UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

(Mark One)

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

For the quarterly period ended October 1, 2022

 OR

☐ 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 001-36861

Lumentum Holdings Inc.

(Exact name of Registrant as specified in its charter)

Delaware						47-3108385
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification Number)

1001 Ridder Park Drive, San Jose, California 95131

(Address of principal executive offices including Zip code)

(408) 546-5483

(Registrant’s telephone number, including area code)

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

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
Common Stock, par value of $0.001 per share			LITE			Nasdaq Global Select Market

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 every Interactive Data File required to be submitted 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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

x

Accelerated filer

o

Non-accelerated filer

o

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

As of November 1, 2022, the Registrant had 68.2 million shares of common stock outstanding.

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TABLE OF CONTENTS
									Page
PART I - FINANCIAL INFORMATION
			Item 1.			Financial Statements (Unaudited)
						Condensed Consolidated Statements of Operations for the Three Months Ended October 1, 2022 and October 2, 2021			2
						Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended October 1, 2022 and October 2, 2021			3
						Condensed Consolidated Balance Sheets as of October 1, 2022 and July 2, 2022			4
						Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended October 1, 2022 and October 2, 2021			5
						Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 1, 2022 and October 2, 2021			6
						Notes to Condensed Consolidated Financial Statements			7
			Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
			Item 3.			Quantitative and Qualitative Disclosures About Market Risk			50
			Item 4.			Controls and Procedures			52
PART II - OTHER INFORMATION
			Item 1.			Legal Proceedings			53
			Item 1A.			Risk Factors			53
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			80
			Item 6.			Exhibits			81
SIGNATURES									82

1

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(Unaudited)

			Three Months Ended
			October 1, 2022						October 2, 2021
Net revenue			$	506.8					$	448.4
Cost of sales			282.6						200.4
Amortization of acquired developed intangibles			23.0						15.8
Gross profit			201.2						232.2
Operating expenses:
Research and development			72.7						54.1
Selling, general and administrative			105.7						63.3
Restructuring and related charges			9.3						(1.1)
Total operating expenses			187.7						116.3
Income from operations			13.5						115.9
Interest expense			(8.5)						(16.9)
Other income (expense), net			13.8						0.6
Income before income taxes			18.8						99.6
Provision for income taxes			19.2						18.1
Net income (loss)			$	(0.4)					$	81.5
Net income (loss) per share:
Basic			$	(0.01)					$	1.12
Diluted			$	(0.01)					$	1.08
Shares used to compute net income (loss) per share:
Basic			68.1						72.7
Diluted			68.1						75.4

    

See accompanying Notes to Condensed Consolidated Financial Statements.

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LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)

(Unaudited)

			Three Months Ended
			October 1, 2022						October 2, 2021
Net income (loss)			$	(0.4)					$	81.5
Other comprehensive income (loss), net of tax:
Net change in unrealized gain (loss) on available-for-sale securities			(0.6)						0.3
Other comprehensive income (loss), net of tax			(0.6)						0.3
Comprehensive income (loss), net of tax			$	(1.0)					$	81.8

See accompanying Notes to Condensed Consolidated Financial Statements.

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LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)

			October 1, 2022						July 2, 2022
ASSETS
Current assets:
Cash and cash equivalents			$	605.3					$	1,290.2
Short-term investments			1,019.6						1,258.8
Accounts receivable, net			340.5						262.0
Inventories			366.2						250.1
Prepayments and other current assets			106.8						78.1
Total current assets			2,438.4						3,139.2
Property, plant and equipment, net			478.0						360.5
Operating lease right-of-use assets, net			89.4						73.6
Goodwill			693.7						368.9
Other intangible assets, net			576.0						155.7
Deferred tax asset			100.5						27.0
Other non-current assets			11.4						37.3
Total assets			$	4,387.4					$	4,162.2
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable			$	205.7					$	156.7
Accrued payroll and related expenses			62.2						54.6
Accrued expenses			52.8						44.7
Short term debt			420.2						409.9
Operating lease liabilities, current			13.6						11.2
Other current liabilities			48.3						39.4
Total current liabilities			802.8						716.5
Long term debt			1,899.5						1,466.1
Operating lease liabilities, non-current			58.0						48.8
Deferred tax liability			24.8						12.9
Other non-current liabilities			75.9						42.9
Total liabilities			2,861.0						2,287.2
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.001 par value, 990 authorized shares, 68.2 and 68.0 shares issued and outstanding as of October 1, 2022 and July 2, 2022, respectively			0.1						0.1
Additional paid-in capital			1,596.1						2,003.6
Accumulated deficit			(69.6)						(129.1)
Accumulated other comprehensive income (loss)			(0.2)						0.4
Total stockholders’ equity			1,526.4						1,875.0
Total liabilities and stockholders’ equity			$	4,387.4					$	4,162.2

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

(Unaudited)

									Common Stock												Additional Paid-In Capital						Accumulated Deficit						Accumulated Other Comprehensive Loss												Total Stockholders' Equity
															Shares									Amount
Balance as of July 2, 2022															68.0						$	0.1					$	2,003.6					$	(129.1)					$	0.4											$	1,875.0
Cumulative adjustment from adoption of ASU 2020-06															—						—						(426.5)						85.6						—												(340.9)
Net loss															—						—						—						(0.4)						—												(0.4)
Other comprehensive loss															—						—						—						—						(0.6)												(0.6)
Issuance of shares in connection with vesting of restricted stock units and performance stock units															0.7						—						—						—						—												—
Withholding taxes related to net share settlement of restricted stock units															(0.2)						—						(22.4)						—						—												(22.4)
Repurchases of common stock															(0.3)						—						—						(25.7)						—												(25.7)
Stock-based compensation															—						—						41.4						—						—												41.4
Balance as of October 1, 2022															68.2						$	0.1					$	1,596.1					$	(69.6)					$	(0.2)											$	1,526.4

									Common Stock												Additional Paid-In Capital						Retained Earnings						Accumulated Other Comprehensive Income												Total Stockholders' Equity
															Shares									Amount
Balance as of July 3, 2021															73.0						$	0.1					$	1,743.6					$	220.9					$	8.2											$	1,972.8
Net income															—						—						—						81.5																		81.5
Other comprehensive income															—						—						—						—						0.3												0.3
Issuance of shares in connection with vesting of restricted stock units and performance stock units															0.6						—						—						—						—												—
Withholding taxes related to net share settlement of restricted stock units															(0.2)						—						(16.6)						—						—												(16.6)
Repurchases of common stock															(1.1)						—						—						(91.7)						—												(91.7)
Stock-based compensation															—						—						25.1						—						—												25.1
Balance as of October 2, 2021															72.3						$	0.1					$	1,752.1					$	210.7					$	8.5											$	1,971.4

See accompanying Notes to Condensed Consolidated Financial Statements.

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LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

			Three Months Ended
			October 1, 2022						October 2, 2021
OPERATING ACTIVITIES:
Net income (loss)			$	(0.4)					81.5
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense			24.5						20.4
Stock-based compensation			46.6						24.8
Amortization of acquired intangibles			32.2						21.4
(Gain) loss on sales and dispositions of property, plant and equipment			0.3						(5.3)
Amortization of debt discount and debt issuance costs			5.7						15.3
Amortization of inventory fair value adjustment in connection with acquisition			4.6						—
Other non-cash items			(2.2)						3.3
Changes in operating assets and liabilities:
Accounts receivable			(11.5)						(50.4)
Inventories			(24.6)						(10.3)
Operating lease right-of-use assets, net			3.6						(7.8)
Prepayments and other current and non-currents assets			(1.9)						(3.9)
Income taxes, net			(11.0)						(18.1)
Accounts payable			(41.1)						(10.5)
Accrued payroll and related expenses			(14.5)						(11.4)
Operating lease liabilities			(6.9)						9.8
Accrued expenses and other current and non-current liabilities			17.4						3.1
Net cash provided by operating activities			20.8						61.9
INVESTING ACTIVITIES:
Payments for acquisition of property, plant and equipment			(22.9)						(17.9)
Acquisition of businesses, net of cash acquired			(860.8)						—
Purchases of short-term investments			(79.5)						(255.9)
Proceeds from maturities and sales of short-term investments			316.6						151.0
Proceeds from the sales of property, plant and equipment			—						5.9
Net cash used in investing activities			(646.6)						(116.9)
FINANCING ACTIVITIES:
Repurchase of common stock			(35.8)						(91.7)
Payment of withholding taxes related to net share settlement of restricted stock units			(22.4)						(16.6)
Repayment of term loan			(0.9)						—
Net cash used in financing activities			(59.1)						(108.3)
Decrease in cash and cash equivalents			(684.9)						(163.3)
Cash and cash equivalents at beginning of period			1,290.2						774.3
Cash and cash equivalents at end of period			$	605.3					$	611.0
Supplemental disclosure of cash flow information:
Cash paid for taxes			$	29.3					$	36.3
Cash paid for interest			0.6						0.6
Supplemental disclosure of non-cash transactions:
Unpaid property, plant and equipment in accounts payable and accrued expenses			12.6						5.8
Repurchase of common stock pending settlement			—						5.1
Settlement of loan to NeoPhotonics			50.0						—
Right-of-use assets obtained in exchange for new operating lease liabilities			19.4						10.5
Unpaid portion of acquisition purchase price			0.8						—

See accompanying Notes to Condensed Consolidated Financial Statements.

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Lumentum Holdings Inc. (“we,” “us,” “our”, “Lumentum” or the “Company”) is an industry-leading provider of optical and photonic products defined by revenue and market share addressing a range of end market applications including Optical Communications (“OpComms”) and Commercial Lasers (“Lasers”) for manufacturing, inspection and life-science applications. We seek to use our core optical and photonic technology, and our volume manufacturing capability, to expand into attractive emerging markets that benefit from advantages that optical or photonics-based solutions provide, including 3D sensing for consumer electronics and diode light sources for a variety of consumer and industrial applications. The majority of our customers are currently as well as historically original equipment manufacturers (“OEMs”) that incorporate our products into their products which then address end-market applications. For example, we sell fiber optic components that network equipment manufacturers (“NEMs”) assemble into communications networking systems, which they sell to communications service providers, hyperscale cloud operators, and enterprises with their own networks. Similarly, many of our Lasers products customers incorporate our products into tools they produce, which are used for manufacturing processes by their customers. For 3D sensing, we sell diode lasers to manufacturers of consumer electronics products for mobile, personal computing, gaming, and other applications, including to the automotive industry, who then integrate our devices within their products, for eventual resale to consumers and also into other industrial applications.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be different from the estimates. Operating results for the quarter ended October 1, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2023. In the opinion of the Company’s management, the information presented herein reflects all normal and recurring adjustments necessary for a fair presentation of our results of operations, financial position, stockholders’ equity and cash flows. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are inventory valuation, revenue recognition, income taxes, goodwill and business combinations.

While the impact of COVID-19 pandemic is lessening, the duration and severity of the impact of the pandemic on our business and results of operations in future periods remain uncertain. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including but not limited to the duration and spread of the pandemic and its variants, implementation and duration of local, state and federal issued public health orders in each jurisdiction where we operate or in which our customers and suppliers operate, impact on our customers and our sales cycles, impact on our supply chain and manufacturing partners, impact on our employees and impact on regional and worldwide economies and financial markets in general, all of which are uncertain and cannot be predicted. We assessed the potential impact that this pandemic has on our estimates as of October 1, 2022 and determined that there were no material impacts. However, due to the global supply chain constraint, we have had to incur incremental supply and procurement costs in order to fulfill demand from our customers. As of October 1, 2022, our inventory balance includes $21.9 million of incremental supply procurement costs.

We are also continuously monitoring developments in the ongoing conflict between Russia and Ukraine including the related export controls and resulting sanctions imposed on Russia by the U.S. and other countries. Additional factors such as increased inflation, escalating energy costs, constrained raw material availability, and thus increasing costs could impact the global economy. Although the global implications of the Russian/Ukraine conflict are difficult to predict at this time, we do not presently foresee direct material adverse effects upon our business.

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Business Combinations

On August 3, 2022, we completed a merger with NeoPhotonics Corporation (“NeoPhotonics”). Our condensed consolidated financial statements include the operating results of NeoPhotonics for the period from the date of the closing of the merger through October 1, 2022. We have applied the acquisition method of accounting in accordance with ASC 805 Business Combinations to account for this transaction. Refer to “Note 4. Business Combinations” for further discussion of the merger.

On August 15, 2022, we completed a transaction to acquire IPG Photonics’ telecom transmission product lines. Our condensed consolidated financial statements include the operating results of this business unit for the period from the date of the acquisition through October 1, 2022. We have applied the acquisition method of accounting in accordance with ASC 805 Business Combinations to account for this transaction. Refer to “Note 4. Business Combinations” for further discussion of this acquisition.

Fiscal Years

We utilize a 52-53 week fiscal year ending on the Saturday closest to June 30th. Every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the third quarter, making such quarter consist of 14 weeks. Our fiscal 2023 is a 52-week year ending on July 1, 2023, with the quarter ended October 1, 2022 being a 13-week quarterly period. Our fiscal 2022 was a 52-week year that ended on July 2, 2022, with the quarter ended October 2, 2021 being a 13-week quarterly period.

Principles of Consolidation

These interim unaudited condensed consolidated financial statements include the accounts of Lumentum Holdings Inc. and its wholly-owned subsidiaries. All inter-company transactions and balances are eliminated in consolidation. 

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassification of the prior period amounts did not impact previously reported condensed consolidated financial statements.

Accounting Policies

The condensed consolidated financial statements and accompanying related notes should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2022.

Except for the accounting policies for convertible instruments as a result of our adoption of Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, there have been no significant changes to our accounting policies during the three months ended October 1, 2022.

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 2. Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. This ASU is expected to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 is effective for us in our first quarter of fiscal year 2024. We early adopted the new standard in the first quarter of fiscal 2023 in connection with the merger with NeoPhotonics Corporation (“NeoPhotonics”), noting no material impact to our condensed consolidated financial statements as of and for the period ended October 1, 2022.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (i) convertible debt with a cash conversion feature and (ii) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument is accounted for as a single liability measured at its amortized cost. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share. We adopted the standard as of July 3, 2022, using the modified retrospective approach. Upon adoption, our 2026 Notes and 2028 Notes were accounted for as a single liability measured at amortized cost, resulting in: (i) an increase to the convertible notes liability balance of $433.0 million to reflect the full principal amount of the convertible notes outstanding, net of issuance costs; (ii) a reduction to additional paid-in capital, net of estimated income tax effects, of $426.5 million, to remove the equity component separately recorded for the conversion features associated with the convertible notes; (iii) an increase to deferred tax assets, net of $92.1 million; and (iv) a cumulative-effect adjustment of $85.6 million, net of estimated income tax effects, to decrease the accumulated deficit. In addition, the adoption requires the use of the if-converted method for all convertible notes in the diluted net income per share calculation and the inclusion of the effect of potential share settlement of the convertible notes, if the effect is more dilutive. There was no impact to diluted earnings per share for the three months ended October 1, 2022, as the inclusion of potential shares of common stock related to the convertible notes was anti-dilutive. Refer to “Note 9. Debt” for further information.

The following table sets forth the impact upon adoption of ASU 2020-06 as of July 3, 2022 (in millions):

						Short Term Debt - 2024 Notes						Long Term Debt - 2026 Notes						Long Term Debt - 2028 Notes						Additional Paid-In Capital						Accumulated Deficit						Deferred Tax Asset (Liability), net
Balances pre-adoption of ASC 2020-06						$	409.9					$	831.4					$	634.7					$	2,003.6					$	129.1					$	12.9
Reclassify amounts from equity to debt						—						312.9						229.3						(542.2)						—						—
Adjustment for interest accretion						—						(99.5)						(9.7)						—						(109.2)						—
Tax effect						—						—						—						115.7						23.6						92.1
Balances upon adoption of ASC 2020-06						$	409.9					$	1,044.8					$	854.3					$	1,577.1					$	43.5					$	105.0

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3. Earnings Per Share

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

			Three Months Ended
			October 1, 2022						October 2, 2021
Numerator:
Net income (loss) - basic and diluted			$	(0.4)					$	81.5
Denominator:
Weighted average common shares outstanding - basic			68.1						72.7
Effect of dilutive securities from 2015 Equity Incentive Plan			—						0.6
Shares issuable assuming conversion of the convertible notes			—						2.1
Weighted average common shares outstanding - diluted			68.1						75.4
Net income (loss) per share:
Basic			$	(0.01)					$	1.12
Diluted			$	(0.01)					$	1.08

Upon adoption of ASU 2020-06 in the first quarter of fiscal 2023, potentially dilutive common shares issuable upon conversion of our outstanding 2024 Notes, 2026 Notes and 2028 Notes (collectively referred to as the “Convertible Notes”) are determined using the if-converted method. Anti-dilutive shares excluded from the calculation of diluted net income (loss) per share for the three months ended October 1, 2022 include 28.4 million shares related to Convertible Notes and 0.5 million shares related to restricted stock units (“RSUs”) under the 2015 Equity Incentive Plan and shares to be purchased under the Employee Stock Purchase Plan (the “2015 Purchase Plan”). Refer to “Note 13. Equity.”

Periods prior to the adoption of ASU 2020-06, which includes the first quarter of fiscal 2022, our potentially dilutive common shares issuable upon conversion of our outstanding convertible notes are determined using the treasury stock method. Anti-dilutive shares excluded from the calculation of diluted net income (loss) per share for the three months ended October 2, 2021 include 0.4 million shares related to RSUs and the 2015 Purchase Plan.

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Business Combinations

NeoPhotonics Merger

On November 3, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NeoPhotonics and Neptune Merger Sub, Inc. On August 3, 2022 (the “Closing date”), we completed the acquisition of NeoPhotonics through the consummation of the merger and, accordingly, we acquired all of the issued and outstanding common stock of NeoPhotonics. The addition of NeoPhotonics expands our opportunity in some of the fastest growing markets for optical components used in cloud and telecom network infrastructure. We expect the integrated company to be better positioned to serve the needs of a global customer base who are increasingly utilizing photonics to accelerate the shift to digital and virtual approaches to work and life, the proliferation of IoT, 5G, and next-generation mobile networks, and the transition to advanced cloud computing architectures.

We have applied the acquisition method of accounting in accordance with ASC 805 Business Combinations, with respect to the fair value of purchase price consideration and the identifiable assets and liabilities of NeoPhotonics, which have been measured at estimated fair value as of the Closing date. The following tables summarize the total purchase price consideration (in millions):

			Fair Value
Cash consideration for outstanding NeoPhotonics common stock (1)			$	867.3
Settlement of pre-existing relationship (loan to NeoPhotonics) (2)			50.0
Share-based compensation (3)			17.1
Total purchase price consideration			$	934.4

(1) Under the terms of the Merger Agreement, NeoPhotonics stockholders received $16.00 per share for each of the 54.2 million NeoPhotonics common stock outstanding at the Closing date. As a result, we paid $867.3 million of cash consideration to shareholders of NeoPhotonics on the Closing Date.

(2) As contemplated by the Merger Agreement, on January 14, 2022, Lumentum and NeoPhotonics entered into a credit agreement where Lumentum agreed to make term loans (“loans”) to NeoPhotonics in an aggregate principal amount not to exceed $50.0 million to help fund capital expenditures and increase working capital associated with NeoPhotonics’ growth plans. During fiscal 2022, the Company funded a $30.0 million loan request to NeoPhotonics. On August 1, 2022, we funded an additional $20.0 million loan request to NeoPhotonics. The interest was payable monthly in arrears on the first day of each month. The loans would have matured on January 14, 2024 unless earlier repaid or accelerated. The $50.0 million loans in aggregate were included as part of the total purchase price consideration.

(3) We paid $22.6 million cash consideration to holders of vested NeoPhotonics equity awards as of closing, of which $13.6 million was allocated to the purchase price consideration and $9.0 million was expensed immediately after the Closing date. Additionally, we issued replacement equity awards (the “Replacement Awards”) in settlement of certain NeoPhotonics equity awards that did not become vested at the Closing date, with the total fair value of $40.2 million based on our closing stock price on the Closing date. The portion of Replacement Awards attributed to pre-merger service was recorded as part of the consideration transferred, which was $3.5 million.

The total transaction consideration of $934.4 million was funded by the cash balances of the combined company. We also recorded $20.9 million of merger-related costs, representing professional and other direct acquisition costs. Of the $20.9 million of merger-related costs, $12.6 million was incurred during the three months ended October 1, 2022 and was recorded as selling, general and administrative expense in the consolidated statement of operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We allocated the fair value of the purchase price consideration to the assets acquired and liabilities assumed as of the Closing date based on their estimated fair values. The excess of purchase price consideration over the fair value of net assets acquired is recorded as goodwill. Our preliminary allocation of the purchase price consideration to the assets acquired and liabilities assumed as of the Closing date is as follows (in millions):

			Fair Value
Total purchase price consideration			$	934.4
Assets acquired
Cash and cash equivalents			$	92.9
Accounts receivable, net			66.5
Inventories			85.3
Prepayments and other current assets			24.2
Property, plant and equipment, net			106.6
Operating lease right-of-use assets, net			16.9
Other intangible assets, net (1)			412.5
Other non-current assets			1.9
Total assets			806.8
Liabilities assumed
Accounts payable			79.6
Accrued payroll and related expenses			12.0
Accrued expenses			4.1
Other current liabilities			10.6
Operating lease liabilities, current			2.8
Operating lease liabilities, non-current			13.2
Deferred tax liability			40.1
Other non-current liabilities			28.3
Total liabilities			190.7
Goodwill			$	318.3

(1) Other intangible assets include customer relationship of $144.5 million, developed technology of $220.0 million, and in-process research and development (“IPR&D”) of $48.0 million. Refer to “Note 8. Goodwill and Other Intangible Assets” for more information.

The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and subject to change. The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of inventories, property, plant and equipment, intangible assets, deferred tax assets and liabilities, and contingent liabilities. Further adjustments may result before the end of the measurement period, which ends one year from the Closing date. During the measurement period, if new information is obtained about facts and circumstances that existed as of the Closing date that, if known, would have resulted in revised estimated values of assets acquired and liabilities assumed, we will revise the preliminary purchase price allocation. The effect of measurement period adjustments to the estimated fair values will be calculated as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments will be included in current period earnings.

Goodwill has been assigned to the OpComms segment. The preliminary goodwill of $318.3 million arising from the acquisition is attributed to the expected synergies, including future cost efficiencies and other benefits that are expected to be generated by combining Lumentum and NeoPhotonics. None of the goodwill is expected to be deductible for local tax purposes. Refer to “Note 8. Goodwill and Other Intangible Assets.”

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

From the Closing date, NeoPhotonics contributed $72.8 million of our consolidated net revenue for the three months ended October 1, 2022. Due to the continued integration of the combined businesses, as well as our corporate structure and the allocation of selling, general and administrative costs, it is impractical to determine NeoPhotonics’ contribution to our earnings.

Supplemental Pro Forma Information

The following supplemental pro forma information presents the combined results of operations for the three months ended October 1, 2022 and October 2, 2021, as if the merger was completed at the beginning of fiscal 2022. The supplemental pro forma financial information presented below is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated. The supplemental pro forma financial information does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position.

The pro forma financial information includes adjustments for: (i) additional amortization expense that would have been recognized related to the acquired intangible assets, (ii) additional depreciation expense that would have been recognized related to the acquired property, plant, and equipment, (iii) additional cost of sales related to the inventory valuation adjustment, (iv) acquisition related costs, such as third party transaction costs and restructuring costs, (vi) stock-based compensation expense and (vi) the estimated income tax effect on the pro forma adjustments.

The supplemental pro forma financial information for the periods presented is as follows (in millions):

									Three Months Ended
									October 1, 2022						October 2, 2021
Net revenue									$	530.7					$	532.1
Net income									32.4						22.2

Acquisition of IPG Photonics’ Telecom Transmission Product Lines

On August 15, 2022 (“IPG Closing date”), we completed a transaction to acquire IPG Photonics’ telecom transmission product lines that develops and markets products for use in telecommunications and datacenter infrastructure, including Digital Signal Processors (DSPs), ASICs and optical transceivers. This acquisition will enable us to expand our business in the OpComms segment.

We have applied the acquisition method of accounting in accordance with ASC 805 Business Combinations to account for this transaction. The total purchase price is $55.9 million, which was paid in cash. Our preliminary allocation of the purchase price consideration includes $29.1 million of in-process research and development (“IPR&D”), $8.6 million of developed technology, $2.3 million of customer relationships, $9.4 million of other net assets and liabilities, resulting in preliminary goodwill of $6.5 million. The allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount allocated to goodwill, is based upon preliminary information and adjustments may result before the end of the measurement period, which ends one year from the IPG Closing date.

We incurred $1.4 million transaction costs during the three months ended October 1, 2022, which was recorded as selling, general and administrative expense in the condensed consolidated statement of operations.

The pro forma financial information from the IPG Photonics’ telecom transmission product lines, assuming the acquisition had occurred as of the beginning of the fiscal year prior to the fiscal year of the acquisition, as well as revenue and earnings generated during the current fiscal year, were not material for disclosure purposes.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5. Cash, Cash Equivalents and Short-term Investments

The following table summarizes our cash, cash equivalents and short-term investments by category for the periods presented (in millions):

			Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
October 1, 2022:
Cash			$	326.9					$	—					$	—					$	326.9
Cash equivalents:
Commercial paper			24.5						—						—						24.5
Money market funds			221.1						—						—						221.1
U.S. Agency securities			9.0						—						—						9.0
U.S. Treasury securities			23.8						—						—						23.8
Total cash and cash equivalents			$	605.3					$	—					$	—					$	605.3
Short-term investments:
Certificates of deposit			$	33.3					$	—					$	—					$	33.3
Commercial paper			66.1						—						(0.4)						65.7
Corporate debt securities			492.4						—						(7.6)						484.8
Municipal bonds			1.0						—						—						1.0
U.S. Agency securities			87.5						—						(1.8)						85.7
U.S. Treasury securities			353.2						0.1						(4.2)						349.1
Total short-term investments			$	1,033.5					$	0.1					$	(14.0)					$	1,019.6
July 2, 2022:
Cash			$	235.9					$	—					$	—					$	235.9
Cash equivalents:
Commercial paper			23.6						—						—						23.6
Money market funds			1,000.2						—						—						1,000.2
U.S. Agency securities			8.0						—						—						8.0
U.S. Treasury securities			22.5												—						22.5
Total cash and cash equivalents			$	1,290.2					$	—					$	—					$	1,290.2
Short-term investments:
Certificates of deposit			$	28.3					$	—					$	—					$	28.3
Commercial paper			107.4						—						(0.4)						107.0
Corporate debt securities			539.9												(7.4)						532.5
Municipal bonds			1.0						—						—						1.0
U.S. Agency securities			67.1						—						(1.4)						65.7
U.S. Treasury securities			528.2						0.3						(4.2)						524.3
Total short-term investments			$	1,271.9					$	0.3					$	(13.4)					$	1,258.8

We review our investment portfolio to identify and evaluate investments that have indicators of possible impairment. Factors considered in determining whether a loss is other-than-temporary include, but are not limited to, the length of time and extent a security’s fair value has been below its cost, the financial condition and near-term prospects of the investee, the credit quality of the security’s issuer, likelihood of recovery and our intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in value. For our debt instruments, we also evaluate whether we have the intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery of its cost basis. We have not recorded our unrealized losses on our short-term investments into income because we do not intend to sell nor is it more likely than not that we will be required to sell these investments prior to recovery of their amortized cost basis.

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LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We use the specific-identification method to determine any realized gains or losses from the sale of our short-term investments classified as available-for-sale. During the three months ended October 1, 2022 and October 2, 2021, we did not realize significant gains or losses on a gross level from the sale of our short-term investments classified as available-for-sale.

During the three months ended October 1, 2022 and October 2, 2021, our other income (expense), net was $13.8 million income and $0.6 million income, respectively, which includes interest and investment income on cash equivalents and short-term investments of $4.8 million and $0.6 million, respectively.

As of October 1, 2022 and July 2, 2022, we recorded interest receivables of $3.9 million and $3.9 million, respectively, in prepayments and other current assets within the condensed consolidated balance sheets. We did not recognize an allowance for credit losses against interest receivables in any of the periods presented as there were no such losses.

As of October 1, 2022, we had corporate debt securities and U.S. government bonds of $148.9 million and $19.7 million, respectively, that have been in a continuous unrealized loss position for more than 12 months with an unrealized loss position of $2.6 million and $0.4 million, respectively. As of July 2, 2022, we had corporate debt securities of $57.4 million that have been in a continuous loss position for more than 12 months with an unrealized loss position of $0.9 million.

The following table summarizes unrealized losses on our cash equivalents and short-term investments by category that have been in a continuous unrealized loss position for less than 12 months as of the periods presented (in millions):

			Fair Value						Unrealized Losses
October 1, 2022:
U.S. Agency securities			$	86.4					(1.8)
Certificates of deposit			6.4						—
Commercial paper			90.2						(0.4)
Corporate debt securities			334.4						(5.0)
U.S. government bonds			262.5						(3.7)
Total			$	779.9					$	(10.9)
July 2, 2022:
U.S. Agency securities			$	73.7					$	(1.4)
Certificates of deposit			16.2						—
Commercial paper			130.7						(0.4)
Corporate debt securities			473.2						(6.5)
Municipal bonds			1.0						—
U.S. government bonds			366.0						(4.2)
Total			$	1,060.8					$	(12.5)

The following table classifies our short-term investments by contractual maturities (in millions): 

			October 1, 2022												July 2, 2022
			Amortized Cost						Fair Value						Amortized Cost						Fair Value
Due in 1 year			$	831.3					$	821.2					$	1,010.9					$	1,002.2
Due in 1 year through 5 years			202.2						198.4						261.0						256.6
			$	1,033.5					$	1,019.6					$	1,271.9					$	1,258.8

All available-for-sale securities have been classified as current, based on management’s intent and ability to use the funds in current operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6. Fair Value Measurements

We determine fair value based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

Level 1:			Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:			Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
Level 3:			Inputs are unobservable inputs based on our assumptions.

The fair value of our Level 1 financial instruments, such as money market funds and U.S. Treasury securities, which are traded in active markets, is based on quoted market prices for identical instruments. The fair value of our Level 2 fixed income securities is obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data. Our marketable securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models. Our procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained from our pricing service against fair values obtained from another independent source.

Financial assets measured at fair value on a recurring basis are summarized below (in millions): 

			Level 1						Level 2						Level 3						Total
October 1, 2022: (1)
Assets:
Cash equivalents:
Commercial paper			$	—					$	24.5					$	—					$	24.5
Money market funds			221.1						—						—						221.1
U.S. Agency securities			—						9.0						—						9.0
U.S. Treasury securities			23.8						—						—						23.8
Short-term investments:
Certificates of deposit			—						33.3						—						33.3
Commercial paper			—						65.7						—						65.7
Corporate debt securities			—						484.8						—						484.8
Municipal bonds			—						1.0						—						1.0
U.S. Agency securities			—						85.7						—						85.7
U.S. Treasury securities			349.1						—						—						349.1
Total assets			$	594.0					$	704.0					$	—					$	1,298.0

(1) Excludes $326.9 million in cash held in our bank accounts as of October 1, 2022.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

			Level 1						Level 2						Level 3						Total
July 2, 2022: (1)
Assets:
Cash equivalents:
Commercial paper			$	—					$	23.6					$	—					$	23.6
Money market funds			1,000.2						—						—						1,000.2
U.S. Agency securities			—						8.0						—						8.0
U.S. Treasury securities			22.5						—						—						22.5
Short-term investments:
Certificates of deposit			—						28.3						—						28.3
Commercial paper			—						107.0						—						107.0
Corporate debt securities			—						532.5						—						532.5
Municipal bonds			—						1.0						—						1.0
U.S. Agency securities			—						65.7						—						65.7
U.S. Treasury securities			524.3						—						—						524.3
Total assets			$	1,547.0					$	766.1					$	—					$	2,313.1

(1) Excludes $235.9 million in cash held in our bank accounts as of July 2, 2022.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

We report our financial instruments at fair value with the exception of the 2028 Notes, 2026 Notes and 2024 Notes. The estimated fair value of the convertible notes was determined based on the trading price of the convertible notes as of the last day of trading for the period. We consider the fair value of the notes to be a Level 2 measurement as they are not actively traded in markets.

The carrying amounts and estimated fair values of the 2028 Notes, 2026 Notes and 2024 Notes are as follows for the periods presented (in millions):

			October 1, 2022												July 2, 2022
			Carrying Amount						Estimated Fair Value						Carrying Amount						Estimated Fair Value
2028 Notes			$	854.5					$	691.4					$	634.7					$	735.7
2026 Notes			1,045.0						983.8						831.4						1,065.0
2024 Notes			415.2						553.9						409.9						614.2
			$	2,314.7					$	2,229.1					$	1,876.0					$	2,414.9

Assets Measured at Fair Value on a Non-Recurring Basis

We periodically review our intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. If not recoverable, an impairment loss would be calculated based on the excess of the carrying amount over the fair value.

Management utilizes various valuation methods, including an income approach, a market approach and a cost approach, to estimate the fair value of intangibles and other long-lived assets. During the annual impairment testing performed in the fourth quarter of fiscal 2022, we concluded that our intangible and other long-lived assets were not impaired. We review our intangible and other long-lived assets for impairment at least annually in the fourth quarter of each fiscal year, absent any interim indicators of impairment. There were no indicators of impairment during the three months ended October 1, 2022.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7. Balance Sheet Details

Allowance for Current Expected Credit Losses

We did not have any allowance for credit losses other than our allowance for uncollectible accounts receivable. As of October 1, 2022 and July 2, 2022, the allowance for credit losses on our trade receivables was $0.1 million and $0.1 million, respectively.

Inventories

The components of inventories were as follows (in millions):

			October 1, 2022						July 2, 2022
Raw materials and purchased parts			$	150.6					$	98.9
Work in process			133.3						92.2
Finished goods			82.3						59.0
Inventories			$	366.2					$	250.1

The inventory balance as of October 1, 2022 includes $80.7 million inventory from the merger with NeoPhotonics, net of amortization of fair value step-up of $4.6 million during the three months ended October 1, 2022.

Operating Lease Right-of-Use Assets

Operating lease right-of-use assets, net were as follows (in millions):

			October 1, 2022						July 2, 2022
Operating lease right-of-use assets			$	120.7					$	102.1
Less: accumulated amortization			(31.3)						(28.5)
Operating lease right-of-use assets, net			$	89.4					$	73.6

In connection with the NeoPhotonics merger, we acquired $16.9 million right-of-use assets related to leases of real estate properties used as our manufacturing and R&D premises. These leases are accounted for as operating leases and have the remaining lease term ranging from 3.8 to 6.4 years years at the merger Closing date.

Property, Plant and Equipment, Net

The components of property, plant and equipment, net were as follows (in millions):

			October 1, 2022						July 2, 2022
Land			$	63.3					$	49.7
Buildings and improvement			142.7						105.3
Machinery and equipment			614.4						548.8
Computer equipment and software			35.5						31.3
Furniture and fixtures			9.7						8.9
Leasehold improvements			44.6						35.7
Construction in progress			56.4						47.0
			966.6						826.7
Less: Accumulated depreciation			(488.6)						(466.2)
Property, plant and equipment, net			$	478.0					$	360.5

In connection with our merger with NeoPhotonics, we assumed $106.6 million of property, plant and equipment, net.

Our construction in progress primarily includes machinery and equipment that we expect to place in service in the next 12 months.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the three months ended October 1, 2022 and October 2, 2021, we recorded depreciation expense of $24.5 million and $20.4 million, respectively.

Other Current Liabilities

The components of other current liabilities were as follows (in millions):

			October 1, 2022						July 2, 2022
Restructuring accrual and related charges (1)			$	3.1					$	—
Warranty accrual			10.1						10.0
Income tax payable (2)			27.0						26.0
Other current liabilities			8.1						3.4
Other current liabilities			$	48.3					$	39.4

(1) Refer to “Note 11. Restructuring and Related Charges.”

(2) Refer to “Note 12. Income Taxes.”

Other Non-Current Liabilities

The components of other non-current liabilities were as follows (in millions):

			October 1, 2022						July 2, 2022
Asset retirement obligations			$	8.0					$	4.6
Pension and related accrual (1)			9.4						7.7
Unrecognized tax benefit			50.9						30.5
Other non-current liabilities			7.6						0.1
Other non-current liabilities			$	75.9					$	42.9

(1) We have defined benefit pension plans in Japan, Switzerland, and Thailand. In connection with our merger with NeoPhotonics, we assumed an additional defined benefit plan covering employees in Japan. As of October 1, 2022, the projected benefit obligations, net of plan assets, in Japan, Switzerland and Thailand were $4.3 million, $1.7 million and $3.4 million, respectively. As of July 2, 2022, the projected benefit obligations, net of plan assets, in Japan, Switzerland and Thailand were $2.6 million, $1.7 million and $3.4 million, respectively. We typically re-evaluate the assumptions related to the fair value of our defined benefit obligations annually and make any updates as necessary.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Goodwill and Other Intangible Assets

Goodwill

In the first quarter of fiscal 2023, we completed two acquisitions, our merger with NeoPhotonics and the acquisition of IPG Photonics’ telecom transmission product lines. As of the acquisition dates, we recognized goodwill in the amount of $318.3 million related to the NeoPhotonics merger and $6.5 million related to the acquisition of the IPG Photonics’ telecom transmission product lines. We allocated the entire goodwill amount in connection with the acquisitions to the OpComms segment.

The following table presents the changes in goodwill by reportable segments during the three months ended October 1, 2022 (in millions):

			Optical Communications						Commercial Lasers						Total
Balance as of July 2, 2022			$	363.5					$	5.4					$	368.9
Acquisition of NeoPhotonics			318.3						—						318.3
Acquisition of IPG Photonics’ Telecom Transmission Product Lines			6.5						—						6.5
Balance as of October 1, 2022			$	688.3					$	5.4					$	693.7

Impairment of Goodwill

We review goodwill for impairment during the fourth quarter of each fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred. In the fourth quarter of fiscal 2022, we completed the annual impairment test of goodwill, which indicated there was no goodwill impairment. There were no indicators of goodwill impairment during the three months ended October 1, 2022.

Other Intangibles

The intangible assets are amortized on a straight-line basis over the estimated useful lives, except for customer relationships, which are amortized using an accelerated method of amortization over the expected customer lives, more accurately reflecting the pattern of realization of economic benefits expected to be obtained. Acquired developed technologies are amortized to cost of sales and customer relationships are amortized to selling, general and administrative expenses in the consolidated statement of operations.

In-process research and development (IPR&D) is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life.

In the first quarter of fiscal 2023, we recorded the preliminary fair value of acquired intangible assets of $412.5 million related to the merger with NeoPhotonics and $40.0 million related to the acquisition of IPG Photonics’ telecom transmission product lines (“IPG product lines”). Refer to “Note 4. Business Combinations.”

The intangible assets acquired from the acquisitions in the first quarter of fiscal 2023 were as follows (in millions, except for weighted average amortization periods):

			Preliminary fair value at the acquisition date																		Weighted average amortization period (in years)
			NeoPhotonics						IPG product lines						Total acquired
Acquired developed technologies			$	220.0					$	8.6					$	228.6					5.2
Customer relationships			144.5						2.3						146.8						5.9
In-process research and development			48.0						29.1						77.1						n/a
			$	412.5					$	40.0					$	452.5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following tables present details of our other intangibles, including those acquired in connection with our acquisitions in the first quarter of fiscal 2023, as of the periods presented (in millions, except for weighted average remaining amortization period):

October 1, 2022			Gross Carrying Amounts						Accumulated Amortization						Net Carrying Amounts						Weighted average remaining amortization period (years)
Acquired developed technologies			$	618.9					$	(327.0)					$	291.9					4.9
Customer relationships			291.8						(84.8)						207.0						5.5
In-process research and development			77.1						—						77.1						n/a
Total intangible assets			$	987.8					$	(411.8)					$	576.0

July 2, 2022			Gross Carrying Amounts						Accumulated Amortization						Net Carrying Amounts						Weighted average remaining amortization period (years)
Acquired developed technologies			$	390.3					$	(303.6)					$	86.7					2.5
Customer relationships			145.0						(76.0)						69.0						4.4
Total intangible assets			$	535.3					$	(379.6)					$	155.7

The following table presents details of amortization for the periods presented (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Cost of sales			$	22.9					$	15.8
Selling, general and administrative			9.3						5.6
Total amortization of intangibles			$	32.2					$	21.4

Based on the carrying amount of our acquired developed technologies and customer relationships as of October 1, 2022, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):

Fiscal Years
Remainder of 2023			$	93.6
2024			110.2
2025			97.3
2026			84.9
2027			73.0
Thereafter			39.9
Total future amortization			$	498.9

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Note 9. Debt

Convertible Notes

2028 Notes

In March 2022, we issued $861.0 million in aggregate principal amount of 0.50% Convertible Notes due in 2028 (the “2028 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2028 Notes are governed by an indenture between the Company and U.S. Bank Trust Company National Association (as successor in interest to U.S. Bank National Association), as a trustee (the “2028 Indenture”). The 2028 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.

The net proceeds from the sale of the 2028 Notes was $854.8 million, after deducting $6.2 million in issuance costs. In addition, we incurred $0.7 million in professional fees in connection with this transaction. Concurrent with the issuance of the 2028 Notes, we used $200.0 million of the net proceeds to repurchase our common stock in privately negotiated transactions. We intend to use the remaining net proceeds for general corporate purposes, which may include capital expenditures and working capital.

The 2028 Notes bear interest at a rate of 0.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2022. The 2028 Notes will mature on June 15, 2028, unless earlier redeemed, repurchased by us, or converted pursuant to the terms.

The initial conversion rate is 7.6319 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equivalent to an initial conversion price of approximately $131.03 per share). The conversion rate is subject to adjustment upon the occurrence of certain specified events, but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or our issuance of a notice of redemption, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert the 2028 Notes in connection with such make-whole fundamental change or notice of redemption.

Prior to the close of business on the business day immediately preceding March 15, 2028, holders of the 2028 Notes may convert their 2028 Notes only under the following circumstances:

•during any fiscal quarter commencing after July 2, 2022 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price, or $170.34, on each applicable trading day;

•during the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2028 Notes for each trading day of such measurement was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day;

•if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or

•upon the occurrence of specified corporate events, as specified in the 2028 Indentures.

On or after March 15, 2028 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2028 Notes at any time. Upon conversion, we may satisfy our conversion obligation in cash, shares of common stock or a combination of cash and shares of common stock, at our election.

We may redeem for cash all or any of the 2028 Notes, at our option (subject to the partial redemption limitation set forth in the 2028 Indenture), on or after June 20, 2025, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2028 Notes. If we elect to redeem fewer than all of the outstanding 2028 Notes, at least $100.0 million aggregate principal amount of the 2028 Notes must be outstanding and not subject to redemption as of the redemption notice date. Upon the occurrence of a fundamental change (as defined in the 2028 Indenture), holders may require the Company to

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repurchase all or a portion of their 2028 Notes for cash at a price equal to 100% of the principal amount of the 2028 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

We initially bifurcated the principal amount of the 2028 Notes into liability and equity components. The liability component of the 2028 Notes was initially valued at $629.8 million based on the contractual cash flow discounted at an appropriate comparable market on non-convertible debt borrowing rate at the date of issuance, which was 5.7%, with the equity component representing the residual amount of the proceeds of $231.2 million, which was recorded as a debt discount. Upon adoption of ASU 2020-06 in the first quarter of fiscal 2023, our 2028 Notes were accounted for as a single liability measured at amortized cost. Refer to “Note 2. Recently Issued Accounting Pronouncement” for the detailed adoption impact.

2026 Notes

In December 2019, we issued $1,050.0 million in aggregate principal amount of 0.50% Convertible Notes due in 2026 (the “2026 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2026 Notes are governed by an indenture between the Company and U.S. Bank Trust Company National Association (as successor in interest to U.S. Bank National Association, as a trustee (the “2026 Indenture”). We used approximately $196.0 million of the net proceeds of the offering to repay in full all amounts outstanding under our term loan credit facility, and a portion of the net proceeds of the offering to purchase approximately $200.0 million of our common stock concurrently with the pricing of the offering in privately negotiated transactions. The 2026 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.

The 2026 Notes bear interest at a rate of 0.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2020. The 2026 Notes will mature on December 15, 2026, unless earlier redeemed, repurchased by us, or converted pursuant to their terms.

The initial conversion rate is 10.0711 shares of common stock per $1,000 principal amount of the 2026 Notes (which is equivalent to an initial conversion price of approximately $99.29 per share). The conversion rate is subject to adjustment upon the occurrence of certain events specified in the 2026 Indenture but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or our issuance of a notice of redemption, we will, in certain circumstances, increase the conversion rate by a number of additional shares set forth in the 2026 Indenture or a holder that elects to convert the 2026 Notes in connection with such make-whole fundamental change or notice of redemption.

Prior to the close of business on the business day immediately preceding September 15, 2026, holders of the 2026 Notes may convert their 2026 Notes only under the following circumstances:

•during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2026 Notes, or $129.08 on each applicable trading day;

•during the five business day period after any five consecutive trading day period (the "2026 measurement period") in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of the 2026 measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2026 Notes on each such trading day;

•if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the relevant redemption date; or

•upon the occurrence of specified corporate events.

On or after September 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2026 Notes at any time. Upon conversion, we may satisfy our conversion obligation in cash, shares of common stock or a combination of cash and shares of common stock, at our election.

We may redeem for cash, for all or any portion of the 2026 Notes, at our option, on or after December 20, 2023, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide a notice of redemption at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2026 Notes. Upon the occurrence of a fundamental change (as defined in the 2026 Indenture), holders may require us to repurchase all or a portion of the 2026 Notes for cash at a

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price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

We initially bifurcated the principal amount of the 2026 Notes into liability and equity components. The liability component of the 2026 Notes was initially valued at $734.8 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.8% with the equity component representing the residual amount of the proceeds of $315.2 million, which was recorded as a debt discount. Upon adoption of ASU 2020-06 in the first quarter of fiscal 2023, our 2026 Notes were accounted for as a single liability measured at amortized cost. Refer to “Note 2. Recently Issued Accounting Pronouncement” for the detailed adoption impact.

2024 Notes

In March 2017, we issued $450.0 million in aggregate principal amount 2024 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2024 Notes are governed by an indenture between the Company, as the issuer, and U.S. Bank Trust Company National Association (as successor in interest to U.S. Bank National Association), as trustee (the “2024 Indenture”). The 2024 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.

The 2024 Notes bear interest at a rate of 0.25% per year. Interest on the 2024 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2017. The 2024 Notes will mature on March 15, 2024, unless earlier repurchased by us or converted pursuant to their terms.

The initial conversion rate of the 2024 Notes is 16.4965 shares of common stock per $1,000 principal amount of 2024 Notes, which is equivalent to an initial conversion price of approximately $60.62 per share, a 132.5% premium to the fair market value at the date of issuance. Prior to the close of business on the business day immediately preceding December 15, 2023, each holder of the 2024 Notes may convert their 2024 Notes only under the following circumstances:

•during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price, or $78.80 on each applicable trading day;

•during the five consecutive business day period after any five consecutive trading day period (the “2024 measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of such 2024 measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day;

•upon the occurrence of specified corporate events.

On or after December 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time. In addition, upon the occurrence of a make-whole fundamental change (as defined in the 2024 Indenture), we will, in certain circumstances, increase the conversion rate by a number of additional shares set forth in the 2024 Indenture for a holder that elects to convert 2024 Notes in connection with such make-whole fundamental change.

We may not redeem the 2024 Notes prior to their maturity date and no sinking fund is provided for the 2024 Notes. Upon the occurrence of a fundamental change, holders may require us to repurchase all or a portion of their 2024 Notes for cash at a price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus any accrued and unpaid interest.

During the three months ended October 1, 2022, we received conversion requests of less than $0.1 million principal amount of the 2024 Notes, which we settled with cash in accordance with the 2024 Indenture. Since issuing the 2024 Notes, we have converted a total of approximately $1.9 million principal amount of the 2024 Notes. The remaining principal amount of the 2024 Notes as of October 1, 2022 was $448.1 million.

We considered the features embedded in the 2024 Notes other than the conversion feature, including the holders’ put feature, our call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument. Prior to the Tax Matters Agreement settlement condition (“TMA settlement condition”), because we could only settle the 2024 Notes in cash, we determined that the conversion feature met the definition of a derivative liability. We separated the derivative liability from the host debt instrument based on the fair value of the derivative liability. During fiscal 2017, we satisfied the TMA settlement condition. As such, the value of the conversion option

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is no longer marked-to-market and was reclassified to additional paid-in capital within stockholders’ equity on our condensed consolidated balance sheets. The adoption of ASU 2020-06 did not change the presentation of the 2024 Notes, as the conversion feature associated with the 2024 Notes continues to be classified within stockholders’ equity.

Convertible Notes - Additional Disclosures

Our convertible notes consisted of the following components as of the periods presented (in millions):

Liability component:			October 1, 2022																		July 2, 2022
			2024 Notes (1)						2026 Notes (2)						2028 Notes (3)						2024 Notes (1)						2026 Notes (2)						2028 Notes (3)
Principal			$	448.1					$	1,050.0					$	861.0					$	448.1					$	1,050.0					$	861.0
Unamortized debt discount and issuance costs			(32.9)						(5.0)						(6.5)						(38.2)						(218.6)						(226.3)
Net carrying amount of the liability component			$	415.2					$	1,045.0					$	854.5					$	409.9					$	831.4					$	634.7

(1) If the closing price of our stock exceeds $78.80 (or 130% of the conversion price of $60.62) for 20 of the last 30 trading days of any future quarter, our 2024 Notes would become convertible at the option of the holders. During the fourth quarter of fiscal 2022, the 2024 Notes were convertible at the option of the holders and therefore, the debt component of our 2024 Notes was classified as current liabilities in our condensed consolidated balance sheet. While the 2024 Notes will not be convertible during the second quarter of fiscal 2023, as our stock price did not exceed $78.80 for 20 of the last 30 trading days of the quarter ended October 1, 2022, we continue to classify the 2024 Notes in current liabilities as this presentation provides consistency and better comparability with our prior periods.

(2) If the closing price of our stock exceeds $129.08 (or 130% of the conversion price of $99.29) for 20 of the last 30 trading days of any future quarter, our 2026 Notes would become convertible at the option of the holders and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

(3) If the closing price of our stock exceeds $170.34 (or 130% of the conversion price of $131.03) for 20 of the last 30 trading days of such quarter, our 2028 Notes would become convertible at the option of the holders and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

The following table sets forth interest expense information related to the convertible notes for the periods presented (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Contractual interest expense			$	2.7					$	1.6
Amortization of the debt discount and debt issuance costs			5.7						15.3
Total interest expense			$	8.4					$	16.9

The future interest and principal payments related to our convertible notes are as follows as of October 1, 2022 (in millions):

Fiscal Years			2024 Notes						2026 Notes						2028 Notes						Total
Remainder of 2023			$	0.6					$	5.3					$	4.3					$	10.2
2024			449.2						5.3						4.3						458.8
2025			—						5.3						4.3						9.6
2026			—						5.3						4.3						9.6
2027			—						1,052.4						869.6						1,922.0
Total convertible notes payments			$	449.8					$	1,073.6					$	886.8					$	2,410.2

The principal balances of our convertible notes are reflected in the payment periods in the table above based on their respective contractual maturities.

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(Unaudited)

Mitsubishi Bank Loans

In connection with our merger of NeoPhotonics, we assumed several loan agreements with MUFG Bank, Ltd. (the “Mitsubishi Bank”).

In February 2015, NeoPhotonics entered into a loan agreement with Mitsubishi Bank, that provided for a term loan in the aggregate principal amount of 1.0 billion JPY (approximately $6.9 million based on the exchange rate on October 1, 2022) (the “2015 Mitsubishi Bank Loan”). The 2015 Mitsubishi Bank Loan is secured by a mortgage on certain real property and buildings owned by NeoPhotonic’s Japanese subsidiary. The 2015 Mitsubishi Bank Loan accrues interest and is paid monthly based upon the annual rate of the monthly Tokyo Interbank Offer Rate ("TIBOR") plus 1.40%. The term loan requires equal monthly payments of principal equal to 8.3 million JPY (approximately $0.1 million based on the exchange rate on October 1, 2022) until the maturity date of February 25, 2025, with a lump sum payment of the balance of 8.4 million JPY (approximately $0.1 million based on the exchange rate on October 1, 2022) on the maturity date. The outstanding principal balance for the 2015 Mitsubishi Bank Loan was 241.7 million JPY (approximately $1.6 million) as of October 1, 2022.

In March 2017, NeoPhotonics entered into a loan agreement with Mitsubishi Bank for a term loan of 690.0 million JPY (approximately $4.8 million based on the exchange rate on October 1, 2022) (the “2017 Mitsubishi Bank Loan”) to acquire manufacturing equipment for its Japanese subsidiary. This loan is secured by the manufacturing equipment owned by the NeoPhotonics' subsidiary in Japan. Interest on the 2017 Mitsubishi Bank Loan is based on the annual rate of the monthly TIBOR rate plus 1.00%. The 2017 Mitsubishi Bank Loan matures on March 29, 2024 and requires monthly interest and principal payments over 72 months commencing in April 2018. The outstanding principal balance for the 2017 Mitsubishi Bank Loan was 172.5 million JPY (approximately $1.3 million) as of October 1, 2022.

In January 2018, NeoPhotonics entered into a term loan agreement with Mitsubishi Bank and The Yamanashi Chuo Bank, Ltd. for a term loan in the aggregate principal amount of 850.0 million JPY (approximately $5.9 million based on the exchange rate on October 1, 2022) (the “2018 Mitsubishi Bank Loan”). The purpose of this term loan was to obtain machinery for the core parts of the manufacturing line and payments for related expenses by NeoPhotonics' subsidiary in Japan. This term loan requires no additional security. Interest on the term loan is based upon the annual rate of the three months TIBOR rate plus 1.00%. The term loan requires quarterly interest payments, along with the principal payments, over 82 months commencing in April 2018. The outstanding principal balance for the 2018 Mitsubishi Bank Loan was approximately 303.6 million JPY (approximately $2.1 million) as of October 1, 2022.

All of these term loans contain customary representations and warranties, and customary affirmative and negative covenants applicable to NeoPhotonics’ Japanese subsidiary, including, among other things, restrictions on cessation in business, management, mergers or acquisitions. These term loans contain customary covenants relating to minimum net assets, maximum ordinary loss and a coverage ratio covenant. We are in compliance with the related covenants for all these term loans as of October 1, 2022.

We intend to repay all amounts outstanding under the 2015 Mitsubishi Bank Loan, 2017 Mitsubishi Bank Loan and 2018 Mitsubishi Bank Loan during fiscal year 2023. As such, we presented these term loans within short term debt in our condensed consolidated balance sheet.

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(Unaudited)

Note 10. Accumulated Other Comprehensive Income (Loss)

Our accumulated other comprehensive income (loss) consists of the accumulated net unrealized gains or losses on foreign currency translation adjustments, the defined benefit obligations and available-for-sale securities.

The changes in accumulated other comprehensive income (loss) were as follows for the periods as presented (in millions):

			Foreign currency translation adjustments, net of tax (1)						Defined benefit obligations, net of tax (2)						Unrealized gain (loss) on available-for-sale securities, net of tax												Total
Beginning balance as of July 2, 2022			$	9.7					$	1.0					$	(10.3)											$	0.4
Other comprehensive loss			—						—						(0.6)												(0.6)
Ending balance as of October 1, 2022			9.7						1.0						(10.9)												(0.2)
			Foreign currency translation adjustments, net of tax (1)						Defined benefit obligations, net of tax (2)						Unrealized gain (loss) on available-for-sale securities, net of tax												Total
Beginning balance as of July 3, 2021			$	9.7					$	(1.4)					$	(0.1)											$	8.2
Other comprehensive income			—						—						0.3												0.3
Ending balance as of October 2, 2021			9.7						(1.4)						0.2												8.5

(1) In fiscal 2019, we established the functional currency for our worldwide operations as the U.S. dollar. Translation adjustments reported prior to December 10, 2018 remain as a component of accumulated other comprehensive income (loss) in our condensed consolidated balance sheets, until all or a part of the investment in the subsidiaries is sold or liquidated.

(2) We re-evaluate the assumptions related to the fair value of our defined benefit obligations annually and make any updates as necessary.

Note 11. Restructuring and Related Charges

We have initiated various strategic restructuring actions primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our business in response to market conditions and as a result of our acquisitions in the first quarter of fiscal 2023.

The following table summarizes the activity of restructuring and related charges for the periods as presented (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Balance as of beginning of period			$	—					$	5.7
Charges (reversals), net			9.3						(1.1)
Payments			(6.2)						(3.8)
Balance as of end of period			$	3.1					$	0.8

During the three months ended October 1, 2022, we recorded restructuring and related charges of $9.3 million in our condensed consolidated statements of operations which was primarily attributable to severance and employee-related benefits associated with NeoPhotonics’ executive severance and retention agreements. These retention agreements provide, under certain circumstances, for payments and benefits upon an involuntary termination of employment. We made $6.2 million of payments in connection with these agreements during the three months ended October 1, 2022.

During the three months ended October 2, 2021, we recorded a net reversal to our restructuring and related charges of $1.1 million in our condensed consolidated statements of operations, which was attributable to lower than anticipated employee severance charges primarily as a result of retaining and re-assigning certain employees.

Any changes in the estimates of executing our restructuring activities will be reflected in our future results of operations.

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Note 12. Income Taxes

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period. Our quarterly tax provision and estimate of our annual effective tax rate are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how we do business, and tax law developments.

We recorded a tax provision of $19.2 million and $18.1 million for the three months ended October 1, 2022 and October 2, 2021, respectively. Our tax provision for the three months ended October 1, 2022 includes a discrete tax expense of $13.1 million, primarily related to the international restructuring and currency re-measurement of certain tax related accounts, partially offset by the tax benefit from tax rate changes. Our estimated effective tax rate for fiscal 2023 also differs from the 21% U.S. statutory rate primarily due to the income tax expense from the tax effect of Global Intangible Low-Taxed Income (“GILTI”), net of benefit for foreign tax credits, subpart F inclusion and non-deductible stock-based compensation, partially offset by the income tax benefit from the earnings of our foreign subsidiaries being taxed at rates that differ from the U.S. statutory rate, and U.S. federal R&D tax credits.

As of October 1, 2022, we had $53.8 million of unrecognized tax benefits, which, if recognized, would affect the effective tax rate. We are subject to examination of income tax returns by various domestic and foreign tax authorities. The timing of resolution and closure of tax audits is highly unpredictable. Although it is possible that certain ongoing tax audits may be concluded within the next 12 months, we cannot reasonably estimate the impact to tax expense and net income from tax exams that could be resolved or closed within the next 12 months. Subject to audit timing and uncertainty, we expect the amount of unrecognized tax benefit that would become recognized due to expiration of the statute of limitations and affect the effective tax rate to decrease by $0.5 million over the next 12 months.

Note 13. Equity

Description of Lumentum Stock-Based Benefit Plans

Equity Incentive Plan

As of October 1, 2022, we had 4.1 million shares subject to restricted stock units, restricted stock awards, and performance stock units issued and outstanding under the 2015 Equity Incentive Plan (“2015 Plan”). These grants are performance-based, time-based or a combination of both and are expected to vest over one to four years. The fair value of these grants is based on the closing market price of our common stock on the date of grant. As of October 1, 2022, 1.9 million shares of common stock under the 2015 Plan were available for grant.

Replacement Awards

In connection with the merger with NeoPhotonics, we issued equity awards to certain NeoPhotonics employees, consisting of restricted stock units (the “Replacement Awards”) in exchange for their NeoPhotonics equity awards. The terms of these Replacement Awards are substantially similar to the original NeoPhotonics equity awards. The Replacement Awards consisted of 0.4 million restricted stock units with a grant date fair value of $93.4 per share, which represents our closing stock price on the Closing date. The total fair value of these Replacement Awards is $40.2 million, $3.5 million of which is attributed to employee services rendered through August 3, 2022, the merger Closing date, and was recognized as a component of the merger consideration. The remaining fair value of the Replacement Awards is recorded as stock-based compensation over the remaining vesting period. Refer to “Note 4. Business Combinations.”

Restricted Stock Units

Restricted stock units (“RSUs”) under the 2015 Plan are grants of shares of our common stock, the vesting of which is based on the requisite service requirement. Generally, our RSUs are subject to forfeiture and are expected to vest over one to four years. For annual refresh grants, RSUs generally vest ratably on an annual basis, or combination of annual and quarterly basis, over three years.

During the three months ended October 1, 2022, our board of directors approved grants of 1.5 million RSUs which primarily vest over three years. In addition, we issued 0.4 million RSUs that were issued as part of the Replacement Awards in connection with the merger with NeoPhotonics as described above.

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(Unaudited)

Performance Stock Units

Performance stock units (“PSUs”) under the 2015 Plan are grants of shares of our common stock that vest upon the achievement of certain performance and service conditions. We begin recognizing compensation expense when we conclude that it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each reporting period and adjust our compensation cost based on this probability assessment. Our PSUs are subject to risk of forfeiture until performance and service conditions are satisfied and generally vest between one and three years.

During the three months ended October 1, 2022, 0.3 million PSUs were issued to executive and certain non-executive employees as part of our revised Annual Incentive Plan. These PSUs have an aggregate grant date fair value of $26.0 million and are subject to performance targets and service conditions, and vest over a one-year period. The board of directors also approved a grant of 0.2 million PSUs with an aggregate grant date fair value of $22.6 million to certain executive officers and senior management. These PSUs will vest subject to the achievement of revenue targets and certain non-financial performance measurement, as well as service conditions, over three years.

Employee Stock Purchase Plan

Our 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a 15% purchase price discount as well as a 6-month look-back period. The 2015 Purchase Plan is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. The 2015 Purchase Plan will terminate upon the date on which all shares available for issuance have been sold. Of the 3.0 million shares authorized under the 2015 Purchase Plan, 1.4 million shares remained available for issuance as of October 1, 2022.

Stock-Based Compensation

The impact on our results of operations of recording stock-based compensation by function for the periods presented was as follows (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Cost of sales			$	5.5					$	4.6
Research and development			9.6						5.0
Selling, general and administrative			31.5						15.2
Total stock-based compensation			$	46.6					$	24.8

In connection with the NeoPhotonics merger, certain equity awards for NeoPhotonics employees were accelerated. The total stock-based compensation associated with the acceleration was $11.9 million for the three months ended October 1, 2022, of which $9.0 million was settled in cash. Refer to “Note 4. Business Combinations.”

Included in stock-based compensation for the three months ended October 1, 2022 and October 2, 2021, is $8.8 million and $4.7 million of stock-based compensation costs related to PSUs, respectively. The amount of stock-based compensation expense recognized in any one period related to PSUs can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the underlying PSUs, and any previously recognized compensation expense related to those PSUs would be reversed.

Total income tax benefit associated with stock-based compensation recognized in our condensed consolidated statements of operations during the years presented was as follows (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Income tax benefit associated with stock-based compensation			$	5.1					$	4.0

Approximately $10.3 million and $6.4 million of stock-based compensation was capitalized to inventory as of October 1, 2022 and July 2, 2022, respectively.

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(Unaudited)

As of October 1, 2022, $266.5 million of stock-based compensation cost related to RSU awards remains to be amortized. That RSU cost is expected to be recognized over an estimated amortization period of 2.3 years.

Stock Award Activity

The following table summarizes our award activity for the three months ended October 1, 2022 (in millions, except per share amounts):

															Restricted Stock Units												Performance Stock Units
																											Number of Shares						Weighted-Average Grant Date Fair Value per Share						Number of Shares						Weighted-Average Grant Date Fair Value per Share
Balance as of July 2, 2022																											2.0						$	85.9					0.3						$	81.9
Replacement Awards Issued																											0.4						93.4						—						—
Granted																											1.5						89.2						0.5						88.3
Vested																											(0.5)						81.7						(0.1)						68.8
Canceled																											(0.1)						85.0						—						82.6
Balance as of October 1, 2022																											3.3						$	88.9					0.7						$	89.3

A summary of awards available for grant is as follows (in millions):

			Awards Available for Grant
Balance as of July 2, 2022			3.8
Assumed in connection with NeoPhotonics merger			0.4
Replacement Awards			(0.4)
Granted			(2.0)
Canceled			0.1
Balance as of October 1, 2022			1.9

Employee Stock Purchase Plan Activity

The 2015 Purchase Plan expense for the three months ended October 1, 2022 and October 2, 2021 was $1.2 million and $1.2 million, respectively. The expense related to the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During the three months ended October 1, 2022 and October 2, 2021, there were no shares issued to employees through the 2015 Purchase Plan.

Repurchase and Retirement of Common Stock

On May 7, 2021, our board of directors approved the 2021 share buyback program, which authorizes us to use up to $700.0 million to purchase our own shares of common stock. On March 3, 2022, our board of directors approved an increase in our share buyback program, which authorizes us to use up to an aggregate amount of $1.0 billion (an increase from $700.0 million) to purchase our own shares of common stock through May 2024, but may be suspended or terminated by the board of directors at any time.

During the three months ended October 1, 2022, we repurchased 0.3 million shares of our common stock at an average price of $89.80 per share for an aggregate purchase price of $25.7 million.

Since the share buyback program was approved by the board of directors, we have repurchased 7.4 million shares in aggregate at an average price of $83.38 per share for a total purchase price of $615.5 million. We recorded the $615.5 million aggregate purchase price as a reduction of retained earnings within our condensed consolidated balance sheet. All repurchased shares were retired immediately.

The price, timing, amount, and method of future repurchases will be determined based on the valuation of market conditions and other factors, at prices determined to be attractive and in the best interests of both the Company and our stockholders.

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(Unaudited)

Note 14. Commitments and Contingencies

Purchase Obligations

Purchase obligations of $416.2 million as of October 1, 2022, represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. In addition, we assumed certain purchase orders in connection with our merger with NeoPhotonics for the purchase of inventory and other items in the ordinary course of its business. Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on our business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.

We depend on a limited number of contract manufacturers, subcontractors and suppliers for raw materials, packages and standard components. We generally purchase these single or limited source products through standard purchase orders or one-year supply agreements and have no significant long-term guaranteed supply agreements with such vendors. While we seek to maintain a sufficient safety stock of such products and maintain on-going communications with our suppliers to guard against interruptions or cessation of supply, our business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of such supplies, or our inability to obtain reduced pricing from our suppliers in response to competitive pressures.

Product Warranties

We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We typically offer a twelve month warranty for most of our products. However, in some instances depending upon the product, product components or application of our products by the end customer, our warranties can vary and generally range from six months to five years. We estimate the costs of our warranty obligations on an annualized basis based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. We assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.

The following table presents the changes in our warranty reserve for the periods presented (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Balance as of beginning of period			$	10.0					$	5.0
Warranties assumed in NeoPhotonics merger			0.7						—
Provision for warranty			1.5						1.7
Utilization of reserve			(2.1)						(1.6)
Balance as of end of period			$	10.1					$	5.1

Environmental Liabilities

Our research and development, manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. We apply strict standards for protection of the environment and occupational health and safety to sites inside and outside the United States, even if not subject to regulations imposed by foreign governments. We believe that our properties and operations at our facilities comply in all material respects with applicable environmental laws and occupational health and safety laws. However, the risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental and health and safety laws will not require us to incur significant expenditures. We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements. The environmental, product content/disposal and recycling laws are gradually becoming more stringent and may cause us to incur significant expenditures in the future.

Legal Proceedings

We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in the aggregate, will not have a material adverse impact on our financial position, results of operations or statements of cash flows, these matters are subject to inherent

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uncertainties and management’s view of these matters may change in the future. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.

Oclaro Merger Litigation

In connection with our acquisition of Oclaro in 2018, seven lawsuits were filed by purported stockholders of Oclaro challenging the proposed merger (the “Merger”). All but one was voluntarily dismissed after the Oclaro Merger closed. The remaining lawsuit, SaiSravan B. Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit”), was filed in the United States District Court for the Northern District of California and is styled as a class action.

The Karri Lawsuit alleges, among other things, that Oclaro and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder by disseminating an incomplete and misleading Form S-4, including proxy statement/prospectus. The Karri Lawsuit further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act. The plaintiff in the Karri Lawsuit seeks, among other things, damages to be awarded to the plaintiff and any class, if a class is certified, and litigation costs, including attorneys’ fees.

After the plaintiff in the Karri Lawsuit was appointed as lead plaintiff and his counsel as lead counsel, the plaintiff filed a first amended complaint on April 15, 2019. The first amended complaint, also named Lumentum as a defendant but Lumentum has since been dismissed from the action. On October 8, 2020, the court granted in part and denied in part the defendant’s motion to dismiss the first amended complaint. On December 1, 2020, defendants answered the first amended complaint. On September 17, 2021, lead plaintiff filed a second amended complaint. Defendants moved to stay discovery in light of the second amended complaint. On January 11, 2022 the Court struck the second amended complaint as untimely, terminated defendants’ motions to dismiss as moot, and lifted the stay.

On August 16, 2022, Plaintiff moved for class certification and to be appointed class representative. Defendants opposed the motion. A hearing on the motion is scheduled for November 17, 2022. Defendants intend to continue to defend the Karri Lawsuit vigorously.

NeoPhotonics Merger Litigation

In connection with our planned acquisition of NeoPhotonics Corporation (“NeoPhotonics”) announced in November 2021, ten lawsuits (the “NeoPhotonics Lawsuits”) were filed by purported stockholders of NeoPhotonics challenging the proposed merger (the “NeoPhotonics Merger”). All of the NeoPhotonics Lawsuits have been dismissed.

Indemnifications

In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification. Exposure under these agreements is unknown because claims may be made against us in the future, and we may record charges in the future as a result of these indemnification obligations. As of October 1, 2022, we did not have any material indemnification claims that were probable or reasonably possible.

Audit Proceedings

We are under audit by various domestic and foreign tax authorities with regards to income tax and indirect tax matters. In some, although not all cases, we have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by these tax authorities or final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense.

Note 15. Operating Segments and Geographic Information

Our chief executive officer is our Chief Operating Decision Maker (“CODM”). The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and gross margin. We do not track all of our property, plant and equipment by operating segments. The geographic identification of these assets is set forth below.

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We are an industry leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications including optical communications and commercial lasers. We have two operating segments, Optical Communications, which we refer to as OpComms, and Commercial Lasers, which we refer to as Lasers. Our OpComms products address the following markets: telecommunications and data communications (“Telecom and Datacom”), and consumer and industrial (“Consumer and Industrial”), and include product lines from the recent merger of NeoPhotonics and the acquisition of IPG Photonics’ telecom transmission product lines. The two operating segments were primarily determined based on how the CODM views and evaluates our operations. The CODM regularly reviews operating results to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments.

OpComms

Our OpComms products include a wide range of components, modules and subsystems to support customers including carrier networks for access (local), metro (intracity), long-haul (city-to-city and worldwide) and submarine (undersea) applications. Additionally, our products address enterprise, cloud, and data center applications, including storage-access networks (“SANs”), local-area networks (“LANs”) and wide-area networks (“WANs”). These products enable the transmission and transport of video, audio and data over high-capacity fiber-optic cables. We maintain leading positions in these fast growing OpComms markets through our extensive product portfolio, including reconfigurable optical add/drop multiplexers (“ROADMs”), coherent dense wavelength division multiplexing (“DWDM”) pluggable transceivers, and tunable small form-factor pluggable transceivers. We also sell laser chips for use in the manufacture of high-speed Datacom transceivers.

In the Consumer and Industrial market, our OpComms diode laser products include vertical cavity surface emitting lasers (“VCSELs”) and edge emitting lasers. In the Consumer end-market, our laser light sources are integrated into 3D sensing cameras which are used in applications in mobile devices, gaming, payment kiosks, computers, and other consumer electronics devices. Applications include biometric identification, computational photography, virtual and augmented reality, and natural user interfaces. Emerging applications for our lasers include automotive safety systems, LiDAR for advanced driver assistance systems in automobiles and autonomous vehicles, self-navigating robotics and drones in industrial applications, and 3D capture of objects coupled with 3D imaging or printing. In the Industrial end-market, our diode lasers are used primarily as pump sources for pulsed and kilowatt class fiber lasers.

Lasers

Our Lasers products serve our customers in markets and applications such as sheet metal processing, general manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining such as drilling in printed circuit boards, wafer singulation, glass cutting and solar cell scribing.

Our Lasers products are used in a variety of OEM applications including diode-pumped solid-state, fiber, diode, direct-diode and gas lasers such as argon-ion and helium-neon lasers. Fiber lasers provide kW-class output powers combined with excellent beam quality and are used in sheet metal processing and metal welding applications. Diode-pumped solid-state lasers provide excellent beam quality, low noise and exceptional reliability and are used in biotechnology, graphics and imaging, remote sensing, materials processing and precision machining applications. Diode and direct-diode lasers address a wide variety of applications, including laser pumping, thermal exposure, illumination, ophthalmology, image recording, printing, plastic welding and selective soldering. Gas lasers such as argon-ion and helium-neon lasers provide a stable, low-cost and reliable solution over a wide range of operating conditions, making them well-suited for complex, high-resolution OEM applications such as flow cytometry, DNA sequencing, graphics and imaging and semiconductor inspection.

We also provide high-powered and ultrafast lasers for the industrial and scientific markets. Manufacturers use high-power, ultrafast lasers to create micro parts for consumer electronics and to process semiconductor, LED, and other types of chips. Use of ultrafast lasers for micromachining applications is being driven primarily by the increasing use of consumer electronics and connected devices globally.

Reportable Segments

We do not allocate research and development, sales and marketing, or general and administrative expenses to our segments because management does not include the information in its measurement of the performance of the operating segments. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, stock-based compensation and certain other charges impacting the gross margin of each segment because management does not include this information in its measurement of the performance of the operating segments.

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(Unaudited)

Information on reportable segments utilized by our CODM is as follows (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Net revenue:
OpComms			$	453.4					$	406.0
Lasers			53.4						42.4
Net revenue			$	506.8					$	448.4
Gross profit:
OpComms			$	216.0					$	225.9
Lasers			28.1						20.8
Total segment gross profit			244.1						246.7
Unallocated corporate items:
Stock-based compensation			(5.5)						(4.6)
Amortization of acquired intangibles			(22.9)						(15.8)
Amortization of acquired inventory fair value adjustments			(4.6)						—
Other (charges) gains (1)			(9.9)						5.9
Gross profit			$	201.2					$	232.2

(1) Other (charges) gains of unallocated corporate items for the three months ended October 1, 2022 primarily relate to $7.3 million of charges to acquire components from various brokers to satisfy customer demand.

Other (charges) gains of unallocated corporate items for the three months ended October 2, 2021 primarily relate to $5.9 million of gain as a result of selling equipment that was no longer needed after we transferred certain product lines to new production facilities in fiscal 2021.

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(Unaudited)

Concentrations

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

			Three Months Ended
			October 1, 2022												October 2, 2021
			Amount						% of Total						Amount						% of Total
Net revenue:
Americas:
United States			$	62.2					12.3		%				$	28.1					6.3		%
Other Americas			59.8						11.8						35.0						7.8
Total Americas			$	122.0					24.1		%				$	63.1					14.1		%
Asia-Pacific:
Hong Kong			$	77.6					15.3		%				$	142.3					31.7		%
South Korea			67.7						13.4						105.1						23.4
Thailand			57.5						11.3						17.1						3.8
Other Asia-Pacific			133.7						26.4						95.0						21.2
Total Asia-Pacific			$	336.5					66.4		%				$	359.5					80.1		%
EMEA			$	48.3					9.5		%				$	25.8					5.8		%
Total net revenue			$	506.8											$	448.4

During the three months ended October 1, 2022, our net revenue from a single customer, which represented 10% or greater of the total net revenue, was concentrated with two customers, who collectively accounted for 34% of our total net revenue. During the three months ended October 2, 2021, our net revenue from a single customer, which represented 10% or greater of total net revenue was concentrated with one customer, who accounted for 41% of our total net revenue.

As of October 1, 2022, our accounts receivable from a single customer, which represented 10% or greater of the total accounts receivable, was concentrated with two customers, which individually represented 13% and 11% of gross accounts receivable, respectively. As of July 2, 2022, our accounts receivable from a single customer, which represented 10% or greater of the total accounts receivable, was concentrated with two customers, which individually represented 10% and 10% of gross accounts receivable, respectively.

Long-lived assets, namely property, plant and equipment, net, were identified based on the physical location of the assets in the corresponding geographic areas as of the periods indicated (in millions):

			October 1, 2022						July 2, 2022
Property, plant and equipment, net
United States			$	136.9					$	107.8
Thailand			118.0						107.6
Japan			89.2						38.9
China			58.4						32.7
Other countries			75.5						73.5
Total property, plant and equipment, net			$	478.0					$	360.5

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(Unaudited)

We purchase a portion of our inventory from contract manufacturers and vendors located primarily in Taiwan, Thailand and Malaysia. During the three months ended October 1, 2022 and October 2, 2021, our net inventory purchases from a single contract manufacturer, which represented 10% or greater of our total net inventory purchases, were concentrated with two contract manufacturers. These two contract manufacturers collectively accounted for 51% of the total net inventory purchases during the three months ended October 1, 2022 and 64% of the total net inventory purchases during the three months ended October 2, 2021.

Note 16. Revenue Recognition

Disaggregation of Revenue

We disaggregate revenue by product and by geography. We do not present other levels of disaggregation, such as by type of products, customer, markets, contracts, duration of contracts, timing of transfer of control and sales channels, as this information is not used by our CODM to manage the business.

The table below discloses our total net revenue attributable to each of our two reportable segments. In addition, the table sets forth the percentage of our total net revenue attributable to our product offerings that serve Telecom and Datacom, and Consumer and Industrial markets accounted for 10% or more of our total net revenue during the periods presented (in millions, except percentage data):

			Three Months Ended
			October 1, 2022									October 2, 2021
OpComms:
Telecom and Datacom			$	360.1		71.1		%				$	216.0		48.2		%
Industrial and Consumer			93.3			18.4						190.0			42.3		%
Total OpComms			$	453.4		89.5		%				$	406.0		90.5		%
Lasers			53.4			10.5		%				42.4			9.5		%
Net Revenue			$	506.8								$	448.4

Contract Balances

The following table reflects the changes in contract balances for the periods presented (in millions, except percentages):

Contract balances						Balance sheet location						October 1, 2022						July 2, 2022						Change						Percentage Change
Accounts receivable, net						Accounts receivable, net						$	340.5					$	262.0					$	78.5					30.0		%
Deferred revenue and customer deposits						Other current liabilities						$	1.1					$	—					$	1.1					n/a

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and the corresponding notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to, among other things, our markets and industry, products and strategy, the impact of export regulation changes, the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our business and results of operations, sales, gross margins, operating expenses, capital expenditures and requirements, liquidity, product development and R&D efforts, manufacturing plans, litigation, effective tax rates and tax reserves, our corporate and financial reporting structure, our plans for growth and innovation, our expectations regarding U.S.-China relations, market and regulatory conditions, trends and uncertainties in our business and financial results, and our merger with NeoPhotonics and the successful integration of NeoPhotonics’ business (including personnel), and are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” “contemplate,” “believe,” “predict,” “potential” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part II, Item 1A of this Quarterly Report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

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Overview

We are an industry-leading provider of optical and photonic products defined by revenue and market share, addressing a range of end-market applications including Optical Communications (“OpComms”) and Commercial Lasers (“Lasers”) for manufacturing, inspection and life-science applications.

We have two operating segments, OpComms and Lasers. The two operating segments were primarily determined based on how the Chief Operating Decision Maker (“CODM”) views and evaluates our operations. Operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments.

We believe the global markets in which Lumentum participates have fundamentally robust, long-term trends that increase the need for our photonics products and technologies. We believe the world is becoming more reliant on ever-increasing amounts of data flowing through optical networks and data centers. Lumentum’s products and technology enable the scaling of these optical networks and data centers to higher capacities. We expect the accelerating shift to digital and virtual approaches to all aspects of work and life that is driving staggering amounts of data in the world’s networks and cloud datacenters will continue into the future. Virtual meetings, video calls, and hybrid in-person and virtual environments for work and other aspects of life will continue to drive strong needs for bandwidth growth and present dynamic new challenges that our technology addresses. As manufacturers demand higher levels of precision, new materials, and factory and energy efficiency, suppliers of manufacturing tools globally are turning to laser-based approaches, including the types of lasers Lumentum supplies. Laser-based 3D sensing and LiDAR for security, industrial and automotive applications are rapidly developing markets. The technology enables computer vision applications that enhance security, safety, and new functionality in the electronic devices that people rely on every day. The use of LiDAR and in-cabin 3D sensing in automobile and delivery vehicles over time significantly adds to our long-term market opportunity. Frictionless and contactless biometric security and access control is of increasing focus globally given the world’s experience with the COVID-19 pandemic. Additionally, we expect 3D-enabled machine vision solutions to expand significantly in industrial applications in the coming years.

To maintain and grow our market and technology leadership positions, we are continually investing in new and differentiated products and technologies and customer programs that address both nearer-term and longer-term growth opportunities, both organically and through acquisitions, as well as continually improving and optimizing our operations. Over many years, we have developed close relationships with market leading customers. We seek to use our core optical and photonic technology and our volume manufacturing capability to expand into attractive emerging markets that benefit from advantages that optical or photonics-based solutions provide.

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Mergers and Acquisitions

NeoPhontonics Merger

On August 3, 2022 (the “Closing date”), we completed our merger with NeoPhotonics Corporation (“NeoPhotonics”). The addition of NeoPhotonics expands our opportunity in some of the fastest growing markets for optical components used in cloud and telecom network infrastructure. We expect the integrated company to be better positioned to serve the needs of a global customer base who are increasingly utilizing photonics to accelerate the shift to digital and virtual approaches to work and life, the proliferation of IoT, 5G, and next-generation mobile networks, and the transition to advanced cloud computing architectures.

Under the terms of the Merger Agreement, NeoPhotonics stockholders received $16.00 per share for each of the NeoPhotonics common stock they own at the Closing date. As a result, we paid $867.3 million of cash consideration to shareholders of NeoPhotonics on the Closing Date.

As contemplated by the Merger Agreement, on January 14, 2022, Lumentum and NeoPhotonics entered into a credit agreement where Lumentum agreed to make term loans (“loans”) to NeoPhotonics in an aggregate principal amount not to exceed $50.0 million to help fund capital expenditures and increase working capital associated with NeoPhotonics’ growth plans. During fiscal 2022, we funded a $30.0 million loan request to NeoPhotonics. On August 1, 2022, we funded an additional $20.0 million loan request to NeoPhotonics. The interest was payable monthly in arrears on the first day of each month. The loans would have matured on January 14, 2024 unless earlier repaid or accelerated. The $50.0 million loans in aggregate were included as part of the total purchase price consideration.

We paid $22.6 million cash consideration to shareholders of NeoPhotonics for the vested and accelerated NeoPhotonics equity awards, of which $13.6 million was allocated to the purchase price consideration. The remaining $9.0 million related to the payment of change-in-control provisions for certain executives, which were recognized as post-combination expenses due to the dual-trigger nature of the arrangements. Additionally, we issued replacement equity awards (the “Replacement Awards”) in settlement of certain NeoPhotonics equity awards that did not become vested at the Closing date, with the total fair value of $40.2 million based on our closing stock price on the Closing date. The portion of Replacement Awards attributed to pre-merger service was recorded as part of the consideration transferred, which was $3.5 million.

The total transaction consideration of $934.4 million was funded by the cash balances of the combined company. We also recorded $20.9 million of merger-related costs, representing professional and other direct acquisition costs. Of the $20.9 million of merger-related costs, $12.6 million was incurred during the three months ended October 1, 2022 and was recorded as selling, general and administrative expense in the consolidated statement of operations.

Refer to “Note 4. Business Combinations” in the notes to condensed consolidated financial statements for additional information regarding the merger with NeoPhotonics.

Acquisition of IPG Photonics’ Telecom Transmission Product Lines

On August 15, 2022, we completed a transaction to acquire IPG Photonics’ telecom transmission product lines that develops and markets products for use in telecommunications and datacenter infrastructure, including Digital Signal Processors (DSPs), ASICs and optical transceivers. This acquisition will enable us to expand our business in the OpComms segment. The total purchase price is $55.9 million, which was paid in cash. Refer to “Note 4. Business Combinations” in the notes to condensed consolidated financial statements for additional information regarding the acquisition of these product lines.

We evaluate strategic opportunities regularly and, where appropriate, may acquire additional businesses, products, or technologies that are complementary to, or broaden the markets for our products. We believe we have strengthened our business model by expanding our addressable markets, customer base and expertise, diversifying our product portfolio and fortifying our core businesses from acquisitions as well as through organic initiatives.

Impact of COVID-19 to Our Business

Since February 2020, the COVID-19 pandemic has caused public health officials to recommend, and governments to enact, precautions to mitigate the spread of the virus, including travel restrictions and bans, extensive social distancing guidelines, closure or restrictions on business and quarantine or other types of “shelter-in-place” orders in many regions of the world. The pandemic and these related responses continue to cause a global slowdown of economic activity (including a decrease in demand for a broad variety of goods and services), disruptions in global supply chains, labor shortages, and significant volatility and potential disruption of financial markets. The ultimate extent to which COVID-19 will impact our business depends on future developments, which are highly uncertain and very difficult to predict, including the effectiveness

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and utilization of vaccines for COVID-19 and its variants, the severity of COVID-19 and its variants, and the effectiveness of the actions to contain or limit their spread.

From the start of the COVID-19 pandemic, we proactively implemented preventative measures and protocols, which we continuously assess and update for changes in conditions and emerging trends. Some of these measures have included complying with local, state or federal orders that require employees to work from home, instructing employees to work from home in certain jurisdictions, limiting the number of employees onsite which slowed our manufacturing operations in certain countries, enhancing use of personal protective equipment and restricting non-critical business travel by our employees, enacting vaccine and testing mandates in certain jurisdictions, and implementing health and safety enhancements. These measures are intended to safeguard our team members, contractors, suppliers, customers, distributors, and communities, and to ensure business continuity. Currently, our major production facilities in Europe, Asia, and the United States remain open. At most of our locations, we have transitioned from business continuity plans to return-to-office plans while continuing to maintain high standards of employee safety and sanitization protocols.

In the geographies where we have operations, we have, in general and where applicable, been deemed an essential business and been permitted to continue manufacturing and conducting new product development operations in a more limited capacity during the pandemic. This stems from our critical role in global supply chains for the world’s communications and health-care systems. However, the pandemic continues to affect our suppliers and manufacturers who are experiencing component materials and labor shortages. Given the continually evolving situation, particularly in light of the potential emergence of new variants, it is difficult to predict the magnitude and duration of the impact of the COVID-19 pandemic to our markets, its effects, or precisely when our ability to supply our products will return to full capacity. We are continuing to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, communities, business partners, suppliers and stockholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business, including the effects on our customers, employees and prospects, or on our financial results for the future.

Our primary strategic focus for several years has been technology and product leadership combined with close customer relationships in long-term healthy and growing markets. We believe this strategy is even more apt, and our long-term opportunity is not diminished, with COVID-19. We believe there are long-term opportunities, as the world’s experience with COVID-19 could drive an increasingly digital and virtual world, touching all aspects of life and work, that increasingly emphasizes the importance of communications systems, cloud services, augmented and virtual reality, and enhanced security. Additionally, ever advancing electronic devices are needed to consume, produce, and communicate digital and virtual content. All these trends could drive the need for higher volumes of higher performing optical devices that we could supply. As such, we expect to continue to invest strongly in new products, technology and customer programs.

For more information on risks associated with the COVID-19 outbreak and regulatory actions, see the section titled “Risk Factors” in Item 1A of Part II of this report.

Supply Chain Constraints

Our business and our customers’ businesses have been negatively impacted by worldwide logistics and supply chain issues, including constraints on available cargo capabilities and limited availability of once broadly available supplies of both raw materials and finished components. COVID-19 has also created dynamics in the semiconductor component supply chains that have led to shortages of the types of components we and our customers require in our products. These shortages have impacted our ability to meet demand and generate revenue from certain products in fiscal 2022 and, they continue to impact our ability to meet demand today. If our ability to procure needed semiconductor components does not improve, our ability to supply our products to our customers will be impacted and our revenue and profit margin may be reduced. In addition, if our customers are unable to procure needed semiconductor components, this could reduce their demand for our products and reduce our revenue. The impact of semiconductor component shortages may continue in the near term as supplier and customer buffer inventories and safety stocks are exhausted. Due to the global supply chain constraints, we have had to incur incremental supply and procurement costs in order to increase our ability to fulfill demands from our customers. These costs have increased our inventory balances as of October 1, 2022 and may decrease our gross margin in the near term. We expect component supply to be a challenge at least into the second half of fiscal 2023.

For more information on risks associated with supply chain constraints, see the section titled “Risk Factors” in Item 1A of Part II of this report.

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Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), and we consider the various staff accounting bulletins and other applicable guidance issued by the United States Securities and Exchange Commission (“SEC”). GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

•Inventory Valuation

•Revenue Recognition

•Income Taxes

•Business Combinations

•Goodwill

Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended July 2, 2022 provides a complete discussion of our critical accounting policies and estimates. There have been no changes to these policies during the three months ended October 1, 2022.

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Recently Issued Accounting Pronouncements

Refer to “Note 2. Recently Issued Accounting Pronouncements” in the notes to condensed consolidated financial statements.

Results of Operations

The results of operations for the periods presented are not necessarily indicative of results to be expected for future periods. The following table summarizes selected unaudited condensed consolidated statements of operations items as a percentage of net revenue:

			Three Months Ended
			October 1, 2022						October 2, 2021
Segment net revenue:
OpComms			89.5		%				90.5		%
Lasers			10.5						9.5
Net revenue			100.0						100.0
Cost of sales			55.8						44.7
Amortization of acquired developed intangibles			4.5						3.5
Gross profit			39.7						51.8
Operating expenses:
Research and development			14.3						12.1
Selling, general and administrative			20.9						14.1
Restructuring and related charges			1.8						(0.2)
Total operating expenses			37.0						25.9
Income from operations			2.7						25.8
Interest expense			(1.7)						(3.8)
Other income (expense), net			2.7						0.1
Income before income taxes			3.7						22.2
Provision for income taxes			3.8						4.0
Net income (loss)			(0.1)		%				18.2		%

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Financial Data for the three months ended October 1, 2022 and October 2, 2021

The following table summarizes selected unaudited condensed consolidated statements of operations items (in millions, except for percentages):

			Three Months Ended
			October 1, 2022						October 2, 2021						Change						Percentage Change
Segment net revenue:
OpComms			$	453.4					$	406.0					$	47.4					11.7		%
Lasers			53.4						42.4						11.0						25.9
Net revenue			$	506.8					$	448.4					$	58.4					13.0		%
Gross profit			$	201.2					$	232.2					$	(31.0)					(13.4)		%
Gross margin			39.7		%				51.8		%
Research and development			$	72.7					$	54.1					$	18.6					34.4		%
Percentage of net revenue			14.3		%				12.1		%
Selling, general and administrative			$	105.7					$	63.3					$	42.4					67.0		%
Percentage of net revenue			20.9		%				14.1		%
Restructuring and related charges			$	9.3					$	(1.1)					$	10.4					N/A
Percentage of net revenue			1.8		%				(0.2)		%

Net Revenue

Net revenue increased by $58.4 million, or 13.0%, during the three months ended October 1, 2022 compared to the three months ended October 2, 2021, due to a $47.4 million increase in OpComms revenue and a $11.0 million increase in Lasers revenue.

OpComms net revenue increased by $47.4 million, or 11.7%, during the three months ended October 1, 2022 compared to the three months ended October 2, 2021. Within OpComms, Telecom and Datacom increased by $144.1 million, primarily due an aggregate of $73.8 million of revenue generated by NeoPhotonics and the IPG Photonics’ telecom transmission product lines from the respective acquisition dates. Additionally, the supply shortage in fiscal 2022 was partially relieved, allowing us to meet more customer demand during the first quarter of fiscal year 2023. Industrial and Consumer decreased by $96.7 million primarily due to higher market competition in the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022 and reflects share normalization in the market.

Lasers net revenue increased by $11.0 million, or 25.9%, during the three months ended October 1, 2022 compared to the three months ended October 2, 2021, primarily due to a return in customer demand for our kilowatt class fiber lasers following a recovery in industrial production.

During the three months ended October 1, 2022, our net revenue from a single customer, which represented 10.0% or greater of total net revenue was concentrated with two customers, which collectively accounted for 34% of our total net revenue.

During the three months ended October 2, 2021, our net revenue from a single customer, which represented 10% or greater of total net revenue was concentrated with one customer, which accounted for 41% of our total net revenue.

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Revenue by Region

We operate in three geographic regions: Americas, Asia-Pacific and EMEA. Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country; however, the location of the end-customers may differ. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries within those regions that represented 10% or more of our total net revenue (in millions, except for percentages):

			Three Months Ended
			October 1, 2022												October 2, 2021
			Amount						% of Total						Amount						% of Total
Americas:
United States			$	62.2					12.3		%				$	28.1					6.3		%
Other Americas			59.8						11.8						35.0						7.8
Total Americas			$	122.0					24.1		%				$	63.1					14.1		%
Asia-Pacific:
Hong Kong			$	77.6					15.3		%				$	142.3					31.7		%
South Korea			67.7						13.4						105.1						23.4
Thailand			57.5						11.3						17.1						3.8
Other Asia-Pacific			133.7						26.4						95.0						21.2
Total Asia-Pacific			$	336.5					66.4		%				$	359.5					80.1		%
EMEA			$	48.3					9.5		%				$	25.8					5.8		%
Total net revenue			$	506.8											$	448.4

For the three months ended October 1, 2022 and October 2, 2021, net revenue from customers outside the United States, based on customer shipping location, represented 87.7% and 93.7% of net revenue, respectively.

Our net revenue is primarily denominated in U.S. dollars, including our net revenue from customers outside the United States as presented above. We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities. However, regulatory and enforcement actions by the United States and other governmental agencies, as well as changes in tax and trade policies and tariffs, have impacted and may continue to impact net revenue from customers outside the United States.

Gross Margin and Segment Gross Margin

The following table summarizes segment gross margin for the periods presented (in millions, except for percentages):

			Three Months Ended
			Gross Profit												Gross Margin
			October 1, 2022						October 2, 2021						October 1, 2022						October 2, 2021
OpComms			$	216.0					$	225.9					47.6		%				55.6		%
Lasers			28.1						20.8						52.6		%				49.1		%
Segment total			$	244.1					$	246.7					48.2		%				55.0		%
Unallocated corporate items:
Stock-based compensation			(5.5)						(4.6)
Amortization of acquired intangibles			(22.9)						(15.8)
Amortization of acquired inventory fair value adjustments			(4.6)						—
Other (charges) gains (1)			(9.9)						5.9
Total			$	201.2					$	232.2					39.7		%				51.8		%

(1) Other (charges) gains of unallocated corporate items for the three months ended October 1, 2022 primarily relate to $7.3 million of charges to acquire components from various brokers to satisfy customer demand.

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Other (charges) gains of unallocated corporate items for the three months ended October 2, 2021 relate to $5.9 million of gain as a result of selling equipment that was no longer needed after we transferred certain product lines to new production facilities in fiscal 2021.

The unallocated corporate items for the periods presented include the effects of amortization of acquired developed technologies and other intangibles, amortization of acquired inventory fair value adjustments, share-based compensation and certain other charges. We do not allocate these items to the gross margin for each segment because management does not include such information in measuring the performance of the operating segments.

Gross Margin

Gross margin for the three months ended October 1, 2022 decreased to 39.7% from 51.8% for the three months ended October 2, 2021. The decrease was primarily driven by lower gross margin from our OpComms segment. The lower gross margin was also a result of an aggregate $7.1 million higher amortization of intangible assets acquired in the NeoPhotonics merger and the acquisition of IPG Photonics’ telecom transmission product lines, $4.6 million of amortization of acquired inventory, and $7.3 million of charges to acquire components from various brokers to satisfy customer demand during the first quarter of fiscal year 2023. Additionally, gross margin for the three months ended October 2, 2021 includes $5.9 million of gain as a result of selling equipment that was no longer needed after we transferred certain product lines to new production facilities.

We sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive, are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.

Due to the global supply chain constraint, we have had to incur incremental supply and procurement costs in order to increase our ability to fulfill demands from our customers. As of October 1, 2022, our inventory balance includes $21.9 million of incremental supply procurement costs.

Segment Gross Margin

OpComms

OpComms gross margin for the three months ended October 1, 2022 decreased to 47.6% from 55.6% for the three months ended October 2, 2021. The decrease was primarily due to a less profitable mix of products, including lower sales of higher margin 3D sensing products, as well as higher sales of telecom transmission products due to the merger with NeoPhotonics, which have lower margins than our average OpComms margins.

Lasers

Lasers gross margin for the three months ended October 1, 2022 increased to 52.6% from 49.1% for the three months ended October 2, 2021. The increase was primarily due to the higher manufacturing levels and improved factory utilization as a result of return in customer demand for our kilowatt class fiber products following the recent recovery in industrial production.

Research and Development (“R&D”)

R&D expense increased by $18.6 million, or 34.4%, for the three months ended October 1, 2022 compared to the three months ended October 2, 2021. The increase in R&D expense for the three months ended October 1, 2022 was primarily driven by an increase in payroll, stock-based compensation and other compensation related expenses due to additional headcount from the merger with NeoPhotonics and the acquisition of IPG Photonics’ telecom transmission product lines.

We believe that continuing our investments in R&D is critical to attaining our strategic objectives. Despite the uncertainty related to COVID-19 and the global economic outlook, we plan to continue to invest in R&D and new products that we believe will further differentiate us in the marketplace and we expect our investment in R&D to increase in absolute dollars in future quarters.

Selling, General and Administrative (“SG&A”)

SG&A expense increased by $42.4 million, or 67.0%, during the three months ended October 1, 2022 compared to the three months ended October 2, 2021. The increase in SG&A expense for the three months ended October 1, 2022 was primarily driven by an increase in payroll and employee compensation related expenses due to additional headcount from the merger with NeoPhotonics and higher stock-based compensation. In connection with the NeoPhotonics merger, certain equity awards for NeoPhotonics employees were accelerated. The total stock-based compensation associated with the acceleration was $11.9 million for the three months ended October 1, 2022. In addition, we incurred $16.2 million merger and acquisition related costs, primarily professional service fees and retention expenses related to the NeoPhotonics merger and the acquisition of IPG

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Photonics’ telecom transmission product lines, and $3.7 million of amortization of intangibles acquired as part of these acquisitions.

From time to time, we incur non-recurring expenses, such as mergers and acquisition-related expenses, which generally increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.

Restructuring and Related Charges

We have initiated various strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our business in response to market conditions and as a result of our merger with NeoPhotonics on August 3, 2022.

During the three months ended October 1, 2022, we recorded restructuring and related charges of $9.3 million, which was primarily attributable to severance and employee-related benefits associated with NeoPhotonics’ executive severance and retention agreements. These retention agreements provide, under certain circumstances, for payments and benefits upon an involuntary termination of employment.

During the three months ended October 2, 2021, we recorded a net reversal to our restructuring and related charges of $1.1 million in our condensed consolidated statements of operations which was attributable to lower than anticipated employee severance charges primarily as a result of retaining and re-assigning certain employees.

Interest Expense

For the three months ended October 1, 2022 and October 2, 2021, we recorded interest expense of $8.5 million and $16.9 million, respectively, driven primarily by the amortization of the debt discount and issuance costs of our convertible notes. The decrease in interest expense for the three months ended October 1, 2022 compared to the three months ended October 2, 2021, is primarily a result of the adoption of ASU 2020-06 in our first quarter of fiscal 2023, which requires us to treat our 2026 Notes and 2028 Notes as a single liability measured at amortized cost, eliminating the interest expense associated with the debt discount.

Other Income (Expense), Net

The components of other income (expense), net are as follows (in millions):

			Three Months Ended
			October 1, 2022						October 2, 2021
Foreign exchange gains (losses), net			$	9.0					$	(0.1)
Interest and investment income			4.8						0.6
Other income (expense), net			—						0.1
Total other income (expense), net			$	13.8					$	0.6

For the three months ended October 1, 2022, other income (expense), net increased by $13.2 million, primarily due to $9.1 million more in foreign exchange gains as a result of a strengthening U.S. dollar relative to other foreign currencies, and an increase in interest and investment income of $4.2 million from an increase in interest rates on our U.S. Treasury securities.

Provision for Income Taxes

(in millions)			Three Months Ended
			October 1, 2022						October 2, 2021
Provision for income taxes			$	19.2					$	18.1

We recorded a tax provision of $19.2 million and $18.1 million for the three months ended October 1, 2022 and October 2, 2021, respectively. Our tax provision for the three months ended October 1, 2022 includes a discrete tax expense of $13.1 million, primarily related to the international restructuring and currency re-measurement of certain tax related accounts, partially offset by the tax benefit from tax rate changes. Our tax provision for the three months ended October 2, 2021 includes a discrete tax expense of $1.1 million, primarily related to return-to-provision differences.

Our estimated effective tax rate for fiscal 2023 also differs from the 21% U.S. statutory rate primarily due to the income tax tax expense from the tax effect of Global Intangible Low-Taxed Income (“GILTI”), net of benefit for foreign tax credits, subpart F inclusion and non-deductible stock-based compensation, partially offset by the income tax benefit from the earnings of our foreign subsidiaries being taxed at rates that differ from the U.S. statutory rate, and U.S. federal R&D tax credits.

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On August 1, 2022, the Company completed an international restructuring that included the intra-entity transfer of certain intellectual property and other assets used in the business among various subsidiaries. The international restructuring aligns the global economic ownership of the Company’s intellectual property rights with the Company’s current and future business operations. The international restructuring resulted in an income tax expense for the fiscal first quarter of approximately $15.7 million, which is primarily the tax effect of the intra-entity transfers of the intellectual property.

On August 9, 2002, President Biden signed into law the CHIPS and Science Act, and on August 9, 2022, the Inflation Reduction Act. The new legislation provide tax incentives as well as impose a 15% minimum tax on certain corporation’s book income and a 1% excise tax on certain stock buybacks. While we may be subject to the new excise tax on certain stock buybacks in years after fiscal 2023 if our net repurchase exceeds the $1.0 million annual threshold, the enactment of both the CHIPS and Science ACT as well as the Inflation Reduction Act did not result in any material adjustments to our income tax provision for the period ended October 1, 2022.

Financial Condition

Liquidity and Capital Resources

As of October 1, 2022 and July 2, 2022, our cash and cash equivalents were $605.3 million and $1,290.2 million, respectively. As of October 1, 2022 and July 2, 2022, our short-term investments of $1,019.6 million and $1,258.8 million, respectively, were all held in the United States. Cash equivalents and short-term investments are primarily comprised of money market funds, treasuries, agencies, high quality investment grade fixed income securities, certificates of deposit and commercial paper. Our investment policy and strategy is focused on the preservation of capital and supporting our liquidity requirements.

The total amount of cash held by the non-United States entities as of October 1, 2022 and July 2, 2022 was $379.7 million and $216.1 million, respectively, which was primarily held by entities incorporated in the United Kingdom, the British Virgin Islands, Japan, Hong Kong, China, Canada and Thailand. Although the cash currently held in the United States, as well as the cash generated in the United States from future operations, is expected to cover our normal operating requirements, a substantial amount of additional cash could be required for other purposes, such as capital expenditures to support our business and growth, including costs associated with increasing internal manufacturing capabilities, particularly in our Thailand facility, strategic transactions and partnerships, and future acquisitions.

Our intent is to indefinitely reinvest funds held outside the United States and, except for the funds held in the Cayman Islands, the British Virgin Islands, Japan and Hong Kong, our current plans do not demonstrate a need to repatriate them to fund our domestic operations. However, if in the future, we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, or the cost to bring back the money is not significant from a tax perspective, we may determine that cash repatriations are necessary or desirable. Repatriation could result in additional material taxes. These factors may cause us to have an overall tax rate higher than other companies or higher than our tax rates have been in the past. Additionally, if conditions warrant, we may seek to obtain additional financing through debt or equity sources. To the extent we issue additional shares, our existing stockholders may be diluted. However, any such financing may not be available on terms favorable to us, or may not be available at all.

Further, the United States recently introduced a 1% excise tax on stock buybacks and a 15% alternative minimum tax on adjusted financial statement income. We are evaluating the impact of the excise tax to us. Many countries, and organizations such as the Organization for Economic Cooperation and Development have proposed implementing changes to existing tax laws, including a proposed global minimum tax of 15%. Any of these developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our operating results.

Liquidity and Capital Resources Requirements

We believe that our cash and cash equivalents as of October 1, 2022 and cash flows from our operating activities will be sufficient to meet our liquidity and capital spending requirements for at least the next 12 months.

There are a number of factors that could positively or negatively impact our liquidity position, including:

•global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers, including the impact of COVID-19; 

•fluctuations in demand for our products as a result of changes in regulations, tariffs or other trade barriers, and trade relations in general;

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

•increase in capital expenditures to support our business and growth, including increases in manufacturing capacity;

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•the tendency of customers to delay payments or to negotiate favorable payment terms to manage their own liquidity positions;

•timing of payments to our suppliers;

•volatility in fixed income and credit, which impact the liquidity and valuation of our investment portfolios;

•volatility in foreign exchange markets, which impacts our financial results;

•possible investments or acquisitions of complementary businesses, products or technologies, or other strategic transactions or partnerships;

•issuance of debt or equity securities, or other financing transactions, including bank debt;

•potential funding of pension liabilities either voluntarily or as required by law or regulation;

•other acquisitions or strategic transactions;

•the settlement of any conversion or redemption of the 2024 Notes, 2026 Notes and the 2028 Notes in cash; and

•common stock repurchases under the 2021 share buyback program.

Contractual Obligations

The following table summarizes certain of our contractual obligations as of October 1, 2022, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in millions):

			Payments due by period
			Total						Less than 1 year						More than 1 year
Contractual Obligations
Asset retirement obligations			$	8.0					$	0.5					$	7.5
Operating lease liabilities, including imputed interest (1)			77.9						15.1						62.8
Pension plan contributions (2)			1.4						1.4						—
Purchase obligations (3)			416.2						374.1						42.1
Term loans			4.9						4.9						—
Convertible notes - principal (4)			2,359.1						—						2,359.1
Convertible notes - interest (4)			51.1						10.6						40.5
Total			$	2,918.6					$	406.6					$	2,512.0

(1) The amounts of operating lease liabilities in the table above do not include any sublease income amounts nor do they include payments for short-term leases or variable lease payments. As of October 1, 2022, we expect to receive sublease income of approximately $4.6 million over the sublease periods.

(2) The amount represents planned contributions to our defined benefit plans. Although additional future contributions will be required, the amount and timing of these contributions will be affected by actuarial assumptions, the actual rate of returns on plan assets, the level of market interest rates, legislative changes, and the amount of voluntary contributions to the plan. Any contributions for the following fiscal year and later will depend on the value of the plan assets in the future and thus are uncertain. As such, we have not included any amounts beyond one year in the table above.

(3) Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Refer to “Note 14. Commitments and Contingencies” in the notes to condensed consolidated financial statements.

(4) The amount includes principal and interest payment in cash on our 0.25% Convertible Notes due in 2024 (the “2024 Notes”); principal and interest on our 0.50% Convertible Notes due in 2026 (the “2026 Notes”); and principal and interest on our 0.50% Convertible Notes due in 2028. The 2024 Notes have a maturity date of March 15, 2024, the 2026 Notes have a maturity date of December 15, 2026, and the 2028 Notes have a maturity date of June 15, 2028. The principal balances of our convertible notes are reflected in the payment periods in the table above based on their respective contractual maturities assuming no conversion. Refer to “Note 9. Debt” in the notes to condensed consolidated financial statements.

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We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our liquidity or capital resources that are material to investors.

Indebtedness

As of October 1, 2022, our 2024 Notes of $415.2 million (principal balance of $448.1 million maturing in 2024) is presented in current liabilities in our condensed consolidated balance sheets. While the 2024 Notes will not be convertible during the second quarter of fiscal 2023 as our stock price did not exceed $78.80 for 20 of the last 30 trading days of the quarter ended October 1, 2022, we do expect that the 2024 Notes will again become convertible at the option of the holders during future quarters in fiscal 2023, and as such, continue to classify the debt in current liabilities. During the three months ended October 1, 2022, we received conversion requests of less than $0.1 million principal amount of the 2024 Notes, which we settled with cash in accordance with the 2024 Indenture. Since issuing the 2024 Notes, we have converted a total of approximately $1.9 million principal amount of the 2024 Notes. The remaining principal amount of the 2024 Notes as of October 1, 2022 was $448.1 million.

As of October 1, 2022, our 2026 Notes of $1,045.0 million (principal balance of $1,050.0 million maturing in 2026) is presented in non-current liabilities in our condensed consolidated balance sheets. If the closing price of our stock exceeds $129.08 for 20 of the last 30 trading days of any future quarter, our 2026 Notes would also become convertible at the option of the holders and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

As of October 1, 2022, our 2028 Notes of $854.5 million (principal balance of $861.0 million maturing in 2028) is presented in non-current liabilities in our condensed consolidated balance sheets. If the closing price of our stock exceeds $170.34 for 20 of the last 30 trading days of any future quarter, our 2028 Notes would also become convertible at the option of the holders and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

As of October 1, 2022, we presented our term loans that we assumed in connection with our merger with NeoPhotonics, within current liabilities in our condensed consolidated balance sheet.

Share Repurchases

On May 7, 2021, our board of directors approved the 2021 share buyback program, which authorizes us to use up to $700.0 million to purchase our own shares of common stock. On March 3, 2022, our board of directors approved an increase in our share buyback program, which authorizes us to use up to an aggregate amount of $1.0 billion (an increase from $700.0 million) to purchase our own shares of common stock through May 2024, but may be suspended or terminated by the board of directors at any time.

During the three months ended October 1, 2022, we repurchased 0.3 million shares of our common stock at an average price of $89.80 per share for an aggregate purchase price of $25.7 million.

Since the share buyback program was approved by the board of directors, we have repurchased 7.4 million shares in aggregate at an average price of $83.38 per share for a total purchase price of $615.5 million. We recorded the $615.5 million aggregate purchase price as a reduction of retained earnings within our condensed consolidated balance sheet. All repurchased shares were retired immediately.

The price, timing, amount, and method of such repurchases will be determined based on the valuation of market conditions and other factors, at prices determined to be attractive and in the best interests of both the Company and our stockholders.

Unrecognized Tax Benefits

As of October 1, 2022, our other non-current liabilities also include $50.9 million of unrecognized tax benefit for uncertain tax positions. We are unable to reliably estimate the timing of future payments related to uncertain tax positions.

Cash Flows

Our balance of cash and cash equivalents decreased by $684.9 million, from $1,290.2 million as of July 2, 2022 to $605.3 million as of October 1, 2022. The decrease in cash and cash equivalents during the three months ended October 1, 2022 was

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due to cash used in investing activities of $646.6 million and financing activities of $59.1 million, partially offset by cash provided by operating activities of $20.8 million.

Operating Cash Flow

Cash provided by operating activities was $20.8 million during the three months ended October 1, 2022, which reflects a net loss of $0.4 million and non-cash items of $111.7 million for the three months ended October 1, 2022, offset by $90.5 million changes in our operating assets and liabilities.

Cash provided by operating activities was $61.9 million during the three months ended October 2, 2021. Our net income was $81.5 million for the three months ended October 2, 2021. Cash provided by operating activities was also generated from $79.9 million of non-cash items (such as depreciation, stock-based compensation, amortization of intangibles, amortization of debt discount and debt issuance costs, and other non-cash charges), offset by $99.5 million of changes in our operating assets and liabilities.

Investing Cash Flow

Cash used in investing activities of $646.6 million during the three months ended October 1, 2022 was attributable to the acquisition of NeoPhotonics and IPG Photonics’ telecom transmission product lines in the amount of $860.8 million, net of cash acquired, and capital expenditures of $22.9 million, partially offset by net proceeds from sales or maturities of short-term investments of $237.1 million.

Cash used in investing activities of $116.9 million during the three months ended October 2, 2021 was primarily attributable to purchases of short-term investments, net of sales and maturities of $104.9 million, capital expenditures of $17.9 million, partially offset by proceeds from the sales of property, plant and equipment of $5.9 million.

Financing Cash Flow

Cash used in financing activities of $59.1 million during the three months ended October 1, 2022 was driven by the repurchase of shares of our common stock of $35.8 million and tax payments related to net share settlement of restricted stock of $22.4 million.

Cash used in financing activities of $108.3 million during the three months ended October 2, 2021 resulted primarily from the repurchase of shares of our common stock of $91.7 million and tax payments related to restricted stock of $16.6 million.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COVID-19 Risk

There are a number of market risk factors related to the COVID-19 pandemic and associated global economic impacts. We continue to actively evaluate these risks, and have taken reserves and financial positions as of October 1, 2022 that we believe are reasonable based on the information currently available. However, the COVID-19 pandemic and related regional shelter-in-place orders are unprecedented events that are continually evolving, and there could be significant changes and/or charges resulting in the future. These market risks include, for example:

•Accounts receivable collectability - there could be significant bad debt expenses incurred if our customers experience financial difficulties.

•Accounts receivable collections timing - our working capital and cash flows could be impacted if we start to agree to longer payment terms for our customers. Although we have not done so, a broader market move to longer payment terms could delay our collection timing as well.

•Inventory (excess and obsolete) - our customers may not be able to purchase inventory that we have built for them, or their demand may slow down to a point where inventory becomes aged. Conversely, we have seen, and may continue to see supply chain shortages and demand outpacing supply in a number of product lines. Such shortages can lead to increased inventory levels, higher purchase prices, and slower manufacturing lead times.

•Short-term investment values - an increase in prevailing interest rates occasioned by U.S. Federal monetary policy “tapering” to address supply-induced inflation could lead to a decrease in the value of our investment portfolio.

•Long-term assets such as fixed assets, goodwill, and intangibles - a market slowdown could impair the value of these assets.

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•Tax valuation - we have significant net operating losses (“NOLs”) in the United States which have associated deferred tax assets on our balance sheet, and these could be deemed unrecoverable in the future.

In addition, all of the below market risks are heightened in light of the current market situation. Foreign exchange markets could be impacted and cause significant fluctuations in our future expenses. The price of our common stock has fluctuated significantly in the past and global equity markets are experiencing significant volatility following the COVID-19 outbreak.

Foreign Exchange Risk

We conduct our business and sell our products to customers primarily in Asia, Europe and North America. Due to the impact of changes in foreign currency exchange rates between the U.S. Dollar and foreign currencies, for the three months ended October 1, 2022 and October 2, 2021, we recorded foreign exchange gains (losses), net of $9.0 million gain and a $0.1 million loss, respectively, in the condensed consolidated statements of operations.

Although we sell primarily in the U.S. Dollar, we have foreign currency exchange risks related to our expenses denominated in currencies other than the U.S. Dollar, principally the Chinese Yuan, Canadian Dollar, Thai Baht, Japanese Yen, UK Pound, Swiss Franc and Euro. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. In the event our foreign currency denominated monetary assets and liabilities, sales or expenses increase, our operating results may be more greatly affected by fluctuations in the exchange rates of the currencies in which we do business as compared with the U.S. dollar.

Equity Price Risk

We are exposed to equity price risk related to the conversion options embedded in our 2028 Notes, 2026 Notes and 2024 Notes.

We issued the 2028 Notes in March 2022, the 2026 Notes in December 2019 and the 2024 Notes in March 2017 with an aggregate principal amount of $861.0 million, $1,050.0 million and $450.0 million, respectively. The 2028 Notes and 2026 Notes are carried at face value less issuance costs, while the 2024 Notes are carried at face value less amortized discount and issuance costs on the condensed consolidated balance sheet. The 2028 Notes, 2026 Notes and the 2024 Notes bear interest at a rate of 0.50%, 0.50% and 0.25% per year, respectively. Since the notes bear interest at fixed rates, we have no financial statement risk associated with changes in market interest rates. However, the potential value of the shares to be distributed to the holders of our Notes changes when the market price of our stock fluctuates. The 2028 Notes and 2026 Notes will mature on June 15, 2028 and December 15, 2026, respectively, unless earlier repurchased by us or converted pursuant to their terms, at a conversion price of approximately $131.03 per share for the 2028 Notes and approximately $99.29 per share for the 2026 Notes. The 2024 Notes will mature on March 15, 2024, unless earlier repurchased by us or converted pursuant to their terms, at a conversion price of approximately $60.62 per share.

Interest Rate Fluctuation Risk

As of October 1, 2022, we had cash, cash equivalents, and short-term investments of $1,624.9 million. Cash equivalents and short-term investments are primarily comprised of money market funds, treasuries, agencies, high quality investment grade fixed income securities, certificates of deposit and commercial paper. Our investment policy and strategy is focused on the preservation of capital and supporting our liquidity requirements. We do not enter into investments for trading or speculative purposes. As of October 1, 2022, the weighted-average life of our investment portfolio was about six months.

Our fixed-income portfolio is subject to fluctuations in interest rates, which could affect our results of operations. Based on our investment portfolio balance as of October 1, 2022, a hypothetical increase or decrease in interest rates of 1% (100 basis points) would have resulted in a decrease or an increase in the fair value of our portfolio of approximately $4.7 million, and a hypothetical increase or decrease in interest rates of 0.50% (50 basis points) would have resulted in a decrease or an increase in the fair value of our portfolio of approximately $2.3 million.

Bank Liquidity Risk

As of October 1, 2022, we had approximately $326.9 million of unrestricted cash (excluding cash equivalents) in operating accounts that are held with domestic and international financial institutions. These cash balances could be lost or become inaccessible if the underlying financial institutions fail or if they are unable to meet the liquidity requirements of their depositors and if they are not supported by the national government of the country in which such financial institution is located. Notwithstanding, we have not incurred any losses to date and have had full access to our operating accounts. We believe any failures of domestic and international financial institutions could impact our ability to fund our operations in the short term.

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ITEM 4. CONTROLS AND PROCEDURES 

(a) Evaluation of Disclosure Controls and Procedures

Our management (with the participation of our Principal Executive Officer and Principal Financial Officer), as of the end of the period covered by this Quarterly Report, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), identified in connection with the evaluation required by Exchange Act Rules 13a-15(d) or 15d-15(d) that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, recognizes that our disclosure controls and procedures or our internal control over financial reporting cannot prevent or detect all possible instances of errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. As such, we regularly evaluate developments in legal matters that could affect the amount of the previously accrued liability and record adjustments as appropriate. While management currently believes that resolving claims against us, individually or in the aggregate, will not have a material adverse impact on our financial position, results of operations or cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. Should we experience an unfavorable final outcome, there exists the possibility of a material adverse impact on our financial position, results of operations or cash flows for the period in which the effect becomes reasonably estimable. For a description of our material pending legal proceedings, refer to “Note 14. Commitments and Contingencies” of the notes to condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.

ITEM 1A. RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, financial condition, results of operations or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risk Factor Summary

Our business operations are subject to numerous risks, factors and uncertainties, including those outside of our control, that could cause our actual results to be harmed, including risks regarding the following:

General economic factors

•the impact of the ongoing COVID-19 pandemic and responsive measures; and

•challenges relating to supply chain constraints;

Operational factors

•changes in technology and intense competition;

•our reliance on a limited number of customers;

•our ability to sell to a significant customer;

•our reliance on a limited number of suppliers;

•our ability to timely procure components needed to manufacture our products;

•our ability to manufacture our products;

•our leverage in negotiations with large customers;

•order cancellations, reductions or delays in delivery schedules by our customers or distributors;

•any delay in collecting or failure to collect accounts receivable;

•defects in our products;

•our international operations;

•our strategic transactions;

•our level of success in accessing new markets and obtaining new customers;

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•our implementation strategy for our acquisitions;

•changes in spending levels, demand and customer requirements for our products;

•our international structure;

•restructure charges;

•fluctuations in foreign currency;

•our ability to hire and retain key personnel;

•the effects of immigration policy on our ability to hire and retain employees;

•our ability to protect our product and proprietary rights;

•our reliance on licensed third-party technology;

•the unpredictability of our results of operations;

•actual or perceived security or privacy breaches or incidents, as well as defects, errors or vulnerabilities in our technology and that of third-party providers;

•factors relating to our intellectual property rights as well as the intellectual property rights of others; and

•merger and acquisition related risks

Regulatory and Legal factors

•our ability to obtain government authorization to export our products;

•our ability to obtain antitrust approvals in connection with certain strategic transactions;

•the threat of tariffs;

•changes in tax laws;

•litigation risks, including intellectual property litigation;

•changes in social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands;

•changes in laws and the adoption and interpretation of administrative rules and regulations, including U.S. and international customs and export regulations; and

•our ability to maintain an effective system of disclosure controls and internal control over financial reporting

Financing and Transactional Risks

•our future capital requirements; and

•our ability to service our current and future debt

Risk related to our Merger with NeoPhotonics

•failure to successfully integrate NeoPhotonics to our business;

•failure to realize the benefits expected from the merger; and

•litigation in connection with the merger

Governance Risks and Risks related to Ownership of our Capital Stock

•dilution related to our 2024 Notes, 2026 Notes and 2028 Notes (each as defined below);

•provisions of Delaware law and our certificate of incorporation and bylaws that may make a merger, tender offer or proxy contest difficult;

•exclusive forum provisions in our bylaws;

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•the volatility of the trading price of our common stock; and

•our intention not to pay dividends for the foreseeable future

Risks Related to Our Business

Our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives has been affected, and may be materially and adversely affected by the ongoing COVID-19 pandemic.

The COVID-19 pandemic has, and may continue to, significantly affect how we and our customers are operating our businesses, and the duration and extent to which this will impact our future results of operation and financial performance remain uncertain. From the start of the COVID-19 pandemic, in early February 2020 we proactively implemented certain measures to limit the spread of the virus, such as travel restrictions, temporarily closing or limiting the number of employees permitted onsite in our offices and manufacturing sites in several heavily impacted locations, implementing vaccination guidelines in accordance with government mandates, and work-from-home rules at most of our facilities. We have recently reopened many of our facilities world-wide for office-based employees in a new office/hybrid model. We will continue our phased return to the office at our facilities around the world based on considerations regarding the health and safety of our employees and guidance of local and national governments. If the ongoing COVID-19 pandemic, corresponding governmental regulations or our return to the office process have a substantial impact on the health, attendance or productivity of our employees, partners, or customers, our results of operations and overall financial performance may be adversely impacted.

Further, the pandemic has caused, and may continue to cause, disruption and delays in our ability to operate and manufacture, test and assemble products in our internal facilities, particularly in the United States, China, Thailand and the United Kingdom. Our ability to continue certain research and development activities has also been limited, which could materially and adversely affect our ability to develop new products and technologies on the timelines we previously anticipated. New and potentially more contagious variants of the COVID-19 virus continue to develop in several countries, including regions in which we have significant operations. If there is any further decline of the situation in countries where we operate or if the current situation persists for an extended period, our employees and operations could be significantly impacted.

In addition, we have experienced disruption and delays with our manufacturing partners, for example in Malaysia, limitations were imposed at certain times on which businesses could operate and the amount of the workforce permitted to perform manufacturing operations, and in the third quarter of fiscal 2022, we experienced a temporary factory closure in China as a result of an increase in the number of COVID-19 cases, as required by local government mandates. These and other limitations have, in some instances, been reinstated, and could be reinstated again, if the number of COVID-19 cases in particular regions increases and there is considerable uncertainty regarding the duration of such limitations and potential future restrictions, and complexity in ensuring compliance. Challenges to our supply chain due to the impact of the pandemic remain dynamic, including ongoing shortages of component parts, and we continue to experience increased logistics costs due to air travel and transport restrictions that limit the availability of flights on which we are able to ship products. Additionally, cost increases, delayed and extended shipping times for ocean transit have increased our dependence on higher-cost air freight.Similarly, our customers have also experienced, and could continue to experience, disruptions in their operations, which may result in reduced, delayed, or canceled orders, and has increased collection risks, which may adversely affect our results of operations. Further, we have seen delayed deployments of 5G networks, particularly in China, which has harmed and may continue to harm our OpComms revenue. These disruptions, delays and restrictions have adversely affected our revenue and results of operations and could be extended or further restrictions could be put in place in other regions, which would materially and adversely impact our revenue, results of operations and financial condition.

While we believe that we have been successful in identifying, managing, and mitigating the economic disruption impacts of the COVID-19 pandemic on us, we cannot provide any assurance that we similarly will be able to mitigate the impacts of any future widespread health crises, including as a result of any variants of COVID-19. The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic (including restrictions on travel and transport and workforce pressures); the impact of the pandemic and actions taken in response on global and regional economies, travel, and economic activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility, including increasing levels of inflation in the United States; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides (including the availability and efficacy of treatments and vaccines and the impact of new variants on recovery). In addition, the global economic volatility has significantly impacted the foreign exchange markets, and the currencies of various countries in which we operate and in which we have significant volume of local-currency denominated expenses have seen significant volatility. The magnitude of the impact of COVID-19 on our business operations remains uncertain and difficult to predict, and the situation remains highly dynamic. We have experienced and will continue to

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experience in subsequent periods, disruptions to our business that will adversely impact our business, financial condition and results of operations.

We depend on a limited number of suppliers for raw materials, packages and components, and any failure or delay by these suppliers in meeting our requirements could have an adverse effect on our business and results of operations.

We purchase raw materials, packages and components from a limited number of suppliers, who are often small and specialized. Additionally, some of our suppliers are our sole sources for certain materials, equipment and components. We depend on the timely and continued supply and quality of the materials, packages and components that our suppliers supply to us. We have not entered into long-term agreements with many of these suppliers. We do not have a guarantee of supply from these suppliers and as a result, there is no assurance that we would be able to secure the equipment or components that we require, in sufficient quantity, quality and on reasonable terms. Our business and results of operations have been, and could continue to be, adversely affected by this dependency. Specific concerns we periodically encounter with our sole suppliers or limited number of suppliers include receipt of defective parts or contaminated materials, stoppages or delays of supply, insufficient resources to supply our requirements, substitution of more expensive or less reliable materials, increases in the price of supplies, and an inability to obtain reduced pricing from our suppliers in response to competitive pressures. Furthermore, the COVID-19 pandemic and related supply chain disruptions and labor market constraints have created heightened risk that sole suppliers or limited number of suppliers may be unable to meet their obligations to us. If we experience any significant difficulty in obtaining the materials or services used in the conduct of our business, these supply challenges may limit our ability to fully satisfy customer demand.

Global economic downturns may adversely affect our business, operating results, and financial condition.

Current and future conditions in the global economy have an inherent degree of uncertainty. As a result, it is difficult to estimate the level of growth or contraction of the global economy as a whole. It is even more difficult to estimate growth or contraction in various parts, sectors, and regions of the economy, including the markets in which we participate. All aspects of our forecasts depend on estimates of growth or contraction in the markets we serve. Thus, prevailing global economic uncertainties render estimates of future income and expenditures very difficult to make.

Global economic downturns may affect industries in which our customers operate. These changes could include decreases in the rate of consumption or use of our customers’ products. Such conditions could have a material adverse effect on demand for our customers’ products and, in turn, on demand for our products.

Adverse changes may occur in the future as a result of declining or flat global or regional economic conditions, fluctuations in currency and commodity prices, capital expenditure reductions, unemployment, decline in stock markets, contraction of credit availability, or other factors affecting economic conditions. These changes may negatively affect sales of products and increase exposure to losses from bad debt and commodity prices, the cost and availability of financing, and costs associated with manufacturing and distributing products. Any economic downturn could have a material adverse effect on our business, results of operations, or financial condition.

Challenges relating to current supply chain constraints, including semiconductor components, could adversely impact our business, results of operations and financial condition.

Due to increased demand across a range of industries, our business and customers’ businesses have experienced and are continuing to experience supply constraints due to both constrained manufacturing capacity, as well as component parts shortages, in particular semiconductor components, as our vendors have also been facing supply constraints, and increased logistics costs due to air travel and transport restrictions that limited the availability of flights on which we ship our products. Additionally, costs increases and extended shipping time for ocean transit have increased our dependence on higher-cost air freight. The COVID-19 pandemic has also contributed to and exacerbated this strain and may continue to cause volatility and uncertainty in customer demand. This constrained supply environment has adversely affected and could further affect availability, lead-times and cost of components, and could increase the likelihood of unexpected cancellations or delays of previously committed supply of key components. These challenges have resulted in extended lead-times to our customers and have had a negative impact on our ability to recognize associated revenue and have resulted in and may continue to result in an increase in accelerated ordering for certain of our products. As a result, we may experience increases in the costs to manufacture our products and may not be able to manufacture and deliver all of the orders placed by our customers in time. We continue to work with our suppliers to ensure that we are able to continue manufacturing and distributing our products, and in the quantities requested by our customers; however, we continue to experience disruption to our supply chain that could impact our operations. Any disruption in the supply of the raw materials, packaging or components used in the manufacture and delivery of our products could have a material adverse impact on our business, financial condition and results of operations. Limits on manufacturing availability or capacity or delays in production or delivery of components or raw materials due to COVID-related restrictions or otherwise could further delay or inhibit our ability to obtain supply of components and produce

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finished goods inventory. There can be no assurance that the current supply chain impacts will not continue, or worsen, in the future. These supply chain constraints and their related challenges could result in shortages, increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which could adversely impact our business, results of operations and financial condition.

Changing technology and intense competition require us to continuously innovate while controlling product costs, and our failure to do so may result in decreased revenues and profitability.

The markets in which we operate are dynamic and complex, and our success depends upon our ability to deliver both our current product offerings and new products and technologies on time and at acceptable prices to our customers. The markets for our products are characterized by rapid technological change, frequent new product introductions and enhancements, substantial capital investment, changes in customer requirements, continued price pressures and a constantly evolving industry. Historically, these pricing pressures have led to a continued decline of average selling prices across our business. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation and the accurate prediction of technology and market trends, and is further impacted by the disruptions caused by COVID-19 on our ability to continue with research and development activities and on our customers’ abilities to introduce new products and offerings. The introduction of new products also often requires significant investment to ramp up production capacity, the benefit of which may not be realized if we are not successful in the production of such products or if customer demand does not develop as expected. Ramping of production capacity also entails risks of delays which can limit our ability to realize the full benefit of new product introductions. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. We also cannot assure you that potential markets for our new products will materialize on the timelines we anticipate, or at all, or that our technology will meet our customers’ specifications. Our future performance will depend on the successful development, introduction, deployment and market acceptance of new and enhanced features and products that meet our customers’ current and future needs. Future demand for our products is uncertain and will depend to a great degree on continued technological development and the introduction of new or enhanced products. If this does not continue, sales of our products may decline which could adversely impact our business, results of operations and financial condition.

The market for optical communications products in particular has matured over time and these products have increasingly become subject to commoditization. Both legacy competitors as well as new entrants, predominantly Asia-based competitors, have intensified market competition in recent years leading to pricing pressure. To preserve our revenues and product margin structures, we remain reliant on an integrated customer and market approach that anticipates end customer needs as Telecom and Datacom requirements evolve. We also must continue to develop more advanced, differentiated products that command a premium with customers, while conversely continuing to focus on streamlining product costs for established legacy products. If we fail to continue to develop enhanced or new products that enable us to increase revenues while maintaining consistent margins, or over time are unable to adjust our cost structure to continue to competitively price more mature products, our financial condition and results of operations could be materially and adversely affected.

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We rely on a limited number of customers for a significant portion of our sales; and the majority of our customers do not have contractual purchase commitments.

We have consistently relied on a small number of customers for a significant portion of our sales, and in certain of our markets, such as 3D sensing and commercial lasers, this customer concentration is particularly acute. We expect that this customer concentration will continue in the future, and we expect that our financial performance in certain business lines and growth prospects will continue to depend in part on a small number of customers. Many of our customers purchase products under purchase orders or under contracts that do not contain volume or long-term purchase commitments. Therefore, these customers may alter their purchasing behavior with little or no notice to us for various reasons, including developing, or, in the case of our distributors, their customers developing, their own product solutions; choosing to purchase or distribute product from our competitors; incorrectly forecasting end market demand for their products; or experiencing a reduction in their market share in the markets for which they purchase our products. Some customers provide us with their expected forecasts for our products several months in advance, but these customers may decrease, cancel or delay purchase orders already in place, including on short notice, or may experience financial difficulty which affects their ability to pay for products, particularly in light of the impacts of COVID-19 on their businesses and markets, and the impact of any such actions may be intensified given our dependence on a limited number of large customers. In addition, changes in the business requirements, vendor selection, project prioritization, financial prospects, capital resources, and expenditures, or purchasing behavior (including product mix purchased or timing of purchases) of our key customers, or any real or perceived quality issues related to the products that we sell to such customers, could significantly decrease our sales to such customers or could lead to delays or cancellations of planned purchases of our products or services, which increases the risk of quarterly fluctuations in our revenues and operating results. We may also experience pricing pressure with certain of our customers that may adversely affect our revenue and margins, or, if the ongoing relationship no longer benefits us, we may decide to suspend or terminate our relationship with such customers. Our relationships with large customers may also be harmed to the extent the impacts of the COVID-19 pandemic prevent us from being able to satisfy their orders in a timely manner. There are also continuing trade tensions, including an uncertain regulatory environment, in the U.S. and countries in Asia, which have and could continue to materially impact our sales to key customers in these regions. Further, we may be required to purchase raw materials, increase production capacity or make other changes to our business to accommodate certain large customers. If forecasted orders do not materialize, we may need to reduce investment in R&D activities, we may fail to optimize our manufacturing capacity, we may incur liabilities with our suppliers for reimbursement of capital expenditures, or we may have excess inventory. In addition, if we incur expenses in response to forecasted demand and do not have a corresponding increase in revenue, our profitability may suffer. Any of these factors could adversely affect our business, financial condition and results of operations.

Our ability to sell our products to a significant customer has been restricted.

On August 17, 2020, the Bureau of Industry and Security of the U.S. Department of Commerce (“BIS”) issued final rules that further restricted access by Huawei Technologies Co. Ltd. to items produced domestically and abroad from U.S. technology and software. The final rules prevent us from selling certain products to Huawei entities without a license issued subject to the Export Administration Regulations (“EAR”). Further, even if there are products unaffected by the rule or for which we are able to obtain an export license, Huawei may not be able to source products from other suppliers due to the final rules, which could impact Huawei’s demand for our products. We are dependent upon our ability to obtain export licenses, or exceptions to export license requirements, from U.S. and other foreign regulatory agencies. There is no assurance that we will be issued these licenses or be granted exceptions, and failure to obtain such licenses or exceptions could limit our ability to sell our products into certain countries and negatively impact our business, financial condition and operating results.

Under the current regulatory regime, our business with Huawei has been and will continue to be more limited than it was in the past. For example, we have been unable to supply certain additional products and may be limited or unable to work with Huawei on future product developments while Huawei remains on the Entity List, which may negatively impact our financial condition and results of operations. Huawei may seek to obtain similar or substitute products from our competitors that are not subject to these restrictions, or to develop similar or substitute products themselves.

We cannot be certain what additional actions the U.S. government may take with respect to Huawei or other entities in China or other countries, including additional changes to the Entity List restrictions, export regulations, tariffs or other trade restrictions. We are unable to predict the duration of the restrictions enacted in May 2019 through August October 2022, including the restrictions on Huawei’s access to foreign-made chips made using U.S. technology which could have a long-term adverse effect on our business. The U.S. government has added other customers of ours to the Entity List, such as FiberHome Technologies Group in May 2020, and may continue to do so or otherwise restrict our ability to ship products which may harm our business, financial condition and results of operations. In April 2021, BIS added other China-based technology companies into the Entity List, including seven supercomputing companies in April 2021 and twenty-three more entities located in China in July 2021, thereby further expanding the scope of companies subject to trade restrictions.

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We also manufacture customized products for Huawei, and therefore may be unable to sell certain finished goods inventory to alternative customers, or may be unable to utilize such manufacturing capabilities for products for alternative customers, which may result in further excess and obsolete inventory charges and/or underutilized capacity charges in future periods. In addition, we sell various non-customized products to Huawei in which Huawei represents a significant portion of the related products’ demand.  We have taken charges, and may have significant future charges, for common components which become excess as a result of the inability to sell to Huawei. Future charges related to trade restrictions could be caused by either additional regulatory restrictions enacted with respect to Huawei, or revisions to our estimates of the impact from already-enacted restrictions.  Additional charges may also occur with respect to customized products that we manufacture for other customers in the event that such customers were to be added to the Entity List or otherwise if our ability to sell to such customers were restricted. We believe this trade uncertainty has caused and may in the future cause delays or cancellations, which could adversely affect our business, financial conditions and operating results.

Intense competition in our markets may lead to an accelerated reduction in our prices, revenues, margins and market share.

The end markets for optical products have experienced significant industry consolidation during the past few years. As a result, the markets for optical subsystems, components and laser diodes are highly competitive. Our current competitors include a number of domestic and international public and private companies, many of which may have substantially greater financial, technical, marketing and distribution resources and brand name recognition than we have. Our competitors include Coherent (previously named II-VI), Acacia Communications (acquired by Cisco in 2021), Accelink, ams AG, Broadcom Inc., Fujitsu Optical Components, Furukawa Electric, IPG Photonics, Mitsubishi Electric, MKS Instruments, Molex, and O-Net Communications, Sumitomo Electric Industries, and Trumpf Group. As we expand into new markets, we face competition not only from our existing competitors, but also from new competitors, including existing companies with strong technological and sales positions in those markets. We may not be able to compete successfully against either current or future competitors, particularly, in light of increasing consolidation. Our competitors may continue to enter markets or gain or retain market share through introduction of new or improved products or with aggressive low pricing strategies that may impact the efficacy of our approach. These competitors may be able to devote greater resources than we can to the development, promotion, sale and support of their products. Additionally, the merger or consolidation of significant competitors, for example, II-VI’s acquisition of Finisar in September of 2019 and its acquisition of Coherent on July 1, 2022, the acquisition of Acacia Communications by Cisco in March 2021, and the acquisition of OSRAM by AMS in December 2019, may result in competitors with greater resources, enable them to offer a different market approach, or a lower cost structure through economies of scale or other efficiencies that we may be unable to match and which may intensify competition in the various markets. Further, our competitors may seek to vertically integrate by buying suppliers that also supply products or components to us, which could enable them to further reduce prices, or could increase our costs. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would significantly harm our business.

We are subject to risks arising from our international operations, which may adversely affect our business, financial condition, and results of operations.

We derive a majority of our revenue from our international operations, and we plan to continue expanding our business in international markets in the future. In addition, we have extensive international manufacturing capabilities through third-party contract manufacturers, as well as through our own international facilities, with employees engaged in R&D, administration, manufacturing, support and sales and marketing activities.

As a result of our international operations, in addition to similar risks we face in our U.S. operations, we are affected by economic, business, regulatory, social, and political conditions in foreign countries, including the following:

•adverse social, political and economic conditions, such as inflation and rising interest rates;

•effects of adverse changes in currency rates;

•impacts related to business disruptions and restrictions related to COVID-19, including supply chain disruptions and labor shortages and differential impacts in different regions and geographies;

•changes in general IT spending;

•less effective protection of intellectual property;

•the imposition of government controls, inclusive of critical infrastructure protection;

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•changes in or limitations imposed by trade protection laws or other regulatory orders or requirements in the United States or in other countries, including tariffs, sanctions, or other costs or requirements which may affect our ability to import or export our products from various countries or increase the cost to do so, including government action to restrict our ability to sell to foreign customers where sales of products may require export licenses (such as the U.S. Department of Commerce’s addition of Huawei to the Entity List in May 2019, the addition of FiberHome in May 2020, amendment to the Foreign-Produced Direct Product Rule in August 2020 and the prohibition of export and sale of certain products to ZTE Corporation in early 2018) and increased tariffs on various products that have been proposed by the U.S. government and other non-U.S. governments;

•the imposition of sanctions on customers in China may cause those customers to seek domestic alternatives to our products, including developing alternatives internally, and our customers demand for our products could be impacted by their inability to obtain other materials subject to sanctions. For example, sanctions on sales to certain parties of U.S. semiconductors and semiconductor equipment has caused a delay in 5G deployment in China while the affected companies seek alternative solutions, which has reduced the demand for our products from some of our Chinese customers;

•varying and potentially conflicting laws and regulations;

•overlapping, differing or more burdensome tax structure and laws;

•potential global or regional recession as a result of the COVID-19 pandemic and related responses of individuals, governments and private industry;

•markets for 5G infrastructure not developing in the manner or in the time periods we anticipate, including as a result of unfavorable developments with evolving laws and regulations worldwide;

•inflationary pressures that may occur as a result of economic recovery following the COVID-19 pandemic and other factors outside of our control;

•wage inflation or a tightening of the labor market;

•the impact of recessions and other economic conditions in economies outside the United States, including, for example, dips in the manufacturing Purchasing Managers Index as well as the Institute for Supply Management data in the Eurozone;

•tax and customs changes that adversely impact our global sourcing strategy, manufacturing practices, transfer-pricing, or competitiveness of our products for global sales;

•volatility in oil prices and increased costs, or limited supply of other natural resources;

•political developments, geopolitical unrest or other conflicts in foreign nations, including Brexit, the war in Ukraine and political developments in Hong Kong and Taiwan and the potential impact such developments or further actions could have on our customers in the markets in which we operate; and

•the impact of the following on service provider and government spending patterns as well as our contract and internal manufacturing: political considerations, unfavorable changes in tax treaties or laws, unfavorable events that affect foreign currencies on an absolute or relative basis, natural disasters, epidemic disease, labor unrest, earnings expatriation restrictions, misappropriation of intellectual property, military actions, acts of terrorism, political and social unrest and difficulties in staffing and managing international operations

Additionally, our business is impacted by fluctuations in local economies and currencies. The COVID-19 pandemic and resulting global economic volatility has significantly impacted the foreign exchange markets, and the currencies of various countries in which we operate and have significant volume of local-currency denominated expenses have seen significant volatility. We expect such volatility to continue, which could negatively impact our results by making our non-U.S. operations more expensive when reported in U.S. dollars, primarily due to the costs of payroll.

Moreover, local laws and customs in many countries differ significantly from or conflict with those in the United States or other countries in which we operate. In many foreign countries, particularly in those with developing economies, it is common for others to engage in business practices that are prohibited by our internal policies and procedures or U.S. regulations applicable to us. There can be no assurance that our employees, contractors, channel partners and agents will not take actions in violation of our policies and procedures, which are designed to ensure compliance with U.S. and foreign laws and policies. Violations of laws or key control policies by our employees, contractors, channel partners, or agents could result in termination of our relationships with customers and suppliers, financial reporting problems, fines and/or penalties for us, or prohibition on

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the importation or exportation of our products, and could have a material adverse effect on our business, financial condition and results of operations.

Like most other multinational companies, we are also highly dependent upon the ability to ship products to customers and to receive shipments from our suppliers. The COVID-19 pandemic and resulting government policies have resulted in variable limitations on our ability to receive supplies and ship our products to customers. In the event of a disruption in the worldwide or regional shipping infrastructure, our access to supplies and our ability to deliver products to customers would correspondingly be negatively impacted. While we have experienced certain disruptions, including increased costs to ship products and delays in receiving components, they have not had a material adverse impact on our business. However, any such disruption in the future would likely materially and adversely affect our operating results and financial condition.

In addition to the above risks related to our international operations, we also face risks related to health epidemics, such as the COVID-19 pandemic. An outbreak of a contagious disease, and other adverse public health developments, particularly in Asia, could have a material and adverse effect on our business operations. The effects could include restrictions on our ability to travel to support our sites in Asia or our customers located there, disruptions in our ability to distribute products, and/or temporary closures of our facilities in Asia or the facilities of our suppliers or customers and their contract manufacturers. Disruption to the operations of our suppliers or customers and their contract manufacturers due to COVID-19 have impacted and will likely continue to impact our sales and operating results. For additional information regarding the impact of COVID-19 on our business, refer to the risk factor above titled “Our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives may be materially and adversely affected by the ongoing COVID-19 pandemic.”

Any or all of these factors could have a material adverse impact on our business, financial condition, and results of operations.

The manufacturing of our products may be adversely affected if we are unable to manufacture certain products in our manufacturing facilities or if our contract manufacturers and suppliers fail to meet our production requirements.

We manufacture some of our finished good products as well as some of the components that we provide to our contract manufacturers in our China, Japan, Thailand, U.K., and San Jose, California manufacturing facilities. For some of the components and finished good products, we are the sole manufacturer. Our manufacturing processes are highly complex, and issues are often difficult to detect and correct. From time to time we have experienced problems achieving acceptable yields in our manufacturing facilities, resulting in delays in the availability of our products and inability to meet customer demand. In addition, if we experience problems with our manufacturing facilities or are unable to continue operations at any of these sites, including as a result of social, geopolitical, environmental or health factors, damage caused by natural disasters, or other problems or events beyond our control, including pandemics or widespread health epidemics such as COVID-19, it would be costly and require a long period of time to move the manufacture of these components and finished good products to a different facility or contract manufacturer which could then result in interruptions in supply, and would likely materially impact our financial condition and results of operations. Our manufacturing is heavily concentrated in regions in Asia, and we would be severely impacted if there were further escalation of COVID-19 or related restrictions imposed by governments or private industry in that region. For example, in the third quarter of fiscal 2022, we experienced a temporary factory closure in China as a result of an increase in the number of COVID-19 cases, as required by local government mandates.

We also rely on several independent contract manufacturers to supply us with certain products. For many products, a particular contract manufacturer may be the sole source of the finished good products. We depend on these manufacturers to meet our production and capacity requirements and to provide quality products to our customers. There are a number of risks associated with our reliance on contract manufacturers including:

•reduced control over delivery schedules and planning;

•availability of manufacturing capability and capacity, particularly during periods of high demand;

•reliance on the quality assurance procedures of third parties;

•risks associated with data security breaches or cyber-attacks targeting our contract manufacturers, including manufacturing disruptions or unauthorized access to information; and

•potential misappropriation of our intellectual property.

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Additionally, if operations at these contract manufacturers is adversely impacted, such as by natural disasters, or restrictions due to COVID-19 or any resulting economic impact to their business, this would likely materially impact our financial condition and results of operations. Our ability to control the quality of products produced by contract manufacturers has and may in the future be impaired due to COVID-19 disruptions, and quality issues might not be resolved in a timely manner. Additionally, if our contract manufacturers continue experiencing disruptions or discontinue operations, we may be required to identify and qualify alternative manufacturers, which is expensive and time consuming. If we are required to change or qualify a new contract manufacturer, this would likely cause business disruptions and adversely affect our results of operations, and could harm our existing customer relationships.

Despite rigorous testing for quality, both by us and the contract manufacturers to whom we sell products, we may receive and ship defective products. We may incur significant costs to correct defective products which could result in the loss of future sales and revenue, indemnification costs or costs to replace or repair the defective products, litigation and damage to our reputation and customer relations. Defective products may also cause diversion of management attention from our business and product development efforts.

Our manufacturing operations and those of our contract manufacturers may be affected by natural disasters such as earthquakes, typhoons, tsunamis, fires and public health crises, including a global pandemic such as COVID-19, changes in legal requirements, labor strikes and other labor unrest and economic, political or other forces that are beyond our control. For example, in the past one of our former contract manufacturers experienced a labor strike which threatened the contract manufacturer’s ability to fulfill its product commitments to us and, in turn, our ability to fulfill our obligations to our customers. We are heavily dependent on a small number of manufacturing sites. Our business and operations would be severely impacted by any significant business disruptions for which we may not receive adequate recovery from insurance. There is also an increased focus on corporate social and environmental responsibility in our industry. As a result, a number of our customers may adopt policies that include social and environmental responsibility provisions that their suppliers should comply with. These provisions may be difficult and expensive to comply with, given the complexity of our supply chain. We may be unable to cause our suppliers or contract manufacturers to comply with these provisions which may adversely affect our relationships with customers.

In addition, for a variety of reasons, including changes in circumstances at our contract manufacturers, restrictions or inability to operate due to COVID-19, or regarding our own business strategies, we may choose or be required to transfer the manufacturing of certain products to other manufacturing sites, including to our own manufacturing facilities. As a result of such transfers, our contract manufacturers may prioritize other customers or otherwise be unable or unwilling to meet our demand. There also may be delays with the transfer of manufacturing equipment and successfully setting up that equipment at the transfer sites and training new operators. If such transfers are unsuccessful or take a longer period of time than expected, it could result in interruptions in supply and supply chain, and would likely impact our financial condition and results of operations.

Some of our purchase commitments with contract manufacturers are not cancellable which may impact our results of operations if customer forecasts driving these purchase commitments do not materialize and we are unable to sell the products to other customers. Alternatively, our contract manufacturers may not be able to meet our demand which would inhibit our ability to meet our customers’ demands and maintain or grow our revenues. Furthermore, it could be costly and require a long period of time to move products from one contract manufacturer to another which could result in interruptions in supply and adversely impact our financial condition and results of operations.

Further, certain of our suppliers are located in China, which exposes us to risks associated with Chinese laws and regulations and U.S. laws, regulations and policies with respect to China, such as those related to import and export policies, tariffs, taxation and intellectual property. Chinese laws and regulations are subject to frequent change, and if our suppliers are unable to obtain or retain the requisite legal permits or otherwise to comply with Chinese legal requirements, we may be forced to obtain products from other manufacturers or to make other operational changes, including transferring our manufacturing to another manufacturer or to our own manufacturing facilities. In addition, many of our products are sourced from suppliers based outside of the United States, primarily in Asia. Uncertainty with respect to our suppliers’ abilities due to COVID-19 impacts, tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries has recently increased. Major developments in tax policy or trade relations, such as the imposition of tariffs on imported products, for example, tariffs on the import of certain products manufactured in China, could increase our product and product-related costs or require us to seek alternative suppliers, either of which could result in decreased sales or increased product and product-related costs. Any such developments could have a material impact on our ability to meet our customers’ expectations and may materially impact our operating results and financial condition.

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If our customers do not qualify our manufacturing lines or the manufacturing lines of our subcontractors for volume shipments, our operating results could suffer.

Certain of our customers do not purchase products, other than limited numbers of evaluation units, prior to qualification of the manufacturing line for volume production. Our existing manufacturing lines, as well as each new manufacturing line, must pass through varying levels of qualification with certain of our customers. Some of our customers require that our manufacturing lines pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under international quality standards. We may encounter quality control issues as a result of setting up new manufacturing lines in our facilities, relocating our manufacturing lines or introducing new products to fill production. We may be unable to obtain, or we may experience delays in obtaining, customer qualification of our manufacturing lines. If we introduce new contract manufacturing partners and move any production lines from existing internal or external facilities, the new production lines will likely need to be re-qualified with our customers. Any delays or failure to obtain qualifications would harm our reputation, operating results, and customer relationships.

We contract with a number of large OEM and end-user service providers and product companies that have considerable bargaining power, which may require us to agree to terms and conditions that could have an adverse effect on our business or ability to recognize revenues.

Large OEM and end-user service providers and product companies comprise a significant portion of our customer base. These customers generally have greater purchasing power than smaller entities and, accordingly, often request and receive more favorable terms from suppliers, including us. As we seek to expand our sales to existing customers and acquire new customers, we may be required to agree to terms and conditions that are favorable to our customers and that may affect the timing of our ability to recognize revenue, increase our costs and have an adverse effect on our business, financial condition, and results of operations. Furthermore, large customers have increased buying power and ability to require onerous terms in our contracts with them, including pricing, warranties, and indemnification terms. If we are unable to satisfy the terms of these contracts, it could result in liabilities of a material nature, including litigation, damages, additional costs, loss of market share and loss of reputation. Additionally, the terms these large customers require, such as most-favored nation or exclusivity provisions, may impact our ability to do business with other customers and generate revenues from such customers.

Our products may contain defects that could cause us to incur significant costs, divert our attention from product development efforts and result in loss of customers.

Our products are complex and defects and quality issues are found from time to time. Networking products in particular frequently contain undetected software or hardware defects when first introduced or as new versions are released. In addition, our products are often embedded in or deployed in conjunction with our customers’ products which incorporate a variety of components produced by third parties, which may contain defects. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant damages or warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and manufacturing resources, and cause significant customer relation problems or loss of customers, or risk exposure to product liability suits, all of which would harm our business. Additionally, changes in our or our suppliers' manufacturing processes or the inadvertent use of defective materials by us or our suppliers could result in a material adverse effect on our ability to achieve acceptable manufacturing yields and product reliability. To the extent that we do not achieve and maintain our projected yields or product reliability, our business, operating results, financial condition and customer relationships would be adversely affected.

The threat of increasing tariffs, particularly to goods traded between the United States and China, could materially and adversely affect our business and results of operations.

Since the beginning of 2018, there has been rhetoric, in some cases coupled with legislative or executive action, from several U.S. and foreign leaders regarding instituting tariffs against foreign imports of certain materials. More specifically, since 2018, the United States and China applied or proposed to apply tariffs to certain of each other’s exports, and we expect these actions to continue for the foreseeable future. The institution of trade tariffs both globally and between the United States and China specifically carries the risk of negatively impacting overall economic conditions, which could have negative repercussions on our industry and our business. Furthermore, imposition of tariffs or new or revised export, import or doing-business regulations, including trade sanctions, could cause a decrease in the demand for, or sales of our products to customers located in China or other customers selling to Chinese end users or increase the cost for our products, which would directly impact our business and results of operations.

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We face a number of risks related to our strategic transactions.

We continuously monitor the marketplace for strategic opportunities, and our business strategy includes expanding our product lines and markets through both internal product development and acquisitions. Consequently, we expect to continue to expand and diversify our operations with additional acquisitions and strategic transactions, such as our recent acquisition of NeoPhotonics Corporation (“NeoPhotonics”) on August 3, 2022, and IPG Photonics’ telecom transmission product lines on August 15, 2022, as well as acquire complementary technologies, products, assets and businesses. We may be unable to identify or complete prospective acquisitions for many reasons, including competition from other potential acquirers, the effects of consolidation in our industries and potentially high valuations of acquisition candidates. Even if we do identify acquisitions or enter into agreements with respect to such acquisitions, we may not be able to complete the acquisition due to competition, regulatory requirements or restrictions or other reasons, as occurred with the termination of our Merger Agreement with Coherent in March 2021. In addition, applicable antitrust laws and other regulations may limit our ability to acquire targets or force us to divest an acquired business. If we are unable to identify suitable targets or complete acquisitions, our growth prospects may suffer, and we may not be able to realize sufficient scale and technological advantages to compete effectively in all markets.

In connection with acquisitions, risks to us and our business include:

•diversion of management’s attention from normal daily operations of the business;     

•failure to achieve the anticipated transaction benefits or the projected financial results and operational synergies;

•unforeseen expenses, delays or conditions imposed upon the acquisition or transaction, including due to required regulatory approvals or consents, or fees that may be triggered upon a failure to consummate an acquisition or transaction for certain reasons;

•unanticipated changes in the combined business due to potential divestitures or other requirements imposed by antitrust regulators;

•unanticipated changes in the acquired business, including due to regulatory action or changes in the operating results or financial condition of the business;

•the inability to retain and obtain required regulatory approvals, licenses and permits;

•difficulties and costs in integrating the operations, technologies, products, IT and other systems, assets, facilities and personnel of the purchased businesses;

•disruption due to the integration and rationalization of operations, products, technologies and personnel;

•loss of customers, suppliers or partners; and

•failure to consummate an acquisition resulting in negative publicity and/or negative impression of us in the investment community that could impact on our stock price

Further, an acquisition or strategic transaction may not further our business strategy as we expected or we may overpay for, or otherwise not realized the expected return on, our investments. We have also faced litigation in connection with acquisitions, some of which continues following the consummation of the acquisition. Such litigation may be costly and diverts management time and attention.

We have in the past, and may in the future, divest or reduce our investment in certain businesses or product lines from time to time. For example, in the fourth quarter of fiscal year 2019, we completed the divestiture of our Datacom module business in Japan, and in the second quarter of fiscal year 2020 we sold the assets associated with certain Lithium Niobate product lines manufactured by our San Donato, Italy site. Such divestitures involve risks, such as difficulty separating portions from our other businesses, distracting employees, incurring potential loss of revenue, negatively impacting margins, and potentially disrupting customer relationships. We may also incur significant costs associated with exit or disposal activities, related impairment charges, or both.

If we are unable to successfully manage any of these risks in relation to any future acquisitions or divestitures, our business, financial condition and results of operations could be adversely impacted.

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We may be unable to successfully implement our acquisitions strategy or integrate acquired companies and personnel with existing operations.

To the extent we are successful in making acquisitions, such as our recent acquisitions of NeoPhotonics and IPG Photonics’ telecom transmission product lines, we may be unsuccessful in implementing our acquisitions strategy, or integrating acquired companies, businesses or product lines and personnel with existing operations, or the integration may be more difficult or more costly than anticipated. Some of the challenges involved integrating businesses and acquisitions include:

•difficulty preserving relationship with customers, suppliers or partners;

•potential difficulties in completing projects associated with in-process R&D;

•unanticipated liabilities or our exposure for known contingencies and liabilities may exceed our estimates;

•insufficient net revenue or unexpected expenses that negatively impact our margins and profitability;

•unexpected losses of key employees of the acquired company, or inability to maintain our company culture;

•unexpected expenses for cost of litigation against us or our directors and officers, or against the acquired company, in connection with an acquisition;

•potential adverse effects on our ability to attract, recruit, retain, and motivate current and prospective employees;

•conforming the acquired company’s standards, processes, procedures and controls with our operations, including integrating Enterprise Resource Planning (“ERP”) systems and other key business applications;

•coordinating new product and process development;

•increasing complexity from combining operations, including administrative functions, finance and human resources;

•increasing the scope, geographic diversity and complexity of our operations;

•difficulties in integrating operations across different cultures and languages and to address the particular economic, currency, political, and regulatory risks associated with specific countries;

•difficulties in integrating acquired technology;

•difficulties in coordinating and integrating geographically separated personnel, organizations, systems and facilities;

•difficulty managing customer transitions or entering into new markets;

•difficulties in consolidating facilities and transferring processes and know-how;

•diversion of management’s attention from other business concerns;

•temporary loss of productivity or operational efficiency;

•dilution of our current stockholders as a result of any issuance of equity securities as acquisition consideration;

•adverse tax or accounting impact;

•expenditure of cash that would otherwise be available to operate our business; and

•indebtedness on terms that are unfavorable to us, limit our operational flexibility or that we are unable to repay

In addition, following an acquisition, we may have difficulty forecasting the financial results of the combined company and the market price of our common stock could be adversely affected if the effect of any acquisitions on our consolidated financial results is dilutive or is below the market's or financial analysts' expectations, or if there are unanticipated changes in the business or financial performance of the target company or the combined company. Any failure to successfully integrate acquired businesses may disrupt our business and adversely impact our business, financial condition and results of operations.

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Although we expect that our acquisitions will result in cost savings, synergies, and other benefits, we may not realize those benefits, or be able to retain those benefits even if realized.

The success of our acquisitions will depend in large part on our success in integrating the acquired operations, strategies, technologies, and personnel. We may fail to realize some or all of the anticipated benefits of an acquisition if the integration process takes longer than expected or is more costly than expected. If we fail to meet the challenges involved in successfully integrating any acquired operations or to otherwise realize any of the anticipated benefits of an acquisition, including any expected cost savings and synergies, our operations could be impaired. In addition, the overall integration of an acquired business can be a time-consuming and expensive process that, without proper planning and effective and timely implementation, could significantly disrupt our business.

Changes in demand and customer requirements for our products may reduce manufacturing yields, which could negatively impact our profitability.

Manufacturing yields depend on a number of factors, including the volume of production due to customer demand and the nature and extent of changes in specifications required by customers for which we perform design-in work. Changes in manufacturing processes required as a result of changes in product specifications, changing customer needs, introduction of new product lines and changes in contract manufacturers may reduce manufacturing yields, resulting in low or negative margins on those products. Moreover, an increase in the rejection rate of products during the quality control process, before, during or after manufacturing, results in lower gross margins from lower yields and additional rework costs. Additionally, the duration and impact of COVID-19 could exacerbate factors that affect our manufacturing yields. Any reduction in our manufacturing yields will adversely affect our gross margins and could have a material impact on our operating results.

We may not be able to realize tax savings from our international structure, which could materially and adversely affect our operating results.

The Company recently completed an international restructuring that included the intra-entity transfer of certain intellectual property and other assets used in the business among various subsidiaries. This structure may be challenged by tax authorities, and if such challenges are successful, the tax consequence we expect to realize could be adversely impacted. If substantial modifications to our international structure or the way we operate our business are made, such as if future acquisitions or divestitures occur, if changes in domestic and international tax laws negatively impact the structure, if we do not operate our business consistent with the structure and applicable tax provisions, if we fail to achieve our revenue and profit goals, or if the international structure or our application of arm’s-length principles to intercompany arrangements is successfully challenged by the U.S. or foreign tax authorities, our effective tax rate may increase, which could have a material adverse effect on our operating and financial results.

Changes in tax laws could have a material adverse effect on our business, cash flow, results of operations or financial conditions.

As a multinational corporation, we are subject to income taxes as well as non income-based taxes, in both the U.S. and various foreign jurisdictions. Significant uncertainties exist with respect to the amount of our tax liabilities, including those arising from potential changes in laws in the countries in which we do business and the possibility of adverse determinations with respect to the application of existing laws. Many judgments are required in determining our worldwide provision for income taxes and other tax liabilities, and we are under audit by various tax authorities, which often do not agree with positions taken by us on our tax returns. Any unfavorable resolution of these uncertainties may have a significant adverse impact on our tax rate.

Increasingly, countries around the world are actively considering or have enacted changes in relevant tax, accounting and other laws, regulations and interpretations. For example, the United States recently introduced a 1% excise tax on stock buybacks and a 15% alternative minimum tax on adjusted financial statement income. We are evaluating the impact of the excise tax to us in connection with a settlement of the capped call transactions. Many countries, and organizations such as the Organization for Economic Cooperation and Development have proposed implementing changes to existing tax laws, including a proposed global minimum tax of 15%. Any of these developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our operating results. There can be no assurance that our effective tax rates, tax payments, or incentives will not be adversely affected by these or other developments or changes in law.

Other countries also continue to enact and consider enacting new laws, which could increase our tax obligations, cause us to change the way we do business or our operations or otherwise adversely affect us. The foregoing items could increase our future tax expense, could change our future intentions regarding reinvestment of foreign earnings, and could have a material adverse effect on our business, financial condition and results of operations.

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Our subsidiary in Thailand has been granted certain tax holidays by the Thailand government. As we do not currently meet the tax holiday requirements, income earned in Thailand is subject to the regular statutory income tax rate.

We are also subject to the continuous examination of our income tax and other returns by the Internal Revenue Service and other tax authorities globally, and we have a number of such reviews underway at any time. It is possible that tax authorities may disagree with certain positions we have taken and an adverse outcome of such a review or audit could have a negative effect on our financial position and operating results. There can be no assurance that the outcomes from such examinations, or changes in tax law or regulation impacting our effective tax rates, will not have an adverse effect on our business, financial condition and results of operations.

Our operating results may be subject to volatility due to fluctuations in foreign currency.

We are exposed to foreign exchange risks with regard to our international operations which may affect our operating results. Since we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. Although we price our products primarily in U.S. dollars, a portion of our operating expenses are incurred in foreign currencies. For example, a portion of our expenses are denominated in the U.K. pound sterling, Chinese yuan and Thai baht. Fluctuations in the exchange rate between these currencies and other currencies in which we collect revenues and/or pay expenses could have a material effect on our future operating results. Recently, our exposure to foreign currencies has increased as our non-U.S. manufacturing footprint has expanded. We continue to look for opportunities to leverage the lower cost of non-U.S. manufacturing, including the United Kingdom, Thailand, and Japan. While these geographies are lower cost than the U.S. and such concentration will in general lower our total cost to manufacture, this increase in concentration in non-U.S. manufacturing will also increase the volatility of our results. If the value of the U.S. dollar depreciates relative to certain other foreign currencies, it would increase our costs as expressed in U.S. dollars. Conversely, if the U.S. dollar strengthens relative to other currencies, such strengthening could raise the relative cost of our products to non-U.S. customers, especially as compared to foreign competitors, and could reduce demand. The COVID-19 pandemic has had a significant impact on the exchange markets, which heightened this risk, and we expect this higher level of volatility in foreign exchange markets will likely continue.

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including supporting the development and introduction of new products, addressing new markets, engaging in strategic transactions and partnerships, improving or expanding our operating infrastructure or acquiring complementary businesses and technologies. Investments, partnerships and acquisitions involve risks and uncertainties which could materially and adversely affect our operating and financial results. In March 2017, we issued and sold a total of $450 million in aggregate principal amount of 2024 Notes, in December 2019, we issued and sold a total of $1,050 million in aggregate principal amount of 2026 Notes, and in March 2022, we issued and sold a total of $861 million aggregate principal amount of 2028 Notes. We may in the future engage in additional equity or debt financings to secure additional funds. If we raise additional funds through future issuances of equity, equity-linked or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired, and our business may be harmed.

If we fail to effectively manage our growth or, alternatively, our spending during downturns, our business could be disrupted, which could harm our operating results.

Growth in sales, combined with the challenges of managing geographically dispersed operations, can place a significant strain on our management systems and resources, and our anticipated growth in future operations could continue to place such a strain. The failure to effectively manage our growth could disrupt our business and harm our operating results. Our ability to successfully offer our products and implement our business plan in evolving markets requires an effective planning and management process. In economic downturns, we must effectively manage our spending and operations to ensure our competitive position during the downturn, as well as our future opportunities when the economy improves, remain intact. The failure to effectively manage our spending and operations could disrupt our business and harm our operating results.

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Any failure, disruption or security breach or incident of or impacting our information technology infrastructure or information management systems could have an adverse impact on our business and operations.

Our business depends significantly on effective and efficient information management systems, and the reliability and security of our information technology infrastructure are essential to the operation, health and expansion of our business. For example, the information gathered and processed by our information management systems assists us in managing our supply chain, financial reporting, monitoring customer accounts, and protecting our proprietary and confidential business information, plans, trade secrets, and intellectual property, among other things. In addition, these systems may also contain personal data or other confidential or otherwise protected information about our employees, our customers’ employees, or other business partners. We must continue to expand and update this infrastructure in response to our changing requirements as well as evolving security standards and risks.

In some cases, we may rely upon third-party providers of hosting, support and other services to meet our information technology requirements. Any failure to manage, expand and update our information technology infrastructure, including our ERP system and other applications, any failure in the extension implementation or operation of this infrastructure, or any failure by our hosting and support partners or other third-party service providers in the performance of their services could materially harm our business. In addition, we have partnered with third parties to support our information technology systems and to help design, build, test, implement and maintain our information management systems. Our merger, acquisition and divestiture activity may also require transitions to or from, and the integration of, various information management systems within our overall enterprise architecture, including our ERP system and other applications. Those systems that we acquire or that are used by acquired entities or businesses may also pose security risks of which we are unaware or unable to mitigate, particularly during the transition of these systems.

Like other companies, we are subject to ongoing attempts by malicious actors, including through hacking, malware, ransomware, denial-of-service attacks, social engineering, exploitation of internet-connected devices, and other attacks, to obtain unauthorized access to or acquisition or other authorized processing of confidential information or otherwise affect service reliability and threaten the confidentiality, integrity and availability of our systems and information stored or otherwise processed on our systems. During the COVID-19 pandemic, cyber threats have increased due to increased remote work and other attacks, including in the form of phishing emails, malware attachments and malicious websites have also increased. Additionally, cybersecurity researchers have reported an increase in cyber-attack activity, and warned of increased risks of cyber-attacks, in connection with the conflict between Russia and Ukraine. While we work to safeguard our internal network systems and validate the security of our third-party providers to mitigate these potential risks, including through information security policies and employee awareness and training, there is no assurance that such actions will be sufficient to prevent future cyber-attacks or security breaches or incidents. We have been in the past, and may be in the future, subject to social engineering and other cybersecurity attacks, and these attacks may become more prevalent with substantial portion of our workforce being distributed geographically, particularly given the increased remote access to our networks and systems as a result. Further, our third-party service providers may have been and may be in the future subject to such attacks or otherwise may suffer security breaches or incidents. In addition, actions by our employees, service providers, partners, contractors, or others, whether malicious or in error, could affect the security of our systems and confidential information. Further, a breach of our information technology infrastructure or those of our third-party service providers could result in the misappropriation of intellectual property, business plans or trade secrets. Any failure or compromise of our systems or those of our third-party service providers could result in unauthorized access to, or unauthorized use, acquisition, disclosure, or other processing of such information, and any actual or perceived security breach or incident could cause significant damage to our reputation and adversely impact our relationships with our customers. Additionally, while our security systems are designed to maintain the physical security of our facilities and information systems, accidental or willful security breaches or incidents or other unauthorized access by third parties to our facilities or our information systems could lead to unauthorized access to, or misappropriation, disclosure, or other processing of proprietary and confidential information.

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Despite our implementation of security measures, our systems and those of our third-party service providers are vulnerable to damage from these types of attacks or errors. In addition, our systems may be impacted by natural disasters, terrorism or other similar disruptions. Any system failure, disruption, accident or security breach or incident affecting us or our third-party providers could result in disruptions to our operations and loss of, or unauthorized access or damage to, our data or inappropriate access to, or use, disclosure or otherwise processing of confidential information. Any actual or alleged disruption to, or security breach or incident affecting, our systems or those of our third-party partners could cause significant damage to our reputation, lead to theft or misappropriation of our protected intellectual property and trade secrets, result in claims, investigations, regulatory proceedings, claims, demands and litigation, legal obligations or liability, affect our relationships with our customers, require us to bear significant costs in connection with remediating and otherwise responding to any disruption, breach, or incident, and ultimately harm our business. In addition, we may be required to incur significant costs to protect against or mitigate damage caused by these disruptions or security breaches or incidents in the future. The costs to us to prevent, detect or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful. All of these costs, expenses, liability and other matters may not be covered adequately by insurance, and may result in an increase in our costs for insurance or insurance not being available to us on economically feasible terms, or at all. Insurers may also deny us coverage as to any future claim. Any of these results could harm our financial condition, business and reputation.

Our revenues, operating results, and cash flows may fluctuate from period to period due to a number of factors, including unfavorable economic and market conditions, which makes predicting financial results difficult.

Spending on optical communication and laser products is subject to cyclical and uneven fluctuations, which could cause our financial results to fluctuate unpredictably. It can be difficult to predict the degree to which end-customer demand and the seasonality and uneven sales patterns of our OEM partners or other customers will affect our business in the future, particularly as we or they release new or enhanced products. While our fourth fiscal quarters are typically strongest, future buying patterns may differ from historical seasonality. Further, if our revenue mix changes, it may also cause results to differ from historical seasonality. Accordingly, our quarterly and annual revenues, operating results, cash flows, and other financial and operating metrics may vary significantly in the future. We attempt to identify changes in market conditions as soon as possible; however, the dynamics of the market in which we operate make prediction of and timely reaction to such events difficult. Due to these and other factors, the results of any prior periods should not be relied upon as an indication of future performance.

Adverse changes to and uncertainty in the global economy, particularly in light of the impacts of COVID-19 and a potential global recession may lead to decreased demand for our products, revenue fluctuations, and increased price competition for our products, and may increase the risk of excess and obsolete inventories and higher overhead costs as a percentage of revenue. Declines or uncertainty in particular geographic regions, such as China or Europe, may impact IT-related spending generally, and consequently may lead to lower growth or a decline in our markets. The loss or delay of orders from any of our significant customers could cause our revenue and profitability to suffer. The impact of economic challenges on the global financial markets could further negatively impact our operations by affecting the solvency of our customers, the solvency of our key suppliers or the ability of our customers to obtain credit to finance purchases of our products. Further, supply chain disruptions may lead to increased costs or may harm our ability to meet customer demand, which would harm our ability to recognize revenue as well as our margins. If economic conditions deteriorate or remain uncertain, our financial condition and results of operations would likely be materially and adversely impacted.

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If we have insufficient proprietary rights or if we fail to protect our rights, our business would be materially harmed.

We seek to protect our products and product roadmaps in part by developing and/or securing proprietary rights relating to those products, including patents, trade secrets, know-how and continuing technological innovation. Protecting against the unauthorized use of our products, technology and other proprietary rights is difficult, time-consuming and expensive; therefore the steps we take to protect our intellectual property may not adequately prevent misappropriation or ensure that others will not develop competitive technologies or products. Other companies may be investigating or developing technologies that are similar to our own. Additionally, there may be existing patents that we are unaware of, which could be pertinent to our business. It is not possible for us to know whether there are patent applications pending that our products might infringe upon since these applications are often not made publicly available until a patent is issued or published. It is possible that patents may not be issued from any of our pending applications or those we may file in the future and, if patents are issued, the claims allowed may not be sufficiently broad to deter or prohibit others from making, using or selling products that are similar to ours, or such patents could be invalidated or ruled unenforceable. We do not own patents in every country in which we sell or distribute our products, and thus others may be able to offer identical products in countries where we do not have intellectual property protections. In addition, the laws of some territories in which our products are or may be developed, manufactured or sold, including Europe, Asia-Pacific or Latin America, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Any patents issued to us may be challenged, invalidated or circumvented. Additionally, we are currently a licensee for a number of third-party technologies including software and intellectual property rights from academic institutions, our competitors and others, and we are required to pay royalties to these licensors for the use thereof. In the future, if such licenses are unavailable or if we are unable to obtain such licenses on commercially reasonable terms, we may not be able to rely on such third-party technologies which could inhibit our development of new products, impede the sale of some of our current products, substantially increase the cost to provide these products to our customers, and could have a significant adverse impact on our operating results.

We also seek to protect our important trademarks by endeavoring to register them in certain countries. We have not registered our trademarks in every country in which we sell or distribute our products, and thus others may be able to use the same or confusingly similar marks in countries where we do not have trademark registrations. We have adopted Lumentum as a house trademark and trade name for our company, and are in the process of establishing rights in this name and brand. We have also adopted the Lumentum logo as a house trademark for our company, and are in the process of establishing rights in this brand. Trademarks associated with the Lumentum brand have been registered in the United States or other jurisdictions, however, the efforts we take to maintain registration and protect trademarks, including the Lumentum brand, may not be sufficient or effective. Although we have registered marks associated with the Lumentum brand, third parties may seek to oppose or otherwise challenge these registrations. There is the possibility that, despite efforts, the scope of the protection obtained for our trademarks, including the Lumentum brand, will be insufficient or that a registration may be deemed invalid or unenforceable in one or more jurisdictions throughout the world.

Further, a breach of our information technology infrastructure could result in the misappropriation of intellectual property, business plans or trade secrets. Any failure of our systems or those of our third-party service providers could result in unauthorized access or acquisition of such proprietary information, and any actual or perceived security breach could cause significant damage to our reputation and adversely impact our relationships with our customers.

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Our products may be subject to claims that they infringe the intellectual property rights of others, the resolution of which may be time-consuming and expensive, as well as require a significant amount of resources to prosecute, defend, or make our products non-infringing.

Lawsuits and allegations of patent infringement and violation of other intellectual property rights occur regularly in our industry. We have in the past received, and anticipate that we will receive in the future, notices from third parties claiming that our products infringe upon their proprietary rights, with two distinct sources of such claims becoming increasingly prevalent. First, large technology companies, including some of our customers and competitors, are seeking to monetize their patent portfolios and have developed large internal organizations that may approach us with demands to enter into license agreements. Second, patent-holding companies that do not make or sell products (often referred to as “patent trolls”) may claim that our products infringe upon their proprietary rights. We respond to these claims in the course of our business operations. The litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense and divert the efforts of our technical and management personnel, regardless of whether or not we are successful. If we are unsuccessful, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We may not be successful in such development, or such licenses may not be available on commercially reasonable terms, or at all. Without such a license, or if we are the subject of an exclusionary order, our ability to make our products could be limited and we could be enjoined from future sales of the infringing product or products, which could adversely affect our revenues and operating results. Additionally, we often indemnify our customers against claims of infringement related to our products and may incur significant expenses to defend against such claims. If we are unsuccessful defending against such claims, we may be required to indemnify our customers against any damages awarded.

We also face risks that third parties may assert trademark infringement claims against us in one or more jurisdictions throughout the world related to our Lumentum and Oclaro brands and/or other trademarks and our exposure to these risks may increase as a result of acquisitions. The litigation or settlement of these matters, regardless of the merit of the claims, could result in significant expense and divert the efforts of our technical and management personnel, regardless of whether or not we are successful. If we are unsuccessful, trademark infringement claims against us could result in significant monetary liability or prevent us from selling some or all of our products or services under the challenged trademark. In addition, resolution of claims may require us to alter our products, labels or packaging, license rights from third parties, or cease using the challenged trademark altogether, which could adversely affect our revenues and operating results.

We face certain litigation risks that could harm our business.

We are now, and in the future we may become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of legal proceedings are difficult to predict. Moreover, many of the complaints filed against us may not specify the amount of damages that plaintiffs seek, and we therefore may be unable to estimate the possible range of damages that might be incurred should these lawsuits be resolved against us. While we may be unable to estimate the potential damages arising from such lawsuits, certain of them assert types of claims that, if resolved against us, could give rise to substantial damages or restrictions on or changes to our business. Thus, an unfavorable outcome or settlement of one or more of these lawsuits could have a material adverse effect on our financial condition, liquidity and results of operations. Even if these lawsuits are not resolved against us, the uncertainty and expense associated with unresolved lawsuits could seriously harm our business, financial condition and reputation. Litigation is generally costly, time-consuming and disruptive to normal business operations. The costs of defending these lawsuits have been significant in the past, will continue to be costly and may not be covered by our insurance policies. The defense of these lawsuits could also result in continued diversion of our management’s time and attention away from business operations, which could harm our business. For additional discussion regarding litigation, refer to “Part I, Item 3. Legal Proceedings,” and “Note 18. Commitments and Contingencies” to the consolidated financial statements.

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Our products incorporate and rely upon licensed third-party technology, and if licenses of third-party technology do not continue to be available to us or are not available on terms acceptable to us, our revenues and ability to develop and introduce new products could be adversely affected.

We integrate licensed third-party technology into certain of our products. From time to time, we may be required to license additional technology from third-parties to develop new products or product enhancements. Third-party licenses may not be available or continue to be available to us on commercially reasonable terms. The failure to comply with the terms of any license, including free open source software, may result in our inability to continue to use such license. Our inability to maintain or re-license any third-party licenses required in our products or our inability to obtain third-party licenses necessary to develop new products and product enhancements, could potentially require us to develop substitute technology or obtain substitute technology of lower quality or performance standards or at a greater cost, any of which could delay or prevent product shipment and harm our business, financial condition, and results of operations.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and Nasdaq listing requirements. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant time and operational resources, including accounting-related costs and significant management oversight.

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could cause us to delay reporting of our financial results, be subject to one or more investigations or enforcement actions by state or federal regulatory agencies, stockholder lawsuits or other adverse actions requiring us to incur defense costs, pay fines, settlements or judgments. Any such failures could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock and customer perception of our business may suffer. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the NASDAQ stock market.

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Risks Related to Human Capital

Our ability to develop, market and sell products could be harmed if we are unable to retain or hire key personnel.

Our future success depends upon our ability to recruit and retain the services of executive, engineering, sales and marketing, and support personnel. The supply of highly qualified individuals, in particular engineers in very specialized technical areas, or sales people specializing in the service provider, enterprise and commercial laser markets, is limited and competition for such individuals is intense. Competition is particularly intense in certain jurisdictions where we have research and development centers, including Silicon Valley, and for engineering talent generally. Also, as a result of COVID-19, employees in our industries are increasingly able to work remotely, which has increased employee mobility and turnover, making it difficult for us to retain or hire employees. In addition, government requirements intended to mitigate the impact of the pandemic, including mandates that require employees to be vaccinated or be tested regularly, may lead to increased challenges in meeting labor needs, inefficiencies related to employee turnover, and costs associated with implementation and ongoing compliance. There can be no assurance that the programs, initiatives, rewards and recognition that are part of our people strategy will be successful in attracting and retaining the talent necessary to execute on our business plans. None of our officers or key employees is bound by an employment agreement for any specific term. The loss of the services of any of our key employees, the inability to attract or retain personnel in the future, particularly during the integration of NeoPhotonics and with respect to key employees of NeoPhotonics, or delays in hiring required personnel and the complexity and time involved in replacing or training new employees, could delay the development and introduction of new products, and negatively impact our ability to market, sell, or support our products. Similarly, the failure to properly manage the necessary knowledge transfer required for employee transitions could impact our ability to maintain industry and innovation leadership. The loss of members of our management team or other key personnel, including due to COVID-19 and related vaccine and testing mandates, could be disruptive to our business and, were it necessary, it could be difficult to replace such individuals. If we are unable to attract and retain qualified personnel, we may be unable to manage our business effectively, and our business, financial condition and results of operations may be harmed.

Our ability to hire and retain employees may be negatively impacted by changes in immigration laws, regulations and procedures.

Foreign nationals who are not U.S. citizens or permanent residents constitute an important part of our U.S. workforce, particularly in the areas of engineering and product development. Our ability to hire and retain these workers and their ability to remain and work in the United States are impacted by laws and regulations, as well as by procedures and enforcement practices of various government agencies and global events such as COVID-19 may interfere with our ability to hire or retain workers who require visas or entry permits. For example, numerous U.S. Embassies suspended or delayed the processing of new visa applications for a period of time during the pandemic due to COVID-19 related concerns impacting embassy operations and staffing. Additional changes in immigration laws, regulations or procedures, including those that have been and may be enacted in the future by the U.S. government, including current U.S. presidential administration, and in the United Kingdom or the European Union in connection with Brexit or the war in Ukraine, may adversely affect our ability to hire or retain such workers, increase our operating expenses and negatively impact our ability to deliver our products and services.

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Legal, Regulatory and Compliance Risks

Our sales may decline if we are unable to obtain government authorization to export certain of our products, and we may be subject to legal and regulatory consequences if we do not comply with applicable export control laws and regulations.

Exports of certain of our products are subject to export controls imposed by the U.S. government and administered by the U.S. Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department. For products subject to the Export Administration Regulations (“EAR”) administered by the Bureau of Industry and Security (“BIS”), the requirement for a license is dependent on the type and end use of the product, the final destination, the identity of the end user and whether a license exception might apply. Virtually all exports of products subject to the International Traffic in Arms Regulations (“ITAR”) administered by the Department of State’s Directorate of Defense Trade Controls, require a license. Certain of our fiber optics products are subject to EAR and certain of our RF-over-fiber products, as well as certain products and technical data, are developed with government funding, and are currently subject to ITAR. Products and the associated technical data developed and manufactured in our foreign locations are subject to export controls of the applicable foreign nation. There is no assurance that we will be issued these licenses or be granted exceptions, and failure to obtain such licenses or exceptions could limit our ability to sell our products into certain countries and negatively impact our business, financial condition and/or operating results.

Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses for these shipments could significantly reduce our revenue and materially adversely affect our business, financial condition, relationships with our customers and results of operations. Compliance with U.S. government regulations also subjects us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.

Further, there is increased attention from the government and the media regarding potential threats to U.S. national security and foreign policy relating to certain foreign entities, particularly Chinese entities, and the imposition of enhanced restrictions or sanctions regarding the export of our products or on specific foreign entities that would restrict their ability to do business with U.S. companies may materially adversely affect our business. For example, on May 16, 2019, Huawei was added to the Entity List of the Bureau of Industry and Security of the U.S. Department of Commerce, additional regulatory restrictions were imposed in May and August 2020 and in October 2022 to the Foreign-Produced Direct Product Rule, which impose limitations on the supply of certain U.S. items and product support to Huawei, and FiberHome Technologies was added to the Entity List on May 22, 2020. These actions have resulted in escalating tensions between the U.S. and China and create the possibility that the Chinese government may take additional steps to retaliate against U.S. companies or industries. We cannot predict what additional actions the U.S. government may take with respect to Huawei beyond what is described above or to other of our customers, including modifications to or interpretations of Entity List restrictions, export restrictions, tariffs, or other trade limitations or barriers.

Our association with customers that are or become subject to U.S. regulatory scrutiny or export restrictions could negatively impact our business. Governmental actions such as these could subject us to actual or perceived reputational harm among current or prospective investors, suppliers or customers, customers of our customers, other parties doing business with us, or the general public. Any such reputational harm could result in the loss of investors, suppliers or customers, which could harm our business, financial condition, operating results or prospects. Further, if we fail to comply with any of these export regulations, we could be subject to civil, criminal, monetary and non-monetary penalties and costly consent decrees, which would lead to disruptions to our business, restrictions on our ability to export products and technology, and adversely affect our business and results of operation.

In addition, certain of our significant customers and suppliers have products that are subject to U.S. export controls, and therefore these customers and suppliers may also be subject to legal and regulatory consequences if they do not comply with applicable export control laws and regulations. Such regulatory consequences could disrupt our ability to obtain components from our suppliers, or to sell our products to major customers, which could significantly increase our costs, reduce our revenue and materially adversely affect our business, financial condition and results of operations.

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Social and environmental responsibility regulations, policies and provisions, as well as customer and investor demands, may make our supply chain more complex and may adversely affect our relationships with customers and investors.

There is an increasing focus on corporate social and environmental responsibility in the semiconductor industry, particularly with OEMs. A number of our customers have adopted, or may adopt, procurement policies that include social and environmental responsibility provisions or requirements that their suppliers should comply with, or they may seek to include such provisions or requirements in their procurement terms and conditions. An increasing number of investors are also requiring companies to disclose corporate social and environmental policies, practices and metrics. These legal and regulatory requirements, as well as investor expectations, on corporate environmental and social responsibility practices and disclosure, are subject to change, can be unpredictable, and may be difficult and expensive for us to comply with, given the complexity of our supply chain. If we are unable to comply with, or are unable to cause our suppliers or contract manufacturers to comply with such policies or provisions, or meet the requirements of our customers and investors, a customer may stop purchasing products from us or an investor may sell their shares, and may take legal action against us, which could harm our reputation, revenue and results of operations. We expect increased worldwide regulatory activity relating to climate change in the future. Future compliance with these laws and regulations, as well as meeting related customer and investor expectations, may adversely affect our business and results of operations.

We may be adversely affected by climate change regulations.

In many of the countries in which we operate, government bodies are increasingly enacting legislation and regulations in response to potential impacts of climate change. These laws and regulations may be mandatory. They have the potential to impact our operations directly or indirectly as a result of required compliance by our customers or supply chain. Inconsistency of regulations may also affect the costs of compliance with such laws and regulations. Assessments of the potential impact of future climate change legislation, regulation, and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate.

We may incur increased capital expenditures resulting from required compliance with revised or new legislation or regulations, added costs to purchase raw materials, lower profits from sales of our products, increased insurance premiums and deductibles, changes in competitive position relative to industry peers, changes to profit or loss arising from increased or decreased demand for goods produced by us, or changes in costs of goods sold, which would have an adverse effect on our business, financial condition and results of operations.

We are subject to laws and regulations worldwide including with respect to environmental matters, securities laws, privacy and data protection, compliance with which could increase our expenses and harm our operating results.

Our operations and our products are subject to various federal, state and foreign laws and regulations, including those governing pollution and protection of human health and the environment in the jurisdictions in which we operate or sell our products. These laws and regulations govern, among other things, wastewater discharges and the handling and disposal of hazardous materials in our products. Our failure to comply with current and future environmental or health or safety requirements could cause us to incur substantial costs, including significant capital expenditures, to comply with such environmental laws and regulations and to clean up contaminated properties that we own or operate. Such clean-up or compliance obligations could result in disruptions to our operations. Additionally, if we are found to be in violation of these laws, we could be subject to governmental fines or civil liability for damages resulting from such violations. These costs could have a material adverse impact on our financial condition or operating results.

From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. We continue to evaluate the necessary steps for compliance with regulations as they are enacted. These regulations include, for example, the Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”), the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (“RoHS”) and the Waste Electrical and Electronic Equipment Directive (“WEEE”) enacted in the European Union which regulate the use of certain hazardous substances in, and require the collection, reuse and recycling of waste from, certain products we manufacture. These regulations and similar legislation may require us to re-design our products to ensure compliance with the applicable standards, for example by requiring the use of different types of materials, which could have an adverse impact on the performance of our products, add greater testing lead-times for product introductions or other similar effects. We believe we comply with all such legislation where our products are sold, and we continuously monitor these laws and the regulations being adopted under them to determine our responsibilities.

In addition, pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has promulgated rules requiring disclosure regarding the use of certain “conflict minerals” that are mined from the Democratic Republic of Congo and adjoining countries and procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals. We may face challenges with government regulators and our customers and suppliers if we are unable to sufficiently

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make any required determination that the metals used in our products are conflict free. Complying with these disclosure requirements involves substantial diligence efforts to determine the source of any conflict minerals used in our products and may require third-party auditing of our diligence process. These efforts may demand internal resources that would otherwise be directed towards operations activities.

Since our supply chain is complex, we may face reputational challenges if we are unable to sufficiently verify the origins of all minerals used in our products. Additionally, if we are unable to satisfy those customers who require that all of the components of our products are determined to be conflict free, they may choose a competitor’s products which could materially impact our financial condition and operating results.

We are also subject to laws and regulations with respect to personal data we collect from our employees, customers, and others. These laws and regulations are subject to frequent modifications and updates and require ongoing supervision. For example, the European Union adopted a General Data Protection Regulation (“GDPR”) that became effective in May 2018, and has established new, and in some cases more stringent, requirements for data protection in Europe, and which provides for substantial penalties for noncompliance. We may also find it necessary to make further changes to our handling of personal data of residents of the European Economic Area (“EEA”). We have made certain modifications to our practices in order to comply with these or other requirements, and may be required to make additional modifications in order to comply with these or other requirements relating to privacy and data protection in the future, each of which may require us to incur significant costs and expenses. Additionally, California enacted legislation in June 2018, the California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020 and which, among other things, requires covered companies to provide new disclosures to California consumers. In November 2020, California passed the California Privacy Rights Act (“CPRA”), which will go into effect on January 1, 2023. The CPRA amends and augments the CCPA by expanding individuals’ rights and the obligations of businesses that handle personal data. Similar legislation has been proposed or adopted in other states, including Colorado, Virginia, Utah, and Connecticut. Aspects of the CCPA, CPRA and these other laws and regulations, as well as their enforcement, remain unclear. The U.S. federal government also is contemplating federal privacy legislation. The effects of the CCPA, CPRA and these other state laws and regulations are potentially significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Laws and regulations relating to privacy and data protection continue to evolve in various jurisdictions, with existing laws and regulations subject to new and differing interpretations and new laws and regulations being proposed and adopted. It is possible that our practices may be deemed not to comply with those privacy and data protection legal requirements that apply to us now or in the future.

Further, the United Kingdom left the European Union on January 31, 2020, with a transitional period that ended on December 31, 2020, commonly referred to as “Brexit.” The United Kingdom has implemented legislation similar to the GDPR, including the UK Data Protection Act and legislation similar to the GDPR referred to as the UK GDPR, which provides for substantial penalties, similar to the GDPR. Additionally, the relationship between the United Kingdom in relation to certain aspects of data protection law remains unclear following the United Kingdom’s exit from the European Union, including with respect to regulation of data transfers between European Union member states and the United Kingdom. On June 28, 2021, the European Commission announced a decision of “adequacy” concluding that the United Kingdom ensures an equivalent level of data protection to the GDPR, providing for the legality of continued personal data flows from the European Economic Area to the United Kingdom. Some uncertainty remains, however, as this adequacy determination must be renewed after four years and may be modified or revoked in the interim. We cannot fully predict how the Data Protection Act, the UK GDPR, and other United Kingdom data protection laws or regulations may develop in the medium to longer term nor the effects of divergent laws and guidance regarding how data transfers to and from the United Kingdom will be regulated.

Our failure or perceived failure to comply with any of the foregoing legal and regulatory requirements could result in increased costs for our products, monetary penalties, damage to our reputation, government inquiries and investigations, legal claims, demands and litigation, and other liabilities. Furthermore, the legal and regulatory requirements that are applicable to our business are subject to change from time to time, which increases our monitoring and compliance costs and the risk that we may fall out of compliance. Additionally, we may be required to ensure that our suppliers comply with applicable laws and regulations. If we or our suppliers fail to comply with such laws or regulations, we could face sanctions for such noncompliance, and our customers may refuse to purchase our products, which would have a material adverse effect on our business, financial condition and results of operations.

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Risks Related to Our Common Stock

Our stock price may be volatile and may decline regardless of our operating performance.

Our common stock is listed on the Nasdaq Global Select Market (“NASDAQ”) under the symbol “LITE”. The market price of our common stock has fluctuated, and may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

•general economic and market conditions and other external factors, particularly in light of the market volatility driven by the impact and duration of COVID-19;

•actual or anticipated fluctuations in our quarterly or annual operating results;

•changes in earnings estimates by securities analysts or our ability to meet those estimates;

•the operating and stock price performance of other comparable companies;

•a shift in our investor base;

•the financial performance of other companies in our industry, and of our customers;

•general market, economic and political conditions, including market conditions in the semiconductor industry;

•pandemics and similar major health concerns, including the COVID-19 pandemic;

•success or failure of our business strategy;

•credit market fluctuations which could negatively impact our ability to obtain financing as needed;

•changes in governmental regulation including taxation and tariff policies;

•changes in global political tensions that may affect business with our customers;

•announcements by us, competitors, customers, or our contract manufacturers of significant acquisitions or dispositions, strategic alliances or overall movement toward industry consolidations among our customers and competitors;

•investor perception of us and our industry;

•changes in recommendations by securities analysts;

•changes in accounting standards, policies, guidance, interpretations or principles;

•differences, whether actual or perceived, between our corporate social responsibility and ESG practices and disclosure and investor expectations;

•litigation or disputes in which we may become involved;

•overall market fluctuations;

•issuances of our shares upon conversion of some or all of the Notes;

•sales of our shares by our officers, directors, or significant stockholders; and

•the timing and amount of dividends and share repurchases, if any

In addition, the stock markets have experienced extreme price and volume fluctuations, including as a result of the effects of the COVID-19 pandemic, that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business, results of operations, financial condition and cash flows.

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Servicing our 2024 Notes, 2026 Notes and 2028 Notes may require a significant amount of cash, and we may not have sufficient cash flow or the ability to raise the funds necessary to satisfy our obligations under the 2024 Notes, 2026 Notes or 2028 Notes and our current and future indebtedness may limit our operating flexibility or otherwise affect our business.

Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 2024 Notes, 2026 Notes and 2028 Notes, or to make cash payments in connection with any conversion of the 2024 Notes, 2026 Notes, 2028 Notes or upon any fundamental change if holders of the applicable series of Notes require us to repurchase their Notes for cash, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring indebtedness or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, our existing and future indebtedness could have important consequences to our stockholders and significant effects on our business. For example, it could:

•make it more difficult for us to satisfy our debt obligations, including the 2024 Notes, the 2026 Notes and the 2028 Notes;

•increase our vulnerability to general adverse economic and industry conditions;

•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital and other general corporate purposes;

•limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•restrict us from exploiting business opportunities;

•place us at a competitive disadvantage compared to our competitors that have less indebtedness; and

•limit our availability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general purposes

The accounting method for our 2024 Notes, 2026 Notes and 2028 Notes could adversely affect our financial condition and operating results.

In August 2020, the FASB published an Accounting Standards Update, or ASU 2020-06, to reduce the number of accounting models for convertible debt instruments. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, upon adoption, our 2026 Notes and 2028 Notes will be accounted for as a single liability measured at amortized cost. Further, ASU 2020-06 eliminates the use of the treasury stock method for convertible instruments that can be settled in whole or in part with equity, and instead requires application of the “if-converted” method. Under that method, diluted earnings per share will be generally calculated assuming that all our 2024 Notes, 2026 Notes or 2028 Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be antidilutive. ASU 2020-06 is effective for us in our first quarter of fiscal year 2023. refer to “ Note 2. Recently Issued Accounting Pronouncements” to the consolidated financial statements.

Transactions relating to our 2024 Notes, 2026 Notes and 2028 Notes may dilute the ownership interest of existing stockholders, or may otherwise depress the price of our common stock.

If the 2024 Notes, 2026 Notes or the 2028 Notes are converted by holders of such series, we have the ability under the applicable indenture to deliver cash, common stock, or any combination of cash or common stock, at our election upon conversion of the applicable series of Notes. If we elect to deliver common stock upon conversion of the 2024 Notes, 2026 Notes or the 2028 Notes, it would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, certain holders of the 2024 Notes, 2026 Notes or the 2028 Notes, may engage in short selling to hedge their position in the Notes. Anticipated future conversions of the 2024 Notes, 2026 Notes or 2028 Notes into shares of our common stock could depress the price of our common stock.

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We do not expect to pay dividends on our common stock.

We do not currently expect to pay dividends on our common stock. The payment of any dividends to our stockholders in the future, and the timing and amount thereof, if any, is within the discretion of our board of directors. Our board of directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, potential debt service obligations or restrictive covenants, industry practice, legal requirements, regulatory constraints and other factors that our board of directors deems relevant.

In addition, because we are a holding company with no material direct operations, we are dependent on loans, dividends and other payments from our operating subsidiaries to generate the funds necessary to pay dividends on our common stock. However, our operating subsidiaries’ ability to make such distributions will be subject to their operating results, cash requirements and financial condition and the applicable provisions of Delaware law that may limit the amount of funds available for distribution. Our ability to pay cash dividends may also be subject to covenants and financial ratios related to existing or future indebtedness, and other agreements with third parties.

Certain provisions in our charter and Delaware corporate law could hinder a takeover attempt.

We are subject to the provisions of Section 203 of the Delaware General Corporate Law which prohibits us, under some circumstances, from engaging in business combinations with some stockholders for a specified period of time without the approval of the holders of substantially all of our outstanding voting stock. Such provisions could delay or impede the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, even if such events could be beneficial, in the short-term, to the interests of our stockholders. In addition, such provisions could limit the price that some investors might be willing to pay in the future for shares of our common stock. Our certificate of incorporation and bylaws contain provisions providing for the limitations of liability and indemnification of our directors and officers, allowing vacancies on our board of directors to be filled by the vote of a majority of the remaining directors, granting our board of directors the authority to establish additional series of preferred stock and to designate the rights, preferences and privileges of such shares (commonly known as “blank check preferred”) and providing that our stockholders can take action only at a duly called annual or special meeting of stockholders, which may only be called by the chairman of the board of directors, the chief executive officer or the board of directors. These provisions may also have the effect of deterring hostile takeovers or delaying changes in control or changes in our management.

Our bylaws designate Delaware courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us or our directors and officers.

Our bylaws provide that, unless we consent in writing to an alternative forum, the state or federal courts of Delaware are the sole and exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting breach of fiduciary duty, or other wrongdoing, by our directors, officers or other employees to us or our stockholders; any action asserting a claim against Lumentum pursuant to the Delaware General Corporation Law or our certificate of incorporation or bylaws; any action asserting a claim against Lumentum governed by the internal affairs doctrine; or any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a different judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us or our directors and officers.

Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table sets forth issuer purchases of equity securities for the three months ended October 1, 2022, (in millions, except share and per share amounts):

Period						Total number of shares purchased (1)						Average price paid per share (2)						Total number of shares purchased as part of publicly announced plans or programs						Maximum number (or approximation dollar value) of shares that may yet be purchased under the plans or programs
July 3, 2022 to July 30, 2022						—						$	—					—						$	410.2
July 31, 2022 to September 3, 2022						286,710						$	89.80					286,710						$	384.5
September 4, 2022 to October 1, 2022						—
Total						286,710												286,710						$	384.5

(1) On May 7, 2021, we announced that our board of directors approved the 2021 share buyback program, which authorizes us to use up to $700.0 million to purchase our own shares of common stock. On March 3, 2022, our board of directors approved an increase in our share buyback program, which authorizes us to use up to an aggregate amount of $1.0 billion to purchase our own shares of common stock through May 2024, but may be suspended or terminated by the board of directors at any time.

(2) Average price paid per share includes costs associated with the repurchases.

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ITEM 6. EXHIBITS

The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.

Exhibit

Incorporated by  Reference

Filed

No.

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

2.1

Agreement and Plan of Merger by and among Lumentum Holdings Inc., Neptune Merger Sub, Inc. and NeoPhotonics Corporation, dated as of November 3, 2021

8-K

001-36861

2.1

November 5, 2021

10.1

NeoPhotonics Corporation - Amended and Restated 2020 Equity Incentive Plan

S-8

333-238938

99.1

June 10, 2021

10.2

NeoPhotonics Corporation - 2010 Equity Incentive Plan, as amended

S-8

333-189577

99.1

June 25, 2013

10.3

NeoPhotonics Corporation - 2011 Inducement Award Plan

S-8

333-177306

99.1

October 13, 2011

31.1

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

X

31.2

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

X

32.1†

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

X

32.2†

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

X

101

The following financial information from Lumentum Holdings Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended October 1, 2022 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three months ended October 1, 2022 and October 2, 2021; (ii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended October 1, 2022 and October 2, 2021; (iii) Condensed Consolidated Balance Sheets as of October 1, 2022 and July 2, 2022; (iv) Condensed Consolidated Statements of Stockholders’ Equity for the three months ended October 1, 2022 and October 2, 2021; (v) Condensed Consolidated Statements of Cash Flows for the three months ended October 1, 2022 and October 2, 2021, and (vi) Notes to the Consolidated Financial Statements.

X

104

Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101).

X

† The certifications furnished in Exhibits 32.1 and 32.2 that accompany this report are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this report, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

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

						LUMENTUM HOLDINGS INC.
Date:			November 8, 2022			By: /s/ Wajid Ali
						By: Wajid Ali
						Executive Vice President, Chief Financial Officer

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