Company Quick10K Filing
Quick10K
Viavi Solutions
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.77 228 $2,910
10-Q 2018-12-29 Quarter: 2018-12-29
10-Q 2018-09-29 Quarter: 2018-09-29
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-07-01 Annual: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-K 2016-07-02 Annual: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-Q 2016-01-02 Quarter: 2016-01-02
10-Q 2015-10-03 Quarter: 2015-10-03
10-K 2015-06-27 Annual: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-Q 2014-12-27 Quarter: 2014-12-27
10-Q 2014-09-27 Quarter: 2014-09-27
10-K 2014-06-28 Annual: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-Q 2013-12-28 Quarter: 2013-12-28
8-K 2019-02-05 Earnings, Exhibits
8-K 2018-11-14 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-11-01 Earnings, Exhibits
8-K 2018-09-04 Other Events, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-07-25 Other Events, Exhibits
8-K 2018-07-18 Other Events, Exhibits
8-K 2018-06-19 Officers
8-K 2018-05-22 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-05-03 Earnings, Exhibits
8-K 2018-03-15 M&A, Regulation FD, Exhibits
8-K 2018-02-13 Officers, Regulation FD, Exhibits
8-K 2018-02-01 Enter Agreement, Regulation FD, Exhibits
WBA Walgreens Boots Alliance 50,140
MWA Mueller Water Products 1,750
CORV Correvio Pharma 112
SDPI Superior Drilling Products 28
ACY Aerocentury 18
EVIO EVIO 0
FXF Invesco Currencyshares Swiss Franc Trust 0
GRP Granite Real Estate 0
TOMI Tomi Environmental Solutions 0
JMDA Jerrick Media Holdings 0
VIAV 2018-12-29
Part I-Financial Information
Item 1. Financial Statements (Unaudited)
Note 1. Basis of Presentation
Note 2. Recently Issued Accounting Pronouncements
Note 3. Revenue
Note 4. Earnings per Share
Note 5. Accumulated Other Comprehensive Loss
Note 6. Acquisitions
Note 7. Balance Sheet and Other Details
Note 8. Investments, Forward Contracts and Fair Value Measurements
Note 9. Goodwill
Note 10. Acquired Developed Technology and Other Intangibles
Note 11. Debt
Note 12. Restructuring and Related Charges
Note 13. Income Taxes
Note 14. Stockholders' Equity
Note 15. Stock-Based Compensation
Note 16. Employee Pension and Other Benefit Plans
Note 17. Commitments and Contingencies
Note 18. Operating Segments and Geographic Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 viavq2fy1910q5-ex101.htm
EX-31.1 viavq2fy1910-q1ex311.htm
EX-31.2 viavq2fy1910q2ex312.htm
EX-32.1 viavq2fy1910q3-ex321.htm
EX-32.2 viavq2fy1910q4-ex322.htm

Viavi Solutions Earnings 2018-12-29

VIAV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 viavq2fy1910-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 

(Mark One)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2018
 OR
o 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 0-22874
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)

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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See definition 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
x
Accelerated filer
o
Non-accelerated filer
(Do not check if a smaller reporting company)
o
Smaller reporting company
o
Emerging growth company
o
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.

o

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

As of January 25, 2019 the Registrant had 227,996,418 shares of common stock outstanding.
 
 
 
 
 




 
TABLE OF CONTENTS
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


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 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
Revenues:
 
 
 
 
 
 
 
Product revenue
$
272.8

 
$
181.3

 
$
513.9

 
$
346.4

Service revenue
34.1

 
24.1

 
61.5

 
49.9

Total net revenue
306.9

 
205.4

 
575.4

 
396.3

Cost of revenues:
 
 
 
 
 
 
 
Product cost of revenue
106.0

 
69.5

 
203.9

 
132.1

Service cost of revenue
14.4

 
12.4

 
25.2

 
23.9

Amortization of acquired technologies
8.5

 
4.1

 
17.9

 
8.2

Total cost of revenues
128.9

 
86.0

 
247.0

 
164.2

Gross profit
178.0

 
119.4

 
328.4

 
232.1

Operating expenses:
 
 
 
 
 
 
 
Research and development
45.9

 
29.9

 
88.5

 
59.0

Selling, general and administrative
88.5

 
76.7

 
172.9

 
149.0

Amortization of other intangibles
10.4

 
3.4

 
20.2

 
6.5

Restructuring and related charges
0.3

 
2.5

 
15.1

 
4.0

Total operating expenses
145.1

 
112.5

 
296.7

 
218.5

Income from operations
32.9

 
6.9

 
31.7

 
13.6

Interest and other income, net
1.7

 
2.9

 
3.6

 
3.1

Loss on sale of investments
(0.2
)
 

 
(0.4
)
 

Interest expense
(8.1
)
 
(11.7
)
 
(18.2
)
 
(24.2
)
Income (loss) before taxes
26.3

 
(1.9
)
 
16.7

 
(7.5
)
Provision for (benefit from) income taxes
10.9

 
(0.8
)
 
16.6

 
1.2

Income (loss) from continuing operations, net of taxes
15.4

 
(1.1
)
 
0.1

 
(8.7
)
Loss from discontinued operations, net of taxes
(2.4
)
 

 
(2.4
)
 

Net income (loss)
$
13.0

 
$
(1.1
)
 
$
(2.3
)
 
$
(8.7
)
 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 

 
 

 
 
 
 
Continuing operations
$
0.07

 
$
0.00

 
$
0.00

 
$
(0.04
)
Discontinued operations
(0.01
)
 

 
(0.01
)
 

Net income (loss) per share - basic
$
0.06

 
$
0.00

 
$
(0.01
)
 
$
(0.04
)
 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.00

 
$
0.00

 
$
(0.04
)
Discontinued operations
(0.01
)
 

 
(0.01
)
 

Net income (loss) per share - diluted
$
0.06

 
$
0.00

 
$
(0.01
)
 
$
(0.04
)
 
 
 
 
 
 
 
 
Shares used in per-share calculation - basic
228.3

 
227.4

 
227.8

 
227.7

Shares used in per-share calculation - diluted
230.4

 
227.4

 
230.5

 
227.7

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


2


VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
Net income (loss)
$
13.0

 
$
(1.1
)
 
$
(2.3
)
 
$
(8.7
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net change in cumulative translation adjustment, net of tax
(13.0
)
 
7.0

 
(26.1
)
 
17.3

Net change in available-for-sale investments, net of tax:
 
 
 
 
 
 
 
Unrealized holding (loss) gain arising during period

 
(0.4
)
 
0.2

 
(0.4
)
Plus: reclassification adjustments included in net income
0.2

 

 
0.4

 

Net change in defined benefit obligation, net of tax:
 
 
 
 
 
 
 
Amortization of actuarial losses
0.4

 
0.5

 
1.0

 
0.9

Net change in accumulated other comprehensive (loss) income
(12.4
)
 
7.1

 
(24.5
)
 
17.8

Comprehensive income (loss)
$
0.6

 
$
6.0

 
$
(26.8
)

$
9.1

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


3


VIAVI SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except share and par value data)
(unaudited) 
 
December 29, 2018
 
June 30, 2018
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
465.6

 
$
611.4

Short-term investments
30.0

 
169.3

Restricted cash
7.1

 
7.3

Accounts receivable, net
248.3

 
218.6

Inventories, net
87.2

 
92.3

Prepayments and other current assets
51.7

 
56.3

Total current assets
889.9

 
1,155.2

Property, plant and equipment, net
180.6

 
170.5

Goodwill
371.1

 
336.3

Intangibles, net
222.9

 
235.1

Deferred income taxes
113.2

 
114.3

Other non-current assets
20.5

 
15.4

Total assets
$
1,798.2

 
$
2,026.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
55.4

 
$
55.5

Accrued payroll and related expenses
61.6

 
52.8

Deferred revenue
59.2

 
60.6

Accrued expenses
33.4

 
30.1

Current portion of long-term debt

 
275.3

Other current liabilities
88.2

 
78.9

Total current liabilities
297.8

 
553.2

Long-term debt, net of current portion
568.4

 
557.9

Other non-current liabilities
221.9

 
180.8

Commitments and contingencies (Note 17)

 

Stockholders’ equity:
 
 
 
Preferred stock, no shares authorized, issued or outstanding at December 29, 2018. $0.001 par value; 1 million shares authorized; 1 share issued and outstanding at June 30, 2018.

 

Common stock, $0.001 par value; 1 billion shares authorized; 228 million shares at December 29, 2018 and 227 million shares at June 30, 2018, issued and outstanding
0.2

 
0.2

Additional paid-in capital
70,226.8

 
70,216.2

Accumulated deficit
(69,389.5
)
 
(69,378.6
)
Accumulated other comprehensive loss
(127.4
)
 
(102.9
)
Total stockholders’ equity
710.1

 
734.9

Total liabilities and stockholders’ equity
$
1,798.2

 
$
2,026.8

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

4


VIAVI SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(2.3
)
 
$
(8.7
)
Adjustments to reconcile net loss to net cash provided by operating activities:

 

Depreciation expense
19.7

 
16.7

Amortization of acquired technologies and other intangibles
38.1

 
14.7

Stock-based compensation
17.7

 
15.2

Amortization of debt issuance costs and accretion of debt discount
12.1

 
18.8

Amortization of discount and premium on investments, net
(0.2
)
 
0.2

Loss on disposal of assets
0.7

 
1.5

Loss on extinguishment of debt

 
3.8

Other
1.6

 
0.8

Changes in operating assets and liabilities, net of impact of acquisitions of businesses:
 
 
 
Accounts receivable
(31.6
)
 
(18.6
)
Inventories
3.4

 
(20.3
)
Other current and non-currents assets
(2.6
)
 
10.5

Accounts payable
(3.0
)
 
2.2

Income taxes payable
7.0

 
(0.6
)
Deferred revenue, current and non-current
0.3

 
5.3

Deferred taxes, net
(4.5
)
 
(6.7
)
Accrued payroll and related expenses
9.5

 
(0.6
)
Accrued expenses and other current and non-current liabilities
3.2

 
0.7

Net cash provided by operating activities
69.1

 
34.9

 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Purchases of available-for-sale investments

 
(297.6
)
Maturities of available-for-sale investments
42.2

 
250.3

Sales of available-for-sale investments
97.0

 
26.6

Capital expenditures
(24.2
)
 
(14.9
)
Proceeds from the sale of assets
3.0

 
2.3

Acquisition of businesses, net of cash acquired
(28.1
)
 
(56.2
)
Net cash provided by (used in) investing activities
89.9

 
(89.5
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Payment of debt issuance costs
(0.5
)
 

Repurchase and retirement of common stock
(8.5
)
 
(31.0
)
Withholding tax payment on vesting of restricted stock awards
(9.8
)
 
(8.9
)
Repurchase and redemption of convertible debt
(276.9
)
 
(175.0
)
Payment of financing obligations
(0.4
)
 
(0.9
)
Proceeds from exercise of employee stock options and employee stock purchase plan
2.1

 
2.5

Net cash used in financing activities
(294.0
)
 
(213.3
)
 
 
 
 
Effect of exchange rates on cash, cash equivalents and restricted cash
(11.2
)
 
11.9

Net decrease in cash, cash equivalents and restricted cash
(146.2
)
 
(256.0
)
Cash, cash equivalents and restricted cash at the beginning of the period (1)
624.3

 
1,022.4

Cash, cash equivalents and restricted cash at the end of the period (2)
$
478.1

 
$
766.4


(1) These amounts include both current and non-current balances of restricted cash totaling $12.9 million and $18.0 million as of December 29, 2018 and December 30, 2017, respectively, which primarily represent collateral for letters of credit and performance bonds for the benefit of third parties.
(2) These amounts include both current and non-current balances of restricted cash totaling $12.5 million and $13.3 million as of December 29, 2018 and December 30, 2017, respectively, which primarily represent collateral for letters of credit and performance bonds for the benefit of third parties.
The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

5


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”, “we”, “our” and “us”) for the three and six months ended December 29, 2018 and December 30, 2017 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 30, 2018.
Other than updates to the Company’s revenue recognition policy under Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers, as disclosed in “Note 2. Recently Issued Accounting Pronouncements” and “Note 3. Revenue”, there have been no material changes to the Company’s accounting policies during the three and six months ended December 29, 2018, 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 30, 2018 on Form 10-K filed with the SEC on August 28, 2018.
The balance sheet as of June 30, 2018 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 29, 2018 and December 30, 2017 may not be indicative of results for the fiscal year ending June 29, 2019 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 2019 is a 52-week year ending on June 29, 2019. The Company’s fiscal 2018 was a 52-week year ending on June 30, 2018.
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 November 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) that requires a statement of cash flows to present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. In the first quarter of fiscal 2019, we adopted this ASU using a retrospective transition method. Accordingly, our consolidated statement of cash flows for the six months ended December 29, 2018 and December 30, 2017, as presented herein, has been restated to comply with the new requirements. 

In May 2014, the FASB issued new authoritative guidance related to revenue recognition from contracts with customers, ASC 606 - Revenue from Contracts with Customers (the “revenue standard”). The new guidance provides a unified model to determine when and how revenue is recognized. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company adopted the new standard effective in the first quarter of fiscal 2019 using the retrospective transition method, which required the Company to recast each prior period

6


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

presented consistent with the new guidance. Refer to “Note 3. Revenue” of the Consolidated Financial Statements for a summary of significant policies related to the new accounting standards. As part of the adoption, certain prior period amounts have been adjusted or reclassified within the consolidated financial statements.
The following table presents the impact of the revenue standard adoption, to select line items of our Consolidated Balance Sheet as of June 30, 2018, (in millions):
 
June 30, 2018
 
As Reported
 
Adjustment
 
As Adjusted
ASSETS
 
 
 
 
 
Accounts receivable, net
$
217.5

 
$
1.1

 
$
218.6

Prepayments and other assets
54.8

 
1.5

 
56.3

Deferred income taxes
114.5

 
(0.2
)
 
114.3

Other non-current assets
13.6

 
1.8

 
15.4

Total assets
$
2,022.6

 
$
4.2

 
$
2,026.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Deferred revenue
$
71.9

 
$
(11.3
)
 
$
60.6

Accrued payroll and related expenses
51.4

 
1.4

 
52.8

Other current liabilities
77.0

 
1.9

 
78.9

Other non-current liabilities
182.8

 
(2.0
)
 
180.8

Total stockholders’ equity
720.7

 
14.2

 
734.9

Total liabilities and stockholders’ equity
$
2,022.6

 
$
4.2

 
$
2,026.8

The primary impacts to the previously issued amounts are as follows:
Accounts receivable, net: Adoption of the new revenue standard resulted in an increase to accounts receivable, net primarily due to two items: 1) The return rights provision, which represents a liability for expected customer returns, was previously presented as a reduction to accounts receivable and is now presented in other current liabilities; and 2) Contract assets which are recorded when a conditional right to consideration exists and transfer of control has occurred in advance of the Company’s right to invoice. Upon adoption of ASC 606, contract assets, which were previously presented as a component of accounts receivable, net, are now presented as a component of prepayments and other current assets.

Prepayments and other current assets: As noted above, contract assets, which are recognized when a conditional right to consideration exists and transfer of control has occurred in advance of the Company’s right to invoice, were previously presented as a component of accounts receivable, net. Upon adoption of ASC 606, contract assets are presented as a component of prepayments and other current assets.

Other non-current assets: The costs of obtaining contracts where the amortization period for recognition of the expense is beyond a year are capitalized and recognized over the revenue recognition period of the original contract. These costs are now classified as other non-current assets.

Short-term and long-term deferred revenue: Adoption of the new revenue standard resulted in a decrease of deferred revenue primarily due to the net change in timing of software related revenue. Under the previous standard revenue for software license sales bundled with post-contract support and/or services where vendor-specific objective evidence of fair value had not been established was recognized ratably over the support period. Upon adoption of ASC 606 the revenue related to such software license sales will now be recognized when control transfers, which is usually at the time of billing. The actual revenue recognition treatment required under the standard will depend on contract-specific terms and, in some instances, transfer of control and revenue recognition may differ from the time of billing. Long-term deferred revenue is presented under other non-current liabilities.


7


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other current liabilities: The returns provision, which represents a liability for expected customer returns, was previously presented as a reduction of accounts receivable and is now presented as other current liabilities.
Adoption of the revenue standard had no impact on net cash provided by or used in operating, investing or financing activities as presented on our Consolidated Statements of Cash Flows.
The following table presents the impact of the revenue standard adoption to select line items of our previously reported Consolidated Statement of Operations for the three and six months ended December 30, 2017 (in millions, except per share data) as follows:
 
Three months ended December 30, 2017
 
Six months ended December 30, 2017
 
As Reported
 
Adjustment
 
As Adjusted
 
As Reported
 
Adjustment
 
As Adjusted
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Product revenue
$
177.5

 
$
3.8

 
$
181.3

 
$
349.4

 
$
(3.0
)
 
$
346.4

Service revenue
24.3

 
(0.2
)
 
24.1

 
47.6

 
2.3

 
49.9

Total net revenue
201.8

 
3.6

 
205.4

 
397.0

 
(0.7
)
 
396.3

Cost of revenues:
 
 
 
 
 
 
 
 
 
 
 
Product cost of revenue
69.6

 
(0.1
)
 
69.5

 
133.1

 
(1.0
)
 
132.1

Service cost of revenue
12.0

 
0.4

 
12.4

 
23.4

 
0.5

 
23.9

Amortization of acquired technologies
4.1

 

 
4.1

 
8.2

 

 
8.2

Total cost of revenue
85.7

 
0.3

 
86.0

 
164.7

 
(0.5
)
 
164.2

Gross profit
116.1

 
3.3

 
119.4

 
232.3

 
(0.2
)
 
232.1

Income from operations
3.7

 
3.2

 
6.9

 
13.7

 
(0.1
)
 
13.6

Loss before taxes
(5.1
)
 
3.2

 
(1.9
)
 
(7.4
)
 
(0.1
)
 
(7.5
)
(Benefit from) provision for income taxes
(1.4
)
 
0.6

 
(0.8
)
 
1.1

 
0.1

 
1.2

Net loss
$
(3.7
)
 
$
2.6

 
$
(1.1
)
 
$
(8.5
)
 
$
(0.2
)
 
$
(8.7
)
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic and dilutive
$
(0.02
)
 
$
0.02

 
$
0.00

 
$
(0.04
)
 
$

 
$
(0.04
)
 
 
 
 
 
 
 
 
 
 
 
 
Shares used in per share calculations:
 
 
 
 
 
 
 
 
 
 
 
Basic and dilutive
227.4

 

 
227.4

 
227.7

 

 
227.7

The impacts to the previously issued amounts are summarized, as follows:
Net revenue: Adoption of the revenue standard resulted in a change in the timing of revenue recognized primarily due to the treatment of software license revenue. Under the prior standard, if vendor-specific objective evidence had not been established for the post contract support and/or the services, software license revenue would have been recognized ratably over the support period. Upon adoption of ASC 606, revenue related to such software license sales will now be recognized when control transfers which is usually at the time of billing. The decrease in revenue for the period presented above is primarily the result of the elimination of ratable software license revenue. Such license revenue was previously amortized; however it is now recognized upon recast, at a point in time under the new standard.
Recent Accounting Pronouncements Not Yet Adopted
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

8


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

in the first quarter of fiscal 2022 and early adoption is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its Consolidated Financial Statements.
In August 2018, the FASB issued guidance which changes the fair value measurement disclosure requirements of FASB Accounting Standards Codification Topic 820, Fair Value Measurement. The update to Topic 820 includes new, eliminated and modified disclosure requirements. The guidance is effective for the Company in the first quarter of fiscal 2020 and early adoption is permitted for any eliminated or modified disclosures. 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.
In February 2016, the FASB issued guidance regarding both operating and financing leases, requiring lessees to recognize on their balance sheets “right-of-use assets” and corresponding lease liabilities, measured on a discounted basis over the lease term. Virtually all leases will be subject to this treatment except leases that meet the definition of a “short-term lease.” The guidance requires a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. The guidance is effective for the Company in the first quarter of fiscal 2020. While the Company is not yet in a position to assess the full impact of the application of the new guidance, the Company expects adoption of this guidance will materially increase the assets and liabilities recorded on its Consolidated Balance Sheets.
Note 3. Revenue
Effective in the first quarter of fiscal 2019, the Company adopted the revenue standard using the retrospective transition method which requires the Company to recast each prior period presented, consistent with the new guidance. The most significant impact of the revenue standard relates to our accounting for contracts containing software. As a result, for software solutions bundled with post-contract support (“PCS”) and/or services where vendor-specific objective evidence (“VSOE”) has not been established for the PCS and/or services, revenue will now be recognized when control transfers which is usually at time of billing rather than ratably over the life of the support term. The actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances transfer of control and revenue recognition may differ from the time of billing. Revenue recognition under the revenue standard for the remainder of the Company’s products and services remains substantially unchanged.
The Company derives revenue 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.

9


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Steps of revenue recognition
The Company accounts for revenue in accordance with the revenue standard, in which the following five steps are applied to recognize revenue.
1.
Identify the contract with a customer: Generally, the Company considers customer purchase orders, which in some cases are governed by master sales or other purchase agreements, to be the customer contract. All of the following criteria must be met before the Company considers an agreement to qualify as a contract with a customer under the revenue standard: (i) it must be approved by all parties; (ii) each party’s rights regarding the goods and services to be transferred can be identified; (iii) the payment terms for the goods and services can be identified; (iv) the customer has the ability and intent to pay and collection of substantially all of the consideration is probable; and (v) the agreement has commercial substance. The Company utilizes judgment to determine the customer’s ability and intent to pay, which is based upon various factors including the customer’s historical payment experience or credit and financial information and credit risk management measures implemented by the Company.
2.
Identify the performance obligations in the contract: The Company assesses whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and (ii) the Company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The Company's performance obligations consist of a variety of products and services offerings which include networking equipment; proprietary pigment, optical filters, proprietary software licenses; support and maintenance which includes hardware support that extends beyond the Company's standard warranties, software maintenance, installation, professional and implementation services, and training.
Determining whether products and services are considered distinct performance obligations may require significant judgment. We may enter into contracts that involve a significant level of integration and interdependency between a software license and installation services. Judgment may be required to determine whether the software license is considered distinct in the context of the contract and accounted for separately, or not distinct in the context of the contract and accounted for together with the installation service.
3.
Determine the transaction price: Transaction price reflects the amount of consideration to which the Company expects to be entitled in exchange for transferring goods or services to the customer. The Company’s contracts may include terms that could cause variability in the transaction price including rebates, sales returns, market incentives and volume discounts. Variable consideration is generally accounted for at portfolio level and estimated based on historical information. If a contract includes a variable amount, the price adjustments are estimated at contract inception. In both cases, estimates are updated at the end of each reporting period as additional information becomes available.
4.
Allocate the transaction price to performance obligations in the contract: If the contract contains a single performance obligation, the entire transaction price is allocated to that performance obligation. Many of the Company’s contracts include multiple performance obligations with a combination of distinct products and services, maintenance and support, professional services and/or training. Contracts may also include rights or options to acquire future products and/or services, which are accounted for as separate performance obligations by the Company only if the right or option provides the customer with a material right that it would not receive without entering into the contract. For contracts with multiple performance obligations, the Company allocates the total transaction value to each distinct performance obligation based on relative standalone selling price (“SSP”). Judgment is required to determine the SSP for each distinct performance obligation. The best evidence of SSP is the observable price of a good or service when the Company sells that good or service separately under similar circumstances to similar customers. If a directly observable price is not available, the SSP must be estimated based on multiple factors including, but not limited to, historical pricing practices, internal costs, and profit objectives as well as overall market conditions.

10


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5.
Recognize revenue when (or as) performance obligations are satisfied: Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For software license sales transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For sales of implementation service and solution contracts or in instances where software is sold along with essential installation services, transfer of control occurs and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if the Company has evidence that all acceptance provisions will be, or have been, satisfied. For fixed-price support and extended warranty contracts, or certain software arrangements which provide customers with a right to access over a discrete period, control is deemed to transfer over time and revenue is recognized on a straight-line basis over the contract term due to the stand-ready nature of the performance obligation. Revenue from hardware repairs and calibration services is recognized at the time of completion of the related service. For other professional services or time-based labor contracts, revenue is recognized as the Company performs the services and the customers receive and consume the benefits.
Revenue policy and practical expedients
The following policy and practical expedient elections have been made by the Company under the revenue standard:
Revenue-based taxes as assessed by governmental authorities have been excluded from the measurement of transaction price(s).
Shipping and handling activities performed after customer obtains control of the good are treated as activities to fulfill the promise (cost of fulfillment). Therefore, the Company does not evaluate whether the shipping and handling activities are promised services.
Incremental costs of obtaining contracts that would have been recognized within one year or less are recognized as an expense when incurred. These costs are included in selling, general, and administrative expenses (“SG&A”). The costs of obtaining contracts where the amortization period for recognition of the expense is beyond a year are capitalized and recognized over the revenue recognition period of the original contract.
The portfolio approach is used for certain types of variable consideration for contracts with similar characteristics. The methodology is used when the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts within that portfolio.
Where at contract inception, the expected period between the transfer of promised goods or services and payment is within one year or less, we forgo adjustment for the impact of significant financing component for the contract.
For contracts that were modified before the beginning of the earliest reporting period presented, the Company has applied a transition practical expedient and will not recast the contracts for those modifications. Instead we have reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.
For the reporting periods presented before the date of initial application, the amount of the transaction price allocated to the remaining performance obligations and the explanation of when it expects to recognize that amount as revenue is not disclosed.
Disaggregation of revenue
The Company's revenue is presented on a disaggregated basis on the Consolidated Statements of Operations and in “Note 18. 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.
Balance sheet and other details
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.

11


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 are included in other current assets on the consolidated balance sheet. There were contract assets of $3.2 million and $1.3 million as of December 29, 2018 and June 30, 2018, respectively. Contract asset balances will fluctuate based upon the timing of transfer of services, billings and customers’ acceptance of contractual milestones.
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 other 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):
 
Three Months Ended
 
Six Months Ended
 
December 29, 2018
 
December 29, 2018
Deferred revenue:
 
 
 
Balance at beginning of period
$
72.6

 
$
71.9

Revenue deferrals for new contracts (1)
29.3

 
56.0

Revenue recognized during the period
(30.9
)
 
(56.9
)
Balance at end of period
$
71.0

 
$
71.0

 
 
 
 
Short-term deferred revenue
$
59.2

 
$
59.2

Long-term deferred revenue
$
11.8

 
$
11.8

(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 incomplete, as of December 29, 2018. 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.
The Company also applied the practical expedient to not disclose the amount of transaction price allocated to remaining performance obligations for the periods prior to adoption of the new revenue standard.
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.
The value of the transaction price allocated to remaining performance obligations as of December 29, 2018, was $239.3 million. The Company expects to recognize 94% of remaining performance obligations as revenue within the next 12 months, and the remainder thereafter.

12


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 4. Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share (in millions, except per share data):
 
Three Months Ended
 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
Numerator:
 

 
 

 
 
 
 
Income (loss) from continuing operations, net of taxes
$
15.4

 
$
(1.1
)
 
$
0.1

 
$
(8.7
)
Loss from discontinued operations, net of taxes
(2.4
)
 

 
(2.4
)
 

Net income (loss)
$
13.0

 
$
(1.1
)
 
$
(2.3
)
 
$
(8.7
)
Denominator:
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
Basic
228.3

 
227.4

 
227.8

 
227.7

Effect of dilutive securities from stock-based benefit plans
2.1

 

 
2.7

 

Diluted
230.4

 
227.4

 
230.5

 
227.7

 
 
 
 
 
 
 
 
Net income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.00

 
$
0.00

 
$
(0.04
)
Discontinued operations
(0.01
)
 

 
(0.01
)
 

Net income (loss) per share
$
0.06

 
$
0.00

 
$
(0.01
)
 
$
(0.04
)
 
 
 
 
 
 
 
 
Net income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.07

 
$
0.00

 
$
0.00

 
$
(0.04
)
Discontinued operations
(0.01
)
 

 
(0.01
)
 

Net income (loss) per share
$
0.06

 
$
0.00

 
$
(0.01
)
 
$
(0.04
)
The following table sets forth the weighted-average potentially dilutive securities excluded from the computation of the diluted net (loss) income per share because their effect would have been anti-dilutive (in millions):
 
Three Months Ended
 
Six Months Ended
 
December 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
 
(2) (3) (4) 
 
(1) (2) (3) 
 
(2) (3) (4) 
 
(1) (2) (3) 
Stock options and ESPP
0.1

 
1.6

 
0.1

 
1.6

Restricted stock units
0.2

 
7.7

 
0.7

 
7.8

Total potentially dilutive securities
0.3

 
9.3

 
0.8

 
9.4


(1) 
As the Company incurred a loss from continuing operations in the period, potential dilutive securities from employee stock options, ESPP, RSUs and PSUs have been excluded from the diluted net loss per share computations as their effects were deemed anti-dilutive.
(2) 
The Company’s 0.625% Senior Convertible Notes due 2033 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 $11.28 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 periods presented did not exceed the conversion price of $11.28. In October 2018, the 2033 Notes were fully converted and redeemed by the Company and any potential EPS dilution effect of the Notes was realized

13


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

upon the Company settling the “in-the-money” conversion benefit feature of the Notes with shares of common stock. Refer to “Note 11. Debt” for more details.
(3) 
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 periods presented did not exceed the conversion price of $13.22. Refer to “Note 11. Debt” for more details.
(4) 
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 principle 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 periods 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 29, 2018 the changes in accumulated other comprehensive loss by component net of tax 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 30, 2018
$
(5.8
)
 
$
(74.0
)
 
$
(23.1
)
 
$
(102.9
)
Other comprehensive income (loss) before reclassification
0.2

 
(26.1
)
 

 
(25.9
)
Amounts reclassified to accumulated other comprehensive loss
0.4

 

 
1.0

 
1.4

Net current-period other comprehensive income (loss)
0.6

 
(26.1
)
 
1.0

 
(24.5
)
Ending balance as of December 29, 2018
$
(5.2
)
 
$
(100.1
)
 
$
(22.1
)
 
$
(127.4
)
(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 29, 2018. There was no tax impact for the six months ended December 29, 2018. Refer to “Note 16. Employee Pension and Other Benefit Plans” for more details on the computation of net periodic cost for pension plans.
Note 6. Acquisitions
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 year period, subsequent to the RPC Close date. The $33.4 million cash consideration is subject to final cash and net working capital adjustments and includes Escrow payments of $3.5 million, which are reserved for potential breaches of representations and warranties. The acquisition of RPC expands the Company’s 3D Sensing offerings.

14


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The RPC acquisition meets the definition of a business and the acquisition has been accounted for in accordance with the authoritative guidance on business combination. Accordingly, the tangible and intangible assets acquired, and the liabilities assumed are recorded at fair value on the acquisition date. Acquisition related costs incurred were not material. The fair value of consideration transferred for the RPC acquisition consists of the following (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 was 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. Investment, Forward Contracts and Fair Value Measurements".
The preliminary 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 preliminary 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 preliminary valuation, and our estimates and assumptions are subject to refinement, and final cash and net working capital adjustments within the measurement period (up to one year from the RPC Close Date). Adjustments to the purchase price allocation may require prospective adjustments to goodwill.
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.


15


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AvComm and Wireless Test and Measurement Acquisition
On March 15, 2018 (AW Close Date), the Company completed the acquisition of the AW Business of Cobham plc. (“AW”) for $469.8 million in cash, subject to working capital adjustments. The acquisition further strengthens the Company’s competitive position in 5G deployment and diversifies the Company into military, public safety and avionics test markets. The acquired business has been integrated into the Company's NE segment.
The Company accounted for the transaction in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed are recorded at fair value on the acquisition date.
Total identified tangible and intangible assets acquired, as of the AW Close Date, were as follows (in millions):
Tangible assets acquired:
 
$
59.3

Intangible assets acquired:
 
 
Developed technology
 
113.5

Customer relationships
 
75.0

Trade names
 
28.0

In-process research and development
 
9.0

Customer Backlog
 
6.5

Goodwill
 
178.5

Total consideration transferred
 
$
469.8

The preliminary allocation of the purchase price to tangible assets, based on the estimated fair values of assets acquired and liabilities assumed on the AW Close Date, were as follows (in millions):
Cash
 
$
16.1

Accounts receivable
 
43.0

Inventory
 
33.5

Property and equipment
 
33.5

Other assets
 
7.6

Accounts payable
 
(10.9
)
Other liabilities
 
(29.6
)
Deferred revenue
 
(10.2
)
Deferred tax liabilities
 
(23.7
)
Net tangible assets acquired
 
$
59.3

The allocation of the purchase price was based upon a preliminary valuation, and our estimates and assumptions are subject to refinement, final cash and working capital adjustments within the measurement period (up to one year from the AW Close Date). Adjustments to the purchase price allocation may require adjustments to goodwill prospectively.
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 value of acquired developed technology, customer relationships, trade names, acquired in-process research and development (“IPR&D”) and backlog was determined based on an income approach using the discounted cash flow method. The intangible assets, except IPR&D, are being amortized over their estimated useful lives that range from three to six years. Order backlog will be fully amortized within one year.
In accordance with authoritative guidance, the Company recognizes IPR&D at fair value as of March 15, 2018. The IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the R&D efforts and is tested for impairment in each period it is considered an indefinite lived asset.
Goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of AW. Goodwill has been assigned to the NE segment and is partially deductible for tax purposes.
During the six months ended December 29, 2018, the Company recorded a measurement period adjustment of $6.3 million  for a tax related liability, which resulted in a corresponding increase to acquired goodwill.

16


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AW results of operations have been included in the Company’s Consolidated Financial Statements subsequent to the date of acquisition.
Note 7. Balance Sheet and Other Details
Accounts receivable allowance
The following table presents the activities and balances for allowance for doubtful accounts, as follows (in millions):
 
June 30, 2018
 
Charged to Costs and Expenses
 
Deductions (1)
 
December 29, 2018
Allowance for doubtful accounts
$
2.4

 
$
0.4

 
$
(0.3
)
 
$
2.5

(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, as follows (in millions):
 
December 29, 2018
 
June 30, 2018
Finished goods
$
32.2

 
$
31.7

Work in process
18.1

 
24.4

Raw materials
36.9

 
36.2

Inventories, net
$
87.2

 
$
92.3

Prepayments and other current assets
The following table presents the components of prepayments and other current assets, as follows (in millions):
 
December 29, 2018
 
June 30, 2018
Prepayments
$
12.6

 
$
11.0

Asset held for sale
3.0

 
3.0

Advances to contract manufacturers
6.2

 
5.9

Refundable income taxes
6.7

 
10.8

Other current assets
23.2

 
25.6

Prepayments and other current assets
$
51.7

 
$
56.3

Other current liabilities
The following table presents the components of other current liabilities, as follows (in millions):
 
December 29, 2018
 
June 30, 2018
Customer prepayments
$
37.9

 
$
37.9

Restructuring accrual
11.7

 
7.4

Income tax payable
11.8

 
5.9

Warranty accrual
4.6

 
4.7

VAT liabilities
3.5

 
1.7

Foreign exchange forward contracts liability
5.6

 
11.7

Other
13.1

 
9.6

Other current liabilities
$
88.2

 
$
78.9


17


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other non-current liabilities
The components of other non-current liabilities were as follows (in millions):
 
December 29, 2018
 
June 30, 2018
Pension and post-employment benefits
$
97.1

 
$
100.0

Financing obligation
26.3

 
26.8

Deferred tax liability
16.4

 
20.5

Long-term deferred revenue
11.8

 
11.3

Fair value of contingent consideration (1)
36.2

 

Other
34.1

 
22.2

Other non-current liabilities
$
221.9

 
$
180.8


(1) See “Note 6. Acquisitions” of the Notes to Consolidated Financial Statements for more detail.
Note 8. Investments, Forward Contracts and Fair Value Measurements
Available-For-Sale Investments
As of December 29, 2018, the Company’s available-for-sale securities were as follows (in millions):
 
Amortized Cost/
Carrying Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available-for-sale debt securities:
 

 
 

 
 

 
 

U.S. treasuries
$
4.0

 
$

 
$

 
$
4.0

U.S. agencies
3.5

 

 

 
3.5

Municipal bonds and sovereign debt instruments
1.7

 

 

 
1.7

Asset-backed securities
4.4

 

 
(0.4
)
 
4.0

Corporate securities
16.1

 

 
(0.2
)
 
15.9

Total available-for-sale debt securities
$
29.7

 
$

 
$
(0.6
)
 
$
29.1

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 29, 2018, of the total estimated fair value, $28.5 million was classified as short-term investments and $0.6 million was classified as other non-current assets.
 In addition to the amounts presented above, as of December 29, 2018, 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.
During the three and six months ended December 29, 2018 and December 30, 2017, the Company recorded no other-than-temporary impairment charges in each respective period.

18


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 29, 2018, contractual maturities of the Company’s debt securities classified as available-for-sale were as follows (in millions):
 
Amortized Cost/
Carrying Cost
 
Estimated
Fair Value
Amounts maturing in less than 1 year
$
19.9

 
$
19.8

Amounts maturing in 1 - 5 years
8.9

 
8.7

Amounts maturing in more than 5 years
0.9

 
0.6

Total debt available-for-sale securities
$
29.7

 
$
29.1

As of June 30, 2018, the Company’s available-for-sale securities were as follows (in millions):
 
Amortized Cost/
Carrying Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Available-for-sale securities:
 

 
 

 
 

 
 

U.S. treasuries
$
36.0

 
$

 
$
(0.1
)
 
$
35.9

U.S. agencies
13.3

 

 
(0.1
)
 
13.2

Municipal bonds and sovereign debt instruments
2.7

 

 

 
2.7

Asset-backed securities
23.9

 

 
(0.4
)
 
23.5

Corporate securities
114.9

 

 
(0.6
)
 
114.3

Total available-for-sale securities
$
190.8

 
$

 
$
(1.2
)
 
$
189.6

As of June 30, 2018, of the total estimated fair value, $21.2 million was classified as cash equivalents, $167.7 million was classified as short-term investments and $0.7 million was classified as other non-current assets.
In addition to the amounts presented above, as of June 30, 2018, the Company’s short-term investments classified as trading securities, related to the deferred compensation plan, were $1.6 million, of which $0.4 million was invested in debt securities, $0.3 million was invested in money market instruments and funds and $0.9 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. 

19


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Level 3: includes financial instruments for which fair value is derived from valuation based on inputs that are unobservable and significant to the overall fair value measurement. As of December 29, 2018 and June 30, 2018, the Company did not hold any Level 3 investment securities. As of December 29, 2018, the fair value of the Company’s contingent liability was determined using Level 3 inputs, as discussed below.
Fair Value Measurements
Assets and liabilities measured at fair value as of December 29, 2018 and June 30, 2018 are summarized below (in millions):
 
December 29, 2018
 
June 30, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Debt available-for-sale securities
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
U.S. treasuries
$
4.0

 
$
4.0

 
$

 
$

 
$
35.9

 
$
35.9

 
$

 
$

U.S. agencies
3.5

 

 
3.5

 

 
13.2

 

 
13.2

 

Municipal bonds and sovereign debt instruments
1.7

 

 
1.7

 

 
2.7

 

 
2.7

 

Asset-backed securities
4.0

 

 
4.0

 

 
23.5

 

 
23.5

 

Corporate securities
15.9

 

 
15.9

 

 
114.3

 

 
114.3

 

Total debt available-for-sale securities
29.1

 
4.0

 
25.1

 

 
189.6

 
35.9

 
153.7

 

Money market funds
226.8

 
226.8

 

 

 
354.9

 
354.9

 

 

Trading securities
1.5

 
1.5

 

 

 
1.6

 
1.6

 

 

Foreign currency forward contract (1)
1.0

 

 
1.0

 

 
2.7

 

 
2.7

 

Total assets (2)
$
258.4

 
$
232.3

 
$
26.1

 
$

 
$
548.8

 
$
392.4

 
$
156.4

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liability:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contract (3)
$
5.6

 
$

 
$
5.6

 
$

 
$
11.7

 
$

 
$
11.7

 
$

Contingent consideration (4)
36.2

 

 

 
36.2

 

 

 

 

Total liabilities
$
41.8

 
$

 
$
5.6


$
36.2

 
$
11.7

 
$

 
$
11.7

 
$

(1) 
$1.0 million and $2.7 million in prepayments and other current assets on the Company’s Consolidated Balance Sheets as of December 29, 2018 and June 30, 2018, respectively.
(2)  
$215.8 million in cash and cash equivalents, $30.0 million in short-term investments, $7.1 million in restricted cash, $1.0 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 29, 2018. $364.8 million in cash and cash equivalents, $169.3 million in short-term investments, $7.3 million in restricted cash, $2.7 million in other current assets, and $4.7 million in other non-current assets on the Company’s Consolidated Balance Sheets as of June 30, 2018.
(3) 
$5.6 million and $11.7 million in other current liabilities on the Company’s Consolidated Balance Sheets as of December 29, 2018 and June 30, 2018, respectively.
(4) 
Refer to “Note 6. Acquisitions” of the Notes to Consolidated Financial Statements for more detail.
  
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 29, 2018, 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 $1.0 million and $5.6 million is reflected as prepayments

20


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and other current assets and other current liabilities, respectively. As of June 30, 2018, the fair value of these contracts of $2.7 million and $11.7 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 29, 2018 and June 30, 2018, the notional amounts of the forward contracts the Company held to purchase foreign currencies were $182.5 million and $167.5 million, respectively, and the notional amounts of forward contracts the Company held to sell foreign currencies were $28.3 million and $28.6 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 loss of $4.5 million and $5.8 million for the three and six months ended December 29, 2018, respectively. The foreign exchange forward contracts incurred a gain of $1.1 million and $4.2 million for the three and six months ended December 30, 2017, respectively.
Contingent consideration
In connection with the RPC acquisition, the Company assumed contingent liability which represents potential future earn-out payments, of up to $53.0 million in cash. See “Note 6. Acquisitions” of the Notes to Consolidated Financial Statements for additional information related to our acquisitions. The earn-out payments are based on the achievement of certain gross profit targets over approximately a four-year period. The achievement or distributions of earn-out payments are not limited in any one period. The estimated fair value of the contingent consideration portion of the earn-out is $36.2 million as of December 29, 2018, which was 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 gross profits of RPC over the earn-out period. The fair value is remeasured at each reporting period at the estimated fair value based on the inputs on the date of remeasurement, with the change in fair value to be recognized within the operating section of our Consolidated Statements of Operations. Projected gross profits are based on our internal projections, although these estimates are based on management’s best knowledge of current events, the estimates could change significantly from period to period. Any changes to the significant unobservable inputs used, including the change in the forecast of gross profit for the earn out periods, may result in a change in fair value of contingent consideration and could have a material impact on future results of operations. Actual payment of contingent consideration in the future could be different from the current estimated fair value of the contingent consideration.
Note 9. Goodwill
Changes in goodwill allocated to the Company’s reportable segments are as follows (in millions):
 
Network
Enablement 
 
Service Enablement
 
Optical Security
and Performance
Products
 
Total
Balance as of June 30, 2018
$
328.0

 
$

 
$
8.3

 
$
336.3

Acquisitions (1)

 

 
33.9

 
33.9

Other
6.3

 

 

 
6.3

Currency translation adjustments
(5.4
)
 

 

 
(5.4
)
Balance as of December 29, 2018
$
328.9

 
$

 
$
42.2

 
$
371.1

(1) See “Note 6. Acquisitions” of the Notes to Consolidated Financial Statements for more detail.
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 2018, 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 29, 2018.

21


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 29, 2018
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Acquired developed technology
$
465.4

 
$
(346.8
)
 
$
118.6

Customer relationships
187.1

 
(113.0
)
 
74.1

In-process research and development
9.0

 

 
9.0

Other (1)
36.6

 
(15.4
)
 
21.2

Total intangibles
$
698.1

 
$
(475.2
)
 
$
222.9

As of June 30, 2018
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Acquired developed technology
$
447.8

 
$
(326.4
)
 
$
121.4

Customer relationships
175.4

 
(97.1
)
 
78.3

In-process research and development
9.0

 

 
9.0

Other (1)
42.8

 
(16.4
)
 
26.4

Total intangibles
$
675.0

 
$
(439.9
)
 
$
235.1

(1) 
Other intangibles consist of customer backlog, non-competition agreements, patents, proprietary know-how and trade secrets, trademarks and trade names.
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 29, 2018
 
December 30, 2017
 
December 29, 2018
 
December 30, 2017
Cost of revenues
$
8.5

 
$
4.1

 
$
17.9

 
$
8.2

Operating expenses
10.4

 
3.4

 
20.2

 
6.5

Total amortization of intangible assets
$
18.9

 
$
7.5

 
$
38.1

 
$
14.7

Based on the carrying amount of acquired developed technology, customer relationships and other intangibles as of December 29, 2018, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
Fiscal Years
 
Remainder of 2019
$
32.8

2020
62.9

2021
58.6

2022
32.3

2023
18.5

Thereafter
8.8

Total amortization
$
213.9

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

22


VIAVI SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 11. Debt
As of December 29, 2018 and June 30, 2018, the Company’s short and long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component, net of unamortized debt discounts and issuance cost, of the Senior Convertible Notes. The following table presents the carrying amounts of the liability and equity components (in millions):
 
December 29, 2018
 
June 30, 2018
Principal amount of 0.625% Senior Convertible Notes
$

 
$
277.0

Principal amount of 1.00% Senior Convertible Notes