Note 3. Discontinued Operations

On August 1, 2015, the Company completed the separation of the Lumentum business (the “Separation”) and made a tax-free distribution of approximately 80.1% of the outstanding shares of Lumentum common stock to Viavi shareholders who received one share of Lumentum common stock for every five shares of Viavi common stock held as of the close of business on July 27, 2015 (the “Record Date”) and not sold prior to August 4, 2015 (the “ex-dividend date”). In connection with the Separation Viavi agreed to contribute $137.6 million all of which was contributed during fiscal 2016. As of the Distribution, Viavi retained ownership of approximately 19.9%, or 11.7 million shares, of Lumentum’s outstanding common stock. Lumentum was formed to hold Viavi’s CCOP business and the WaveReady product line. As a result of the Distribution, Lumentum is now an independent public company trading under the symbol “LITE” on The Nasdaq Stock Market (“NASDAQ”). The Company agreed not to liquidate the retained shares during the first six months following the Distribution. However, in connection with a private letter ruling from the Internal Revenue Service, the Company committed to liquidate these shares within three years from the Distribution. As of July 1, 2017, the Company had sold all of its ownership of Lumentum’s common stock. Refer to “Note 7. Investments, Forward Contracts and Fair Value Measurements” for more information.

In connection with the Separation, the Company entered into a Contribution Agreement, Separation and Distribution Agreement, a Tax Matters Agreement, Employee Matters Agreement, Securities Purchase Agreement, a Supply Agreement, and an Intellectual Property Matters Agreement with Lumentum and others.

The Contribution Agreement identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned and it provides for when and how these transfers, assumptions and assignments will occur.

The Separation and Distribution Agreement governs the separation of the CCOP and WaveReady business, the transfer of assets and other matters related to Viavi’s relationship with Lumentum.

The Tax Matters Agreement governs the respective rights, responsibilities and obligations of Lumentum and Viavi with respect to tax liabilities and benefits, tax attributes, tax contests, tax returns, and certain other tax matters.

The Employee Matters Agreement governs the compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of Lumentum and Viavi, and generally allocates liabilities and responsibilities relating to employee compensation, benefit plans and programs. The Employee Matters Agreement provides that employees of Lumentum will no longer participate in benefit plans sponsored or maintained by Viavi.

The Securities Purchase Agreement with the Company, Lumentum and Amada Holdings Co., Ltd. (“Amada”) set forth terms whereby the Company received 40,000 shares of Lumentum’s Series A Preferred Stock (“Series A Preferred Stock”) pursuant to a binding commitment to sell the Series A Preferred Stock to Amada following the Separation. Upon Separation, in connection with the agreement, during the first quarter of fiscal 2016 the Company sold 35,805 shares of the Series A Preferred Stock to Amada for $35.8 million and the remaining 4,195 shares of the Series A Preferred Stock were canceled. The $35.8 million is included as a part of financing activities in the Statement of Cash Flows.

The Supply Agreement outlines that Viavi will supply test equipment to Lumentum and Lumentum will supply components related to the Company’s metro, fiber and optical product lines and development services related to smart transceivers. The most significant component of the Supply Agreement is $15.0 million related to the sale of certain optical test equipment to Lumentum from the date of the agreement through July 2, 2016, of which the company recorded $14.1 million of net revenue during the fiscal year ended July 2, 2016.

The Intellectual Property Matters Agreement outlines the intellectual property rights and technology transferred to Lumentum upon the Separation, as well as the intellectual property and technology both companies can license from each other. In addition it outlines non-compete restrictions between Viavi and Lumentum.

As the separation of the Lumentum business represented a strategic shift that had and will have a major effect on the Company’s operations and financial results, the results of operations of the Lumentum business are presented separately as discontinued operations for the years ended July 1, 2017 , July 2, 2016 and June 27, 2015 in accordance with the authoritative guidance.

As of the Separation Date, Lumentum became a stand-alone public company that separately reports its financial results. Due to the difference between the basis of presentation for discontinued operations and the basis of presentation as a stand-alone company, the financial results of Lumentum included within discontinued operations for the Company may not be indicative of actual financial results of Lumentum as a stand-alone company.

In connection with the Separation, $7.8 million of accumulated other comprehensive loss, net of income taxes, related to foreign currency translation adjustments and the pension plan obligation was transferred to Lumentum on the Separation Date.

The Company also transferred deferred tax assets of $29.5 million, deferred tax liabilities of $1.0 million, current income tax payables of $3.3 million, an income tax receivable of $1.3 million and other long-term liabilities related to uncertain tax positions totaling $0.1 million on the Separation date. The Company utilized approximately $1.0 billion of federal net operating losses to offset income recognized as a result of the Separation and the license of Lumentum’s intellectual property to a foreign subsidiary.

The removal of Lumentum’s net assets and equity related adjustments upon the Separation are presented as an increase of Viavi's accumulated deficit in the Consolidated Statements of Stockholders’ Equity and represents a non-cash financing activity, excluding the cash transferred. Refer to “Note 14. Stock-Based Compensation” for information on modifications to stock-based compensation awards as a result of the Distribution.

The following table summarizes results from discontinued operations of the Lumentum business included in the Consolidated Statement of Operations (in millions):



	Years Ended
	July 1, 2017			July 2, 2016			June 27, 2015
Net revenues	$	—		$	66.5		$	835.2
Cost of revenues	—			49.8			569.1
Amortization of acquired technologies	—			0.6			7.5
Gross profit	—			16.1			258.6
Operating expenses:
Research and development	—			12.5			139.9
Selling, general and administrative	(0.8		)	24.7			87.5
Restructuring charges	—			0.1			7.7
Total operating expenses	(0.8		)	37.3			235.1
Income (loss) from operations	0.8			(21.2		)	23.5
Interest and other income, net	—			—			(1.1		)
Income (loss) before income taxes	0.8			(21.2		)	22.4
(Benefit from) provision for income taxes	(0.8		)	27.8			(20.9		)
Net income (loss) from discontinued operations (1)	$	1.6		$	(49.0	)	$	43.3

(1) No income or expense relating to the Lumentum business was recorded after the Separation Date.

During the fiscal year ended July 1, 2017, the Net income from discontinued operations had a benefit of $0.8 million related to the true up of contractual obligations between the company and Lumentum per the Tax Matters Agreement and the Company recognized a tax benefit of $0.8 million relating to the income taxes incurred as a result of the Separation.

During the fiscal year ended July 2, 2016, the income tax provision for discontinued operations of $27.8 million included approximately $6.2 million cash taxes that are due to federal and state authorities as a result of the Separation. In addition, approximately $19.0 million of the income tax provision for discontinued operations related to the income tax intraperiod tax allocation rules in relation to continuing operations and other comprehensive income.

Net income (loss) from discontinued operations also includes other costs incurred by the Company to separate Lumentum. These costs include transaction charges, advisory and consulting fees, of $16.5 million and $21.4 million for the years ended July 2, 2016 and June 27, 2015, respectively.

The following table presents supplemental cash flow information: depreciation expense, amortization expense, stock-based compensation expense and capital expenditures of the Lumentum business (in millions):



	Years Ended
	July 2, 2016		June 27, 2015
Operating activities:
Depreciation expense	$	3.7	$	43.4
Amortization expense	0.6		7.9
Stock-based compensation expense	1.6		19.4
Investing activities:
Capital expenditures	$	5.8	$	55.9

(1) No depreciation expense, amortization expense, stock based compensation expense and capital expenditures relating to the Lumentum business are presented after the Separation Date.