VIAVI SOLUTIONS INC. - Quarter Report: 2019 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 28, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from				to

Commission File Number 000-22874

Viavi Solutions Inc.

(Exact name of Registrant as specified in its charter)



Delaware		94-2579683
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6001 America Center Drive, San Jose, California 95002

(Address of principal executive offices including Zip code)

(408) 404-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of the exchange on which registered
Common Stock, par value of $0.001 per share	VIAV	The Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐	Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.									☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of January 25, 2020, the Registrant had 230,252,773 shares of common stock outstanding.

Table of Contents




TABLE OF CONTENTS			Page
PART I - FINANCIAL INFORMATION			2
	Item 1.	Financial Statements (Unaudited)	2
		Consolidated Statements of Operations for the Three and Six Months Ended December 28, 2019 and December 29, 2018	2
		Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended December 28, 2019 and December 29, 2018	3
		Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019	4
		Consolidated Statements of Cash Flows for the Six Months Ended December 28, 2019 and December 29, 2018	5
		Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended December 28, 2019 and December 29, 2018	6
		Notes to Consolidated Financial Statements	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
	Item 3.	Quantitative and Qualitative Disclosure About Market Risks	45
	Item 4.	Controls and Procedures	46

PART II - OTHER INFORMATION			47
	Item 1.	Legal Proceedings	47
	Item 1A.	Risk Factors	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 3.	Defaults Upon Senior Securities	47
	Item 4.	Mine Safety Disclosures	47
	Item 5.	Other Information	47
	Item 6.	Exhibits	48

SIGNATURES			49

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(unaudited)



	Three Months Ended						Six Months Ended
	December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018
Revenues:
Product revenue	$	281.9		$	272.8		$	546.7		$	513.9
Service revenue	31.8			34.1			66.8			61.5
Total net revenue	313.7			306.9			613.5			575.4
Cost of revenues:
Product cost of revenue	103.7			106.0			208.0			203.9
Service cost of revenue	12.1			14.4			24.8			25.2
Amortization of acquired technologies	8.4			8.5			16.8			17.9
Total cost of revenues	124.2			128.9			249.6			247.0
Gross profit	189.5			178.0			363.9			328.4
Operating expenses:
Research and development	50.3			45.9			101.8			88.5
Selling, general and administrative	86.3			88.5			179.5			172.9
Amortization of other intangibles	8.8			10.4			17.5			20.2
Restructuring and related (benefits) charges	(0.9		)	0.3			(0.6		)	15.1
Total operating expenses	144.5			145.1			298.2			296.7
Income from operations	45.0			32.9			65.7			31.7
Interest income and other income, net	1.3			1.5			4.0			3.2
Interest expense	(8.4		)	(8.1		)	(16.7		)	(18.2		)
Income before taxes	37.9			26.3			53.0			16.7
Provision for income taxes	9.9			10.9			18.2			16.6
Income from continuing operations	28.0			15.4			34.8			0.1
Loss from discontinued operations, net of taxes	—			(2.4		)	—			(2.4		)
Net income (loss)	$	28.0		$	13.0		$	34.8		$	(2.3	)

Income (loss) per share - basic:
Continuing operations	$	0.12		$	0.07		$	0.15		$	0.00
Discontinued operations	—			(0.01		)	—			(0.01		)
Net income (loss) per share - basic	$	0.12		$	0.06		$	0.15		$	(0.01	)

Income (loss) per share - diluted:
Continuing operations	$	0.12		$	0.07		$	0.15		$	0.00
Discontinued operations	—			(0.01		)	—			(0.01		)
Net income (loss) per share - diluted	$	0.12		$	0.06		$	0.15		$	(0.01	)

Shares used in per-share calculations:
Basic	230.0			228.3			229.7			227.8
Diluted	238.3			230.4			237.4			230.5

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(unaudited)



	Three Months Ended					Six Months Ended
	December 28, 2019		December 29, 2018			December 28, 2019		December 29, 2018
Net income (loss)	$	28.0	$	13.0		$	34.8	$	(2.3	)
Other comprehensive (loss) income:
Net change in cumulative translation adjustment, net of tax	28.0		(13.0		)	0.6		(26.1		)
Net change in available-for-sale investments, net of tax:
Unrealized holding gain arising during period	—		—			—		0.2
Plus: reclassification adjustments included in net loss	—		0.2			—		0.4
Net change in defined benefit obligation, net of tax:
Amortization of actuarial losses	0.8		0.4			1.5		1.0
Net change in accumulated other comprehensive income (loss)	28.8		(12.4		)	2.1		(24.5		)
Comprehensive income (loss)	$	56.8	$	0.6		$	36.9	$	(26.8	)

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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VIAVI SOLUTIONS INC.

CONSOLIDATED BALANCE SHEETS

(in millions, except share and par value data)

(unaudited)



	December 28, 2019			June 29, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	551.8		$	521.5
Short-term investments	1.6			1.5
Restricted cash	3.5			3.5
Accounts receivable, net	251.5			237.7
Inventories, net	91.9			102.7
Prepayments and other current assets	54.5			49.9
Total current assets	954.8			916.8
Property, plant and equipment, net	173.5			179.9
Goodwill, net	384.5			381.1
Intangibles, net	179.3			211.6
Deferred income taxes	106.8			108.4
Other non-current assets	60.8			17.3
Total assets	$	1,859.7		$	1,815.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	48.9		$	63.4
Accrued payroll and related expenses	66.5			58.7
Deferred revenue	53.2			55.3
Accrued expenses	32.1			34.2
Other current liabilities	61.2			72.4
Total current liabilities	261.9			284.0
Long-term debt	589.8			578.8
Other non-current liabilities	243.7			226.5
Commitments and contingencies (Note 18)
Stockholders’ equity:
Common stock, $0.001 par value; 1 billion shares authorized; 230 million shares at December 28, 2019 and 229 million shares at June 29, 2019, issued and outstanding	0.2			0.2
Additional paid-in capital	70,254.0			70,244.7
Accumulated deficit	(69,357.4		)	(69,384.5		)
Accumulated other comprehensive loss	(132.5		)	(134.6		)
Total stockholders’ equity	764.3			725.8
Total liabilities and stockholders’ equity	$	1,859.7		$	1,815.1

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)



	Six Months Ended
	December 28, 2019			December 29, 2018
OPERATING ACTIVITIES:
Net income (loss)	$	34.8		$	(2.3	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense	19.7			19.7
Amortization of acquired technologies and other intangibles	34.3			38.1
Stock-based compensation	21.6			17.7
Amortization of debt issuance costs and accretion of debt discount	11.0			12.1
Amortization of discount and premium on investments, net	—			(0.2		)
Net change in fair value of contingent liabilities	(4.3		)	—
Loss on disposal of long-lived assets	—			0.7
Other	2.4			1.6
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(13.5		)	(33.5		)
Inventories	3.2			3.4
Other current and non-currents assets	(2.5		)	(0.7		)
Accounts payable	(14.2		)	(3.0		)
Income taxes payable	5.8			7.0
Deferred revenue, current and non-current	2.9			0.3
Deferred taxes, net	(2.8		)	(4.5		)
Accrued payroll and related expenses	8.2			9.5
Accrued expenses and other current and non-current liabilities	(37.3		)	3.2
Net cash provided by operating activities	$	69.3		$	69.1

INVESTING ACTIVITIES:
Maturities of available-for-sale investments	$	—		$	42.2
Sales of available-for-sale investments	—			97.0
Capital expenditures	(13.3		)	(24.2		)
Proceeds from the sale of assets	3.1			3.0
Acquisitions, net of cash acquired	(0.5		)	(28.1		)
Net cash (used in) provided by investing activities	$	(10.7	)	$	89.9

FINANCING ACTIVITIES:
Payment of debt issuance costs	$	—		$	(0.5	)
Repurchase and retirement of common stock	(10.7		)	(8.5		)
Withholding tax payment on vesting of restricted stock awards	(15.1		)	(9.8		)
Repurchase and redemption of convertible debt	—			(276.9		)
Payment of financing obligations	(1.8		)	(0.4		)
Proceeds from exercise of employee stock options and employee stock purchase plan	2.3			2.1
Net cash used in financing activities	(25.3		)	(294.0		)

Effect of exchange rates on cash, cash equivalents and restricted cash	(3.5		)	(11.2		)
Net increase (decrease) in cash, cash equivalents and restricted cash	29.8			(146.2		)
Cash, cash equivalents and restricted cash at the beginning of the period	530.4			624.3
Cash, cash equivalents and restricted cash at the end of the period	$	560.2		$	478.1

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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VIAVI SOLUTIONS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions)

(unaudited)



Three Months Ended December 28, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at September 28, 2019	230.4		$	0.2	$	70,245.4		$	(69,376.2	)	$	(161.3	)	$	708.1
Net income	—		—		—			28.0			—			28.0
Other comprehensive income	—		—		—			—			28.8			28.8
Shares issued under employee stock plans, net of tax	0.5		—		(2.9		)	—			—			(2.9		)
Stock-based compensation	—		—		11.5			—			—			11.5
Repurchase of common stock	(0.7	)	—		—			(9.2		)	—			(9.2		)
Balance at December 28, 2019	230.2		$	0.2	$	70,254.0		$	(69,357.4	)	$	(132.5	)	$	764.3



Three Months Ended December 29, 2018
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at September 29, 2018	228.2		$	0.2	$	70,218.6		$	(69,394.1	)	$	(115.1	)	$	709.6
Net income	—		—		—			13.0			—			13.0
Other comprehensive loss	—		—		—			—			(12.4		)	(12.4		)
Shares issued under employee stock plans, net of tax	0.7		—		(1.5		)	—			—			(1.5		)
Stock-based compensation	—		—		9.7			—			—			9.7
Repurchase of commons stock	(0.9	)	—		—			(8.5		)	—			(8.5		)
Other	—		—		—			0.1			0.1			0.2
Balance at December 29, 2018	228.0		$	0.2	$	70,226.8		$	(69,389.5	)	$	(127.4	)	$	710.1



Six Months Ended December 28, 2019
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 29, 2019	228.8		$	0.2	$	70,244.7		$	(69,384.5	)	$	(134.6	)	$	725.8
Cumulative adjustment for adoption of ASC 842	—		—		—			3.0			—			3.0
Net income	—		—		—			34.8			—			34.8
Other comprehensive income	—		—		—			—			2.1			2.1
Shares issued under employee stock plans, net of tax	2.2		—		(12.6		)	—			—			(12.6		)
Stock-based compensation	—		—		21.9			—			—			21.9
Repurchase of common stock	(0.8	)	—		—			(10.7		)	—			(10.7		)
Balance at December 28, 2019	230.2		$	0.2	$	70,254.0		$	(69,357.4	)	$	(132.5	)	$	764.3

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Six Months Ended December 29, 2018
	Common Stock
	Shares		Amount		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance at June 30, 2018	226.7		$	0.2	$	70,216.2		$	(69,378.6	)	$	(102.9	)	$	734.9
Net loss	—		—		—			(2.3		)	—			(2.3		)
Other comprehensive loss	—		—		—			—			(24.5		)	(24.5		)
Shares issued under employee stock plans, net of tax	2.2		—		(7.3		)	—			—			(7.3		)
Stock-based compensation	—		—		17.9			—			—			17.9
Repurchase of common stock	(0.9	)	—		—			(8.5		)	—			(8.5		)
Other	—		—		—			(0.1		)	—			(0.1		)
Balance at December 29, 2018	228.0		$	0.2	$	70,226.8		$	(69,389.5	)	$	(127.4	)	$	710.1

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The financial information for Viavi Solutions Inc. (“VIAVI” also referred to as “the Company”) for the three and six months ended December 28, 2019 and December 29, 2018 is unaudited, and includes all normal and recurring adjustments Company management considers necessary for a fair statement of the financial information set forth herein. The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual consolidated financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 29, 2019.

Other than updates to the Company’s lease accounting policy under Accounting Standards Codification (“ASC”) 842 - Leases, as disclosed in “Note 2. Recently Issued Accounting Pronouncements” and “Note 12. Leases”, there have been no material changes to the Company’s accounting policies during the three and six months ended December 28, 2019, as compared to the significant accounting policies presented in “Note 1. Basis of Presentation” of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report for the year ended June 29, 2019 on Form 10-K filed with the SEC on August 27, 2019.

The balance sheet as of June 29, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The results for the three and six months ended December 28, 2019 and December 29, 2018 may not be indicative of results for the fiscal year ending June 27, 2020 or any future periods.

Fiscal Years

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to June 30th. The Company’s fiscal 2020 is a 52-week year ending on June 27, 2020. The Company’s fiscal 2019 was a 52-week year ending on June 29, 2019.

Principles of Consolidation

The consolidated financial statements include the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated.

Use of Estimates

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the reported amount of net revenues and expenses and the disclosure of commitments and contingencies during the reporting periods. The Company bases estimates on historical experience and assumptions about future periods that are believed to be reasonable based on available information. The Company’s reported financial positions or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies. If estimates or assumptions differ from actual results, subsequent periods are adjusted to reflect readily available current information.

Note 2. Recently Issued Accounting Pronouncements

Recent Accounting Pronouncements Adopted

In 2016, the Financial Accounting Standards Board (“FASB”) issued guidance on the financial reporting requirements for leasing arrangements, ASC 842 - Leases. ASC 842 requires lessees to recognize operating leases with a term greater than one year on their balance sheets as Right-of-Use (“ROU”) assets and corresponding lease liabilities, measured at the present value of the lease payments. In the first quarter of fiscal 2020 the Company adopted this standard using the modified retrospective approach. The Company elected to apply the optional transition approach of not adjusting comparative period financial statements for the adoption impact. The Company also elected the package of practical expedients to not reassess whether a contract contains a lease, lease classification and accounting for initial direct costs. Adoption of the leasing standard resulted in $35.5 million of ROU assets and $37.0 million of lease

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

liabilities on June 30, 2019. In addition, the Company recorded an adjustment to accumulative deficit, net of taxes, of $3.0 million from the recognition of previously deferred profit under sale-leaseback arrangements and de-recognition of related real estate assets of $7.1 million and financing obligations of $10.1 million. The adoption of the new standard did not have a material impact on the Company’s Consolidated Statements of Operations and Statements of Cash Flows. For additional information refer to “Note 12. Leases.”

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued guidance which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. The guidance is effective for the Company in the first quarter of fiscal year 2022 and early adoption is permitted. The Company is evaluating the effects that the adoption of this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued guidance to amend the disclosure requirements related to defined benefit pension and other post-retirement plans. Some of the changes include adding a disclosure requirement for significant gains and losses related to changes in the benefit obligation for the period and removing the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year. This guidance is effective for the Company in the first quarter of fiscal 2021 and early adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.

In June 2016, the FASB issued guidance that changes the accounting for recognizing impairments of financial assets. Under the new guidance, credit losses for certain types of financial instruments will be estimated based on expected losses. The new guidance also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The guidance is effective for the Company in the first quarter of fiscal 2021 and earlier adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.

Note 3. Revenue

The Company accounts for revenue in accordance with ASC 606, which was adopted in fiscal 2019 using the retrospective transition method. The Company’s revenue is derived from a diverse portfolio of network solutions and optical technology products and services, as follows:

•

Products: Network Enablement (“NE”) and Service Enablement (“SE”) products include instruments, microprobes and perpetual software licenses that support the development, production, maintenance and optimization of network systems. The Company’s Optical Security and Performance (“OSP”) products include proprietary pigments used for optical security and optical filters used in commercial and government 3D Sensing applications.

•

Services: The Company also offers a range of product support and professional services designed to comprehensively address customer requirements. These include repair, calibration, extended warranty, software support, technical assistance, training and consulting services. Implementation services provided in conjunction with hardware or software solution projects include sale of the products along with project management, set-up and installation.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance sheet and other details

Unbilled Receivables: The Company records a receivable when an unconditional right to consideration exists and transfer of control has occurred, such that only the passage of time is required before payment of consideration is due. Timing of revenue recognition may differ from the timing of customer invoicing. Payment terms vary based on product or service offerings and payment is generally required within 30 to 90 days from date of invoicing. Certain performance obligations may require payment before delivery of the service to the customer.

Contract Assets: A Contract Asset is recognized when a conditional right to consideration exists and transfer of control has occurred. Contract Assets include fixed fee professional services, where the transfer of services has occurred in advance of the Company's right to invoice. Contract Assets, included in accounts receivable, net, on the Consolidated Balance Sheets, are not material to the Consolidated Financial Statements. The prior year’s Consolidated Balance Sheets and Statements of Cash Flows have been updated to conform to the current period’s presentation. Contract asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.

Gross receivables include both billed and Unbilled Receivables/Contract Assets. As of December 28, 2019 and June 29, 2019, the Company had total non-billed receivables (Unbilled Receivables/Contract Assets) of $5.4 million and $11.5 million, respectively.

Deferred Revenue: Deferred revenue consists of contract liabilities primarily related to support, solution deployment services, software maintenance, product, professional services, and training when the Company has a right to invoice or payments have been received and transfer of control has not occurred. Revenue is recognized on these items when the revenue recognition criteria are met, generally resulting in ratable recognition over the contract term. Contract liabilities are included in deferred revenue and non-current liabilities on the Consolidated Balance Sheets.

The Company also has short term and long term deferred revenues related to undelivered hardware and professional services, consisting of installations and consulting engagements, which are recognized as the Company's performance obligations under the contract are completed and accepted by the customer.

The following tables summarize the activity related to deferred revenue (in millions):



	December 28, 2019
	Three Months Ended			Six Months Ended
Deferred revenue:
Balance at beginning of period	$	64.4		$	68.5
Revenue deferrals for new contracts ⁽¹⁾	33.6			52.5
Revenue recognized during the period	(26.1		)	(49.1		)
Balance at end of period	$	71.9		$	71.9

Short-term deferred revenue	$	53.2		$	53.2
Long-term deferred revenue	$	18.7		$	18.7

⁽¹⁾ Included in these amounts is the impact from foreign currency exchange rate fluctuations.

Remaining Performance Obligations: Remaining performance obligations represent the aggregate amount of the transaction price allocated to performance obligations not delivered or are incomplete, as of December 28, 2019. Remaining performance obligations include deferred revenue plus unbilled amounts not yet recorded. The aggregate amount of the transaction price allocated to remaining performance obligations does not include amounts owed under cancelable contracts where there is no substantive termination penalty.

Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidation, adjustments for revenue that has not materialized, and adjustments for currency.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The value of the transaction price allocated to remaining performance obligations as of December 28, 2019, was $238.1 million. The Company expects to recognize 89% of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.

Disaggregation of revenue

The Company's revenue is presented on a disaggregated basis on the Consolidated Statements of Operations and in “Note 19. Operating Segments and Geographic Information”. This information includes revenue from reportable segments and a break-out of products and services for which the nature and timing of the revenue as characterized above is generally at a point in time and over time, respectively.

Note 4. Earnings Per Share

The following table sets forth the computation of basic and diluted net loss per share (in millions, except per share data):



	Three Months Ended					Six Months Ended
	December 28, 2019		December 29, 2018			December 28, 2019		December 29, 2018
Numerator:
Income from continuing operations	$	28.0	$	15.4		$	34.8	$	0.1
Loss from discontinued operations, net of taxes	—		(2.4		)	—		(2.4		)
Net income (loss)	$	28.0	$	13.0		$	34.8	$	(2.3	)
Denominator:
Weighted-average shares outstanding:
Basic	230.0		228.3			229.7		227.8
Shares issuable assuming conversion of convertible notes ⁽¹⁾	5.1		—			4.0		—
Effect of dilutive securities from stock-based benefit plans	3.2		2.1			3.7		2.7
Diluted	238.3		230.4			237.4		230.5

Net income (loss) per share - basic:
Continuing operations	$	0.12	$	0.07		$	0.15	$	0.00
Discontinued operations	—		(0.01		)	—		(0.01		)
Net income (loss) per share	$	0.12	$	0.06		$	0.15	$	(0.01	)

Net income (loss) per share - diluted:
Continuing operations	$	0.12	$	0.07		$	0.15	$	0.00
Discontinued operations	—		(0.01		)	—		(0.01		)
Net income (loss) per share	$	0.12	$	0.06		$	0.15	$	(0.01	)

⁽¹⁾

Represents the number of shares that would be issued if the Company’s Senior Convertible Notes had been converted. The par amount of the Company’s convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and the “in-the money” conversion benefit feature above the conversion price is payable in cash, shares of the Company’s common stock or a combination of both, at the Company’s election.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net loss per share because their effect would have been anti-dilutive (in millions):



	Three Months Ended		Six Months Ended
	December 28, 2019	December 29, 2018	December 28, 2019	December 29, 2018
		^{(2) (3)}		^{(2) (3)}
Restricted stock units	0.3	0.2	0.2	0.7
Stock options and ESPP	—	0.1	—	0.1
Total potentially dilutive securities	0.3	0.2	0.2	0.7

⁽²⁾

The Company’s 1.00% Senior Convertible Notes due 2024 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the-money” conversion benefit feature at the conversion price above $13.22 per share payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. The Company’s average quarterly stock price for the period presented did not exceed the conversion price of $13.22. Refer to “Note 11. Debt” for more details.

⁽³⁾

The Company’s 1.75% Senior Convertible Notes due 2023 are not included in the table above. The par amount of convertible notes is payable in cash equal to the principal amount of the notes plus any accrued and unpaid interest and then the “in-the money” conversion benefit feature at the conversion price above $13.94 per share payable in cash, shares of the Company’s common stock or a combination of both at the Company’s election. The Company’s average quarterly stock price for the period presented did not exceed the conversion price of $13.94. Refer to “Note 11. Debt” for more details.

Note 5. Accumulated Other Comprehensive Loss

The Company’s accumulated other comprehensive loss consists of the accumulated net unrealized gains or losses on available-for-sale investments, foreign currency translation adjustments and change in unrealized components of defined benefit obligations.

For the six months ended December 28, 2019, the changes in accumulated other comprehensive loss, net of tax, by component were as follows (in millions):



	Unrealized losses on available-for sale investments			Foreign currency translation adjustments			Change in unrealized components of defined benefit obligations ⁽¹⁾			Total
Beginning balance as of June 29, 2019	$	(5.0	)	$	(101.0	)	$	(28.6	)	$	(134.6	)
Other comprehensive income (loss) before reclassification	—			0.6			—			0.6
Amounts reclassified to accumulated other comprehensive loss	—			—			1.5			1.5
Net current-period other comprehensive income	—			0.6			1.5			2.1
Ending balance as of December 28, 2019	$	(5.0	)	$	(100.4	)	$	(27.1	)	$	(132.5	)

(1) The amount reclassified out of accumulated other comprehensive loss represents the amortization of actuarial losses included as a component of cost of revenues, research and development (“R&D”) and SG&A in the Consolidated Statement of Operations for the six months ended December 28, 2019. There was no tax impact for the six months ended December 28, 2019. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.

Note 6. Acquisitions

3Z Telecom, Inc. Acquisition

On May 31, 2019 (“3Z Close Date”), the Company acquired all of the equity of 3Z Telecom, Inc. (“3Z”) for approximately $23.2 million in cash and contingent consideration (“earn-out”) liability of up to $7.0 million in cash based on the achievement of certain net revenue targets over approximately a two year period, subsequent to the 3Z Close Date. The acquisition of 3Z expands the Company’s Field Instrument offerings.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The 3Z acquisition meets the definition of a business and has been accounted for in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. Acquisition related costs incurred were not material.

The fair value of consideration transferred for the 3Z acquisition consists of the following (in millions):



Cash consideration paid at closing	$	18.9
Escrow payments	4.3
Fair value of contingent consideration	5.5
Total purchase consideration	$	28.7

The fair value of the earn-out payments at the 3Z Close Date was determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs not observable in the market, and therefore represents a Level 3 measurement. The fair value of the Company’s earn-out liabilities is further discussed in “Note 8. Investments, Forward Contracts and Fair Value Measurements.”

The identified tangible and intangible assets acquired, as of the 3Z Close Date, were as follows (in millions):



Tangible assets acquired:	$	4.1
Intangible assets acquired:
Developed technology	4.4
Customer relationships	7.9
Customer backlog	0.1
Goodwill	12.2
Total consideration transferred	$	28.7

The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the 3Z Close Date, was as follows (in millions):



Cash	$	2.2
Total other assets	3.6
Total liabilities	(1.7		)
Net tangible assets acquired	$	4.1

Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives, which range from five to six years. Customer backlog will be fully amortized within one year.

Goodwill arising from this acquisition is primarily attributed to sales of future products and services of 3Z. Goodwill has been assigned to the NE segment and is not deductible for tax purposes.

Results of operations of 3Z have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.

RPC Photonics, Inc. Acquisition

On October 30, 2018 (“RPC Close Date”), the Company acquired all of the equity interest of RPC Photonics, Inc. (“RPC”) for approximately $33.4 million in cash and an additional earn-out of up to $53.0 million in cash based on the achievement of certain gross profit targets over approximately a four years period, subsequent to the RPC Close Date.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The achievement or distributions of earn-out payments are not limited in any one period. The acquisition of RPC expands the Company’s 3D Sensing offerings.

The Company accounted for the transaction in accordance with the authoritative guidance on business combination; therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date.

The fair value of consideration transferred for the RPC Close Date, were as follows (in millions):



Cash consideration paid at closing	$	29.9
Escrow payments	3.5
Fair value of contingent consideration	36.2
Total purchase consideration	$	69.6

The fair value of the earn-out payments at the RPC Close Date were determined by applying a risk-neutral framework using a Monte Carlo Simulation, which includes inputs that are not observable in the market, and therefore represents a Level 3 measurement. The fair value of this earn-out is discussed further in “Note 8. Investments, Forward Contracts and Fair Value Measurements”.

The identified tangible and intangible assets acquired, as of the RPC Close Date, were as follows (in millions):



Tangible assets acquired:	$	5.7
Intangible assets acquired:
Developed technology	15.7
Customer relationships	14.0
Customer backlog	0.3
Goodwill	33.9
Total consideration transferred	$	69.6

The allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the RPC Close Date, were as follows (in millions):



Cash	$	1.8
Other current assets	1.8
Property and equipment	2.6
Total liabilities	(0.5		)
Net tangible assets acquired	$	5.7

The allocation of the purchase price was based upon a valuation performed. Acquired intangible assets are classified as Level 3 assets for which fair value is derived from a valuation based on inputs that are unobservable and significant to the overall fair value measurement. The fair values of acquired customer relationships and developed technology were determined based on the excess earnings method and relief from royalty method, respectively, variations of the income approach. The intangible assets are being amortized over their estimated useful lives that range from six to seven years. Customer backlog will be fully amortized within one year.

Goodwill arising from this acquisition is primarily attributed to sales of future products and services of RPC. Goodwill has been assigned to the OSP segment and is not deductible for tax purposes.

Results of operations of RPC have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition. Proforma or historical post-acquisition results of operations have not been presented because the effect of the acquisition was not material to prior period financial statements.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7. Balance Sheet and Other Details

Accounts receivable allowance

The following table presents the activities and balances for allowance for doubtful accounts (in millions):



	June 29, 2019		Charged to Costs and Expenses		Deductions ⁽¹⁾			December 28, 2019
Allowance for doubtful accounts	$	2.0	$	0.6	$	(0.3	)	$	2.3

⁽¹⁾Represents the effect of currency translation adjustments and write-offs of uncollectible accounts, net of recoveries.

Inventories, net

The following table presents the components of inventories, net (in millions):



	December 28, 2019		June 29, 2019
Finished goods	$	36.3	$	36.7
Work in process	20.4		26.5
Raw materials	35.2		39.5
Inventories, net	$	91.9	$	102.7

Prepayments and other current assets

The following table presents the components of prepayments and other current assets (in millions):



	December 28, 2019		June 29, 2019
Prepayments	$	13.3	$	14.2
Asset held for sale	2.5		2.5
Advances to contract manufacturers	6.2		5.1
Refundable income taxes	9.1		8.9
Transaction tax receivables	10.5		11.8
Other current assets	12.9		7.4
Prepayments and other current assets	$	54.5	$	49.9

Other current liabilities

The following table presents the components of other current liabilities (in millions):



	December 28, 2019		June 29, 2019
Customer prepayments	$	4.7	$	30.2
Restructuring accrual	5.4		8.6
Income tax payable	14.3		8.5
Warranty accrual	5.1		4.7
Transaction tax payable	5.0		3.8
Operating lease liabilities (Note 12)	12.4		—
Foreign exchange forward contracts liability	1.1		4.0
Other	13.2		12.6
Other current liabilities	$	61.2	$	72.4

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other non-current liabilities

The following table presents components of other non-current liabilities (in millions):



	December 28, 2019		June 29, 2019
Pension and post-employment benefits	$	101.7	$	103.2
Financing obligation	16.3		25.5
Deferred tax liability	12.2		14.6
Long-term deferred revenue	18.7		13.2
Fair value of contingent consideration ⁽¹⁾	33.3		37.7
Operating lease liabilities (Note 12)	31.4		—
Uncertain tax position	13.9		13.6
Other	16.2		18.7
Other non-current liabilities	$	243.7	$	226.5

⁽¹⁾ See “Note 6. Acquisitions” of the Notes to our Consolidated Financial Statements for more detail.

Note 8. Investments, Forward Contracts and Fair Value Measurements

Available-For-Sale Investments

The following table presents the Company’s available-for-sale securities as of December 28, 2019 (in millions):



	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale debt securities:
Asset-backed securities	$	0.9	$	—	$	(0.4	)	$	0.5
Total available-for-sale debt securities	$	0.9	$	—	$	(0.4	)	$	0.5

The Company generally classifies debt securities as available-for-sale and as cash equivalents, short-term investments or other non-current assets based on the stated maturities; however, certain securities with stated maturities of longer than twelve months which are highly liquid and available to support current operations are also classified as short-term investments. As of December 28, 2019, the total estimated fair value of $0.5 million was classified as other non-current assets.

In addition to the amounts presented above, the Company’s short-term investments classified as trading securities related to the deferred compensation plan as of December 28, 2019, were $1.6 million, of which $0.5 million was invested in debt securities, $0.3 million was invested in money market instruments and funds and $0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.

During the three and six months ended December 28, 2019 and December 29, 2018, the Company recorded no other-than-temporary impairment charges in each respective period.

The following table presents contractual maturities of the Company’s debt securities classified as available-for-sale as of December 28, 2019, (in millions):



	Amortized Cost/ Carrying Cost		Estimated Fair Value
Amounts maturing in more than 5 years	$	0.9	$	0.5
Total debt available-for-sale securities	$	0.9	$	0.5

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the Company’s available-for-sale securities as of June 29, 2019, (in millions):



	Amortized Cost/ Carrying Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Asset-backed securities	$	0.9	$	—	$	(0.3	)	$	0.6
Total available-for-sale securities	$	0.9	$	—	$	(0.3	)	$	0.6

As of June 29, 2019, of the estimated fair value of $0.6 million was classified as other non-current assets.

In addition to the amounts presented above, as of June 29, 2019, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $1.5 million, of which $0.4 million was invested in debt securities, $0.3 million was invested in money market instruments and funds and $0.8 million was invested in equity securities. Trading securities are reported at fair value, with the unrealized gains or losses resulting from changes in fair value recognized in the Company’s Consolidated Statements of Operations as a component of interest and other income, net.

Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the most observable inputs be used when available. Observable inputs are, inputs which market participants would use in valuing an asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs, which reflect the assumptions market participants would use in valuing an asset or liability.

The Company’s cash and investment instruments are classified within Level 1 or Level 2 of the fair value hierarchy based on quoted prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.


•	Level 1: includes financial instruments for which quoted market prices for identical instruments are available in active markets. Level 1 assets of the Company include money market funds, U.S. Treasury securities and marketable equity securities as they are traded with sufficient volume and frequency of transactions.

•

Level 2: includes financial instruments for which the valuations are based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. Level 2 instruments of the Company generally include certain U.S. and foreign government and agency securities, commercial paper, corporate and municipal bonds and notes, asset-backed securities, certificates of deposit, and foreign currency forward contracts. To estimate their fair value, the Company utilizes pricing models based on market data. The significant inputs for the valuation model usually include benchmark yields, reported trades, broker and dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data, and industry and economic events.


•	Level 3: includes financial instruments for which fair value is derived from valuation-based inputs, that are unobservable and significant to the overall fair value measurement. As of December 28, 2019 and June 29, 2019, the Company did not hold any Level 3 investment securities. The fair value of the Company’s contingent liability was determined using Level 3 inputs, as discussed below.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements

The following table presents assets and liabilities measured at fair value as of December 28, 2019 and June 29, 2019, (in millions):



	December 28, 2019								June 29, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Assets:
Debt available-for-sale securities
Asset-backed securities	$	0.5	$	—	$	0.5	$	—	$	0.6	$	—	$	0.6	$	—
Total debt available-for-sale securities	0.5		—		0.5		—		0.6		—		0.6		—
Money market funds	349.3		349.3		—		—		322.9		322.9		—		—
Trading securities	1.6		1.6		—		—		1.5		1.5		—		—
Foreign currency forward contract ⁽¹⁾	5.9		—		5.9		—		1.2		—		1.2		—
Total assets ⁽²⁾	$	357.3	$	350.9	$	6.4	$	—	$	326.2	$	324.4	$	1.8	$	—

Liability:
Foreign currency forward contract ⁽³⁾	$	1.1	$	—	$	1.1	$	—	$	4.0	$	—	$	4.0	$	—
Contingent consideration ⁽⁴⁾	34.1		—		—		34.1		38.4		—		—		38.4
Total liabilities	$	35.2	$	—	$	1.1	$	34.1	$	42.4	$	—	$	4.0	$	38.4


⁽¹⁾	$5.9 million and $1.2 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.

⁽²⁾

$341.9 million in cash and cash equivalents, $1.6 million in short-term investments, $3.4 million in restricted cash, $5.9 million in prepayments and other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of December 28, 2019. $315.5 million in cash and cash equivalents, $1.5 million in short-term investments, $3.5 million in restricted cash, $1.2 million in other current assets, and $4.5 million in other non-current assets on the Company’s Consolidated Balance Sheets as of June 29, 2019.


⁽³⁾	$1.1 million and $4.0 million in other current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.


⁽⁴⁾	$0.8 million and $0.7 million in other current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively. $33.3 million and $37.7 million in other non-current liabilities on the Company’s Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively.

The Company’s Level 3 liabilities as of December 28, 2019, consist of contingent purchase consideration. The Company has aggregate contingent liabilities related to its acquisitions. The earn-out liabilities represent future payments by the Company of up to $63.0 million over three years, that are contingent on the achievement of certain revenue and gross profit targets. As of December 28, 2019, the aggregate fair value of our contingent consideration was $34.1 million. The fair value of earn-out liabilities were determined using a Monte Carlo Simulation that includes significant unobservable inputs such as the risk-free rate, risk-adjusted discount rate, the volatility of the underlying financial metrics and projected financial forecast of the acquired business over the earn-out period. The fair value of contingent consideration liabilities is remeasured at each reporting period at the estimated fair value based on the input on the date of remeasurement, with the change in fair value recognized in Selling, General and Administrative expense of the Consolidated Statements of Operations.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table provides a reconciliation of changes in fair value of the Company’s Level 3 liabilities for the three and six months ended December 28, 2019 (in millions):



	Three Months Ended					Six Months Ended
	December 28, 2019			December 29, 2018		December 28, 2019			December 29, 2018
Beginning period balance	$	40.1		$	—	$	38.4		$	—
Additions: To Level 3 contingent consideration liabilities	—			36.2		—			36.2
Fair value adjustment of contingent consideration liabilities	(6.0		)	—		(4.3		)	—
Ending period balance	$	34.1		$	36.2	$	34.1		$	36.2

No payments were made in connection with the Company’s contingent earn-out liabilities during the three and six months ended December 28, 2019 and December 29, 2018.

Non-Designated Foreign Currency Forward Contracts

The Company has foreign subsidiaries that operate and sell the Company’s products in various markets around the world. As a result, the Company is exposed to foreign exchange risks. The Company utilizes foreign exchange forward contracts to manage foreign currency risk associated with foreign currency denominated monetary assets and liabilities, primarily certain short-term intercompany receivables and payables, and to reduce the volatility of earnings and cash flows related to foreign-currency transactions. The Company does not use these foreign currency forward contracts for trading purposes.

As of December 28, 2019, the Company had forward contracts that were effectively closed but not settled with the counterparties by quarter end. Therefore, the fair value of these contracts of $5.9 million and $1.1 million is reflected as prepayments and other current assets and other current liabilities, respectively. As of June 29, 2019, the fair value of these contracts of $1.2 million and $4.0 million is reflected as prepayments and other current assets and other current liabilities, respectively.

The forward contracts outstanding and not effectively closed, with a term of less than 120 days, were transacted near quarter end; therefore, the fair value of the contracts is not significant. As of December 28, 2019 and June 29, 2019, the notional amounts of the forward contracts the Company held to purchase foreign currencies were $124.7 million and $117.8 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $36.6 million and $31.3 million, respectively.

The change in the fair value of foreign currency forward contracts is recorded as gain or loss in the Company’s Consolidated Statements of Operations as a component of interest and other income, net. The cash flows related to the settlement of foreign currency forward contracts are classified as operating activities. The foreign exchange forward contracts incurred a gain of $4.8 million and $2.2 million for the three and six months ended December 28, 2019, respectively. The foreign exchange forward contracts incurred a loss of $4.5 million and $5.8 million for the three and six months ended December 29, 2018, respectively.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 9. Goodwill

The following table presents changes in goodwill allocated to the Company’s reportable segments (in millions):



	Network Enablement		Service Enablement		Optical Security and Performance Products		Total
Balance as of June 29, 2019	$	338.9	$	—	$	42.2	$	381.1
Currency translation adjustments	3.4		—		—		3.4
Balance as of December 28, 2019	$	342.3	$	—	$	42.2	$	384.5

The Company tests goodwill for impairment at the reporting unit level annually during the fourth quarter of each fiscal year, or more frequently if events or circumstances indicate that the asset may be impaired. In the fourth quarter of fiscal 2019, the Company reviewed goodwill under the qualitative assessment of the authoritative guidance and concluded that it was more likely than not that the fair value of each reporting unit exceeded its carrying amount and that no indication of impairment existed.

There were no events or changes in circumstances which triggered an impairment review during the three and six months ended December 28, 2019.

Note 10. Acquired Developed Technology and Other Intangibles

The following tables present details of the Company’s acquired developed technology, customer relationships and other intangibles (in millions):



As of December 28, 2019	Gross Carrying Amount		Accumulated Amortization			Net
Acquired developed technology	$	439.7	$	(329.4	)	$	110.3
Customer relationships	195.3		(141.9		)	53.4
Other ⁽¹⁾	36.7		(21.1		)	15.6
Total intangibles	$	671.7	$	(492.4	)	$	179.3



As of June 29, 2019	Gross Carrying Amount		Accumulated Amortization			Net
Acquired developed technology	$	437.0	$	(311.1	)	$	125.9
Customer relationships	193.7		(126.3		)	67.4
Other ⁽¹⁾	36.1		(17.8		)	18.3
Total intangibles	$	666.8	$	(455.2	)	$	211.6


⁽¹⁾	Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the amortization recorded relating to acquired developed technology, customer relationships and other intangibles (in millions):



	Three Months Ended				Six Months Ended
	December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Cost of revenues	$	8.4	$	8.5	$	16.8	$	17.9
Operating expenses	8.8		10.4		17.5		20.2
Total amortization of intangible assets	$	17.2	$	18.9	$	34.3	$	38.1

Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of December 28, 2019, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):



Fiscal Years
Remainder of 2020	$	34.0
2021	64.4
2022	37.7
2023	23.8
2024	9.2
Thereafter	10.2
Total amortization	$	179.3

The acquired developed technology, customer relationships and other intangibles balance are adjusted quarterly to record the effect of currency translation adjustments.

Note 11. Debt

As of December 28, 2019 and June 29, 2019, the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the Senior Convertible Notes, net of unamortized debt discounts and issuance costs.

The following table presents the carrying amounts of the liability and equity components of our debt (in millions):



	December 28, 2019			June 29, 2019
Principal amount of 1.00% Senior Convertible Notes	$	460.0		$	460.0
Principal amount of 1.75% Senior Convertible Notes	225.0			225.0
Unamortized discount of liability component	(89.5		)	(99.8		)
Unamortized debt issuance cost	(5.7		)	(6.4		)
Carrying amount of liability component	$	589.8		$	578.8

Carrying amount of equity component ⁽¹⁾	$	136.8		$	136.8


⁽¹⁾	Included in additional paid-in-capital on the Consolidated Balance Sheets.

The Company was in compliance with all debt covenants as of December 28, 2019 and June 29, 2019.

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.75% Senior Convertible Notes (“2023 Notes”)

On May 29, 2018, the Company issued $225.0 million aggregate principal amount of 1.75% Senior Convertible Notes due 2023 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The Company issued $155.5 million aggregate principal of the 2023 Notes to certain holders of the 2033 Notes in exchange for $151.5 million principal of the 2033 Notes (the “Exchange Transaction”) and issued and sold $69.5 million aggregate principal amount of the 2023 Notes in a private placement to accredited institutional buyers (the “Private Placement”). The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.3% based on the 5-year swap rate plus credit spread as of the issuance date. As of December 28, 2019, the expected remaining term of the 2023 Notes is 3.4 years.

The proceeds from the 2023 Notes Private Placement amounted to $67.3 million after issuance costs. The 2023 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.75% payable in cash semi-annually in arrears on June 1st and December 1st of each year, beginning December 1, 2018. The 2023 Notes mature on June 1, 2023 unless earlier converted, redeemed or repurchased.

Based on quoted market prices as of December 28, 2019 and June 29, 2019, the fair value of the 2023 Notes was approximately $282.5 million and $261.3 million, respectively. The 2023 Notes are classified within Level 2 as they are not actively traded in markets.

1.00% Senior Convertible Notes (“2024 Notes”)

On March 3, 2017, the Company issued $400.0 million aggregate principal amount of 1.00% Senior Convertible Notes due 2024 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. On March 22, 2017, the Company issued an additional $60.0 million upon exercise of the over-allotment option of the initial purchasers. The total proceeds from the 2024 Notes amounted to $451.1 million after issuance costs. The 2024 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 1.00% payable in cash semi-annually in arrears on March 1 and September 1 of each year. The 2024 Notes mature on March 1, 2024 unless earlier converted or repurchased. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 4.8% based on the 7-year swap rate plus credit spread as of the issuance date. As of December 28, 2019, the expected remaining term of the 2024 Notes is 4.2 years.

Based on quoted market prices as of December 28, 2019 and June 29, 2019, the fair value of the 2024 Notes was approximately $596.3 million and $540.8 million, respectively. The 2024 Notes are classified within Level 2 as they are not actively traded in markets.

Interest Expense

The following table presents the interest expense for contractual interest, amortization of debt issuance costs and accretion of debt discount (in millions):



	Three Months Ended				Six Months Ended
	December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Interest expense-contractual interest	$	2.2	$	2.1	$	4.3	$	4.5
Amortization of debt issuance cost	0.4		0.3		0.7		0.7
Accretion of debt discount	5.2		4.9		10.3		11.4

Note 12. Leases

The Company is a lessee in several operating leases, primarily real estate facilities for office space. The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. As the rate implicit in the lease is not readily determinable for our operating leases, the Company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend

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or terminate the lease when it is reasonably certain that an option will be exercised. Operating ROU assets are recognized at commencement based on the amount of the initial measurement of the lease liability. Operating ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. Lease expense is recognized on a straight-line basis over the lease term.

Operating ROU assets are included in other non-current assets and lease liabilities are included in other current liabilities and other non-current liabilities in the Company’s consolidated balance sheets. Lease and non-lease components for all leases are accounted for separately. The Company does not recognize ROU assets and lease liabilities for leases with a lease term of twelve months or less.

The Company's lease arrangements are composed of operating leases with various expiration dates through February 28, 2030. The Company's leases do not contain any material residual value guarantees.

For the three and six months ended December 28, 2019, the total operating lease costs were $3.3 million and $6.6 million, respectively. Total variable lease costs were immaterial during the three and six months ended December 28, 2019. The total operating costs were included in cost of revenues, research and development, selling, general and administrative in the Company’s Consolidated Statements of Operations.

As of December 28, 2019, the weighted-average remaining lease term was 5.4 years, and the weighted-average discount rate was 4.7%.

For the three and six months ended December 28, 2019, cash paid for amounts included in the measurement of operating lease liabilities were $5.8 million and $9.2 million, respectively; and operating ROU assets obtained in exchange of new operating lease liabilities were $12.6 million and $14.5 million, respectively.

The balance sheet information related to our operating leases is as follows (in millions):



	December 28, 2019
Other non-current assets	$	44.9
Total operating ROU assets	$	44.9

Other current liabilities	$	12.4
Other non-current liabilities	31.4
Total operating lease liabilities	$	43.8

Future minimum operating lease payments as of December 28, 2019 are as follows (in millions):



	Operating Leases
Remainder of 2020	$	6.0
2021	12.8
2022	9.9
2023	5.6
2024	4.2
Thereafter	10.8
Total lease payments	$	49.3
Less: Interest	(5.5		)
Present value of lease liabilities	$	43.8

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Prior to the adoption of the new lease standard, future minimum undiscounted operating lease payments as of June 29, 2019, excluding non-lease components, were as follows (in millions):



	Operating Leases
Fiscal 2020	$	11.7
Fiscal 2021	10.8
Fiscal 2022	7.4
Fiscal 2023	3.9
Fiscal 2024	2.5
Thereafter	5.3
Less: sublease income	(0.1		)
Total lease payments	$	41.5

Note 13. Restructuring and Related Charges

The Company has initiated restructuring events primarily intended to reduce its costs, consolidate its operations, integrate various acquisitions, streamline product manufacturing and align its business to address market conditions. The Company’s restructuring charges primarily include severance and benefit costs to eliminate a specific number of positions, facilities and equipment costs to vacate facilities and consolidate operations, and lease termination costs. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over multiple periods.

As of December 28, 2019 and June 29, 2019, the Company’s total restructuring accrual was $5.4 million and $8.8 million, respectively. During the three and six months ended December 28, 2019, the Company recorded restructuring and related benefits of $0.9 million and $0.6 million, respectively. During the three and six months ended December 29, 2018, the Company recorded restructuring and related charges of $0.3 million and $15.1 million, respectively.

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Summary of Restructuring Plans

The following table presents the adjustments to the accrued restructuring expenses related to all of the Company’s restructuring plans described below for the three and six months ended December 28, 2019 (in millions):



	Balance June 29, 2019		Six Months Ended December 28, 2019 Benefits			Cash Settlements			Non-cash Settlements and Other Adjustments⁽²⁾			Balance December 28, 2019		Three Months Ended December 28, 2019 Benefits
Fiscal 2019 Plan
NSE, including AW ⁽¹⁾	$	8.7	$	(0.6	)	$	(2.3	)	$	(0.4	)	$	5.4	$	(0.9	)
Plans Prior to Fiscal 2017
Other Plans ⁽¹⁾	0.1		—			—			(0.1		)	—		—
Total ⁽³⁾	$	8.8	$	(0.6	)	$	(2.3	)	$	(0.5	)	$	5.4	$	(0.9	)


⁽¹⁾	Plan type includes workforce reduction cost.


⁽²⁾	Other adjustments including $0.2 million lease liability reclassification to Operating lease liability upon ASC 842 adoption.


⁽³⁾	$5.4 million and $8.6 million in other current liabilities on the Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019, respectively. $0.2 million in other non-current liabilities on the Consolidated Balance Sheets as of June 29, 2019.

Fiscal 2019 Plans

NSE, including AW Restructuring Plan

During the first quarter of fiscal 2019, Management approved restructuring and workforce reduction plans within its Network Service and Enablement (“NSE”) business, including actions related to the recently acquired AW business. These actions further drive the Company’s 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 the Company’s NSE business. Included in these restructuring plans are specific actions to consolidate and integrate the newly acquired AW business within the NSE business segment. During the third quarter of fiscal 2019, the Company has updated the plan to include additional headcount primarily to transfer a portion of the manufacturing operations related to the recently acquired AW business to a contract manufacturer. A restructuring benefits of $0.6 million was recorded in the six months ended December 28, 2019 for adjustments to severance and employee benefits. Payments related to the severance and benefits accrual are expected to be paid by the end of the fourth quarter of fiscal 2020.

Note 14. Income Taxes

The Company recorded an income tax expense of $9.9 million and $18.2 million for the three and six months ended December 28, 2019, respectively. The Company recorded an income tax expense of $10.9 million and $16.6 million for the three and six months ended December 29, 2018, respectively.

The income tax expense for the three and six months ended December 28, 2019 and December 29, 2018 primarily relates to income tax in certain foreign and state jurisdictions based on the Company’s forecasted pre-tax income or loss for the respective fiscal year.

The income tax expense recorded differs from the expected tax expense that would be calculated by applying the federal statutory rate to the Company’s income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to the Company’s domestic and foreign income (loss) from continuing operations.

As of December 28, 2019, and June 29, 2019, the Company’s unrecognized tax benefits totaled $50.7 million and $50.9 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. The Company had $4.2 million accrued for the payment of interest and penalties at December 28, 2019. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although the Company does not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, the Company is unable to estimate the full range of possible adjustments to this balance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 15. Stockholders' Equity

Repurchase of Common Stock

In September 2019, the Board of Directors authorized a stock repurchase program up to $200 million of the Company’s common stock through open market or private transactions before September 30, 2021. The new stock repurchase program replaces the previous $200 million stock repurchase program that was set to expire on September 30, 2019. Under the new repurchase program, the Company may repurchase its common stock from time to time at the discretion of the Company’s management.

During the three and six months ended December 28, 2019, the Company repurchased 659 thousand and 763 thousand shares of its common stock for $9.2 million and $10.7 million, respectively. As of December 28, 2019, the Company had remaining authorization of $189.3 million for future share repurchases. The number of shares to be repurchased and the timing of such repurchases will be based on several factors, including business and financial market conditions.

Note 16. Stock-Based Compensation

Overview

The impact on the Company’s results of operations of recording stock-based compensation by function for the three and six months ended December 28, 2019 and December 29, 2018, as follows (in millions):



	Three Months Ended				Six Months Ended
	December 28, 2019		December 29, 2018		December 28, 2019		December 29, 2018
Cost of revenues	$	1.0	$	0.9	$	2.0	$	1.7
Research and development	2.0		1.6		3.7		2.8
Selling, general and administrative	8.3		7.1		15.9		13.2
Total stock-based compensation expense	$	11.3	$	9.6	$	21.6	$	17.7

Approximately $1.2 million and $1.0 million of stock-based compensation expense was capitalized to inventory as of December 28, 2019 and December 29, 2018, respectively.

Full Value Awards

Full Value Awards refer to restricted stock units that are granted without an exercise price and are converted to shares immediately upon vesting. Performance-based awards are performance-based with market conditions, performance conditions, time-based or a combination, and are expected to vest over one to four years. When converted into shares upon vesting, shares equivalent in value to the minimum withholding taxes liability on the vested shares are withheld by the Company for the payment of such taxes.

During the six months ended December 28, 2019 and December 29, 2018, the Company granted 3.1 million and 3.7 million time-based awards, respectively. The fair value of the time-based Full Value Awards is based on the closing market price of the Company’s common stock on the date of award. The majority of these time-based awards vest over three years, with 33% vesting after one year and the balance vesting quarterly over the remaining two years.

During the six months ended December 28, 2019 and December 29, 2018, the Company granted 0.5 million and 0.5 million, performance-based awards, respectively. These performance-based shares represent the target amount of grants, and the actual number of shares awarded upon vesting may vary depending upon the achievement of the relevant performance conditions. The shares attained over target upon vesting are reflected as awards granted during the period. Accordingly, during the six months ended December 28, 2019 and December 29, 2018, the Company granted additional 0.2 million and 0.1 million shares due to performance-based shares attained over target. The aggregate grant-date fair value of performance-based awards granted during the six months ended December 28, 2019 and December 29, 2018 were estimated to be $7.7 million and $6.2 million, respectively. The majority of performance-based awards vest in equal annual installments over three years based on the attainment of certain

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performance measures and the employee’s continued service through the vest date. The performance-based awards with market conditions were valued using a Monte Carlo simulation.

As of December 28, 2019, $76.5 million of unrecognized stock-based compensation cost related to Full Value Awards remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.0 years.

Note 17. Employee Pension and Other Benefit Plans

The Company sponsors significant qualified and non-qualified pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. The Company also is responsible for the non-pension post-retirement benefit obligation assumed from a past acquisition.

Most of the 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 in fiscal 2010. Benefits are generally based upon years of service and compensation or stated amounts for each year of service.

As of December 28, 2019, the U.K. plan was partially funded while the other plans were unfunded. The Company’s policy for funded plans is to make contributions equal to or greater than the requirements prescribed by law or regulation. For unfunded plans, the Company pays the post-retirement benefits when due. During the six months ended December 28, 2019, the Company contributed $0.6 million to the U.K. plan and $1.8 million to the other plans. The funded plan assets consist primarily of managed investments.

The following table presents the components of net periodic cost for the pension and benefits plans (in millions):



	Three Months Ended						Six Months Ended
	December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018
Service cost	$	0.1		$	0.1		$	0.2		$	0.1
Interest cost	0.5			0.6			0.9			1.2
Expected return on plan assets	(0.4		)	(0.4		)	(0.8		)	(0.8		)
Amortization of net actuarial losses	0.8			0.4			1.5			1.0
Net periodic benefit cost	$	1.0		$	0.7		$	1.8		$	1.5

Both the calculation of the projected benefit obligation and net periodic cost are based upon actuarial valuations. These valuations use participant-specific information such as salary, age, years of service, and assumptions about interest rates, compensation increases and other factors. At a minimum, the Company evaluates these assumptions annually and makes changes as necessary.

The Company expects to incur cash outlays of approximately $7.9 million related to its defined benefit pension plans during fiscal 2020 to make current benefit payments and fund future obligations. As of December 28, 2019, approximately $2.4 million had been incurred. These payments have been estimated based on the same assumptions used to measure the Company’s projected benefit obligation at June 29, 2019.

Note 18. Commitments and Contingencies

Legal Proceedings

In June 2016, the Company received a court decision regarding the validity of an amendment to a pension deed of trust related to one of its foreign subsidiaries which the Company contends contained an error requiring the Company to increase the pension plan’s benefit. The Company had subsequently further amended the deed to rectify the error. The court ruled that the amendment increasing the pension plan benefit was valid until the subsequent amendment. The Company estimated the liability to range from (amounts represented as £ denote GBP) £5.7 million to £8.4 million. The Company determined the likelihood of loss to be probable and accrued £5.7 million as of July 2, 2016 in accordance with authoritative guidance on contingencies. The accrual is included in pension and post-employment benefits, which is a component of other non-current liabilities in the Company’s Consolidated Balance Sheets.

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The Company pursued an appeal of the court decision. In March 2018, the appellate court affirmed the decision of the lower court. The Company is pursuing a deed of rectification claim and continues to pursue a claim against the U.K. law firm responsible for the error. As of December 28, 2019, the related accrued pension liability was £6.5 million or $8.5 million.

The Company is subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against the Company, individually or in aggregate, will not have a material adverse impact on its financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company’s financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.

Guarantees

The Company follows authoritative guidance which requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. In addition, disclosures about the guarantees that an entity has issued, including a tabular reconciliation of the changes of the entity’s product warranty liabilities, are required.

The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.

The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on the Consolidated Balance Sheets as of December 28, 2019 and June 29, 2019.

Outstanding Letters of Credit and Performance Bonds

As of December 28, 2019, the Company had standby letters of credit of $7.4 million and performance bonds of $1.0 million collateralized by restricted cash.

Product Warranties

The Company provides reserves for the estimated costs of product warranties at the time revenue is recognized. In general, the Company offers its customers warranties up to three years and has accrued a reserve for the estimated costs of product warranties at the time revenue is recognized. It estimates the costs of its warranty obligations based on its historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. From time to time, specific warranty accruals may be made if unforeseen technical problems arise. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table presents the changes in the Company’s warranty reserve during the three and six months ended December 28, 2019 and December 29, 2018, (in millions):



	Three Months Ended						Six Months Ended
	December 28, 2019			December 29, 2018			December 28, 2019			December 29, 2018
Balance as of beginning of period	$	8.8		$	9.0		$	8.7		$	8.2
Provision for warranty	0.9			1.0			1.3			1.4
Utilization of reserve	(0.8		)	(1.5		)	(1.8		)	(2.7		)
Adjustments related to pre-existing warranties (including changes in estimates)	0.3			0.7			1.0			2.3
Balance as of end of period	$	9.2		$	9.2		$	9.2		$	9.2

Note 19. Operating Segments and Geographic Information

The Company evaluates its reportable segments in accordance with the authoritative guidance on segment reporting. The Company’s Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”). The Company's reportable segments reflect the way the Company's CODM review and assess performance of the business.

The Company’s reportable segments are:

(i) Network Enablement:

NE provides testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. The Company also offers a range of product support and professional services such as repair, calibration, software support and technical assistance for our products.

(ii) Service Enablement:

SE solutions are embedded systems that yield network, service and application performance data. These solutions—including instruments, microprobes and software—monitor, collect and analyze network data to reveal the actual customer experience and to identify opportunities for new revenue streams and network optimization.

(iii) Optical Security and Performance Products:

OSP provides innovative, precision, high performance optical products for anti-counterfeiting, government, industrial, automotive and consumer electronic markets, including 3D Sensing applications.

The CODM manages the Company in two broad business categories: NSE and OSP. The CODM evaluates segment performance of the NSE business based on the combined segment gross and operating margins. Operating expenses associated with the NSE business are not allocated to the individual segments within NSE, as they are managed centrally at the business unit level. The CODM evaluates segment performance of the OSP business based on segment operating margin. The Company allocates corporate-level operating expenses to its segment results, except for certain non-core operating and non-operating activities as discussed below.

The Company does not allocate stock-based compensation, acquisition-related charges, amortization of intangibles, restructuring and related (benefits) charges, impairment of goodwill, changes in fair value of contingent consideration liabilities, non-operating income and expenses, or other charges unrelated to core operating performance to its segments because management does not include this information in its measurement of the performance of the operating segments. These items are presented as “Other Items” in the table below. Additionally, the Company does not specifically identify and allocate all assets by operating segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables presents information on the Company’s reportable segments for the three months ended December 28, 2019 and December 29, 2018 (in millions):



	Three Months Ended December 28, 2019
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures
Product revenue	$	183.9		$	18.6		$	202.5		$	79.4		$	—		$	281.9
Service revenue	19.1			12.6			31.7			0.1			—			31.8
Net revenue	$	203.0		$	31.2		$	234.2		$	79.5		$	—		$	313.7

Gross profit	$	134.8		$	20.8		$	155.6		$	43.6		$	(9.7	)	$	189.5
Gross margin	66.4		%	66.7		%	66.4		%	54.8		%				60.4		%

Operating income							$	37.5		$	30.4		$	(22.9	)	$	45.0
Operating margin							16.0		%	38.2		%				14.3		%



	Three Months Ended December 29, 2018
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items			Consolidated GAAP Measures
Product revenue	$	176.0		$	13.8		$	189.8		$	83.0		$	—		$	272.8
Service revenue	19.5			14.4			33.9			0.2			—			34.1
Net revenue	$	195.5		$	28.2		$	223.7		$	83.2		$	—		$	306.9

Gross profit	$	125.7		$	20.3		$	146.0		$	41.8		$	(9.8	)	$	178.0
Gross margin	64.3		%	72.0		%	65.3		%	50.2		%				58.0		%

Operating income							$	32.8		$	31.1		$	(31.0	)	$	32.9
Operating margin							14.7		%	37.4		%				10.7		%



	Three Months Ended
	December 28, 2019			December 29, 2018
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	199.2		$	187.8
Stock-based compensation	(1.0		)	(0.9		)
Amortization of intangibles	(8.4		)	(8.5		)
Other charges unrelated to core operating performance	(0.3		)	(0.4		)
GAAP gross profit	$	189.5		$	178.0

Corporate reconciling items impacting operating income:
Total segment operating income	$	67.9		$	63.9
Stock-based compensation	(11.3		)	(9.6		)
Amortization of intangibles	(17.2		)	(18.9		)
Change in fair value of contingent liability	6.0			—
Other charges unrelated to core operating performance ⁽¹⁾	(1.3		)	(2.2		)
Restructuring and related (benefits) charges	0.9			(0.3		)
GAAP operating income from continuing operations	$	45.0		$	32.9

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⁽¹⁾	During the three months ended December 28, 2019 and December 29, 2018, other charges unrelated to core operating performance primarily consisted of certain acquisition and integration related changes, transformational initiatives such as, site consolidations, and reorganization, loss on sale of investments and loss on disposal of long-lived assets.

The following tables presents information on the Company’s reportable segments for the six months ended December 28, 2019 and December 29, 2018 (in millions):



	Six Months Ended December 28, 2019
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items (1)			Consolidated GAAP Measures
Product revenue	$	361.2		$	26.3		$	387.5		$	159.2		$	—		$	546.7
Service revenue	40.7			25.8			66.5			0.3			—			66.8
Net revenue	$	401.9		$	52.1		$	454.0		$	159.5		$	—		$	613.5

Gross profit	$	262.8		$	33.4		$	296.2		$	86.9		$	(19.2	)	$	363.9
Gross margin	65.4		%	64.1		%	65.2		%	54.5		%				59.3		%

Operating income							$	59.8		$	60.8		$	(54.9	)	$	65.7
Operating margin							13.2		%	38.1		%				10.7		%



	Six Months Ended December 29, 2018
	Network and Service Enablement
	Network Enablement			Service Enablement			Network and Service Enablement			Optical Security and Performance Products			Other Items (1)			Consolidated GAAP Measures
Product revenue	$	325.9		$	27.4		$	353.3		$	160.6		$	—		$	513.9
Service revenue	34.1			27.0			61.1			0.4			—			61.5
Net revenue	$	360.0		$	54.4		$	414.4		$	161.0		$	—		$	575.4

Gross profit	$	228.6		$	38.6		$	267.2		$	81.2		$	(20.0	)	$	328.4
Gross margin	63.5		%	71.0		%	64.5		%	50.4		%				57.1		%

Operating income							$	49.2		$	58.5		$	(76.0	)	$	31.7
Operating margin							11.9		%	36.3		%				5.5		%

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Six Months Ended
	December 28, 2019			December 29, 2018
Corporate reconciling items impacting gross profit:
Total segment gross profit	$	383.1		$	348.4
Stock-based compensation	(2.0		)	(1.7		)
Amortization of intangibles	(16.8		)	(17.9		)
Other charges unrelated to core operating performance (2)	(0.4		)	(0.4		)
GAAP gross profit	$	363.9		$	328.4

Corporate reconciling items impacting operating income:
Total segment operating income	$	120.6		$	107.7
Stock-based compensation	(21.6		)	(17.7		)
Amortization of intangibles	(34.3		)	(38.1		)
Change in fair value of contingent liability	4.3			—
Other charges unrelated to core operating performance (2)	(3.9		)	(5.1		)
Restructuring and related (benefits) charges	0.6			(15.1		)
GAAP operating income from continuing operations	$	65.7		$	31.7

The Company operates primarily in three geographic regions: Americas, Asia-Pacific, and Europe, Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following tables presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue for the three and six months ended December 28, 2019 and December 29, 2018, (in millions):



	Three Months Ended
	December 28, 2019						December 29, 2018
	Product Revenue		Service Revenue		Total		Product Revenue		Service Revenue		Total
Americas:
United States	$	83.1	$	13.1	$	96.2	$	89.8	$	14.3	$	104.1
Other Americas	17.2		3.4		20.6		17.3		4.0		21.3
Total Americas	$	100.3	$	16.5	$	116.8	$	107.1	$	18.3	$	125.4

Asia-Pacific:
Greater China	$	78.4	$	2.1	$	80.5	$	64.8	$	2.1	$	66.9
Other Asia-Pacific	28.7		3.8		32.5		30.4		3.6		34.0
Total Asia-Pacific	$	107.1	$	5.9	$	113.0	$	95.2	$	5.7	$	100.9

EMEA:
Switzerland	$	13.4	$	0.1	$	13.5	$	23.0	$	—	$	23.0
Other EMEA	61.1		9.3		70.4		47.5		10.1		57.6
Total EMEA	$	74.5	$	9.4	$	83.9	$	70.5	$	10.1	$	80.6

Total net revenue	$	281.9	$	31.8	$	313.7	$	272.8	$	34.1	$	306.9

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VIAVI SOLUTIONS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Six Months Ended
	December 28, 2019						December 29, 2018
	Product Revenue		Service Revenue		Total		Product Revenue		Service Revenue		Total
Americas:
United States	$	154.5	$	26.7	$	181.2	$	149.9	$	27.0	$	176.9
Other Americas	33.8		7.5		41.3		35.2		7.1		42.3
Total Americas	$	188.3	$	34.2	$	222.5	$	185.1	$	34.1	$	219.2

Asia-Pacific:
Greater China	$	148.9	$	3.5	$	152.4	$	123.5	$	2.3	$	125.8
Other Asia-Pacific	60.0		7.8		67.8		66.4		7.1		73.5
Total Asia-Pacific	$	208.9	$	11.3	$	220.2	$	189.9	$	9.4	$	199.3

EMEA:
Switzerland	$	25.6	$	0.1	$	25.7	$	48.7	$	—	$	48.7
Other EMEA	123.9		21.2		145.1		90.2		18.0		108.2
Total EMEA	$	149.5	$	21.3	$	170.8	$	138.9	$	18.0	$	156.9

Total net revenue	$	546.7	$	66.8	$	613.5	$	513.9	$	61.5	$	575.4

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements contained in this Quarterly report on Form 10-Q, which we also refer to as the Report, which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as “anticipates,” “believes,” “can,” “can impact,” “could,” “continue,” “estimates,” “expects,” “intends,” “may,” “ongoing,” “plans,” “potential,” “projects,” “should,” “will,” “will continue to be,” “would,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements such as:


•	Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;


•	Our plans for growth and innovation opportunities;

•

Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;


•	Our plans for continued development, use and protection of our intellectual property;


•	Our strategies for achieving our current business objectives, including related risks and uncertainties;


•	Our plans or expectations relating to investments, acquisitions, partnerships and other strategic opportunities;


•	Our strategies for reducing our dependence on sole suppliers or otherwise mitigating the risk of supply chain interruptions;


•	Our research and development plans and the expected impact of such plans on our financial performance; and


•	Our expectations related to our products, including costs associated with the development of new products, product yields, quality and other issues.

Management cautions that forward-looking statements are based on current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These forward-looking statements are only predictions and are subject to risks and uncertainties including those set forth in Part II, Item 1A “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in other documents we file with the U.S. Securities and Exchange Commission. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine or otherwise fail to support or substantiate such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results or to changes in our expectations.

In addition, Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

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You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Risk Factors” and “Forward-Looking Statements.”

OUR INDUSTRIES AND QUARTERLY DEVELOPMENTS

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 to communications service providers (“CSPs”), enterprises, network equipment manufacturers, government and avionics. We help these customers harness the power of instruments, automation, intelligence and virtualization to command the network. VIAVI is also a leader in light management solutions for 3D sensing, anti-counterfeiting, consumer electronics, industrial, automotive, and defense applications.

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


•	Network Enablement (“NE”);


•	Service Enablement (“SE”), and;


•	Optical Security and Performance Products (“OSP”).

Network Enablement

NE provides an integrated portfolio of testing solutions that access the network to perform build-out and maintenance tasks. These solutions include instruments, software and services to design, build, activate, certify, troubleshoot and optimize networks. They also support more profitable, higher-performing networks and facilitate time-to-revenue.

Our solutions address lab and production environments, field deployment and service assurance for wireless and fixed communications networks, including storage networks. Our test instrument portfolio is one of the largest in the industry, with hundreds of thousands of units in active use by major network equipment manufacturers (“NEMs”), operators and services providers worldwide. Designed to be mobile, these products include instruments and software that access the network to perform installation and maintenance tasks. They help service provider technicians assess the performance of network elements and segments and verify the integrity of the information being transmitted across the network. These instruments are highly intelligent and have user interfaces that are designed to simplify operations and minimize the training required to operate them. Our NE solutions are also used by NEMs in the design and production of next-generation network equipment. Other Test & Measurement communications products also serve the public safety, government, and, aerospace and defense markets.

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.

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, and deployed private enterprise customers. Our customers include América Móvil, AT&T Inc., CenturyLink Inc., Cisco Systems, Inc., Comcast Corporation, Nokia Networks and Verizon Communications, Inc.

Our NE products and associated services including acquired business are described below:

Field Instruments: Primarily consisting of (a) Cable and Access products; (b) Fiber Instrument products; (c) Metro products; (d) RF Test products; (e) Radio Test products; and (f) Avionics products.

Lab Instruments: Primarily consisting of (a) Fiber Optic Production Lab Test; (b) Optical Transport products; (c) Storage Network Test products; and (d) Wireless products.

Service Enablement

SE provides embedded systems and performance management solutions that give global CSPs, enterprises and cloud operators visibility into network, service and application data. These solutions - which primarily consist of

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instruments, microprobes and software - monitor, collect and analyze network data to reveal the actual customer experience, deliver insights to optimize performance, detect security threats, and identify opportunities for new revenue streams.

Our SE solutions portfolio delivers service assurance for operational wireless and fixed communications networks also addressed by our NE portfolio, primarily supporting CSPs. Additionally, our SE portfolio supports network performance monitoring for enterprises and cloud operators. As service providers and enterprises shift their networks to a hybrid physical-cloud state, the SE portfolio provides our customers with dynamic and remote network management, control, and optimization. They can initiate service to new customers faster, decrease the need for technicians to make on-site service calls, reduce mean time to repair and, as a result, lower costs while providing higher quality and more reliable services. Remote monitoring decreases operating expenses, while early detection helps increase uptime, preserve revenue, and helps operators better monetize their networks.

SE customers include similar CSPs, NEMs, government organizations, large corporate customers, and storage-segment customers that are served by our NE segment.

Our SE products and associated services are described below:

Data Center: Consisting of our Network Performance Monitoring and Security products.

Assurance: Primarily consisting of our (a) Growth Products (Core and Edge Assurance 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, healthcare and other markets.

Our security offerings for the currency market include, Optically Variable Pigment (“OVP®”) and Optically Variable Magnetic Pigment (“OVMP®”). OVP® enables a color-shifting effect 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. OVMP is an advanced product version of OVP with the added magnetic property feature.

Leveraging our expertise in spectral management and our unique high-precision coating capabilities, OSP provides a range of products and technologies for the consumer and industrial market, including, for example, 3D Sensing optical filters and Engineered Diffusers^TM.

OSP value-added solutions meet the stringent requirements of commercial and government customers. 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.

OSP serves customers such as, L-3 Communications, Lockheed Martin, Seiko Epson, SICPA and STMicroelectronics.

In October 2017 and again in October 2019, we temporarily closed our Santa Rosa, California facility resulting in production stoppage, due to wildfires in the region and the facility’s close proximity to the wildfire evacuation zone. The location of our production facility could subject us to production delays and/or equipment and property damage.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Refer to “Note 2. Recently Issued Accounting Pronouncements” regarding the effect of certain recent accounting pronouncements on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues and expenses, and the disclosure of contingent assets and liabilities. Our estimates are based on historical experience and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying

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values of assets and liabilities. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates and such differences may be material.

For a description of the critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements, refer to Item 7 on Management Discussion and Analysis of Financial Condition and Results of Operations in our Fiscal 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). There have been no material changes to our critical accounting policies and estimates, except with respect to financial reporting of leasing arrangements from the adoption of ASC 842 - Leases. Refer to “Note 12. Leases” for more details.

RESULTS OF OPERATIONS

The results of operations for the current period are not necessarily indicative of results to be expected for future periods. The following table summarizes selected Consolidated Statements of Operations items (in millions, except for percentages):



	Three Months Ended											Six Months Ended
	December 28, 2019			December 29, 2018			Change			Percent Change		December 28, 2019			December 29, 2018			Change			Percent Change
Segment net revenue:
NE	$	203.0		$	195.5		$	7.5		3.8	%	$	401.9		$	360.0		$	41.9		11.6	%
SE	31.2			28.2			3.0			10.6	%	52.1			54.4			(2.3		)	(4.2	)%
OSP	79.5			83.2			(3.7		)	(4.4	)%	159.5			161.0			(1.5		)	(0.9	)%
Total net revenue	$	313.7		$	306.9		$	6.8		2.2	%	$	613.5		$	575.4		$	38.1		6.6	%

Gross profit	$	189.5		$	178.0		$	11.5		6.5	%	$	363.9		$	328.4		$	35.5		10.8	%
Gross margin	60.4		%	58.0		%						59.3		%	57.1		%

Research and development	$	50.3		$	45.9		$	4.4		9.6	%	$	101.8		$	88.5		$	13.3		15.0	%
Percentage of net revenue	16.0		%	15.0		%						16.6		%	15.4		%

Selling, general and administrative	$	86.3		$	88.5		$	(2.2	)	(2.5	)%	$	179.5		$	172.9		$	6.6		3.8	%
Percentage of net revenue	27.5		%	28.8		%						29.3		%	30.0		%

Restructuring and related (benefits) charges	$	(0.9	)	$	0.3		$	(1.2	)	(400.0	)%	$	(0.6	)	$	15.1		$	(15.7	)	(104.0	)%
Percentage of net revenue	(0.3		)%	0.1		%						(0.1		)%	2.6		%

Interest and other income, net	$	1.3		$	1.5		$	(0.2	)	(13.3	)%	$	4.0		$	3.2		$	0.8		25.0	%
Percentage of net revenue	0.4		%	0.5		%						0.7		%	0.6		%

Interest expense	$	(8.4	)	$	(8.1	)	$	0.3		3.7	%	$	(16.7	)	$	(18.2	)	$	(1.5	)	(8.2	)%
Percentage of net revenue	2.7		%	2.6		%						2.7		%	3.2		%

Provision for income taxes	$	9.9		$	10.9		$	(1.0	)	(9.2	)%	$	18.2		$	16.6		$	1.6		9.6	%
Percentage of net revenue	3.2		%	3.6		%						3.0		%	2.9		%

Net Revenue

Revenue from our service offerings exceeds 10% of our total consolidated net revenue and is presented separately in our Consolidated Statements of Operations. Service revenue primarily consists of maintenance and support, extended warranty, training, professional services and post-contract support in addition to other services such as calibration and repair services. When evaluating the performance of our segments, management focuses on total net

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revenue, gross profit and operating income and not the product or service categories. Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.

Three months ended December 28, 2019 and December 29, 2018

Net revenue increased by $6.8 million, or 2.2%, during the three months ended December 28, 2019 compared to the same period a year ago. This increase was due to revenue increase from our NE and SE segments, partially offset by revenue declines in our OSP segment.

Product revenues increased by $9.1 million, or 3.3%, during the three months ended December 28, 2019 compared to the same period a year ago, due to revenue increase from our NE and SE segments, partially offset by revenue declines in our OSP segment as discussed below.

Service revenues decreased by $2.3 million, or 6.7%, during the three months ended December 28, 2019 compared to the same period a year ago primarily due to revenue decreased from our SE segment.

NE net revenue increased by $7.5 million, or 3.8%, during the three months ended December 28, 2019 compared to the same period a year ago. This increase was driven by 5G wireless secular growth trends, higher fiber demand from Field Instruments due to the 400Gb upgrade cycle and cable demand strength of DOCSIS 3.1.

SE net revenue increased by $3.0 million, or 10.6%, during the three months ended December 28, 2019 compared to the same period a year ago. Due to higher demand in our Growth Assurance and Data Center products. This increase was partially offset by revenue declines from the continued runoff of Mature Assurance products.

OSP net revenue decreased by $3.7 million, or 4.4%, during the three months ended December 28, 2019 compared to the same period a year ago. This decrease is primarily driven by declines in demand for our Anti-Counterfeiting products, which benefited from higher banknote redesign demand in the fiscal first half of 2019. This decrease was partially offset by continued increasing 3D Sensing product demand driven by further adoption and the broadening of our customer base.

Six Months Ended December 28, 2019 and December 29, 2018

Net revenue increased by $38.1 million, or 6.6%, during the six months ended December 28, 2019 compared to the same period a year ago due to revenue increase from our NE segment, partially offset by our SE and OSP segments as discussed below.

Product revenues increased by $32.8 million, or 6.4% during the six months ended December 28, 2019 compared to the same period a year ago, primarily from our NE segment as discussed below.

Service revenues increased by $5.3 million, or 8.6%, during the six months ended December 28, 2019 compared to the same period a year ago primarily due to increased support revenue from the NE segment, partially offset by a decline in support contract renewals for the SE segment as discussed below.

NE net revenue increased by $41.9 million, or 11.6%, during the six months ended December 28, 2019 compared to the same period a year ago. This increase was driven by 5G wireless secular growth trends, higher fiber demand from Field Instruments due to the 400Gb upgrade cycle and cable demand strength of DOCSIS 3.1.

SE net revenue decreased by $2.3 million, or 4.2%, during the six months ended December 28, 2019 compared to the same period a year ago. This decrease was primarily driven by continued run-off of our Mature Assurance portfolio solutions, partially offset by an increase in revenues from our Growth Assurance products.

OSP net revenue decreased by $1.5 million, or 0.9%, during the six months ended December 28, 2019 compared to the same period a year ago. This decrease is primarily driven by declines in demand for our Anti-Counterfeiting products, which benefited from higher banknote redesign demand in the fiscal first half of 2019. This decrease was partially offset by continued 3D Sensing product demand driven by further adoption and the broadening of our customer base.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability and general financial performance, and that could create period over period variability in our financial measures. For example, while the majority of our net revenue and expenses are denominated in U.S. dollars, a portion of our international operations

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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 and SE products affected by macroeconomic uncertainty. We cannot predict when or to what extent these uncertainties will be resolved. Our revenues, profitability, and general financial performance may also be affected by: (a) pricing pressures due to, among other things, a highly concentrated customer base, increasing competition, particularly from Asia-based competitors, and a general commoditization trend for certain products; (b) product mix variability in our NE and SE markets, which affects revenue and gross margin; (c) fluctuations in customer buying patterns, which cause demand, revenue and profitability volatility; (d) the current trend of communication industry consolidation, which is expected to continue, that directly affects our NE and SE customer bases and adds additional risk and uncertainty to our financial and business projections; (e) the impact of ongoing global trade policies, tariffs and sanctions; and (f) regulatory or economic developments that slow or change the rate of adoption of 5G, 3D Sensing and other emerging secular technologies and platforms.

Revenue by Region

We operate in three geographic regions: Americas, Asia-Pacific and Europe Middle East and Africa (“EMEA”). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue (in millions):



	Three Months Ended								Six Months Ended
	December 28, 2019				December 29, 2018				December 28, 2019				December 29, 2018
Americas:
United States	$	96.2	30.7	%	$	104.1	33.9	%	$	181.2	29.5	%	$	176.9	30.7	%
Other Americas	20.6		6.5	%	21.3		6.9	%	41.3		6.8	%	42.3		7.4	%
Total Americas	$	116.8	37.2	%	$	125.4	40.8	%	$	222.5	36.3	%	$	219.2	38.1	%

Asia-Pacific:
Greater China	$	80.5	25.7	%	$	66.9	21.8	%	$	152.4	24.8	%	$	125.8	21.9	%
Other Asia-Pacific	32.5		10.3	%	34.0		11.1	%	67.8		11.1	%	73.5		12.7	%
Total Asia-Pacific	$	113.0	36.0	%	$	100.9	32.9	%	$	220.2	35.9	%	$	199.3	34.6	%

EMEA:
Switzerland	$	13.5	4.3	%	$	23.0	7.5	%	$	25.7	4.2	%	$	48.7	8.5	%
Other EMEA	70.4		22.5	%	57.6		18.8	%	145.1		23.6	%	108.2		18.8	%
Total EMEA	$	83.9	26.8	%	$	80.6	26.3	%	$	170.8	27.8	%	$	156.9	27.3	%

Total net revenue	$	313.7	100.0	%	$	306.9	100.0	%	$	613.5	100.0	%	$	575.4	100.0	%

Net revenue from customers outside the Americas during the three months ended December 28, 2019 and December 29, 2018 represented 62.8% and 59.2% of net revenue, respectively.

Net revenue from customers outside the Americas during the six months ended December 28, 2019 and December 29, 2018 represented 63.7% and 61.9% of net revenue, respectively.

We expect revenue from customers outside of United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.

Gross Margin

Gross margin increased by 2.4 percentage points during the three months ended December 28, 2019 from 58.0% in the same period a year ago to 60.4% in the current period. This increase was primarily driven by higher revenue volume and favorable product mix within our NE segment and better manufacturing absorption in our OSP segment.

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The increase was partially offset by gross margin reduction in our SE segment as discussed below in the Operating Segment Information section.

Gross margin increased by 2.2 percentage points during the six months ended December 28, 2019 from 57.1% in the same period a year ago to 59.3% in the current period. This increase was primarily driven by higher revenue volume and favorable product mix within our NE segment and better manufacturing absorption in our OSP segment. This increase was partially offset by gross margin reduction in our SE segment as discussed below in the Operating Segment Information section.

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

Research and Development

R&D expense increased by $4.4 million, or 9.6%, during the three months ended December 28, 2019 compared to the same period a year ago. This increase was primarily driven by targeted investments to support increased demand for our Wireless products. As a percentage of net revenue, R&D increased by 1.0 percentage points during the three months ended December 28, 2019 compared to the same period a year ago.

R&D expense increased by $13.3 million, or 15.0%, during the six months ended December 28, 2019 compared to the same period a year ago. This increase was primarily driven by targeted investments to support increased demand for our key product lines and additional R&D costs incurred from our acquired businesses. As a percentage of net revenue R&D increased by 1.2 percentage points during the six months ended December 28, 2019 compared to the same period a year ago.

We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that will further differentiate us in the marketplace.

Selling, General and Administrative

SG&A expense decreased by $2.2 million or 2.5%, during the three months ended December 28, 2019 compared to the same period a year ago. This decrease was primarily due to change in fair value of contingent consideration, partially offset by targeted investments including upgrading our ERP and related systems, 3D Sensing products and additional SG&A costs incurred from our acquired businesses. As a percentage of net revenue, SG&A decreased 1.3 percentage points during the three months ended December 28, 2019 compared to the same period a year ago.

SG&A expense increased by $6.6 million, or 3.8%, during the six months ended December 28, 2019 compared to the same period a year ago. This increase is primarily due to ongoing investments including upgrading our ERP and related systems, targeted investments to support increased demand for our Wireless, Fiber and 3D Sensing products and additional SG&A costs incurred from our acquired businesses. It is partially offset by the change in fair value of contingent consideration. As a percentage of net revenue, SG&A decreased 0.7 percentage points during the six months ended December 28, 2019 compared to the same period a year ago.

We intend to continue to focus on reducing our SG&A expense as a percentage of net revenue. However, we may experience in the future, certain charges unrelated to our core operating performance, such as mergers and acquisitions-related expenses, litigation expenses and charges from changes in the fair value measurement of our contingent consideration liabilities, which could increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.

Restructuring and Related Charges

From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, integrate various acquisitions, rationalize the manufacturing of our products and align our businesses to address market conditions. We estimate annualized gross cost savings of approximately $24.3 million excluding any one-time charges as a result of recent restructuring activities initiated in the last twelve months. Refer to “Note 13. Restructuring and Related Charges” for more information.

As of December 28, 2019, our total restructuring accrual was $5.4 million. During the three and six months ended December 28, 2019, we recorded $(0.9) million and $(0.6) million respectively, in restructuring and related (benefits)

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charges. During the three and six months ended December 29, 2018, we recorded $0.3 million and $15.1 million respectively, in restructuring and related (benefit) charges.

Interest and Other Income, Net

Interest and other income, net, was $1.3 million during the three months ended December 28, 2019 compared to $1.5 million the same period a year ago. This $0.2 million decrease was primarily driven by$0.5 million unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period, offset by $0.4 million more in interest income due to higher average investment balance during the current period.

Interest and other income, net, was $4.0 million during the six months ended December 28, 2019 compared to $3.2 million the same period a year ago. This $0.8 million increase was primarily driven by $1.3 million favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period, offset by a $0.4 million decrease in interest income during the current period due to much lower average investment balance during the current period.

Interest Expense

Interest expense increased by $0.3 million, or 3.7%, during the three months ended December 28, 2019 compared to the same period a year ago. This increase was primarily due to the increase in debt discount accretion of the 2023 Notes and 2024 Notes during the current period.

Interest expense decreased by $1.5 million, or 8.2%, during the six months ended December 28, 2019 compared to the same period a year ago. This decrease was primarily due to a decrease in debt discount accretion of the 2033 Notes during the current period as the notes were fully redeemed or converted in the second quarter of fiscal 2019.

Provision for Income Taxes

We recorded an income tax expense of $9.9 million and $18.2 million for the three and six months ended December 28, 2019, respectively. We recorded an income tax expense of $10.9 million and $16.6 million for the three and six months ended December 29, 2018, respectively.

The income tax expense for the three and six months ended December 28, 2019 and December 29, 2018 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year.

The income tax expense recorded differs from the expected tax expense that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income (loss) from continuing operations.

As of December 28, 2019, and June 29, 2019, our unrecognized tax benefits totaled $50.7 million and $50.9 million, respectively, and are included in deferred taxes and other non-current tax liabilities, net. We had $4.2 million accrued for the payment of interest and penalties at December 28, 2019. The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year. Although we do not expect that our balance of gross unrecognized tax benefits will change materially in the next 12 months, given the uncertainty in the development of ongoing income tax examinations, we are unable to estimate the full range of possible adjustments to this balance.

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Operating Segment Information

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



	Three Months Ended											Six Months Ended
	December 28, 2019			December 29, 2018			Change			Percentage Change		December 28, 2019			December 29, 2018			Change			Percentage Change
Network Enablement
Net revenue	$	203.0		$	195.5		$	7.5		3.8	%	$	401.9		$	360.0		$	41.9		11.6	%
Gross profit	134.8			125.7			9.1			7.2	%	262.8			228.6			34.2			15.0	%
Gross margin	66.4		%	64.3		%						65.4		%	63.5		%

Service Enablement
Net revenue	$	31.2		$	28.2		$	3.0		10.6	%	$	52.1		$	54.4		$	(2.3	)	(4.2	)%
Gross profit	20.8			20.3			0.5			2.5	%	33.4			38.6			(5.2		)	(13.5	)%
Gross margin	66.7		%	72.0		%						64.1		%	71.0		%

Network and Service Enablement
Net revenue	$	234.2		$	223.7		$	10.5		4.7	%	$	454.0		$	414.4		$	39.6		9.6	%
Operating income	37.5			32.8			4.7			14.3	%	59.8			49.2			10.6			21.5	%
Operating margin	16.0		%	14.7		%						13.2		%	11.9		%

Optical Security and Performance
Net revenue	$	79.5		$	83.2		$	(3.7	)	(4.4	)%	$	159.5		$	161.0		$	(1.5	)	(0.9	)%
Gross profit	43.6			41.8			1.8			4.3	%	86.9			81.2			5.7			7.0	%
Gross margin	54.8		%	50.2		%						54.5		%	50.4		%
Operating income	30.4			31.1			(0.7		)	(2.3	)%	60.8			58.5			2.3			3.9	%
Operating margin	38.2		%	37.4		%						38.1		%	36.3		%

Network Enablement

During the three months ended December 28, 2019, NE gross margin increased by 2.1 percentage points from 64.3% in the same period a year ago to 66.4% in the current period. This increase was primarily due to higher revenue volume and gross margin improvement from favorable product mix.

During the six months ended December 28, 2019, NE gross margin increased by 1.9 percentage points from 63.5% in the same period a year ago to 65.4% in the current period. This increase was primarily due to higher revenue volume and gross margin improvement from favorable product mix.

Service Enablement

During the three months ended December 28, 2019, SE gross margin decreased by 5.3 percentage points from 72.0% in the same period a year ago to 66.7% in the current period. This decrease was primarily due to unfavorable product mix and under absorption of fixed costs.

During the six months ended December 28, 2019, SE gross margin decreased by 6.9 percentage points from 71.0% in the same period a year ago to 64.1% in the current period. This decrease was primarily due to lower revenue volume and unfavorable product mix.

Network and Service Enablement (“NSE”)

During the three months ended December 28, 2019, NSE operating margin increased by 1.3 percentage points from 14.7% in the same period a year ago to 16.0% in the current period. This increase in operating margin was primarily driven by higher gross margins as discussed above, partially offset by targeted investments to support our growth initiatives for our Wireless products.

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During the six months ended December 28, 2019, NSE operating margin increased by 1.3 percentage points from 11.9% in the same period a year ago to 13.2% in the current period. This increase in operating margin was primarily driven by increase in gross margin as discussed above, partially offset by targeted investments to support our growth initiatives for our Wireless products.

Optical Security and Performance Products

During the three months ended December 28, 2019 OSP gross margin increased by 4.6 percentage points from 50.2% in the same period a year ago to 54.8% in the current period. This increase was primarily due to gross margin improvement in our Consumer and Industrial products, favorable manufacturing overhead absorption, partially offset by unfavorable product mix due to lower revenue from Anti-Counterfeiting products.

During the six months ended December 28, 2019, OSP gross margin increased by 4.1 percentage points from 50.4% in the same period a year ago to 54.5% in the current period. This increase was primarily due to gross margin improvement in our Consumer and Industrial products, favorable manufacturing overhead absorption, partially offset by unfavorable product mix due to lower revenue from Anti-Counterfeiting products.

OSP operating margin increased by 0.8 percentage points during the three months ended December 28, 2019 from 37.4% in the same period a year ago to 38.2% in the current period. The increase in operating margin was primarily due to higher gross margins as discussed above, offset by increased 3D Sensing investments.

OSP operating margin increased by 1.8 percentage points during the six months ended December 28, 2019 from 36.3% in the same period a year ago to 38.1% in the current period. The increase in operating margin was primarily due to higher gross margins as discussed above, offset by increased 3D Sensing investments.

Liquidity and Capital Resources

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our 10-K. As of December 28, 2019, U.S. entities owned approximately 26.3% of our cash and cash equivalents, short-term investments and restricted cash.

As of December 28, 2019, the majority of our cash investments have maturities of 90 days or less and are of high credit quality. Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales. During the three months ended December 28, 2019, 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. 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.

On August 15, 2018, certain holders of the 2033 Notes issued in August 2013 exercised the put option and an aggregate principal amount of $134.3 million of the 2033 Notes was validly surrendered for repurchase. The Company accepted all such notes for payment with available cash. On September 5, 2018, the Company elected to exercise its optional redemption right to redeem all $142.7 million aggregate principal amount of its outstanding 2033 Notes. The date fixed for the redemption of the Notes was October 10, 2018 (Redemption Date). In connection with the redemption, holders of $112.0 million aggregate principal amount of Notes converted their Notes in accordance with the terms and conditions of the Notes. Note holders who converted their notes received an aggregate payout of $111.8 million in cash and were issued 231,795 shares of the Company’s common stock. The Company redeemed the remaining $30.7 million aggregate principal amount of outstanding Notes in accordance with its notice of redemption dated September 5, 2018. The Company paid to the registered holders of the Notes that were redeemed an aggregate amount of approximately $30.8 million, including accrued and unpaid interest up to, but excluding, the Redemption Date. As of December 28, 2019, none of the 2033 Notes remain outstanding. For additional information related to our debt refer to “Note 11. Debt.”

Six Months Ended December 28, 2019

As of December 28, 2019, our combined balance of cash and cash equivalents, short-term investments, and restricted cash increased by $30.4 million to $556.9 million from $526.5 million as of June 29, 2019.

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During the six months ended December 28, 2019, Cash provided by operating activities was $69.3 million, consisting of net income of $34.8 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and change in fair value of contingent liabilities) which totaled $81.9 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $47.4 million. Changes in our operating assets and liabilities related primarily to an increase in accounts receivable of $13.5 million mainly driven by revenue growth, a decrease in accounts payable of $14.2 million primarily driven by timing of purchases and related payments, a decrease in accrued expenses and other current and non-current liabilities of $37.3 million, and an increase in other current and non-current assets of $2.5 million. These changes were partially offset by an increase in accrued payroll and related expenses of $8.2 million, an increase in income taxes payable of $5.8 million, a decrease in inventories of $3.2 million due to higher shipment volume at the end of the quarter, and an increase in deferred revenue of $2.9 million.

During the six months ended December 28, 2019, Cash used in investing activities was $10.7 million, primarily related to $13.3 million of cash used for capital expenditures, offset by $3.1 million proceeds from sales of assets.

During the six months ended December 28, 2019, Cash used in financing activities was $25.3 million, primarily resulting from $15.1 million in withholding tax payments on the vesting of restricted stock awards, $10.7 million in cash paid to repurchase common stock under our share repurchase program and $1.8 million payments on financing obligations; offset by $2.3 million in proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

Six Months Ended December 29, 2018

As of December 29, 2018, our combined balance of cash and cash equivalents, short-term investments, and restricted cash decreased by $285.5 million to $508.1 million from $793.6 million as of June 30, 2018.

During the six months ended December 29, 2018, Cash provided by operating activities was $69.1 million, consisting of net loss of $2.3 million adjusted for non-cash charges (e.g., depreciation, amortization and stock-based compensation) which totaled $85.2 million, including changes in deferred tax balance, and changes in operating assets and liabilities that provided $13.8 million. Changes in our operating assets and liabilities related primarily to an increase in accrued payroll and related expenses of $9.5 million, a decrease in inventories of $3.4 million due to increased shipments of 3D Sensing products, an increase in income taxes payable of $7.0 million, an increase in deferred revenue of $0.3 million, and an increase in accrued expenses and other current and non-current liabilities of $3.2 million. These changes were partially offset by an increase in accounts receivable of $33.5 million due to higher billings, a decrease in accounts payable of $3.0 million driven by the timing of payments, and an increase in other current and non-current assets of $0.7 million.

During the six months ended December 29, 2018, Cash provided by investing activities was $89.9 million, primarily related to $139.2 million in sales and maturities of available-for-sale debt securities and $3.0 million proceeds from sales of assets; offset by $24.2 million of cash used for capital expenditures and $28.1 million used for acquisitions of businesses, net of cash acquired.

During the six months ended December 29, 2018, Cash used in financing activities was $294.0 million, primarily resulting from $276.9 million used for redemption and conversion of our 2033 Notes, $9.8 million in withholding tax payments on vesting of restricted stock awards and $0.9 million in payment of financing obligations; offset by $2.1 million in proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve months. However, there are a number of factors that could positively or negatively impact our liquidity position, including:


•	global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;


•	changes in accounts receivable, inventory or other operating assets and liabilities which affect our working capital;


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

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•	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; and


•	compliance with covenants and other terms and conditions related to our financing arrangements.

Contractual Obligations

There were no material changes to our existing contractual commitments during the second quarter of fiscal 2020.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors, other than the guarantees discussed in “Note 18. Commitments and Contingencies.”

Employee Equity Incentive Plan

Our stock-based benefit plans are a broad-based, long-term retention program that is intended to attract and retain employees and align stockholder and employee interests. Refer to “Note 16. Stock-Based Compensation” for more details.

Pension and Other Post-retirement Benefits

We sponsor significant pension plans for certain past and present employees in the United Kingdom (“U.K.”) and Germany. We are also responsible for the non-pension post-retirement benefit obligation (“PBO”) assumed from a past acquisition. All 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 in fiscal 2010. The U.K. plan is partially funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded. As of December 28, 2019, our pension plans were under funded by $107.0 million since the 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. Pension plan assets are managed by external third parties and we monitor the performance of our investment managers. As of December 28, 2019, the fair value of plan assets had increased approximately 3.0% since June 29, 2019, our most recent fiscal year end.

A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate. Changes in the discount rate impact the interest cost component of the net periodic benefit cost calculation and PBO due to the fact that the PBO is calculated on a net present value basis. Decreases in the discount rate will generally increase pre-tax cost, recognized expense and the PBO. Increases in the discount rate tend to have the opposite effect. We estimate a 50 basis point decrease or increase in the discount rate would cause a corresponding increase or decrease, respectively, in the PBO of approximately $9.2 million based upon data as of June 29, 2019.

In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets. While it is not possible to accurately predict future rate movements, we believe our current assumptions are appropriate. Refer to “Note 17. Employee Pension and Other Benefit Plans” for more details.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

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The Company’s market risk has not changed materially from the foreign exchange and interest rate risks disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), which are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 28, 2019.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures of our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems will be achieved. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Accordingly, our disclosure controls and procedures provide reasonable assurance of achieving their objective.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our financial position, results of operations or statement of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. If an unfavorable final outcome were to occur, it may have a material adverse impact on our financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report for the fiscal year ended June 29, 2019, except as noted below.

The geographic location of our Northern California headquarters and production facilities subject them to earthquake and wildfire risks. It is impossible to predict the timing, magnitude or location of such natural disasters or their impacts on the local economy and on our operations. If a major earthquake, wildfire or other natural disaster were to damage or destroy our facilities or manufacturing equipment, we may experience potential impacts ranging from production and shipping delays to lost profits and revenues. 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. While we have not experienced damage to our facilities or disruption to operations as a result of these power outages, ongoing blackouts, particularly if prolonged or frequent, could impact our operations going forward.

We face risks related to health epidemics and other widespread outbreaks of contagious disease, which could significantly disrupt our operations and impact our operating results.

Significant outbreaks of contagious diseases, and other adverse public health developments, could have a material impact on our business operations and operating results. In December 2019, a strain of novel coronavirus causing respiratory illness emerged in the city of Wuhan in the Hubei province of China. The Chinese government has taken certain emergency measures to combat the spread of the virus, including extension of the Lunar New Year holidays, implementation of travel bans and closure of factories and businesses. We have significant manufacturing facilities and contract manufacturers located in China. While the full impact of this outbreak is unknown at this time, we are closely monitoring the rapid developments in China and continually assessing the potential impact on our business, and have restricted employee travel to Asia and closed facilities in China in response to the emergency measures implemented by the government and as a safety precaution to our employees. Any prolonged disruption of our facilities, suppliers, contract manufacturers or customers could negatively impact our sales and operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

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None.

Item 6. Exhibits

The following documents are filed as Exhibits to this report:

Incorporated by Reference

Filed

Furnished

Exhibit No.

Exhibit Description

Form

Exhibit

Filing Date

Herewith

Not Filed

31.1

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

10.1

Amended and Restated 2003 Equity Incentive Plan

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date: February 6, 2020	VIAVI SOLUTIONS INC.
	(Registrant)
	By:	/s/ AMAR MALETIRA
	Name:	Amar Maletira
	Title:	Executive Vice President and Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)