heat and drought. The geographic location of our Northern California offices and production facilities subject them to drought, earthquake and wildfire risks.
Any delay in production or delivery of our products due to an extended closure of our suppliers’ plants as a result of efforts to limit the spread of COVID-19 could adversely impact our business.
The spread of COVID-19 has and is likely to continue to affect the manufacturing and shipment of goods globally. Any delay in production or delivery of our products due to an extended closure of our suppliers’ plants as a result of efforts to limit the spread of COVID-19 could adversely impact our business.
Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may subject us to substantial negative financial consequences and civil or criminal penalties. Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data.
Failure to maintain satisfactory compliance with certain privacy and data protections laws and regulations may harm our business. Complex local, state, national, foreign, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer, and other processing of personal data.
The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation. Further, the California Privacy Rights Act (CPRA) recently passed in California.
The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase data breach litigation.
Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue.
Any failure by us to continue capturing a significant share of these customers could materially harm our business. Dependence on a limited number of customers exposes us to the risk that order reductions from any one customer can have a material adverse effect on periodic revenue.
Competition for people with the specific technical and other skills we require is significant. Moreover, we may face new and unanticipated difficulties in attracting, retaining and motivating employees in connection with the recent change of our headquarters to Scottsdale, Arizona, effective January 1, 2021.
We have recently and could continue to experience changes in our leadership team. Competition for people with the specific technical and other skills we require is significant. Moreover, we may face new and unanticipated difficulties in attracting, retaining and motivating employees in connection with the change of our headquarters to Chandler, Arizona.
If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged, and our customers may choose to reduce or terminate their purchases of our products and purchase additional products from our competitors.
If we do not improve our performance in all of these areas, our operating results will be harmed, the commercial viability of new products may be challenged, and our customers may choose to reduce or terminate their purchases of our products and purchase additional products from our competitors. 16 T a b le of Contents Unfavorable, uncertain or unexpected conditions in the transition to new technologies may cause our growth forecasts to be inaccurate and/or cause fluctuations in our financial results.
We may not be able to engage in these activities on desirable terms or at all, which may result in a default on our existing or future indebtedness and harm our financial condition and operating results. 25 Table of Contents The elimination of LIBOR after June 2023 may affect our financial results.
We may not be able to engage in these activities on desirable terms or at all, which may result in a default on our existing or future indebtedness and harm our financial condition and operating results. Our outstanding indebtedness may limit our operational and financial flexibility.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness. 14 Table of Contents We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we have experienced to date.
To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.
Customer consolidation activity and periodic manufacturing and inventory initiatives could also create the potential for disruptions in demand for our products as a consequence of such customers streamlining, reducing or delaying purchasing decisions. We have a strategic alliance with SICPA, our principal customer for our anti-counterfeiting pigments that are used to, among other things, provide security features for banknotes.
Customer consolidation activity and periodic manufacturing and inventory initiatives could also create the potential for disruptions in demand for our products as a consequence of such customers streamlining, reducing or delaying purchasing decisions. We have a strategic alliance with SICPA to market and sell our OVP and OVMP product lines for banknote anti-counterfeiting applications worldwide.
The ongoing COVID-19 pandemic has resulted in a widespread health crisis that is adversely affecting the broader economies, financial markets and may affect the overall demand environment for our products and services.
ITEM 1A. RISK FACTORS COVID-19 Risks The COVID-19 pandemic has and may continue to adversely affect how we and our customers are operating our businesses. The ongoing COVID-19 pandemic has resulted in a widespread health crisis that adversely affected the broader economies, financial markets and may affect the overall demand environment for our products and services.
We expect to continue to invest heavily in R&D in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology. We believe one of our greatest strengths lies in our innovation and our product development efforts.
We expect to continue to invest heavily in R&D in order to expand the capabilities of 3D sensing and smart phone sensors, handheld spectrometer solution and portable test instruments, introduce new products and features and build upon our technology. We expect that our results of operations may be impacted by the timing and size of these investments.
In the past, licenses generally have been available to us where third-party technology was necessary or useful for the development or production of our products. In the future licenses to third-party technology may not be available on commercially reasonable terms, if at all. Our products may be subject to claims that they infringe the intellectual property rights of others.
In the future licenses to third-party technology may not be available on commercially reasonable terms, if at all. 22 T a b le of Contents Our products may be subject to claims that they infringe the intellectual property rights of others.
The U.S. federal government may also pass data privacy laws. These regulations and legislative developments have potentially far-reaching consequences and may require us to modify our data management practices and incur substantial compliance expense.
The new and proposed privacy laws may result in further uncertainty and would require us to incur additional expenditures to comply. These regulations and legislative developments have potentially far-reaching consequences and may require us to modify our data management practices and incur substantial compliance expense.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results. In addition, we have experienced and may continue to experience shipping and logistics challenges as our customers have also closed their facilities and are operating under similar restrictions.
We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has and may continue to negatively impact our sales and operating results.
If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenditures in connection with a violation of these laws, our financial condition or operating results could be materially adversely impacted. Natural Disasters and Catastrophic Events We operate in geographic regions which face a number of climate and environmental challenges.
If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenditures in connection with a violation of these laws, our financial condition or operating results could be materially adversely impacted. Our disclosures, initiatives and goals related to ESG matters expose us to numerous risks.
If SICPA fails to purchase these quantities, as and when required by the agreement, our business and operating results (including among other things, our revenue and gross margin) will be harmed as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves. 17 Table of Contents Movement towards virtualized networks and software solutions may result in lower demand for our hardware products and increased competition.
A material reduction in sales, or loss of the relationship with SICPA, may harm our business and operating results as we may be unable to find a substitute marketing and sales partner or develop these capabilities ourselves in a timely manner. Movement towards virtualized networks and software solutions may result in lower demand for our hardware products and increased competition.
Our estimate of the market opportunity related to 3D sensing is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis, industry experience and third-party data. Accordingly, our estimated market opportunity may prove to be materially inaccurate.
Growth forecasts are subject to significant uncertainty and are based on assumptions and estimates which may not prove to be accurate. Our estimates of the market opportunities related to 5G infrastructure, 3D sensing and other developing technologies are subject to significant uncertainty and are based on assumptions and estimates, including our internal analysis, industry experience and third-party data.
We cannot assure you that we will be able to serve a significant portion of this market and the growth forecasts should not be taken as indicative of our future growth. We may experience increased pressure on our pricing and contract terms due to our reliance on a limited number of customers for a significant portion of our sales.
We cannot assure you that we will be able to serve a significant portion of these markets and the growth forecasts should not be taken as indicative of our future growth.
We face risks related to our international operations and revenue. Our customers are located throughout the world. In addition, we have significant operations outside North America, including product development, manufacturing, sales and customer support operations.
In addition, we have significant operations outside North America, including product development, manufacturing, sales and customer support operations.
With respect to compliance with environmental laws and regulations in general, we have incurred, and in the future could incur, substantial costs for the cleanup of contaminated properties, either those we own or operate or to which we have sent wastes in the past, or to comply with such environmental laws and regulations.
If we fail to comply with such laws, we could face sanctions for such noncompliance, and our customers may refuse to purchase our products, which would have a materially adverse effect on our business, financial condition and results of operations. 23 T a b le of Contents With respect to compliance with environmental laws and regulations in general, we have incurred, and in the future could incur, substantial costs for the cleanup of contaminated properties, either those we own or operate or to which we have sent wastes in the past, or to comply with such environmental laws and regulations.
We may seek to access the capital or credit markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
We may seek to access the capital or credit markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. For example, in December 2021, we entered into a $300 million asset-based secured credit facility which has certain limitations based on our borrowing capacity.
Surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and the slow pace of vaccine rollout may impact our suppliers and our ability to source materials in a timely manner.
Surges in infection rate, new shutdowns or quarantines, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner. Further, ongoing supply chain constraints and inflationary pressure could have a negative impact on our results.
If these estimates and assumptions are incorrect, if we experience delays, or if other unforeseen events occur, our business and results of operations could be adversely affected. We may not generate positive returns on our research and development strategy. Developing our products is expensive, and the investment in product development may involve a long payback cycle.
We may not generate positive returns on our research and development strategy. Developing our products is expensive, and the investment in product development may involve a long payback cycle.
In March 2017, we issued $460.0 million of 1.00% Senior Convertible Notes due 2024, and in May 2018 we issued $225.0 million of 1.75% Senior Convertible Notes due 2023. The issuance of the Notes increases our overall leverage and could dilute our existing stockholders and lower our reported earnings per share.
Our notes increased our overall leverage and our convertible notes could dilute our existing stockholders and lower our reported earnings per share. The issuance of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the “Notes”) substantially increased our principal payment obligations.
We maintain information security tools and technologies, staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats.
We also design and manage IT systems and products that contain IT systems for various customers, and generally face the same threats for these systems as for our own internal systems. 21 T a b le of Contents We maintain information security tools and technologies, staff, policies and procedures for managing risk to our networks and information systems, and conduct employee training on cyber-security to mitigate persistent and continuously evolving cyber-security threats.
Rapid technological change in our industry presents us with significant risks and challenges, and if we are unable to keep up with the rapid changes, our customers may purchase less of our products which could adversely affect our operating results.
If we fail to achieve profitability expectations, the price of our debt and equity securities, as well as our business and financial condition, may be materially adversely impacted. 15 T a b le of Contents Rapid technological change in our industry presents us with significant risks and challenges, and if we are unable to keep up with the rapid changes, our customers may purchase less of our products.
In addition, unfavorable developments with evolving laws and regulations worldwide related to 5G may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in this area. Further, the COVID-19 pandemic resulted in global work-office shut down and Work-From-Home policies among network service providers, NEMs and its related supply chain.
In addition, unfavorable developments with evolving laws and regulations worldwide related to such technologies may limit or slow the rate of global adoption, impede our strategy, and negatively impact our long-term expectations in these markets.
In addition, the revenues we derive from many of our customers depend on international sales and further expose us to the risks associated with such international sales. Economic conditions and regulatory changes that may result from the United Kingdom’s exit from the European Union could adversely affect our business, financial condition and results of operations.
Lower sales levels that typically occur during the summer months in Europe and some other overseas markets may materially and adversely affect our business. In addition, the revenues we derive from many of our customers depend on international sales and further expose us to the risks associated with such international sales.
The CPRA will impose additional data protection obligations on covered businesses, including additional consumer rights, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data. It will also create a new California data protection agency authorized to issue regulations and could result in increased privacy and information security enforcement.
In addition, a federal privacy bill, called the American Data Privacy and Protection Act was recently published. The new state privacy laws and proposed federal law will impose additional data protection obligations on covered businesses, including additional consumer rights, limitations on data uses, new audit requirements for higher risk data, and opt outs for certain uses of sensitive data.
Worldwide travel restrictions have been imposed by many countries, including air travel and transport, that have caused and are likely to continue to cause delays in shipment of our products as well as increased logistics costs and will restrict our ability to attract, develop, integrate and retain highly skilled employees with appropriate qualifications from other countries.
Worldwide travel restrictions have been imposed by many countries, including air travel and transport, that have caused and are likely to continue to cause delays in shipment of our products as well as increased logistics costs. 19 T a b le of Contents We expect that net revenue from customers outside North America will continue to account for a significant portion of our total net revenue.
Food and Drug Administration, which has extensive and lengthy approval processes. Durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years.
Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales. For example, durability testing by the automobile industry of our special effects pigments used with automotive paints can take up to three years.
In some cases, we rely upon third-party hosting and support services to meet these needs.
In some cases, we rely upon third-party hosting and support services to meet these needs. The internet has experienced an increase in cyber threats in the form of phishing emails, malware attachments and malicious websites.
We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for the foreseeable future. Any failure by us to continue capturing a significant share of these customers could materially harm our business.
We may experience increased pressure on our pricing and contract terms due to our reliance on a limited number of customers for a significant portion of our sales. We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues for the foreseeable future.
Taken together, these factors limit our ability to predict future profitability levels and to achieve our long-term profitability objectives. If we fail to achieve profitability expectations, the price of our debt and equity securities, as well as our business and financial condition, may be materially adversely impacted.
Taken together, these factors limit our ability to predict future profitability levels and to achieve our long-term profitability objectives.
In fiscal 2020, we entered into a $300 million secured credit facility to strengthen our liquidity position but have not drawn on this facility to date. If there is a long-term economic downturn or a prolonged recession as a result of the pandemic, we could face additional liquidity needs and challenges.
If there is a long-term economic downturn or a prolonged recession as a result of the pandemic, we could face additional liquidity needs and challenges. There can be no assurance that we will be able to obtain financing on favorable terms or at all.
The commercialization of certain of the products we design, manufacture and distribute through our OSP segment may be more costly due to required government approval and industry acceptance processes. Development of applications for our anti-counterfeiting and special effects pigments may require significant testing that could delay our sales. For example, certain uses in cosmetics may be regulated by the U.S.
Legal, Regulatory and Compliance Risks Certain of our products are subject to governmental and industry regulations, certifications and approvals. The commercialization of certain of the products we design, manufacture and distribute through our OSP segment may be more costly due to required government approval and industry acceptance processes.
If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed. Our intellectual property rights may not be adequate to protect our products or product roadmaps.
No assurances can be given that our efforts to reduce the risk of such attacks will be successful. If we have insufficient proprietary rights or if we fail to protect those we have, our business would be materially harmed.
If any of these events occur, we may not derive some or all of the expected benefits from our NOLs and tax credit carryforwards. General Risks Failure to maintain effective internal controls may adversely affect our stock price. Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud.
If any of these events occur, we may not derive some or all of the expected benefits from our NOLs and tax credit carryforwards. General Risks Certain provisions in our charter and under Delaware laws could hinder a takeover attempt.
UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Not applicable. ITEM 3. LEGAL PROCEEDINGS The information set forth under the heading “Legal Proceedings” in Note 18. Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of this Report is incorporated herein by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 29 Table of Contents PART II
Commitments and Contingencies in the Notes to Consolidated Financial Statements in Item 8 of this Report is incorporated herein by reference.
The majority of our global workforce is working from home, and we have canceled participation in trade shows and marketing events and restricted business travel, resulting in the limitation of normal sales and business development activity.
As we transition to a hybrid work model, we have resumed the majority of our normal business operations with certain continued limitations on business travel, participation in trade shows, marketing activities, sales and development activities.
Even after shelter-in-place restrictions have been lifted by governmental authorities, there could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts. Further, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets in many countries.
There could be additional waves or spikes in infection, again causing widespread social, economic and operational impacts. We intend to comply with governmental vaccine and/or quarantine mandates.
Unfavorable, uncertain or unexpected conditions in the transition to 5G may cause fluctuations in our rate of revenue growth or financial results. Markets for 5G infrastructure may not develop in the manner or in the time periods we anticipate.
Accordingly, these markets may not develop in the manner or in the time periods we anticipate and our estimated market opportunities may prove to be materially inaccurate.
Removed
ITEM 1A. RISK FACTORS COVID-19 Risks The effects of the COVID-19 pandemic have significantly affected how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operations and overall financial performance remains uncertain.
Added
In addition, we have experienced and may continue to experience shipping and logistics challenges and higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement costs, due to inflationary pressure, among other factors. NSE has experienced some impact to customer demand.
Removed
Both NE and SE net revenue declined in the second half of fiscal 2020.
Added
Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.
Removed
NE revenue declined as the COVID-19 pandemic resulted in certain customer operation and logistic shutdowns that led to shipment or acceptance delays and a demand slowdown in Field Instruments with orders pushed out into future periods, while SE revenue declined as customers were unable to provide on-site verification and acceptance due to facility closures and other restrictions.
Added
Such mandates, could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner. Some laws and directives may also hinder our ability to move certain products across borders.
Removed
Worldwide distribution by central governments of the vaccines commenced in late 2020. There have been logistical and operational challenges with the rollout and global demand for the vaccine has far exceeded supply. It will take some time for the global population to receive vaccines, allowing for widespread immunity to develop.
Added
Economic conditions can also influence order patterns. These factors could negatively impact our consolidated results of operations and cash flow. Further, the COVID-19 pandemic may continue to adversely affect the economies and financial markets in many countries. In December 2021, we entered into a $300 million asset-based secured credit facility.
Removed
At the same time, new and potentially more contagious variants of the virus are developing in several countries and regions in which we operate. We operate a shared services center in Pune, India that provides important finance and IT support services.
Added
We refer you to “Management’s Discussion and Analysis of Financial Position and Results of Operations” under Item 7 of this Annual Report on Form 10-K for a more detailed discussion of the actual operational and financial impacts that we have experienced to date. 14 T a b le of Contents Risks Related to Our Business Strategy and Industry Our future profitability is not assured.
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The recent substantial increase of reported COVID-19 transmission rates in that country due to the emergence of a more virulent variant of the virus has led to a significant spike in illness and death rates. Hospitals and medical facilities are overwhelmed and there is a shortage of oxygen and other medical supplies.
Added
These factors have caused considerable strain on our execution capabilities and customer relations.
Removed
If the situation in India does not improve, our operations and employees there could be negatively impacted.

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Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

4 edited+2 added−1 removed0 unchanged
Biggest changeWe have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. During fiscal 2021, we repurchased and retired shares of our common stock pursuant to the stock repurchase program authorized by the Board of Directors. Refer to “Note 15. Stockholders' Equity” of Item 8 for more details.
Biggest changeWe have not paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future.
The following graph and table set forth the total cumulative return, assuming reinvestment of dividends, on an investment of $100 in June 2016 and ending June 2021 in: (i) our Common Stock, (ii) the S&P 500 Index, (iii) the Nasdaq Stock Market (U.S.) Index, and (iv) the Nasdaq Telecommunications Index.
The following graph and table set forth the total cumulative return, assuming reinvestment of dividends, on an investment of $100 in June 2017 and ending June 2022 in: (i) our Common Stock, (ii) the S&P 500 Index, (iii) the Nasdaq Stock Market (U.S.) Index, and (iv) the Nasdaq Telecommunications Index.
STOCK PERFORMANCE GRAPH The information contained in the following graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
Stockholders' Equity” of Item 8 for more details. 29 T a b le of Contents STOCK PERFORMANCE GRAPH The information contained in the following graph shall not be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference in such filing.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq Global Select Market under the symbol (VIAV). The closing price on July 31, 2021, was $16.69. As of July 31, 2021, we had 2,072 holders of record of our common stock.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq Global Select Market under the symbol (VIAV). As of July 30, 2022, we had 1,942 holders of record of our common stock.
Removed
Historical stock price performance is not necessarily indicative of future stock price performance. *$100 invested on 6/30/16 in stock or index. 30 Table of Contents 6/2016 6/2017 6/2018 6/2019 6/2020 6/2021 VIAVI $ 100.00 $ 158.82 $ 154.45 $ 200.45 $ 188.54 $ 263.50 S&P 500 $ 100.00 $ 115.46 $ 129.52 $ 140.16 $ 143.37 $ 207.37 Nasdaq Composite $ 100.00 $ 126.80 $ 155.09 $ 165.33 $ 201.48 $ 302.30 Nasdaq Telecommunications $ 100.00 $ 113.80 $ 134.59 $ 158.43 $ 161.18 $ 205.28 31 Table of Contents
Added
The following table provides stock repurchase activity during the three months ended July 2, 2022 (in millions, except per share amounts): Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Dollar Value of Shares that May Still Be Purchased Under the Plans or Programs (1) Period April 3 - April 30, 2022 0.7 $14.96 0.7 $ 86.0 May 1- May 28, 2022 0.9 $14.37 0.9 $ 73.7 May 29 - July 2, 2022 0.5 $13.81 0.5 $ 67.3 Total 2.1 2.1 (1) Share repurchases made under our 2019 Repurchase Plan for up to $200 million of our common stock, which was announced September 12, 2019 and expires September 30, 2022.
Added
Historical stock price performance is not necessarily indicative of future stock price performance. *$100 invested on 6/30/17 in stock or index. 6/2017 6/2018 6/2019 6/2020 6/2021 6/2022 VIAVI $ 100.00 $ 97.25 $ 126.21 $ 118.71 $ 165.91 $ 124.31 S&P 500 $ 100.00 $ 114.37 $ 126.29 $ 131.74 $ 193.63 $ 172.67 Nasdaq Composite $ 100.00 $ 123.60 $ 133.22 $ 164.02 $ 247.91 $ 189.76 Nasdaq Telecommunications $ 100.00 $ 118.27 $ 139.22 $ 141.63 $ 180.39 $ 131.62

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

59 edited+43 added−93 removed16 unchanged
Biggest changeThe following table summarizes selected Consolidated Statements of Operations items as a percentage of net revenue: Years Ended July 3, 2021 June 27, 2020 June 29, 2019 Segment net revenue: Network Enablement 62.3 % 65.7 % 65.3 % Service Enablement 7.6 9.0 9.1 Optical Security and Performance 30.1 25.3 25.6 Net revenue 100.0 100.0 100.0 Cost of revenues 37.6 38.6 39.4 Amortization of acquired technologies 2.8 2.9 3.0 Gross profit 59.6 58.5 57.6 Operating expenses: Research and development 16.9 17.0 16.5 Selling, general and administrative 28.2 27.7 30.4 Amortization of other intangibles 2.8 3.1 3.4 Restructuring and related (benefits) charges (0.1) 0.3 1.4 Total operating expenses 47.8 48.1 51.7 Income from operations 11.8 10.4 5.9 Interest income and other income, net 0.3 0.8 0.6 Interest expense (3.0) (2.9) (3.0) Income from continuing operations before income taxes 9.1 8.3 3.5 Provision for income taxes 5.3 5.8 2.8 Income from continuing operations, net of taxes 3.8 2.5 0.7 (Loss) income from discontinued operations, net of taxes — — (0.2) Net income 3.8 % 2.5 % 0.5 % 39 Table of Contents Financial Data for Fiscal 2021, 2020 and 2019 The following table summarizes selected Consolidated Statement of Operations items ( in millions, except for percentages ): 2021 2020 Change Percent Change 2020 2019 Change Percent Change Segment net revenue: NE $746.6 $746.7 $(0.1) —% $746.7 $737.8 $8.9 1.2% SE 91.3 102.7 (11.4) (11.1)% 102.7 103.4 (0.7) (0.7)% OSP 361.0 286.9 74.1 25.8% 286.9 289.1 (2.2) (0.8)% Net revenue $1,198.9 $1,136.3 $62.6 5.5% $1,136.3 $1,130.3 $6.0 0.5% Amortization of acquired technologies $33.2 $32.7 $0.5 1.5% $32.7 $34.4 $(1.7) (4.9)% Percentage of net revenue 2.8% 2.9% 2.9% 3.0% Gross profit $714.4 $665.3 $49.1 7.4% $665.3 $651.4 $13.9 2.1% Gross margin 59.6% 58.5% 58.5% 57.6% Amortization of intangibles $33.3 $35.1 $(1.8) (5.1)% $35.1 $38.1 $(3.0) (7.9)% Percentage of net revenue 2.8% 3.1% 3.1% 3.4% Research and development $203.0 $193.6 $9.4 4.9% $193.6 $187.0 $6.6 3.5% Percentage of net revenue 16.9% 17.0% 17.0% 16.5% Selling, general and administrative $337.5 $315.0 $22.5 7.1% $315.0 $343.5 $(28.5) (8.3)% Percentage of net revenue 28.2% 27.7% 27.7% 30.4% Restructuring and related (benefits) charges $(1.6) $3.5 $(5.1) (145.7)% $3.5 $15.4 $(11.9) (77.3)% Percentage of net revenue (0.1)% 0.3% 0.3% 1.4% Interest and other income, net $3.3 $9.6 $(6.3) (65.6)% $9.6 $6.2 $3.4 54.8% Percentage of net revenue 0.3% 0.8% 0.8% 0.6% Interest expense $(36.1) $(33.7) $(2.4) 7.1% $(33.7) $(34.3) $0.6 (1.7)% Percentage of net revenue (3.0)% (3.0)% (3.0)% (3.0)% Provision for income taxes $63.3 $65.3 $(2.0) (3.1)% $65.3 $31.5 $33.8 107.3% Percentage of net revenue 5.3% 5.8% 5.8% 2.8% 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.
Biggest changeThe following table summarizes selected Consolidated Statements of Operations items as a percentage of net revenue: Years Ended July 2, 2022 July 3, 2021 June 27, 2020 Segment net revenue: Network Enablement 65.4 % 62.3 % 65.7 % Service Enablement 8.0 7.6 9.0 Optical Security and Performance 26.6 30.1 25.3 Net revenue 100.0 100.0 100.0 Cost of revenues 37.9 37.6 38.6 Amortization of acquired technologies 2.3 2.8 2.9 Gross profit 59.8 59.6 58.5 Operating expenses: Research and development 16.5 16.9 17.0 Selling, general and administrative 28.3 28.2 27.7 Amortization of other intangibles 0.7 2.8 3.1 Restructuring and related (benefits) charges — (0.1) 0.3 Total operating expenses 45.5 47.8 48.1 Income from operations 14.3 11.8 10.4 Loss on convertible note settlement (7.9) — — Interest and other (loss) income, net 0.4 0.3 0.9 Interest expense (1.8) (1.2) (1.2) Income before income taxes 5.0 10.9 10.1 Provision for income taxes 3.8 5.3 5.8 Net income 1.2 % 5.6 % 4.3 % 35 T a b le of Contents Financial Data for Fiscal 2022, 2021 and 2020 The following table summarizes selected Consolidated Statement of Operations items ( in millions, except for percentages ): 2022 2021 Change Percent Change 2021 2020 Change Percent Change Segment net revenue: NE $845.8 $746.6 $99.2 13.3% $746.6 $746.7 $(0.1) —% SE 103.3 91.3 12.0 13.1% 91.3 102.7 (11.4) (11.1)% OSP 343.3 361.0 (17.7) (4.9)% 361.0 286.9 74.1 25.8% Net revenue $1,292.4 $1,198.9 $93.5 7.8% $1,198.9 $1,136.3 $62.6 5.5% Amortization of acquired technologies $30.0 $33.2 $(3.2) (9.6)% $33.2 $32.7 $0.5 1.5% Percentage of net revenue 2.3 % 2.8% 2.8% 2.9% Gross profit $773.5 $714.4 $59.1 8.3% $714.4 $665.3 $49.1 7.4% Gross margin 59.8% 59.6% 59.6% 58.5% Amortization of intangibles $9.7 $33.3 $(23.6) (70.9)% $33.3 $35.1 $(1.8) (5.1)% Percentage of net revenue 0.7% 2.8% 2.8% 3.1% Research and development $213.2 $203.0 $10.2 5.0% $203.0 $193.6 $9.4 4.9% Percentage of net revenue 16.5% 16.9% 16.9% 17.0% Selling, general and administrative $365.7 $337.5 $28.2 8.4% $337.5 $315.0 $22.5 7.1% Percentage of net revenue 28.3% 28.2% 28.2% 27.7% Restructuring and related (benefits) charges $(0.1) $(1.6) $1.5 (93.8)% $(1.6) $3.5 $(5.1) (145.7)% Percentage of net revenue —% (0.1)% (0.1)% 0.3% Loss on convertible note exchange $(101.8) $— $(101.8) 100.0% $— $— $— —% Percentage of net revenue (7.9)% —% —% —% Interest and other income, net $5.2 $3.3 $1.9 57.6% $3.3 $9.6 $(6.3) (65.6)% Percentage of net revenue 0.4% 0.3% 0.3% 0.8% Interest expense $(23.3) $(14.7) $(8.6) 58.5% $(14.7) $(13.4) $(1.3) 9.7% Percentage of net revenue (1.8)% (1.2)% (1.2)% (1.2)% Provision for income taxes $49.6 $63.3 $(13.7) (21.6)% $63.3 $65.3 $(2.0) (3.1)% Percentage of net revenue 3.8% 5.3% 5.3% 5.8% 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.
RESULTS OF OPERATIONS The results of operations for the current period are not necessarily indicative of results to be expected for future periods.
The results of operations for the current period are not necessarily indicative of results to be expected for future periods.
Critical Accounting Policies and 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.
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.
During the twelve months ended July 3, 2021, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts that are with third-party financial institutions.
During the twelve months ended July 2, 2022, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets. In addition, we maintain cash balances in operating accounts that are with third-party financial institutions.
If currency exchange rates had been constant in fiscal 2021 and 2020, our consolidated operating expenses in “constant dollars” would have decreased by approximately $9.8 million, or 0.8% of net revenue. 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 2022 and 2021, our consolidated operating expenses in “constant dollars” would have increased by approximately $4.8 million, or 0.4% of net revenue. The Results of Operations are presented in accordance with U.S. GAAP and not using constant dollars.
Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity. As of July 3, 2021, U.S. subsidiaries owned approximately 47.4% of our cash and cash equivalents, short-term investments and restricted cash.
Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity. As of July 2, 2022, U.S. subsidiaries owned approximately 40.3% of our cash and cash equivalents, short-term investments and restricted cash.
As a percentage of net revenue R&D remained relatively flat during fiscal 2021 when compared to fiscal 2020. 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.
As a percentage of net revenue, R&D slightly decreased during fiscal 2022 when compared to fiscal 2021. 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.
We expect these factors to continue to result in variability of our gross margin. Research and Development R&D expense increased by $9.4 million, or 4.9%, during fiscal 2021 compared to fiscal 2020. This increase was primarily driven by targeted investments to support increased demand in our growth products.
We expect these factors to continue to result in variability of our gross margin. Research and Development R&D expense increased $10.2 million, or 5.0%, during fiscal 2022 compared to fiscal 2021. This increase was primarily driven by targeted investments to support increased demand in our growth products.
Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business. Fiscal 2021 and 2020 Net revenue increased by $62.6 million, or 5.5%, during fiscal 2021 when compared to fiscal 2020.
Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business. Fiscal 2022 and 2021 Net revenue increased $93.5 million, or 7.8%, during fiscal 2022 when compared to fiscal 2021.
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 many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions.
The Company recorded foreign tax expense of $13.2 million related to this transaction. 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 many of our jurisdictions, it is more likely than not that our net deferred tax assets will not be realized in those jurisdictions.
During fiscal 2021, we (amounts represented as £ and $ denote GBP and USD, respectively) contributed £1.5 million or approximately $2.0 million, while in fiscal 2020, we contributed £0.5 million or approximately $0.6 million to its U.K. pension plan.
In addition, we expect to contribute approximately $1.2 million to the U.K. plan during fiscal 2023. During fiscal 2022, we (amounts represented as £ and $ denote GBP and USD, respectively) contributed £1.0 million or approximately $1.3 million, while in fiscal 2021, we contributed £1.5 million or approximately $2.0 million to its U.K. pension plan.
Restructuring and Related Charges From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our businesses in response to market conditions. During fiscal 2021, we recorded a net restructuring benefit of $1.6 million.
Restructuring and Related Charges From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our businesses in response to market conditions.
Cash provided by operating activities was $243.3 million, consisted of net income of $46.1 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $173.5 million, offset by changes in operating assets and liabilities that provided $23.7 million.
Cash provided by operating activities was $178.1 million, consisted of net income of $15.5 million adjusted for non-cash or non-operating charges (e.g., depreciation, amortization of intangibles, stock-based compensation, amortization of debt issuance cost, loss on convertible note settlement and discount and net change in fair value of contingent liabilities), including changes in deferred tax balances which totaled $226.1 million, offset by changes in operating assets and liabilities that used $63.5 million.
VIAVI is also a leader in management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, aerospace, automotive and medical applications. To serve our markets, during fiscal 2021 we operated the following business segments: • Network Enablement (NE); • Service Enablement (SE); and • Optical Security and Performance Products (OSP).
VIAVI is also a leader in light management solutions for the anti-counterfeiting, consumer electronics, industrial, government, and automotive markets. To serve our markets, we operate in the following business segments: • Network Enablement (NE); • Service Enablement (SE); and • Optical Security and Performance Products (OSP).
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 July 3, 2021 June 27, 2020 June 29, 2019 Americas: United States $ 330.0 27.5 % $ 341.6 30.1 % $ 342.1 30.3 % Other Americas 85.6 7.2 % 73.2 6.4 % 84.2 7.4 % Total Americas $ 415.6 34.7 % $ 414.8 36.5 % $ 426.3 37.7 % Asia-Pacific: Greater China $ 277.0 23.1 % $ 245.7 21.6 % $ 216.6 19.1 % Other Asia-Pacific 133.5 11.1 % 122.5 10.8 % 155.6 13.8 % Total Asia-Pacific $ 410.5 34.2 % $ 368.2 32.4 % $ 372.2 32.9 % EMEA: Switzerland $ 76.6 6.4 % $ 64.6 5.7 % $ 97.0 8.6 % Other EMEA 296.2 24.7 % 288.7 25.4 % 234.8 20.8 % Total EMEA $ 372.8 31.1 % $ 353.3 31.1 % $ 331.8 29.4 % Total net revenue $ 1,198.9 100.0 % $ 1,136.3 100.0 % $ 1,130.3 100.0 % Net revenue from customers outside the Americas for the fiscal year ended 2021, represented 65.3% of net revenue, an increase of 1.8% year-over-year.
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 July 2, 2022 July 3, 2021 June 27, 2020 Americas: United States $ 388.9 30.1 % $ 330.0 27.5 % $ 341.6 30.1 % Other Americas 96.8 7.5 % 85.6 7.2 % 73.2 6.4 % Total Americas $ 485.7 37.6 % $ 415.6 34.7 % $ 414.8 36.5 % Asia-Pacific: Greater China $ 256.4 19.8 % $ 277.0 23.1 % $ 245.7 21.6 % Other Asia-Pacific 205.3 15.9 % 133.5 11.1 % 122.5 10.8 % Total Asia-Pacific $ 461.7 35.7 % $ 410.5 34.2 % $ 368.2 32.4 % EMEA: Switzerland $ 62.7 4.9 % $ 76.6 6.4 % $ 64.6 5.7 % Other EMEA 282.3 21.8 % 296.2 24.7 % 288.7 25.4 % Total EMEA $ 345.0 26.7 % $ 372.8 31.1 % $ 353.3 31.1 % Total net revenue $ 1,292.4 100.0 % $ 1,198.9 100.0 % $ 1,136.3 100.0 % Net revenue from customers outside the Americas for fiscal 2022, represented 62.4% of net revenue, a decrease of 2.9% year-over-year.
Amortization of Acquired Technologies and Intangibles Amortization of acquired technologies and intangibles for fiscal 2021 decreased $1.3 million, or 1.9%, to $66.5 million from $67.8 million in fiscal 2020. This decrease is primarily due to the runoff of intangible assets becoming fully amortized in fiscal 2021.
Amortization of Acquired Technologies and Intangibles Amortization of acquired technologies and intangibles for fiscal 2022 decreased $26.8 million, or 40.3%, to $39.7 million from $66.5 million in fiscal 2021. This decrease is primarily due to intangible assets becoming fully amortized.
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; • Impact of the COVID-19 pandemic on our financial condition; • 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 market which impact the liquidity and valuation of our investment portfolios; • Volatility in foreign exchange market which impacts our financial results; • Possible investments or acquisitions of complementary businesses, products or technologies; • Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes and/or 2024 Notes prior to their maturity or of our common stock; • 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.
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; • Impact of the COVID-19 pandemic on our financial condition; • 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 market 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 market which impacts our financial results; • Possible investments or acquisitions of complementary businesses, products or technologies; • While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt; • Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes and/or 2029 Notes prior to their maturity or of our common stock; • 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. 41 T a b le of Contents Cash and Cash Equivalents and Short Term Investments Our cash and cash equivalents consist mainly of investments in institutional money market funds, short-term deposits held at major global financial institutions, and similar short duration instruments.
GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses. 40 Table of Contents Fiscal 2021 and 2020 If currency exchange rates had been constant in fiscal 2021 and 2020, our consolidated net revenue in “constant dollars” would have decreased by approximately $15.5 million, or 1.3% of net revenue, which primarily impacted our NE and SE segments.
GAAP measures, may facilitate a better understanding of changes in net revenue and operating expenses. 36 T a b le of Contents Fiscal 2022 and 2021 If currency exchange rates had been constant in fiscal 2022 and 2021, our consolidated net revenue in “constant dollars” would have increased by approximately $10.8 million, or 0.8% of net revenue, which primarily impacted our NE and SE segments.
The increase was partially offset by gross margin reduction in our SE segment, further discussed in the Operating Segment Information section below. 42 Table of Contents 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.
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 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 $9.0 million based upon data as of July 3, 2021. 49 Table of Contents
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 $5.0 million based upon data as of July 2, 2022. 44 T a b le of Contents
This increase is primarily due to revenue growth in NE from EMEA and OSP from Asia-Pacific. 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.
This decrease is primarily due to lower revenues from EMEA and strong NSE North America revenues. 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.
Of the $187.6 million of purchase obligations as of July 3, 2021, $90.8 million are related to inventory and the other $96.8 million are non-inventory items. As of July 3, 2021, our other non-current liabilities primarily relate to asset retirement obligations, pension and financing obligations which are presented in various lines in the preceding table.
Of the $188.9 million of purchase obligations as of July 2, 2022, $76.2 million are related to inventory and the other $112.7 million are non-inventory items. As of July 2, 2022, 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.
This increase was driven by strength in our OSP segment, partially offset by a decrease in our SE segment. Product revenues increase by $46.2 million, or 4.6%, during fiscal 2021 when compared to fiscal 2020. During the period we realized strength from our OSP segment, which was offset by declines in our NE and SE segment as further discussed below.
This increase was driven by strength in our NE and SE segments, partially offset by a decrease in our OSP segment. Product revenues increased $84.1 million, or 8.0%, during fiscal 2022 when compared to fiscal 2021. During the period we realized strength from our NE and SE segments, which was offset by a decline in our OSP segment.
Revenue by Region We operate in three geographic regions, including 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.
We cannot predict when or to what extent these uncertainties will be resolved. 37 T a b le of Contents Revenue by Region We operate in three geographic regions, including 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.
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 $5.1 million and $8.0 million per annum. In addition, we expect to contribute approximately $2.4 million to the U.K. plan during fiscal 2022.
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 $5.1 million and $8.0 million per annum.
Service revenues increased $16.4 million, or 12.5%, during fiscal 2021 when compared to fiscal 2020. This increase was primarily due to increased support revenue from our NE segment, primarily driven by increased support revenues from our Wireless and Legacy Assurance products offset by declines in our SE segment further discussed below.
Service revenues increased $9.4 million, or 6.4%, during fiscal 2022 when compared to fiscal 2021. This increase was primarily due to increased support revenue from our NE segments, offset by declines in our SE and OSP segments.
Gross Margin Gross margin in fiscal 2021 increased by 1.1% to 59.6% from 58.5% in fiscal 2020. This increase was primarily driven by higher revenue volume, favorable product mix and improved factory utilization within our OSP segment.
Gross Margin Gross margin in fiscal 2022 improved by 0.2% to 59.8% from 59.6% in fiscal 2021. This increase was primarily driven by higher revenue volume and favorable product mix.
(VIAVI, also referred to as the Company, we, our, and us) is a global provider of network test, monitoring and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to Command the network .
Our actual results could differ materially from those discussed in the forward-looking statements. OVERVIEW We are a global provider of network test, monitoring, and assurance solutions for communications service providers (CSPs), enterprises, network equipment manufacturers (NEMs), original equipment manufacturers (OEMs), government and avionics. We help these customers harness the power of instruments, automation, intelligence, and virtualization.
Provision for Income Tax We recorded an income tax expense of $63.3 million for fiscal 2021.
Provision for Income Tax We recorded an income tax provision of $49.6 million for fiscal 2022.
We believe that adequate amounts have been provided for any adjustments that may result from these examinations. 44 Table of Contents Operating Segment Information ( in millions ): 2021 2020 Change Percentage Change 2020 2019 Change Percentage Change NE Net revenue $746.6 $746.7 $(0.1) —% $746.7 $737.8 $8.9 1.2% Gross profit 474.2 482.4 (8.2) (1.7)% 482.4 473.3 9.1 1.9% Gross margin 63.5% 64.6% 64.6% 64.2% SE Net revenue $91.3 $102.7 $(11.4) (11.1)% $102.7 $103.4 $(0.7) (0.7)% Gross profit 59.9 68.8 (8.9) (12.9)% 68.8 71.0 (2.2) (3.1)% Gross margin 65.6% 67.0% 67.0% 68.7% NSE Net revenue $837.9 $849.4 $(11.5) (1.4)% $849.4 $841.2 $8.2 1.0% Operating income 92.2 108.8 (16.6) (15.3)% 108.8 99.6 9.2 9.2% Operating margin 11.0% 12.8% 12.8% 11.8% OSP Net revenue $361.0 $286.9 $74.1 25.8% $286.9 $289.1 $(2.2) (0.8)% Gross profit 218.1 153.0 65.1 42.5% 153.0 145.8 7.2 4.9% Gross margin 60.4% 53.3% 53.3% 50.4% Operating income 161.3 102.1 59.2 58.0% 102.1 98.0 4.1 4.2% Operating margin 44.7% 35.6% 35.6% 33.9% Network Enablement NE gross margin decreased 1.1% during fiscal 2021 to 63.5% from 64.6% in fiscal 2020.
Operating Segment Information ( in millions ): 2022 2021 Change Percentage Change 2021 2020 Change Percentage Change NE Net revenue $845.8 $746.6 $99.2 13.3% $746.6 $746.7 $(0.1) —% Gross profit 543.6 474.2 69.4 14.6% 474.2 482.4 (8.2) (1.7)% Gross margin 64.3% 63.5% 63.5% 64.6% SE Net revenue $103.3 $91.3 $12.0 13.1% $91.3 $102.7 $(11.4) (11.1)% Gross profit 71.5 59.9 11.6 19.4% 59.9 68.8 (8.9) (12.9)% Gross margin 69.2% 65.6% 65.6% 67.0% NSE Net revenue $949.1 $837.9 $111.2 13.3% $837.9 $849.4 $(11.5) (1.4)% Operating income 147.8 92.2 55.6 60.3% 92.2 108.8 (16.6) (15.3)% Operating margin 15.6% 11.0% 11.0% 12.8% OSP Net revenue $343.3 $361.0 $(17.7) (4.9)% $361.0 $286.9 $74.1 25.8% Gross profit 193.6 218.1 (24.5) (11.2)% 218.1 153.0 65.1 42.5% Gross margin 56.4% 60.4% 60.4% 53.3% Operating income 139.0 161.3 (22.3) (13.8)% 161.3 102.1 59.2 58.0% Operating margin 40.5% 44.7% 44.7% 35.6% Network Enablement NE gross margin increased by 0.8% during fiscal 2022 to 64.3% from 63.5% in fiscal 2021.
Such omitted discussion can be found under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 27, 2020, filed with the SEC on August 24, 2020.
Discussions of the year to-year comparisons between the fiscal year ended July 3, 2021 and June 27, 2020, 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 3, 2021 .
This was partially offset by $6.6 million in proceeds from the issuance of common stock under our employee stock purchase plan. 47 Table of Contents Contractual Obligations The following summarizes our contractual obligations at July 3, 2021, 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 $ 3.7 $ 1.3 $ 0.6 $ 0.4 $ 1.4 Debt: 2023 1.75% senior convertible notes 225.0 — 225.0 — — 2024 1.00% senior convertible notes 460.0 460.0 — — Estimated interest payments 23.2 9.5 13.7 — — Purchase obligations (1) 187.6 178.8 7.9 0.9 — Operating lease obligations (2) 50.3 11.7 16.2 8.7 13.7 Non-cancelable leaseback obligations (1) 28.8 2.9 4.8 4.9 16.2 Royalty payment 2.8 1.3 0.8 0.7 — Pension and post-retirement benefit payments (3) 104.3 9.2 13.8 12.6 68.7 Total $ 1,085.7 $ 674.7 $ 282.8 $ 28.2 $ 100.0 (1) Refer to “Note 18.
Material Contractual and Material Cash Obligations The following summarizes our contractual obligations at July 2, 2022, 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 $ 0.5 $ 1.1 $ 0.9 $ 1.7 Debt: 2029 3.75% Senior Notes 400.0 — — — 400.0 2023 1.75% Senior Convertible Notes 68.1 68.1 — — — 2024 1.00% Senior Convertible Notes 223.9 — 223.9 — — Estimated interest payments 120.8 19.1 33.0 31.2 37.5 Purchase obligations (1) 188.9 177.7 10.3 0.9 — Operating lease obligations (2) 51.2 10.2 17.6 10.6 12.8 Non-cancelable leaseback obligations (1) 29.0 3.0 6.1 6.3 13.6 Royalty payment 2.8 1.7 0.8 0.3 — Pension and post-retirement benefit payments (3) 66.2 8.0 10.9 10.9 36.4 Total $ 1,155.1 $ 288.3 $ 303.7 $ 61.1 $ 502.0 (1) Refer to “Note 18.
SE net revenue decreased by $11.4 million, or 11.1%, during fiscal 2021 when compared to fiscal 2020. This was primarily driven by decreased volume in our Data Center and Growth Assurance products. OSP net revenue increased by $74.1 million, or 25.8%, during fiscal 2021 when compared to fiscal 2020.
NE net revenue increased $99.2 million, or 13.3% during fiscal 2022 when compared to fiscal 2021, reflecting continued strength in our Wireless and Optical Lab & Production products. SE net revenue increased $12.0 million, or 13.1%, during fiscal 2022 when compared to fiscal 2021. This was primarily driven by increased volume in our Data Center and Growth Assurance products.
Most of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition during fiscal 2010. The U.K. plan is partially funded and the other plans, which were initially established as “pay-as-you-go” plans, are unfunded.
We also are responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition. Most of these plans have been closed to new participants and no additional service costs are being accrued, except for certain plans in Germany assumed in connection with an acquisition during fiscal 2010.
Changes in our operating assets and liabilities related primarily to an increase in accrued payroll and related expenses of $23.1 million due to timing of salary and related payments, a decrease in other current and non-current assets of $14.9 million, an increase in income taxes payable of $18.1, an increase in deferred revenue of $12.3 million, and an increase in accounts payable of $7.0 million driven by timing of purchases and related payments.
Changes in our operating assets and liabilities related primarily to an increase in deferred revenue of $13.2 million, an increase in accrued payroll and related expenses of $3.0 million and an increase in accrued expenses and other current and non-current liabilities of $1.4 million.
We expect our principal growth drivers, 5G Wireless, Fiber and 3D Sensing to continue driving growth and profitability in fiscal 2022. 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.
These contributions allowed us to comply with regulatory funding requirements. 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.
The recent COVID-19 pandemic has caused disruption in global capital markets and over time may impact our ability to obtain credit and/or negotiate acceptable financing terms. As of July 3, 2021, 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.
As of July 2, 2022, 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.
For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations are denominated in foreign currencies.
For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations are denominated in foreign currencies. The strengthening of the U.S. dollar relative to foreign currencies could negatively impact reported revenue. Additionally, we have seen demand for our NE, SE, and OSP products affected by macroeconomic uncertainty.
The Credit Agreement provides for a $300 million senior secured revolving credit facility, which matures on March 1, 2023.
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.
As of July 3, 2021, the ending balance of our restructuring accrual was $0.5 million which is expected to be paid during fiscal 2022. We estimate annualized gross cost savings of approximately $33.7 million excluding any one-time charges as a result of the recent restructuring activities. Refer to “Note 13.
During fiscal 2022, we recorded a net restructuring benefit of $0.1 million and made final remaining payments of $0.4 million, after which the plan was closed. We estimate annualized gross cost savings of approximately $16.8 million excluding any one-time charges as a result of the recent restructuring activities. Refer to “Note 13.
As of July 3, 2021, our pension plans were underfunded by $104.3 million since the Pension Benefit Obligation (PBO) exceeded the fair value of plan assets. Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan. We anticipate future annual outlays related to the German plans will approximate estimated future benefit payments.
The U.K. plan is partially funded and the other plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of July 2, 2022, our pension plans were underfunded by $66.2 million since the Pension Benefit Obligation (PBO) exceeded the fair value of plan assets. Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan.
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. We also are responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition.
Stockholders Equity” under Item 8 of this Annual Report on Form 10-K for more information. 43 T a b le of Contents 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.
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 in this Annual Report on Form 10-K, particularly in “Risk Factors” and “Forward-Looking Statements.” Our Industries and Developments Viavi Solutions Inc.
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.
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.
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.
Debt” under Item 8 of this Annual Report on Form 10-K for more information. Year Ended July 3, 2021 As of July 3, 2021, our combined balance of cash and cash equivalents and restricted cash increased by $161.0 million to $708.4 million from a balance of $547.4 million as of June 27, 2020.
Cash Flows Year Ended July 2, 2022 As of July 2, 2022, our combined balance of cash and cash equivalents and restricted cash decreased by $135.6 million to $572.8 million from a balance of $708.4 million as of July 3, 2021.
This $6.3 million decrease was primarily driven by $2.1 million unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures for fiscal 2021 and a decrease of $4.2 million in interest income due to lower yields on money market funds in which we invested excess cash during fiscal 2021 coupled with cash repatriation from a jurisdiction with relatively high interest rates to a jurisdiction with low interest rates prior to fiscal 2021. 43 Table of Contents Interest Expense Interest expense increased by $2.4 million, or 7.1%, during fiscal 2021 compared to fiscal 2020.
This $1.9 million increase was primarily driven by $1.4 million favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures for fiscal 2022 and an increase of $0.5 million in interest income due to rising interest rates during fiscal 2022.
These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits.
These balances in the U.S. may exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail.
Cash used in financing activities was $58.8 million, primarily resulting from $42.2 million of cash used to repurchase common stock, $17.9 million in withholding tax payment on vesting of restricted stock awards, $2.8 million cash paid to settle assumed debt from an acquisition in fiscal year 2020, $1.2 million of cash used to pay acquisition related to contingent consideration, and $1.3 million payments related to financing obligations, including issuance costs.
Cash used in financing activities was $210.4 million, primarily resulting from $351.6 million paid connection with the repurchase of certain Original Senior Convertible Notes, $235.9 million of cash used to repurchase common stock under our share repurchase program, $14.1 million in withholding tax payment on vesting of restricted stock awards, $10.5 million debt issuance costs paid in the period and $6.1 million in other payments.
While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail. 46 Table of Contents Revolving Credit Facility On May 5, 2020, 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.
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.
Optical Security and Performance Products OSP gross margin increased by 7.1% during fiscal 2021 to 60.4% from 53.3% in fiscal 2020. This increase was primarily due to favorable product mix driven by higher revenue in Anti-Counterfeiting and 3D Sensing products and increased factory utilization. OSP operating margin increased 9.1% during fiscal 2021 to 44.7% from 35.6% in fiscal 2020.
Optical Security and Performance Products OSP gross margin decreased by 4.0% during fiscal 2022 to 56.4% from 60.4% in fiscal 2021. This decrease was primarily due to higher input costs and startup costs in our new Arizona facility. OSP operating margin decreased by 4.2% during fiscal 2022 to 40.5% from 44.7% in fiscal 2021.
(RPC) acquisition in fiscal year 2020, partially offset by continued reduction in net expenses driven by our on-going cost reduction efforts. As a percentage of net revenue, SG&A remained relatively flat at 28.2% in fiscal 2021. We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue.
As a percentage of net revenue, SG&A increased slightly to 28.3% in fiscal 2022 when compared to 2021. 38 T a b le of Contents We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue.
During fiscal 2021, the valuation allowance for deferred tax assets decreased by $109.6 million primarily related to expiration of federal net operating losses, capital losses and federal research credits.
During fiscal 2022, the valuation allowance for deferred tax assets increased by $11.9 million which was primarily due to the increase in capitalization of federal research expenditures in the U.S.
Cash used in investing activities was $48.7 million, primarily related to $52.1 million of cash used for capital expenditures and $0.7 million cash used for acquisitions. This was partially offset by $4.1 million proceeds from sales of assets.
This was partially offset by cash outflows from an increase in inventories of $27.7 million, a decrease in income taxes payable of $18.2 million, an increase in accounts receivable of $18.3 million, an increase in other current and non-current assets of $11.3 million and a decrease in accounts payable of $5.6 million driven by timing of purchases and related payments. 42 T a b le of Contents Cash used in investing activities was $71.0 million, primarily related to $72.5 million of cash used for capital expenditures and $8.3 million cash used for acquisitions.
Restructuring and Related Charges” under Item 8 of this Annual Report on Form 10-K for more information. Interest Income and Other Income, Net Interest income and other income, net was $3.3 million in fiscal 2021 as compared to $9.6 million in fiscal 2020.
Interest and Other Income, Net Interest and other income, net was $5.2 million in fiscal 2022 as compared to $3.3 million in fiscal 2021.
Network and Service Enablement NSE operating margin decreased 1.8% during fiscal 2021 to 11.0% from 12.8% in fiscal 2020. The decrease in operating margin was primarily driven by decreased revenue volumes and product mix in our NE and SE portfolios and higher operating expense from R&D which lead to a decline in our operating margin.
This increase is due to a more favorable product mix. 40 T a b le of Contents Network and Service Enablement NSE operating margin increased by 4.6% during fiscal 2022 to 15.6% from 11.0% in fiscal 2021. The increase in operating margin was primarily driven by gross margin expansion offset by higher sales commissions.
In the fourth quarter of fiscal 2021, we performed the goodwill impairment test in accordance with the authoritative guidance for NE, SE and OSP reporting units, and determined no indicator of impairment. Refer to “Note 9. Goodwill” under Item 8 of this Annual Report on Form 10-K for more information.
In connection with the entry into the senior secured asset-based revolving credit facility noted above, we terminated this facility. Refer to “Note 11. Debt” under Item 8 of this Annual Report on Form 10-K for more information.
This decrease is due to unfavorable product mix within Field Instruments. Service Enablement SE gross margin decreased 1.4% during fiscal 2021 to 65.6% from 67.0% in fiscal 2020. This decrease was primarily due to unfavorable product mix due to lower revenue volumes in Data Center.
This increase is due to leverage on growth and a more favorable product mix. Service Enablement SE gross margin increased by 3.6% during fiscal 2022 to 69.2% from 65.6% in fiscal 2021.
The expected tax expense derived by applying the federal statutory rate to our income before income taxes for fiscal 2021 differed from the income tax expense recorded primarily as a result of domestic and foreign losses that were not realized due to valuation allowances and to a $19.1 million charge related to the state tax impact of the internal intellectual property restructuring transactions.
The expected tax provision derived by applying the federal statutory rate to our income before income taxes for fiscal 2022 differed from the income tax expense recorded primarily due to valuation allowances in addition to the foreign tax impact of the internal intellectual property restructuring transaction and withholding taxes offset by a tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction. 39 T a b le of Contents On July 2, 2022, the Company completed a planned internal transaction moving certain of VIAVI’s intellectual properties out of a foreign jurisdiction where tax rates are scheduled to increase to the U.S. entity established in fiscal 2021 to own and manage VIAVI’s other intellectual properties.
Selling, General and Administrative SG&A expense increased by $22.5 million, or 7.1%, in fiscal 2021 compared to fiscal 2020. This increase was primarily due to a one-time decrease in the fair value of the earn-out liability of $29.6 million related to the RPC Photonics, Inc.
Selling, General and Administrative SG&A expense increased $28.2 million, or 8.4%, in fiscal 2022 compared to fiscal 2021. This increase was driven by higher sales commissions, increased travel and variable pay.
Removed
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.
Added
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 July 2, 2022.
Removed
Refer to “Item 1 Business” for information related to our business segments. COVID-19 Pandemic Update The COVID-19 pandemic has prompted authorities worldwide to implement measures to contain the virus, which include and are not limited to, travel bans and restrictions, quarantines, shelter-in-place orders, temporary business closures among others.
Added
Unless otherwise noted, all references herein for the years 2022, 2021, and 2020 represent the fiscal years ended July 2, 2022, July 3, 2021, and June 27, 2020, respectively.
Removed
The COVID-19 pandemic and these aforementioned measures, have had and continue to have, a substantial macroeconomic impact on businesses and economies worldwide. These conditions may continue and could result in an adverse impact to our operations. Worldwide distribution by central governments of the vaccines commenced in late 2020.
Added
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 principles affect our financial statements.
Removed
There have been logistical and operational challenges with the rollout and global demand for the vaccine has far exceeded supply. It will take some time for the global population to receive vaccines, allowing for widespread immunity to develop.
Added
During fiscal 2022, we experienced global supply chain disruptions, increased raw material costs, higher shipping-related charges, and inflationary pressures. Nevertheless, our ability to secure critical components, build inventory and meet customer demands has helped enable us to grow revenue and market share.
Removed
At the same time, new and potentially more contagious variants of the virus are developing in several countries and regions in which we operate. Our priority during the COVID-19 pandemic has remained focused on protecting the health and safety of our employees, customers, suppliers, and communities, including implementing early and regular updates to our health and safety policies and procedures.
Added
We saw strong revenue growth in our NE business segment driven by fiber and wireless, as North American service providers upgraded and expanded their networks with fiber optic, and wireless demand increased in fiscal 2022.
Removed
We continued to follow the strict COVID-19 pandemic protocols as required by local, state and federal guidelines during the fiscal first half of 2021 and began to relax these restrictions based on government guidelines during the fiscal second half 2021. These COVID-19 pandemic protocols have not thus far had a substantial net impact on our liquidity position.
Added
Our SE business segment also experienced an increase in revenue year over year as we saw strong growth in assurance solutions and data center products, in part due to increased market demand for 5G and growth in network traffic.
Removed
We continue to generate operating cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets.
Added
Revenue from our OSP business segment did decrease, primarily driven by a decrease in demand for our consumer electronics and industrial products. However, any prolonged disruption of manufacturing of our products, commerce and related activity caused by the pandemic or significant decrease in demand for our products could materially and adversely affect our results of business, operations, and financial conditions.
Removed
To date, we have not observed any material or materially adverse indication of impairments under the authoritative guidance, to any of our assets or a significant change to the fair value of assets due to the COVID-19 pandemic. 33 Table of Contents We have experienced and may continue to experience disruption of our facilities, suppliers and contract manufacturers, which has impacted and may continue to negatively impact our sales and operating results.
Added
It may also have the effect of heightening many of the other risks such as those relating to our quarterly revenue and operating results as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with the covenants that apply to our indebtedness.
Removed
In addition, we have experienced and may continue to experience shipping and logistics challenges as many of our customers have also closed their facilities and are operating under similar restrictions. NSE has experienced some impact to customer demand. Customer demand will continue to be challenging to calibrate, due to the nature and timing of the COVID-19 pandemic.
Added
Our financial results and long-term growth model will continue to be driven by revenue growth, non-GAAP operating profit, non-GAAP diluted earnings per share (EPS) and cash flow from operations.
Removed
In addition, we operate a shared services center in Pune, India that provides important finance and IT support services. The recent substantial increase of reported COVID-19 transmission rates in that country due to the emergence of a more virulent variant of the virus has led to a significant spike in illness and death rates.
Added
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. 31 T a b le of Contents We continue to make strategic investments to support our three-year strategic plan highlighted during our September 2019 Analyst Day Event such as: • Continued to invest in R&D to revamp product portfolio and enable the business to leverage secular trends in 5G, Fiber and 3D Sensing. • Enhanced the sales team to continue expanding Total Addressable Market (TAM), gain market share and execute successfully against our competitors. • Successfully completed four acquisitions, consistent with our acquisition strategy.
Removed
If the situation in India does not improve, our operations and employees there could be negatively impacted. We will continue to take the measures described above to ensure the health and safety of our employees and those they come in contact with.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

8 edited+3 added−2 removed7 unchanged
Biggest changeDebt The fair values of our 2023 and 2024 Notes are subject to interest rate and market price risk due to the convertible feature of the Notes and other factors. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise.
Biggest changeGenerally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair value of the 2023 and 2024 Notes may also increase as the market price of our stock rises and decrease as the market price of our stock falls.
As of July 3, 2021, we had forward contracts that were effectively closed but not settled with the counterparties by year end. The fair value of these contracts of $2.6 million and $1.4 million is reflected as prepayments and other current assets and other current liabilities in the Consolidated Balance Sheets as of July 3, 2021, respectively.
As of July 2, 2022, we had forward contracts that were effectively closed but not settled with the counterparties by year end. The fair value of these contracts of $3.8 million and $8.3 million is reflected as prepayments and other current assets and other current liabilities in the Consolidated Balance Sheets as of July 2, 2022, respectively.
During the fourth quarter of fiscal 2021, the closing price of our common stock exceeded 130% of the applicable conversion price of the 2024 Notes, on at least 20 of the last 30 consecutive trading days of the quarter, causing the 2024 Notes to be convertible by their holders for the period of July 1, 2021 to September 30, 2021, resulting in a reclassification of the 2024 Notes to short-term debt.
During the fourth quarter of fiscal 2021, the closing price of the Company’s common stock exceeded 130% of the applicable conversion price of the 2024 Notes on at least 20 of the last 30 consecutive trading days of the calendar quarter, causing the 2024 Notes to be convertible by the holders for the period of July 1, 2021 to September 30, 2021.
The fair value of the Notes may also increase as the market price of our stock rises and decrease as the market price of our stock falls. Changes in interest rates and our stock price affect the fair value of the Notes but does not impact our financial position, cash flows or results of operations.
Changes in interest rates and our stock price in the case of convertible notes affect the fair value of the Notes but does not impact our financial position, cash flows or results of operations.
As of July 3, 2021 and June 27, 2020, the notional amounts of the forward contracts that we held to purchase foreign currencies were $114.0 million and $146.4 million, respectively, and the notional amounts of forward contracts that we held to sell foreign currencies were $27.8 million and $22.0 million, respectively.
As of July 2, 2022 and July 3, 2021, the notional amounts of the forward contracts that we held to purchase foreign currencies were $119.1 million and $114.0 million, respectively, and the notional amounts of forward contracts that we held to sell foreign currencies were $80.5 million and $27.8 million, respectively.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near year end; therefore, the fair value of the contracts is not significant.
The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near year end and had a fair value of $0.1 million which is reflected in other current liabilities in the Consolidated Balance Sheets as of July 2, 2022.
Refer to “Note 11. Debt” under Item 8 of this Annual Report on Form 10-K for more information. 50 Table of Contents
The carrying value of the 2023 Notes was $68.0 million, the carrying value of the 2024 Notes was $222.9 million and the carrying value of the 2029 Notes was $393.6 million. Refer to “Note 11. Debt” under Item 8 of this Annual Report on Form 10-K for more information. 46 T a b le of Contents
We are not aware of, nor do we expect, any conversion requests by holders as the market price of the 2024 Notes exceeds its conversion value. Based on quoted market prices, as of July 3, 2021, the fair value of the 2023 Notes was $300.7 million and the fair value of the 2024 Notes was approximately $646.9 million.
Based on quoted market prices, as of July 2, 2022, the fair value of the 2023 Notes was $73.4 million, the fair value of the 2024 Notes was $250.7 million and the fair value of the 2029 Notes was $337.5 million.
Removed
Settlement of conversion of the 2024 Notes is in cash for the principal amount and, if applicable, cash and/or shares of our common stock for any conversion premium at our election.
Added
As of July 2, 2022, the Company’s short-term investments of $1.4 million were comprised primarily of trading securities related to the deferred compensation plan, of which $0.3 million was invested in debt securities, $1.0 million was invested in equity securities and $0.1 million was invested in money market instruments. 45 T a b le of Contents Debt The fair value of our 2029 Notes is subject to interest rate risk while the fair values of our 2023 and 2024 Notes are subject to interest rate and market price risk due to the convertible feature of the Notes and other factors.
Removed
As a result, we have reclassified the $414.2 million book value of the 2024 Notes to short-term debt and reclassified the difference in the book value and the face value of $45.8 million to temporary equity from permanent equity on the Consolidated Balance Sheets.
Added
As a result, $456.6 million carrying value of the notes was reclassified to short-term debt as of July 3, 2021. The Company received four requests for conversion when the conversion was opened during the first quarter of fiscal 2022. The requests were for trivial amounts.
Added
During fiscal 2022 the closing price of the Company’s stock did not exceed 130% of the applicable conversion price of the 2024 Notes for at least 20 of the last 30 consecutive trading days of any of the calendar quarters. The carrying value of the 2024 Notes was reclassified to long-term debt as of October 2, 2021.

Other VIAV 10-K year-over-year comparisons