Income Taxes

12 Months Ended

Jul. 02, 2022

Income Tax Disclosure [Abstract]

Income Taxes

Note 14. Income Taxes

The Company’s income (loss) before income taxes consisted of the following (in millions):

	Years Ended
	July 2, 2022		July 3, 2021		June 27, 2020
Domestic	$	(82.6)	$	(21.7)	$	(14.9)
Foreign	147.7		152.5		129.2
Income before income taxes	$	65.1	$	130.8	$	114.3

The Company’s income tax expense (benefit) consisted of the following (in millions):

	Years Ended
	July 2, 2022		July 3, 2021		June 27, 2020
Federal:
Current	$	—	$	—	$	—
Deferred	—		—		—
Total federal income tax expense	—		—		—
State:
Current	(2.2)		20.1		2.7
Deferred	—		—		—
Total state income tax (benefit) expense	(2.2)		20.1		2.7
Foreign:
Current	63.2		44.8		50.1
Deferred	(11.4)		(1.6)		12.5
Total foreign income tax expense	51.8		43.2		62.6
Total income tax expense	$	49.6	$	63.3	$	65.3

The state current benefit primarily relates to a true-up of the estimated state tax impact of the internal intellectual property restructuring transaction which, was undertaken in the fourth quarter of fiscal 2021.

The foreign current expense primarily relates to the Company’s profitable operations in certain foreign jurisdictions including the current expense related an internal intellectual property restructuring and withholding tax related to intercompany dividends. The foreign deferred tax (benefit) expense relates to the release of valuation allowance in a foreign jurisdiction, a reclassification of deferred tax expense accrued on intercompany dividends to current tax expense upon dividend declaration and the amortization of purchased intangible assets.

A reconciliation of the Company’s income tax expense at the federal statutory rate to the income tax expense at the effective tax rate is as follows (in millions):

	Years Ended
	July 2, 2022		July 3, 2021		June 27, 2020
Income tax expense computed at federal statutory rate	$	13.7	$	27.5	$	24.0
Withholding Taxes	8.7		8.7		34.2
U.S. Inclusion of foreign earnings	19.8		3.6		12.8
Internal Intellectual Property Restructuring	10.1		19.1		—
Valuation allowance	3.3		1.0		(3.5)
Foreign rate differential	6.9		3.9		4.5
Reserves	1.7		1.5		2.3
Permanent items	0.3		(0.6)		(0.7)
Fair value change of the earn-out liability	0.1		(1.5)		(6.6)
Reversal of previously accrued taxes	(8.6)		(2.1)		(3.7)
Research and experimentation benefits and other tax credits	(1.1)		(0.5)		(0.2)
State taxes	0.8		0.9		2.1
Disallowed compensations	2.2		1.4		0.4
Senior Convertible Notes settlements	(8.3)		—		—
Other	—		0.4		(0.3)
Income tax expense	$	49.6	$	63.3	$	65.3

The components of the Company’s net deferred taxes consisted of the following (in millions):

	Balance as of
	July 2, 2022		July 3, 2021		June 27, 2020
Gross deferred tax assets:
Tax credit carryforwards	$	136.7	$	135.7	$	159.5
Net operating loss carryforwards	491.8		536.1		1,118.6
Capital loss carryforwards	1.0		1.1		63.8
Inventories	34.5		28.9		20.3
Accruals and reserves	58.5		66.5		61.6
Intangibles including acquisition-related items	603.6		632.4		45.2
Capitalized research costs	100.3		15.7		72.0
Other	45.7		65.9		44.1
Gross deferred tax assets	1,472.1		1,482.3		1,585.1
Valuation allowance	(1,320.8)		(1,308.9)		(1,423.1)
Deferred tax assets	151.3		173.4		162.0
Gross deferred tax liabilities:
Acquisition-related items	(31.9)		(29.1)		(31.8)
Tax on unrepatriated earnings	(7.2)		(18.4)		(15.6)
Foreign branch taxes	(17.8)		(22.2)		(21.4)
Other	(17.6)		(18.7)		(11.7)
Deferred tax liabilities	(74.5)		(88.4)		(80.5)
Total net deferred tax assets	$	76.8	$	85.0	$	81.5

As of July 2, 2022, the Company had federal, state and foreign tax net operating loss carryforwards of $1,940.0 million, $444.0 million and $454.5 million, respectively, and federal and state research tax credit carryforwards of $82.4 million and $53.9 million respectively. The federal tax net operating loss carryforwards start to expire in fiscal 2023 and at various dates through 2038 if not utilized. The federal credit carryforwards start to expire fiscal 2023 and at various dates through fiscal 2043 if not utilized. The state tax net operating loss carryforwards start to expire in fiscal 2023 and at various dates through 2041 if not utilized. The state research credit start to expire in fiscal 2023 but a majority of the state credits have an indefinite carryforward period. In addition, a portion of the foreign tax net operating loss and capital loss carryforwards have an indefinite carryforward period. Utilization of the tax net operating losses may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state and foreign provisions. Loss carryforward limitations may result in the expiration or reduced utilization of a portion of the Company’s net operating losses.

On July 2, 2022, the Company completed a planned internal transaction moving certain of VIAVI’s intellectual properties out of a foreign jurisdiction where tax rates are scheduled to increase to the U.S. entity established in fiscal 2021 to own and manage VIAVI’s other intellectual properties. The Company recorded foreign tax expense of $13.2 million related to this transaction which is included in the internal intellectual property restructuring line of the current year effective tax rate reconciliation.

Foreign withholding taxes associated with the repatriation of earnings of foreign subsidiaries have not been provided on $11.8 million of undistributed earnings for certain foreign subsidiaries. The Company intends to reinvest these earnings indefinitely outside of the United States. The Company estimates that an additional $1.5 million of foreign withholding taxes would have to be provided if these earnings were repatriated back to the U.S.

On July 2, 2021, the Company completed a planned series of internal transactions restructuring certain of VIAVI’s intellectual properties. The result of which aligned the properties in a single entity which owns, manages, directs, and protects the properties, including but not limited to patents, product designs, processes, manufacturing technologies, know-how, and trade secrets. In conjunction with the internal restructuring, $2.3 billion ($482 million tax effected) of U.S. federal net operating loss carryforwards were utilized, the Company recognized a new deferred tax asset relating to the book and tax basis difference of certain intangible assets of $589 million. Given the full valuation allowance that is carried on the Company’s U.S. deferred tax assets, the change in the deferred taxes as a result of the transaction does not have material impact on the financial statements. The Company recorded state tax expense including reserves for uncertain tax positions of $19.1 million related to this transaction.  

During fiscal 2020, in light of the economic uncertainty caused by COVID-19, the Company reevaluated its historic assertion on foreign earnings and no longer considered a majority of its earnings to be permanently reinvested resulting in a $32.5 million charge for withholding taxes expected to be paid on the repatriation of $324.0 million of foreign earnings that the Company does not consider to be permanently reinvested. During the third quarter of fiscal 2020, which included changing the Company’s intent with regard to the indefinite reinvestment of such foreign earnings, the Company initially accrued $31.6 million for withholding taxes expected to be paid on the repatriation of $316.4 million of accumulated foreign earnings that it no longer considers to be permanently reinvested as of the third quarter. During fiscal 2020, the Company paid $19.5 million withholding income tax on the repatriation of foreign earnings. The repatriation of these earnings increases available cash in the U.S. and provides greater U.S. financial flexibility to assist the Company in navigating the expected downturn in the economy. The foreign earnings are being repatriated to the U.S. without incurring any significant additional U.S current or deferred tax expense.

On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Tax provisions of the Act include the deferral of certain payroll taxes, relief for retaining employees, and other provisions. The provisions of the legislation did not have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company. The Company continues to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.

The valuation allowance increased by $11.9 million in fiscal 2022, decreased by $114.2 million in fiscal 2021, and decreased by $4.9 million in fiscal 2020. The increase during fiscal 2022 was primarily due to the increase in capitalization of federal research expenditures in the U.S. The decrease during fiscal 2021 was primarily due to the expiration of federal net operating losses, federal capital losses, and federal research credits. The increase during fiscal 2020 was primarily due to the business acquired during the year. The following table provides information about the activity of our deferred tax valuation allowance (in millions):

Deferred Tax Valuation Allowance	Balance at Beginning of Period		Additions Charged to Expenses or Other Accounts(1)		Deductions Credited to Expenses or Other Accounts(2)		Balance at End of Period
Year Ended July 2, 2022	$	1,308.9	$	101.7	$	(89.8)	$	1,320.8
Year Ended July 3, 2021	$	1,423.1	$	617.5	$	(731.7)	$	1,308.9
Year Ended June 27, 2020	$	1,427.9	$	90.1	$	(94.9)	$	1,423.1

(1) Additions include current year additions charged to expenses and current year build due to increases in net deferred tax assets, return to provision true-ups, and other adjustments.

(2) Deductions include current year releases credited to expenses and current year reductions due to decreases in net deferred tax assets, return to provision true-ups, other adjustments and increases in deferred tax liabilities.

A reconciliation of unrecognized tax benefits between June 29, 2019 and July 2, 2022 is as follows (in millions):

Balance at June 29, 2019	$	54.2
Additions based on tax positions related to current year	2.2
Additions based on tax positions related to prior year	0.3
Reduction based on tax positions related to prior year	(3.8)
Reduction related to settlement	(0.4)
Reductions for lapse of statute of limitations	(0.5)
Balance at June 27, 2020	52.0
Additions based on tax positions related to current year	14.8
Reduction based on tax positions related to prior year	(6.8)
Reduction related to settlement	(0.5)
Reductions for lapse of statute of limitations	(0.4)
Balance at July 3, 2021	59.1
Additions based on tax positions related to current year	0.4
Addition based on tax positions related to prior year	2.6
Reduction based on tax positions related to prior year	(2.6)
Reductions for lapse of statute of limitations	(6.1)
Balance at July 2, 2022	$	53.4

The unrecognized tax benefits relate primarily to the allocations of revenue and costs among the Company’s global operations and the validity of some U.S. tax credits. Included in the balance of unrecognized tax benefits at July 2, 2022 are $10.6 million of tax benefits that, if recognized, would impact the effective tax rate. Also included in the balance of unrecognized tax benefits at July 2, 2022 are $39.1 million of tax benefits that, if recognized, would result in adjustments to the valuation allowance.

The Company’s policy is to recognize accrued interest and penalties related to unrecognized tax benefits within the income tax provision. The amount of interest and penalties accrued as of July 2, 2022, July 3, 2021 and June 27, 2020 was approximately $2.1 million, $4.0 million, and $2.7 million, respectively. During fiscal 2022, the Company’s accrued interest and penalties decreased by $1.9 million. 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. 

The Company is routinely subject to various federal, state and foreign audits by taxing authorities. The Company believes that adequate amounts have been provided for any adjustments that may result from these examinations.

The following table summarizes the Company’s major tax jurisdictions and the tax years that remain subject to examination by such jurisdictions as of July 2, 2022:

Tax Jurisdictions	Tax Years
United States(1)	2004 and onward
Canada	2021 and onward
China	2017 and onward
France	2017 and onward
Germany	2017 and onward
Korea	2017 and onward
United Kingdom	2020 and onward

(1) Although the Company is generally subject to a three-year statute of limitations in the U.S., tax authorities maintain the ability to adjust tax attribute carryforwards generated in earlier years.