Q4 FY21 Conference Call August 18, 2021 Forward Looking Statements and Financial Presentation This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include any anticipation or guidance as to future financial or operating performance, trends in our business, including our market position and trends in demand for our products and technology, supply and manufacturing trends a ...

NeoPhotonics Q2'21 SUMMARY NYSE: NPTN August 2021 Forward Looking Statements and Other Important Cautions This presentation includes statements that qualify as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about the following topics: future financial results, demand for the Company's high-speed products, and the Company's market position. Forward-looking statements are subject to certain risks and uncertainties that ...

Financial Data and Key Metrics Changes - Revenue for Q2 2021 was $65 million, with both revenue and gross margin at the upper end of guidance range [7] - Non-GAAP gross margin was 21.7%, above the expected range due to favorable product mix [22] - Non-GAAP net loss was $11.4 million, translating to a loss per share of $0.22, which was $0.03 better than the midpoint estimate [22][24] Business Line Data and Key Metrics Changes - Products for 400 gig and above applications grew 100% year-over-year, accounting for 46% of total revenue [7][27] - Product margin was 37.6%, impacted by excess capacity charges, which are expected to decrease as volume ramps up [22] Market Data and Key Metrics Changes - The cloud and hyperscale interconnect market is anticipated to rival the telecom market in high-speed internet connectivity [10] - Demand for 400 gig and above products is expected to continue growing, with significant opportunities in cloud data centers and telecom carriers [9][10] Company Strategy and Development Direction - The company is focusing on high-speed coherent components and modules, particularly 400ZR and 400ZR+ products, to capture market share in the growing demand for high-speed internet [9][10] - The addition of experienced executives to the team is aimed at enhancing sales and governance capabilities [12] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving non-GAAP breakeven in Q3, despite supply chain challenges impacting revenue [25][27] - The company expects revenue growth of 25% to 35% excluding Huawei, driven by high demand for 400 gig and above products [26][27] Other Important Information - The company has restarted shipments to Huawei, generating $14 million in Q2, but does not expect Huawei to be a 10% customer for the year [22][32] - The company is facing a new chip shortage that could adversely impact Q3 revenue by $8 million [25][44] Q&A Session Summary Question: What is the expected growth for non-Huawei business? - Management indicated that non-Huawei business is expected to grow around 40% year-over-year, but this may be slightly high [29][31] Question: Can you provide insight on shipments to Huawei? - Shipments to Huawei are for a limited set of products, and the company does not rely on Huawei for significant revenue [32][34] Question: What is the outlook for the China market? - There are reports of additional tenders related to 5G in China, but the overall impact on the company's business is limited [35] Question: What is the timing for 400 gig product ramp? - The company is producing 400ZR modules, with deployment levels expected to begin in Q4 [48] Question: What is the visibility on 5G demand in China? - The company sees modest demand for 5G components, with Metro and long-haul deployments remaining muted [51][53] Question: What is the contribution of ZR modules to revenue? - ZR modules have not turned on in a major way yet, but the company is capable of producing at that level [72]

Financial Data and Key Metrics Changes - Net revenue for Q3 was $419.5 million, down 12% sequentially but up 4% year-on-year [35] - Non-GAAP gross margin was approximately 50%, with GAAP gross margin at 44.1% [36] - Non-GAAP operating margin was 27.9%, down 760 basis points sequentially but up 290 basis points year-on-year [38] Business Line Data and Key Metrics Changes - Revenue from Optical Communications segment was $387.9 million, up 14% sequentially and 8% year-on-year [43] - Revenue from Telecom and Datacom, particularly indium phosphide-based components, was up 28% year-on-year [21] - Revenue from EML chips increased over 40% year-on-year, driven by demand from cloud data centers [23] Market Data and Key Metrics Changes - The global market for 3D sensing lasers is expected to decline by approximately 20% to 25% in fiscal 2022 [17] - DML revenue was significantly below year-ago levels due to delays in 5G fronthaul deployments in China [25] - The company expects Telecom and Datacom revenue to increase quarter-on-quarter in Q4 [26] Company Strategy and Development Direction - The company is focused on organic growth opportunities and has authorized a share buyback program of up to $700 million over the next two years [20][42] - Management believes strategic M&A will create long-term value, despite recent setbacks with the Coherent transaction [19][84] - The company is optimistic about long-term market trends driven by digital transformation and 5G deployment [12][14] Management Comments on Operating Environment and Future Outlook - Management anticipates near-term headwinds in telecom and 5G-related components but expects a market reacceleration in the second half of fiscal 2022 [16][18] - The company remains optimistic about long-term growth due to a strong product portfolio and design wins [15][32] - Management noted that the impact of COVID-19 continues to affect market dynamics, particularly in regions like India [10][87] Other Important Information - The company ended the quarter with approximately $2.1 billion in cash and short-term investments, up $354 million quarter-on-quarter [41] - The company has seen a significant increase in kilowatt fiber laser sales after four quarters of decline, indicating a recovery in the commercial lasers segment [30] Q&A Session Summary Question: Can you elaborate on the first half guide for fiscal 2022 regarding Telecom and Datacom? - Management expects moderate growth in Telecom but challenges in Datacom due to 5G rollout delays in China [52][54] Question: What is the outlook for 3D sensing market share? - Management is confident in maintaining a solid market share despite recent shifts and believes the share has stabilized [60][70] Question: How do you see the pricing dynamics with smaller chips in 3D sensing? - Management indicated that ASPs are expected to decrease with smaller chip sizes, but margins should remain stable [75][76] Question: What is the impact of the Coherent deal on M&A strategy? - Management remains open to strategic M&A but currently prioritizes organic growth opportunities [84][86] Question: How is the company addressing semiconductor shortages? - Management acknowledged the challenges posed by semiconductor shortages but is actively working to expedite supply [66]

Q3 FY21 Conference Call May 12, 2021 Forward Looking Statements and Financial Presentation This presentation contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include any anticipation or guidance as to future financial or operating performance, trends in our business, including our market position and trends in demand for our products and technology, supply and manufacturing trends and ...

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This chapter presents the company's revenues, costs, and profitability over recent fiscal periods Condensed Consolidated Statements of Operations | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $419.5 | $402.8 | $1,350.7 | $1,310.5 | | Gross profit | $185.0 | $157.7 | $620.3 | $514.5 | | Income from operations | $266.9 | $42.5 | $481.2 | $177.1 | | Net income | $225.5 | $43.4 | $375.8 | $140.1 | | Diluted Net income per share | $2.85 | $0.56 | $4.78 | $1.80 | - The company recorded a **net gain of $207.5 million** from a merger termination fee and related costs for both the three and nine months ended April 3, 2021, significantly impacting operating expenses and net income[10](index=10&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) This chapter details the company's comprehensive income, including net income and other comprehensive loss components Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Net income | $225.5 | $43.4 | $375.8 | $140.1 | | Other comprehensive loss, net of tax | $(0.3) | $(1.2) | $(2.2) | $(1.3) | | Comprehensive income, net of tax | $225.2 | $42.2 | $373.6 | $138.8 | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This chapter provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets | Asset/Liability | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | | Total current assets | $2,569.8 | $2,050.0 | | Total assets | $3,745.9 | $3,292.6 | | Convertible notes, current | $385.3 | $— | | Total current liabilities | $674.2 | $283.0 | | Total liabilities | $1,580.9 | $1,543.4 | | Total stockholders' equity | $2,165.0 | $1,749.2 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This chapter outlines the changes in the company's equity accounts over the reporting period Condensed Consolidated Statements of Stockholders' Equity | Metric | Balance as of June 27, 2020 (Millions) | Balance as of April 3, 2021 (Millions) | | :--- | :--- | :--- | | Total Stockholders' Equity | $1,749.2 | $2,165.0 | - Net income for the nine months ended April 3, 2021, contributed **$375.8 million** to retained earnings, while stock-based compensation added **$70.3 million** to additional paid-in capital[18](index=18&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This chapter summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Activity | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $614.5 | $401.6 | | Net cash used in investing activities | $(196.3) | $(477.9) | | Net cash (used in) provided by financing activities | $(28.5) | $332.5 | | Increase in cash and cash equivalents | $389.7 | $256.2 | | Cash and cash equivalents at end of period | $687.7 | $688.8 | - Operating cash flow for the nine months ended April 3, 2021, included a significant contribution from the **$207.5 million merger termination fee**, net of related costs[24](index=24&type=chunk)[240](index=240&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the accounting policies and specific items in the financial statements [Note 1. Description of Business and Summary of Significant Accounting Policies](index=11&type=section&id=Note%201.%20Description%20of%20Business%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note describes the company's business operations, significant accounting policies, and the impact of the Coherent merger termination - Lumentum is an industry-leading provider of optical and photonic products for Optical Communications (OpComms) and Commercial Lasers, expanding into emerging markets like **3D sensing** for consumer electronics and industrial applications[29](index=29&type=chunk) - The merger agreement with Coherent, Inc was terminated in March 2021, resulting in Lumentum receiving a **$217.6 million termination fee**, offset by **$10.1 million** in acquisition-related expenses[32](index=32&type=chunk) - The **COVID-19 pandemic** has created significant uncertainty in global financial markets, disrupting and potentially harming the company's business, financial condition, and results of operations[31](index=31&type=chunk) [Note 2. Recently Issued Accounting Pronouncements](index=12&type=section&id=Note%202.%20Recently%20Issued%20Accounting%20Pronouncements) This note discusses the adoption of recent accounting standards and their impact on the financial statements - The company adopted ASU 2018-13 (Fair Value Measurement), ASU 2018-15 (Internal-Use Software), and Topic 326 (Credit Losses) in the first quarter of fiscal 2021, with **no material impact** on its condensed consolidated financial statements[37](index=37&type=chunk)[38](index=38&type=chunk)[39](index=39&type=chunk) - Lumentum is currently evaluating the impact of ASU 2020-06 (Accounting for Convertible Instruments) and ASU 2019-12 (Simplifying the Accounting for Income Taxes), which are effective for fiscal years beginning after December 15, 2021, and at the beginning of fiscal year 2022, respectively[42](index=42&type=chunk)[44](index=44&type=chunk) [Note 3. Earnings Per Share](index=13&type=section&id=Note%203.%20Earnings%20Per%20Share) This note provides a detailed calculation of basic and diluted earnings per share Earnings Per Share | Metric | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic Net income per share | $2.97 | $0.58 | $4.97 | $1.84 | | Diluted Net income per share | $2.85 | $0.56 | $4.78 | $1.80 | | Basic weighted average common shares outstanding (Millions) | 75.8 | 74.8 | 75.6 | 76.2 | | Diluted weighted average common shares outstanding (Millions) | 79.2 | 77.5 | 78.6 | 77.7 | - The potentially dilutive shares from the 2024 Notes were included in the diluted EPS calculation for the three and nine months ended April 3, 2021, as the average common stock price exceeded the conversion price of **$60.62**[47](index=47&type=chunk) [Note 4. Cash, Cash Equivalents and Short-term Investments](index=14&type=section&id=Note%204.%20Cash,%20Cash%20Equivalents%20and%20Short-term%20Investments) This note details the composition of the company's cash, cash equivalents, and short-term investments Cash, Cash Equivalents and Short-term Investments | Category | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | | Total cash, cash equivalents and short-term investments | $2,054.6 | $1,553.8 | - The company did not realize significant gains or losses from the sale of available-for-sale short-term investments during the three and nine months ended April 3, 2021, and March 28, 2020[50](index=50&type=chunk) - All available-for-sale securities are classified as current, reflecting management's intent and ability to use the funds in current operations[55](index=55&type=chunk) [Note 5. Fair Value Measurements](index=15&type=section&id=Note%205.%20Fair%20Value%20Measurements) This note explains the methods used for fair value measurements of financial assets and liabilities Fair Value of Assets (April 3, 2021) | Asset Category (April 3, 2021) | Level 1 (Millions) | Level 2 (Millions) | Level 3 (Millions) | Total (Millions) | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents | $529.4 | $43.5 | $— | $573.0 | | Short-term investments | $674.5 | $692.4 | $— | $1,366.9 | | Total assets measured at fair value | $1,203.9 | $735.9 | $— | $1,939.8 | Fair Value of Convertible Notes (April 3, 2021) | Convertible Notes (April 3, 2021) | Carrying Amount (Millions) | Estimated Fair Value (Millions) | | :--- | :--- | :--- | | 2026 Notes | $778.9 | $1,240.5 | | 2024 Notes | $385.3 | $730.9 | | Total | $1,164.2 | $1,971.4 | - The estimated fair value of the 2026 Notes and 2024 Notes is considered a **Level 2 measurement**, as they are not actively traded in markets[64](index=64&type=chunk) [Note 6. Balance Sheet Details](index=17&type=section&id=Note%206.%20Balance%20Sheet%20Details) This note provides further detail on specific balance sheet accounts, including inventories and property, plant, and equipment Selected Balance Sheet Accounts | Account | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Allowance for credit losses on trade receivables | $1.8 | $1.8 | | Inventories | $210.7 | $188.9 | | Property, plant and equipment, net | $378.0 | $393.0 | | Income tax payable (current) | $73.1 | $28.8 | - Construction in progress primarily includes machinery and equipment expected to be placed in service within the next 12 months[73](index=73&type=chunk) [Note 7. Leases](index=19&type=section&id=Note%207.%20Leases) This note discloses information about the company's operating leases, including costs and future commitments Lease Metrics | Lease Metric | April 3, 2021 | June 27, 2020 | | :--- | :--- | :--- | | Weighted average remaining operating lease term (years) | 7.6 | 8.6 | | Weighted average operating lease discount rate | 3.5% | 3.5% | | Total lease cost (Nine Months Ended April 3, 2021) | $12.3M | $26.3M | - The company anticipates receiving approximately **$3.6 million** in sublease income over the next two years from subleasing offices in the United Kingdom, the United States, Canada, and Japan[79](index=79&type=chunk) [Note 8. Goodwill and Other Intangible Assets](index=20&type=section&id=Note%208.%20Goodwill%20and%20Other%20Intangible%20Assets) This note details the carrying amounts of goodwill and other intangible assets by segment Goodwill and Intangible Assets | Asset Category | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Goodwill | $368.9 | $368.9 | | Total intangible assets, net | $263.2 | $316.8 | | Total amortization of intangibles (Nine Months Ended April 3, 2021) | $63.6 | $57.4 | - Goodwill is primarily allocated to the **Optical Communications segment ($363.5 million)** and **Commercial Lasers segment ($5.4 million)**[82](index=82&type=chunk) - During the nine months ended April 3, 2021, the company reclassified **$10 million** from in-process research and development (IPR&D) to acquired developed technologies, which will be amortized over an estimated useful life of 3 years[87](index=87&type=chunk) [Note 9. Debt](index=22&type=section&id=Note%209.%20Debt) This note describes the terms and status of the company's convertible debt instruments - The company has **$1,050 million** in 0.50% Convertible Notes due 2026 (conversion price $99.29/share) and **$450 million** in 0.25% Convertible Notes due 2024 (conversion price $60.62/share)[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk) - The 2024 Notes, with a net carrying amount of **$385.3 million**, were reclassified to current liabilities as of April 3, 2021, because the stock's closing price exceeded 130% of the conversion price for 20 of the last 30 trading days[99](index=99&type=chunk) Total Interest Expense | Interest Expense Category | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Contractual interest expense | $1.6 | $1.6 | $4.8 | $2.3 | | Amortization of debt discount and debt issuance costs | $14.8 | $14.0 | $43.9 | $24.8 | | Total interest expense | $16.4 | $15.6 | $48.7 | $27.1 | [Note 10. Accumulated Other Comprehensive Income (Loss)](index=24&type=section&id=Note%2010.%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) This note presents the components of accumulated other comprehensive income (loss) Accumulated Other Comprehensive Income (Loss) | Component | Balance as of June 27, 2020 (Millions) | Balance as of April 3, 2021 (Millions) | | :--- | :--- | :--- | | Foreign currency translation adjustments, net of tax | $9.7 | $9.7 | | Defined benefit obligations, net of tax | $(4.2) | $(4.2) | | Unrealized gain (loss) on available-for-sale securities, net of tax | $2.4 | $0.2 | | Total Accumulated Other Comprehensive Income (Loss) | $7.9 | $5.7 | - The company established the U.S. dollar as the functional currency for its worldwide operations in fiscal 2019, following the Oclaro acquisition[105](index=105&type=chunk) [Note 11. Restructuring and Related Charges](index=25&type=section&id=Note%2011.%20Restructuring%20and%20Related%20Charges) This note details charges related to restructuring activities, primarily severance costs Restructuring and Related Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Restructuring and related charges | $2.9 | $2.7 | $3.1 | $4.9 | - Charges for the three and nine months ended April 3, 2021, were mainly due to severance associated with the decision to cease manufacturing certain products in **San Jose, California**[108](index=108&type=chunk) - Charges for the three and nine months ended March 28, 2020, were primarily due to severance related to moving manufacturing from San Jose, California, to **Thailand and other third-party vendors**[109](index=109&type=chunk) [Note 12. Income Taxes](index=25&type=section&id=Note%2012.%20Income%20Taxes) This note explains the components of the provision for income taxes and unrecognized tax benefits Provision for Income Taxes | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $27.4 | $5.2 | $58.8 | $19.6 | - The tax provision for the three months ended April 3, 2021, includes a discrete tax expense of **$16.8 million** primarily associated with the Coherent termination fee[112](index=112&type=chunk)[223](index=223&type=chunk) - As of April 3, 2021, the company had **$26.9 million** in unrecognized tax benefits, with an expected decrease of **$4.8 million** over the next 12 months[113](index=113&type=chunk) [Note 13. Equity](index=26&type=section&id=Note%2013.%20Equity) This note provides details on stock-based compensation and the company's equity incentive plans Stock-Based Compensation | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Total stock-based compensation | $68.7 | $56.1 | | Income tax benefit associated with stock-based compensation | $12.2 | $9.0 | - As of April 3, 2021, **$147.2 million** of stock-based compensation cost remains to be amortized over an estimated period of **1.9 years**[125](index=125&type=chunk) - The 2015 Equity Incentive Plan had **2.3 million shares** available for grant as of April 3, 2021[117](index=117&type=chunk)[126](index=126&type=chunk) [Note 14. Commitments and Contingencies](index=27&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) This note outlines the company's purchase obligations, warranty provisions, and ongoing litigation - Purchase obligations amounted to **$224.9 million** as of April 3, 2021, representing legally-binding commitments, mostly expected to be fulfilled within one year[128](index=128&type=chunk)[129](index=129&type=chunk) Warranty Activity | Warranty Activity | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Provision for warranty | $5.8 | $2.5 | | Utilization of reserve | $(5.2) | $(4.6) | - The company is involved in ongoing merger litigation (Karri Lawsuit) related to the Oclaro acquisition, with Lumentum named as a defendant, and the case is currently in discovery[140](index=140&type=chunk) [Note 15. Operating Segments and Geographic Information](index=29&type=section&id=Note%2015.%20Operating%20Segments%20and%20Geographic%20Information) This note presents financial information for the company's operating segments and geographic regions - Lumentum operates in two segments: **Optical Communications (OpComms)**, which includes Telecom and Datacom, and Consumer and Industrial markets; and **Commercial Lasers (Lasers)**[145](index=145&type=chunk) Segment Net Revenue | Segment Net Revenue | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | OpComms | $387.9 | $359.3 | $1,265.5 | $1,184.8 | | Lasers | $31.6 | $43.5 | $85.2 | $125.7 | | Total Net Revenue | $419.5 | $402.8 | $1,350.7 | $1,310.5 | - Net revenue from customers outside the United States represented **90.9%** and **92.7%** of total net revenue for the three and nine months ended April 3, 2021, respectively, with Asia-Pacific being the largest region[193](index=193&type=chunk) [Note 16. Subsequent Event](index=34&type=section&id=Note%2016.%20Subsequent%20Event) This note discloses a subsequent event regarding a new share buyback program - On May 7, 2021, the board of directors approved a new share buyback program, authorizing the company to purchase up to **$700 million** of its common stock over a two-year period[166](index=166&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Lumentum's financial performance, condition, and future outlook [Forward-Looking Statements](index=35&type=section&id=Forward-Looking%20Statements) This section contains cautionary language regarding forward-looking statements and associated risks - This report contains forward-looking statements based on current expectations, which involve risks, uncertainties, and assumptions that could cause actual results to differ materially[169](index=169&type=chunk) - Key factors influencing future results include market and industry conditions, product strategy, export regulation changes, the impact of the **COVID-19 pandemic**, sales, gross margins, operating expenses, capital expenditures, liquidity, and US-China relations[169](index=169&type=chunk) [Overview](index=36&type=section&id=Overview) This section provides an overview of the company's business, operating segments, and market trends - Lumentum is an industry-leading provider of optical and photonic products, with two operating segments: **Optical Communications (OpComms)** and **Commercial Lasers**[171](index=171&type=chunk) - The company believes in robust, long-term global market trends driving demand for its photonics products, including increasing data flow in optical networks, demand for precision manufacturing, and growth in **3D sensing and LiDAR applications**[172](index=172&type=chunk) - Lumentum continuously invests in new and differentiated products, technologies, and customer programs to maintain and grow its market and technology leadership positions[173](index=173&type=chunk) [Termination of Coherent Merger Agreement](index=36&type=section&id=Termination%20of%20Coherent%20Merger%20Agreement) This section details the financial impact of the terminated merger agreement with Coherent, Inc - Coherent, Inc terminated its merger agreement with Lumentum in March 2021, resulting in Lumentum receiving a **$217.6 million termination fee**[174](index=174&type=chunk) - The net amount of **$207.5 million** (after $10.1 million in acquisition-related expenses) is presented as 'merger termination fee and related costs, net' in the condensed consolidated statements of operations[174](index=174&type=chunk) [Impact of COVID-19 to our Business](index=36&type=section&id=Impact%20of%20COVID-19%20to%20our%20Business) This section discusses the operational and financial impacts of the COVID-19 pandemic on the business - The COVID-19 pandemic has caused a global slowdown, supply chain disruptions, and financial market volatility, leading to measures like work-from-home and limited onsite manufacturing, though Lumentum is deemed an essential business[175](index=175&type=chunk)[176](index=176&type=chunk) - The company faces **semiconductor component shortages**, which could impact its ability to supply products and reduce revenue, with the impact potentially increasing in the near term[178](index=178&type=chunk) - Despite uncertainties, Lumentum believes its long-term opportunities are not diminished by COVID-19 and plans to continue strong investment in new products, technology, and customer programs[179](index=179&type=chunk) [Critical Accounting Policies and Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section identifies the company's most critical accounting policies and estimates - The company's critical accounting policies include **Inventory Valuation, Revenue Recognition, Income Taxes, and Goodwill**[181](index=181&type=chunk) - There have been no significant changes to these policies during the nine months ended April 3, 2021, except for updates resulting from the adoption of Topic 326[181](index=181&type=chunk) [Recently Issued Accounting Pronouncements](index=38&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) This section refers to Note 2 for details on recently issued accounting pronouncements - Refer to Note 2 for details on recently issued accounting pronouncements[182](index=182&type=chunk) [Results of Operations](index=38&type=section&id=Results%20of%20Operations) This section provides a comparative analysis of the company's operating results for recent periods Key Metrics as a Percentage of Net Revenue | Metric (% of Net Revenue) | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Gross profit | 44.1% | 39.2% | 45.9% | 39.3% | | Income from operations | 63.6% | 10.6% | 35.6% | 13.5% | | Net income | 53.8% | 10.8% | 27.8% | 10.7% | Segment Net Revenue as a Percentage of Total | Segment Net Revenue (% of Total) | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | OpComms | 92.5% | 89.2% | 93.7% | 90.4% | | Lasers | 7.5% | 10.8% | 6.3% | 9.6% | [Net Revenue](index=39&type=section&id=Net%20Revenue) This section analyzes the changes in net revenue by operating segment and product line Net Revenue by Segment | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue | $419.5 | $402.8 | 4.1% | $1,350.7 | $1,310.5 | 3.1% | | OpComms | $387.9 | $359.3 | 8.0% | $1,265.5 | $1,184.8 | 6.8% | | Lasers | $31.6 | $43.5 | (27.4)% | $85.2 | $125.7 | (32.2)% | - OpComms revenue growth was primarily driven by a **$23.8 million increase** in Industrial and Consumer sales due to expanded 3D sensing applications and higher adoption rates in consumer electronic devices[186](index=186&type=chunk)[189](index=189&type=chunk) - Lasers net revenue decreased significantly due to reduced customer demand for kilowatt-class fiber lasers, primarily impacted by COVID-19[187](index=187&type=chunk)[190](index=190&type=chunk) [Gross Margin and Segment Gross Margin](index=41&type=section&id=Gross%20Margin%20and%20Segment%20Gross%20Margin) This section examines the factors affecting gross margin for the company and its operating segments Gross Margin by Segment | Gross Margin | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Margin | 44.1% | 39.2% | 45.9% | 39.3% | | OpComms Gross Margin | 50.1% | 45.0% | 52.2% | 46.4% | | Lasers Gross Margin | 47.2% | 49.7% | 46.2% | 44.7% | - OpComms gross margin increased due to higher manufacturing volumes, a more profitable product mix (including higher sales of **3D sensing** and lower sales of Datacom transceiver modules and Lithium Niobate modulators), and ongoing operational improvements[204](index=204&type=chunk)[205](index=205&type=chunk) - Lasers gross margin decreased in the three-month period due to lower manufacturing levels caused by reduced customer demand for kilowatt-class fiber products related to COVID-19[206](index=206&type=chunk) [Research and Development ("R&D")](index=42&type=section&id=Research%20and%20Development%20(%22R&D%22)) This section details the changes and drivers of research and development expenses R&D Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | R&D expense | $57.2 | $48.7 | 17.5% | $160.4 | $149.6 | 7.2% | - The increase in R&D expense was primarily due to incremental headcount, an additional week in the quarter, and increased payroll-related expenses and stock-based compensation, partially offset by reduced discretionary travel due to COVID-19 restrictions[208](index=208&type=chunk)[209](index=209&type=chunk) - The company plans to continue strong investments in R&D and new products to maintain market differentiation, expecting R&D investment to **increase in absolute dollars** in future quarters[210](index=210&type=chunk) [Selling, General and Administrative ("SG&A")](index=43&type=section&id=Selling,%20General%20and%20Administrative%20(%22SG&A%22)) This section explains the fluctuations in selling, general, and administrative expenses SG&A Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | SG&A expense | $65.5 | $61.3 | 6.9% | $183.1 | $180.4 | 1.5% | - The increase in SG&A expense was primarily due to higher stock-based compensation, payroll-related expenses from incremental headcount, an additional week in the quarter, and increased acquisition-related costs, partially offset by lower discretionary travel and trade shows due to COVID-19[211](index=211&type=chunk)[212](index=212&type=chunk) [Restructuring and Related Charges](index=43&type=section&id=Restructuring%20and%20Related%20Charges) This section discusses the nature and amount of restructuring charges incurred during the period Restructuring and Related Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Restructuring and related charges | $2.9 | $2.7 | 7.4% | $3.1 | $4.9 | (36.7)% | - Charges for the three and nine months ended April 3, 2021, were mainly attributable to severance costs associated with the decision to cease manufacturing certain products in **San Jose, California**[215](index=215&type=chunk) - Charges for the three and nine months ended March 28, 2020, were primarily due to severance costs related to moving manufacturing from San Jose, California, to **Thailand and other third-party vendors**[216](index=216&type=chunk) [Merger Termination Fee and Related Costs, Net](index=43&type=section&id=Merger%20Termination%20Fee%20and%20Related%20Costs,%20Net) This section quantifies the net gain recognized from the Coherent merger termination fee Merger Termination Fee and Related Costs, Net | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Merger termination fee and related costs, net | $(207.5) | $— | $(207.5) | $— | - The company recorded a **$217.6 million gain** from the termination fee received from Coherent in March 2021, offset by **$10.1 million** in acquisition-related charges, resulting in a net gain of **$207.5 million**[217](index=217&type=chunk) [Impairment Charges](index=43&type=section&id=Impairment%20Charges) This section notes the absence of impairment charges in the current period compared to the prior year Impairment Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Impairment charges | $— | $2.5 | $— | $2.5 | - Impairment charges of **$2.5 million** in the prior year were related to property, plant, and equipment due to the decision to exit the Datacom transceiver modules product line, with no impairments in fiscal 2021 related to this exit[218](index=218&type=chunk) [Interest Expense](index=44&type=section&id=Interest%20Expense) This section analyzes the components and changes in interest expense related to company debt Interest Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $16.4 | $15.6 | $48.7 | $45.3 | - The increase in interest expense for the nine months ended April 3, 2021, was mainly driven by higher amortization of debt discount and contractual interest expense of the 2026 Notes, partially offset by the full repayment of the term loan facility in fiscal 2020[221](index=221&type=chunk) [Other Income (Expense), Net](index=44&type=section&id=Other%20Income%20(Expense),%20Net) This section breaks down the components of other income and expense, including foreign exchange and interest income Other Income (Expense), Net | Component | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Foreign exchange gains (losses), net | $1.3 | $0.7 | $(3.8) | $(0.3) | | Interest income | $1.0 | $5.2 | $4.9 | $12.6 | | Other income (expense), net | $0.1 | $15.8 | $1.0 | $15.6 | | Total other income (expense), net | $2.4 | $21.7 | $2.1 | $27.9 | - The significant decrease in other income, net, was mainly due to a **$13.8 million gain** on the sale of the Lithium Niobate modulators business recognized in fiscal 2020[222](index=222&type=chunk) [Provision for (Benefit from) Income Taxes](index=44&type=section&id=Provision%20for%20(Benefit%20from)%20Income%20Taxes) This section explains the key factors influencing the provision for income taxes and the effective tax rate Provision for Income Taxes | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $27.4 | $5.2 | $58.8 | $19.6 | - The tax provision for the three months ended April 3, 2021, includes a discrete tax expense of **$16.8 million** mainly from the tax expense associated with the Coherent termination fee[223](index=223&type=chunk) - The estimated effective tax rate for fiscal 2021 differs from the **21% U.S. statutory rate** due to foreign subsidiary earnings, U.S. federal R&D tax credits, non-deductible stock-based compensation, and the tax effect of GILTI[223](index=223&type=chunk) [Contractual Obligations](index=45&type=section&id=Contractual%20Obligations) This section summarizes the company's future contractual payment obligations Contractual Obligations | Contractual Obligation | Total (Millions) | Less than 1 year (Millions) | 1 - 3 years (Millions) | 3 - 5 years (Millions) | More than 5 years (Millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Asset retirement obligations | $4.7 | $— | $0.9 | $2.3 | $1.5 | | Finance lease liabilities | $0.1 | $0.1 | $— | $— | $— | | Operating lease liabilities | $70.7 | $14.0 | $22.4 | $13.3 | $21.0 | | Pension plan contributions | $0.5 | $0.5 | $— | $— | $— | | Purchase obligations | $224.9 | $222.0 | $2.8 | $0.1 | $— | | Convertible notes - principal | $1,500.0 | $— | $450.0 | $— | $1,050.0 | | Convertible notes - interest | $34.9 | $6.4 | $12.7 | $10.5 | $5.3 | | Total | $1,835.8 | $243.0 | $488.8 | $26.2 | $1,077.8 | - The table excludes **$26.6 million** of unrecognized tax benefits for uncertain tax positions, as the timing of future payments cannot be reliably estimated[229](index=229&type=chunk) [Off-Balance Sheet Arrangements](index=45&type=section&id=Off-Balance%20Sheet%20Arrangements) This section confirms the absence of material off-balance sheet arrangements - The company does not have any off-balance sheet arrangements, as defined by SEC rules, that are material to its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources[230](index=230&type=chunk) [Financial Condition](index=46&type=section&id=Financial%20Condition) This section provides an analysis of the company's liquidity, capital resources, and cash flows [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) This subsection details the company's cash position, short-term investments, and capital allocation strategies Liquidity Position | Metric | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | - The 2024 Notes, with a principal balance of **$385.3 million**, are presented in short-term liabilities as of April 3, 2021, due to the stock price exceeding the conversion threshold[234](index=234&type=chunk) - The board of directors approved a **$700 million share buyback program** on May 7, 2021, authorized for two years[235](index=235&type=chunk) [Operating Cash Flow](index=47&type=section&id=Operating%20Cash%20Flow) This subsection analyzes the sources and uses of cash from operating activities Operating Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $614.5 | $401.6 | - Operating cash flow for the nine months ended April 3, 2021, included **$207.5 million** from the Coherent merger termination fee, net of related costs[240](index=240&type=chunk) [Investing Cash Flow](index=47&type=section&id=Investing%20Cash%20Flow) This subsection details cash flows related to investments in assets and securities Investing Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash used in investing activities | $(196.3) | $(477.9) | | Payments for acquisition of property, plant and equipment | $(66.4) | $(64.9) | [Financing Cash Flow](index=47&type=section&id=Financing%20Cash%20Flow) This subsection outlines cash flows from debt, equity, and stock-related transactions Financing Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash (used in) provided by financing activities | $(28.5) | $332.5 | - Cash used in financing activities for the nine months ended April 3, 2021, was primarily due to tax payments related to restricted stock (**$33.8 million**)[244](index=244&type=chunk) - Cash provided by financing activities in the prior year was mainly from the issuance of 2026 Convertible Notes (**$1,042.4 million**) and repayment of the term loan facility (**$497.5 million**)[245](index=245&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=46&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines Lumentum's exposure to various market risks, including those exacerbated by the COVID-19 pandemic [COVID-19 Risk](index=48&type=section&id=COVID-19%20Risk) This section discusses how the COVID-19 pandemic exacerbates various market risks - The COVID-19 pandemic heightens various market risks, including accounts receivable collectability, inventory obsolescence, short-term investment values, long-term asset impairment, and tax valuation[246](index=246&type=chunk) - Foreign exchange markets could experience significant fluctuations, impacting future expenses, and dramatically reduced interest rates will likely negatively affect future investment income[247](index=247&type=chunk) [Foreign Exchange Risk](index=48&type=section&id=Foreign%20Exchange%20Risk) This section details the company's exposure to fluctuations in foreign currency exchange rates Foreign Exchange Gains (Losses), Net | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Foreign exchange gains (losses), net | $1.3 | $0.7 | $(3.8) | $(0.3) | - The company is exposed to foreign currency exchange risks, particularly for expenses denominated in **Chinese Yuan, Canadian Dollar, Thai Baht, Japanese Yen, UK Pound, Swiss Franc, and Euro**, with increased volatility due to the COVID-19 pandemic[249](index=249&type=chunk)[326](index=326&type=chunk) [Equity Price Risk](index=48&type=section&id=Equity%20Price%20Risk) This section explains the equity price risk associated with the company's convertible notes - Lumentum is exposed to equity price risk related to the conversion options embedded in its 2026 Notes (conversion price **$99.29 per share**) and 2024 Notes (conversion price **$60.62 per share**)[250](index=250&type=chunk)[251](index=251&type=chunk) - The 2024 Notes became convertible at the option of holders as of April 3, 2021, because the closing price of the company's stock exceeded **$78.80 (130% of the conversion price)** for 20 of the last 30 trading days of the quarter[252](index=252&type=chunk) [Interest Rate Fluctuation Risk](index=49&type=section&id=Interest%20Rate%20Fluctuation%20Risk) This section quantifies the potential impact of interest rate changes on the investment portfolio - As of April 3, 2021, the company held **$2,054.6 million** in cash, cash equivalents, and short-term investments, with a weighted-average life of approximately seven months for its investment portfolio[253](index=253&type=chunk) - A hypothetical **1% increase or decrease** in interest rates would result in an approximate **$8.8 million decrease or increase**, respectively, in the fair value of the investment portfolio[254](index=254&type=chunk) [Bank Liquidity Risk](index=49&type=section&id=Bank%20Liquidity%20Risk) This section outlines the risk associated with cash balances held at financial institutions - The company held approximately **$114.8 million** of unrestricted cash in operating accounts with domestic and international financial institutions as of April 3, 2021[255](index=255&type=chunk) - These cash balances could become lost or inaccessible if the underlying financial institutions fail or are unable to meet liquidity requirements, potentially impacting the company's ability to fund operations in the short term[255](index=255&type=chunk) [Item 4. Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of Lumentum's disclosure controls and procedures and internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=50&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section confirms management's conclusion on the effectiveness of disclosure controls - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were **effective** as of April 3, 2021[257](index=257&type=chunk) - These controls provide **reasonable assurance** that required information is recorded, processed, summarized, and reported within SEC specified time periods[257](index=257&type=chunk) [Changes in Internal Control over Financial Reporting](index=50&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section states that no material changes were made to internal controls during the quarter - There were **no changes** in internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[258](index=258&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=50&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) This section acknowledges the inherent limitations of any control system - Management acknowledges that disclosure controls and internal control over financial reporting can only provide **reasonable, not absolute, assurance** against errors and fraud due to inherent limitations and resource constraints[259](index=259&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=51&type=section&id=Item%201.%20Legal%20Proceedings) This section describes the legal proceedings Lumentum is involved in, primarily focusing on ongoing merger litigation [Merger Litigation](index=51&type=section&id=Merger%20Litigation) This section provides an update on the status of litigation related to the Oclaro acquisition - Seven lawsuits were filed challenging the Oclaro acquisition; two putative class actions were voluntarily dismissed with prejudice, and four other suits were also dismissed[263](index=263&type=chunk)[264](index=264&type=chunk) - The remaining **Karri Lawsuit**, a putative class action, names Lumentum as a defendant and is currently in discovery, alleging violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934[265](index=265&type=chunk)[266](index=266&type=chunk) - Defendants intend to **vigorously defend** the Karri Lawsuit, which seeks damages and litigation costs[266](index=266&type=chunk) [Item 1A. Risk Factors](index=52&type=section&id=Item%201A.%20Risk%20Factors) This section details the significant risks and uncertainties that could adversely affect Lumentum's business and financial condition [Risk Factor Summary](index=52&type=section&id=Risk%20Factor%20Summary) This section provides a high-level summary of key risks across economic, operational, and regulatory categories - Key general economic risks include the impact of the **COVID-19 pandemic** and responsive measures[269](index=269&type=chunk) - Operational risks encompass changing technology, intense competition, reliance on limited customers and suppliers, manufacturing capabilities, international operations, strategic transactions, product defects, and the ability to hire and retain key personnel[270](index=270&type=chunk)[271](index=271&type=chunk) - Regulatory and legal risks involve changes in tax laws, litigation, export controls, tariffs, and intellectual property rights, while financing risks include capital requirements and debt servicing[271](index=271&type=chunk)[274](index=274&type=chunk) [Risks Related to Our Business](index=53&type=section&id=Risks%20Related%20to%20Our%20Business) This section details specific risks related to the company's business operations and industry [Impact of COVID-19 Pandemic](index=53&type=section&id=Impact%20of%20COVID-19%20Pandemic) This subsection elaborates on the operational and financial risks posed by the COVID-19 pandemic - The COVID-19 pandemic has negatively impacted Lumentum's operations, supply chain, and R&D activities through travel restrictions, limited onsite employees, and disruptions from manufacturing partners (e.g., Malaysia)[273](index=273&type=chunk)[275](index=275&type=chunk) - The pandemic has created economic uncertainty and volatility, affecting demand for products, increasing collection risks, and impacting foreign exchange markets, with the full magnitude and duration remaining difficult to predict[276](index=276&type=chunk) [Changing Technology and Intense Competition](index=54&type=section&id=Changing%20Technology%20and%20Intense%20Competition) This subsection discusses risks from rapid technological change and a highly competitive market - The markets are characterized by **rapid technological change**, frequent new product introductions, substantial capital investment, and continuous price pressures, requiring Lumentum to constantly innovate and control product costs[277](index=277&type=chunk) - Failure to successfully develop, manufacture, market, or support new products on a timely basis, or to adjust cost structures for mature products, could materially and adversely affect financial condition and results of operations[277](index=277&type=chunk)[278](index=278&type=chunk) [Reliance on Limited Customers](index=55&type=section&id=Reliance%20on%20Limited%20Customers) This subsection outlines the risks associated with dependency on a small number of major customers - Lumentum relies on a **small number of customers** for a significant portion of its sales, particularly in 3D sensing and commercial lasers, with many customers lacking contractual volume or long-term purchase commitments[279](index=279&type=chunk) - Changes in customer demand, business requirements, or purchasing behavior, especially from key customers, could significantly decrease sales, lead to order delays or cancellations, and increase the risk of quarterly fluctuations in revenues and operating results[279](index=279&type=chunk) [Restrictions on Sales to Significant Customer (Huawei)](index=55&type=section&id=Restrictions%20on%20Sales%20to%20Significant%20Customer%20(Huawei)) This subsection details the business impact of U.S. government sales restrictions on Huawei - U.S. government restrictions, including Huawei's addition to the **Entity List** and amendments to the Foreign-Produced Direct Product Rule, limit Lumentum's ability to sell certain products to Huawei without a license[280](index=280&type=chunk)[281](index=281&type=chunk) - These restrictions have **reduced business with Huawei**, potentially impacting future product developments and leading to excess and obsolete inventory charges for customized and common components[282](index=282&type=chunk)[284](index=284&type=chunk) - Uncertainty regarding future U.S. government actions against Huawei or other Chinese entities could cause further delays or cancellations, adversely affecting business and financial results[283](index=283&type=chunk)[284](index=284&type=chunk) [Intense Competition and Industry Consolidation](index=56&type=section&id=Intense%20Competition%20and%20Industry%20Consolidation) This subsection discusses competitive pressures and the impact of industry consolidation - The markets for optical subsystems, components, and laser diodes are **highly competitive**, with numerous domestic and international public and private companies, many possessing greater resources[285](index=285&type=chunk) - **Industry consolidation** (e.g., II-VI's acquisition of Finisar and Coherent, Cisco's acquisition of Acacia Communications) may result in competitors with greater resources, lower cost structures, and intensified competition, leading to price erosion, reduced revenue, or loss of market share[285](index=285&type=chunk) [Risks from International Operations](index=56&type=section&id=Risks%20from%20International%20Operations) This subsection outlines the various risks associated with the company's extensive international operations - A majority of Lumentum's revenue is derived from **international operations**, exposing it to economic, business, regulatory, social, and political conditions in foreign countries[286](index=286&type=chunk)[287](index=287&type=chunk) - Risks include trade protection laws, sanctions (e.g., on China's 5G deployment), conflicting local laws, global recession due to COVID-19, wage inflation, political developments (Brexit, Hong Kong), and natural disasters or epidemics[287](index=287&type=chunk)[288](index=288&type=chunk)[291](index=291&type=chunk) - Fluctuations in foreign currencies (e.g., U.K. pound, Chinese yuan, Thai baht) can negatively impact operating results by increasing costs when reported in U.S. dollars or reducing demand for products[289](index=289&type=chunk)[326](index=326&type=chunk) [Manufacturing Risks](index=57&type=section&id=Manufacturing%20Risks) This subsection details risks related to complex manufacturing processes, yields, and supply chain dependencies - Lumentum's **complex manufacturing processes**, conducted in facilities across China, Japan, Thailand, U.K., and San Jose, California, are susceptible to problems achieving acceptable yields, delays, and disruptions from social, geopolitical, environmental, or health factors like COVID-19[293](index=293&type=chunk) - Reliance on independent contract manufacturers and a **limited number of specialized suppliers** for raw materials and components poses risks of supply stoppages, defective parts, insufficient resources, and increased costs[294](index=294&type=chunk)[301](index=301&type=chunk) - Transferring manufacturing to other sites is costly, time-consuming, and can result in supply interruptions, impacting financial condition and results of operations[297](index=297&type=chunk) [Customer Qualification of Manufacturing Lines](index=59&type=section&id=Customer%20Qualification%20of%20Manufacturing%20Lines) This subsection discusses the risks associated with delays or failures in customer manufacturing line qualifications - Certain customers require **qualification of manufacturing lines** for volume production, and delays or failures in this process can harm Lumentum's reputation, operating results, and customer relationships[300](index=300&type=chunk) - Quality control issues can arise from setting up new lines, relocating existing ones, or introducing new products, potentially requiring re-qualification with customers[300](index=300&type=chunk) [Bargaining Power of Large Customers](index=59&type=section&id=Bargaining%20Power%20of%20Large%20Customers) This subsection outlines the risks from the significant bargaining power of large OEM customers - Large OEM and end-user service providers, comprising a significant portion of the customer base, possess **considerable bargaining power**, often demanding more favorable terms, including pricing, warranties, and indemnification[304](index=304&type=chunk) - Agreeing to onerous terms or failing to satisfy contract requirements could result in material liabilities, litigation, increased costs, loss of market share, and damage to reputation[304](index=304&type=chunk) [Product Defects](index=60&type=section&id=Product%20Defects) This subsection details the potential business impact of undetected software or hardware defects in products - Lumentum's complex products may contain **undetected software or hardware defects**, especially upon introduction or new version releases, which can be difficult to identify when embedded in customer products[305](index=305&type=chunk) - Such defects could lead to significant damages, warranty and repair costs, diversion of engineering resources, customer relation problems, loss of customers, or product liability suits, harming the business[305](index=305&type=chunk) [Export Control Laws and Regulations](index=60&type=section&id=Export%20Control%20Laws%20and%20Regulations) This subsection discusses the risks and potential penalties associated with non-compliance with export control laws - Exports of certain products are subject to **U.S. government export controls** (EAR, ITAR), often requiring pre-shipment authorization, which can be difficult and time-consuming to obtain[306](index=306&type=chunk)[307](index=307&type=chunk) - Failure to obtain export licenses or comply with regulations could significantly reduce revenue, adversely affect business, and lead to civil, criminal, monetary, and non-monetary penalties[307](index=307&type=chunk)[309](index=309&type=chunk) - Increased government scrutiny and restrictions on foreign entities (e.g., Huawei, FiberHome) create risks of further export limitations, reputational harm, and disruptions to supply chains and customer relationships[308](index=308&type=chunk)[309](index=309&type=chunk)[310](index=310&type=chunk) [Increasing Tariffs](index=61&type=section&id=Increasing%20Tariffs) This subsection outlines the potential negative impact of increasing trade tariffs on the business - The threat of **increasing tariffs**, particularly between the United States and China, could negatively impact overall economic conditions, Lumentum's industry, and its business[311](index=311&type=chunk) - Imposition of tariffs or new trade regulations could increase product and product-related costs or decrease sales to customers in China or those selling to Chinese end-users, directly impacting business and results of operations[311](index=311&type=chunk) [Strategic Transactions Risks](index=61&type=section&id=Strategic%20Transactions%20Risks) This subsection details the inherent risks associated with pursuing acquisitions and divestitures - Lumentum's strategy involves acquisitions and strategic transactions, which carry risks such as diversion of management attention, unforeseen expenses, regulatory hurdles, and unanticipated changes in the acquired business[312](index=312&type=chunk)[313](index=313&type=chunk) - Divestitures also involve risks, including difficulties in separating businesses, potential loss of revenue, negative impact on margins, and disruption of customer relationships[314](index=314&type=chunk) - Failure to successfully manage these risks in future acquisitions or divestitures could adversely impact business, financial condition, and results of operations[315](index=315&type=chunk) [Acquisitions Strategy and Integration](index=62&type=section&id=Acquisitions%20Strategy%20and%20Integration) This subsection discusses the challenges and risks of integrating acquired companies and technologies - Challenges in implementing an acquisition strategy and **integrating acquired companies** include potential loss of customers, suppliers, or key employees, difficulties in conforming standards and systems, and coordinating new product development[317](index=317&type=chunk) - Integration difficulties can increase operational complexity, dilute current stockholders, expend cash, or incur unfavorable indebtedness, potentially disrupting business and adversely impacting financial results[317](index=317&type=chunk) [Changes in Demand and Customer Requirements](index=62&type=section&id=Changes%20in%20Demand%20and%20Customer%20Requirements) This subsection outlines the risks related to fluctuating production volumes and manufacturing yields - **Manufacturing yields** are dependent on production volume and changes in customer specifications, and modifications to processes or new product introductions can reduce yields, leading to low or negative margins[319](index=319&type=chunk) - An increase in the rejection rate of products during quality control, exacerbated by COVID-19, results in lower gross margins from reduced yields and additional rework costs, adversely affecting operating results[319](index=319&type=chunk) [International Tax Structure](index=63&type=section&id=International%20Tax%20Structure) This subsection discusses the risks associated with the company's international tax structure and potential challenges - Lumentum's international corporate structure aims to **reduce its effective tax rate** through intellectual property use and international procurement/sales operations in lower-tax jurisdictions[320](index=320&type=chunk) - Risks include the inability to fully operationalize the structure, substantial modifications due to acquisitions, negative impacts from changes in tax laws, or successful challenges by tax authorities, which could materially and adversely affect operating and financial results[320](index=320&type=chunk) [Changes in Tax Laws](index=63&type=section&id=Changes%20in%20Tax%20Laws) This subsection details the risks from potential changes in domestic and international tax laws - Significant uncertainties exist regarding tax liabilities due to potential **changes in tax laws** (e.g., Tax Cuts and Jobs Act, BEPS Project) and adverse determinations on existing laws, which could increase tax obligations and impact the effective tax rate[321](index=321&type=chunk)[322](index=322&type=chunk)[324](index=324&type=chunk) - The expiration of the tax holiday for the Thailand subsidiary in fiscal 2025, if not extended, would subject income earned in Thailand to a higher statutory income tax rate, increasing the effective tax rate and reducing liquidity[325](index=325&type=chunk) [Volatility Due to Foreign Currency Fluctuations](index=64&type=section&id=Volatility%20Due%20to%20Foreign%20Currency%20Fluctuations) This subsection explains the impact of foreign exchange rate volatility on operating results - Lumentum is exposed to **foreign exchange risks**, particularly for operating expenses incurred in currencies other than the U.S. dollar (e.g., U.K. pound sterling, Chinese yuan, Thai baht)[326](index=326&type=chunk) - Increased non-U.S. manufacturing and the COVID-19 pandemic have heightened foreign exchange volatility; U.S. dollar depreciation increases costs, while strengthening could reduce demand for products[326](index=326&type=chunk) [Inability to Retain or Hire Key Personnel](index=64&type=section&id=Inability%20to%20Retain%20or%20Hire%20Key%20Personnel) This subsection discusses the risks related to competition for and retention of key employees - Future success depends on the ability to **recruit and retain highly qualified** executive, engineering, sales, and marketing personnel, for whom competition is intense[327](index=327&type=chunk) - Increased employee mobility and turnover due to COVID-19, along with the complexity of replacing or training new employees, could delay new product development and negatively impact marketing, sales, and support[327](index=327&type=chunk) [Need for Additional Capital](index=64&type=section&id=Need%20for%20Additional%20Capital) This subsection outlines the potential need for future financing and the associated risks - Lumentum intends to continue investments for business growth and may require **additional funds** for new products, market expansion, strategic transactions, and infrastructure improvements[330](index=330&type=chunk) - Future equity or debt financings could result in **significant dilution** for existing stockholders or involve restrictive covenants that limit operational flexibility and access to additional capital[330](index=330&type=chunk) [Impact of Immigration Laws on Hiring](index=65&type=section&id=Impact%20of%20Immigration%20Laws%20on%20Hiring) This subsection details how changes in immigration laws could affect the ability to hire skilled personnel - **Foreign nationals** are a crucial part of Lumentum's U.S. workforce, particularly in engineering and product development[331](index=331&type=chunk) - Changes in immigration laws, regulations, or procedures (e.g., U.S. government actions, Brexit) could adversely affect the ability to hire and retain these workers, increase operating expenses, and negatively impact product and service delivery[331](index=331&type=chunk) [Information Technology Infrastructure and Security Risks](index=65&type=section&id=Information%20Technology%20Infrastructure%20and%20Security%20Risks) This subsection discusses the risks of IT system failures and cybersecurity threats - Lumentum's business relies significantly on effective and secure information management systems; failures, disruptions, or security breaches could harm operations and lead to loss of proprietary information[332](index=332&type=chunk)[336](index=336&type=chunk) - The company is subject to ongoing **cyberattacks** (hacking, malware, ransomware, social engineering), which have increased during the COVID-19 pandemic due to a distributed workforce and increased remote access[335](index=335&type=chunk) - Any actual or perceived security breach could cause significant damage to reputation, lead to theft of intellectual property, result in legal obligations, affect customer relationships, and incur significant mitigation costs[336](index=336&type=chunk) [Volatility of Operating Results and Financial Predictions](index=66&type=section&id=Volatility%20of%20Operating%20Results%20and%20Financial%20Predictions) This subsection outlines the factors contributing to the volatility of operating results and the difficulty in forecasting - Operating results and financial predictions are subject to cyclical and uneven fluctuations in market spending, customer buying patterns, and new product releases, making **future performance difficult to predict**[337](index=337&type=chunk) - Adverse changes and uncertainty in the global economy, particularly due to COVID-19, may decrease demand, increase price competition, and lead to excess and obsolete inventories, materially impacting financial condition and results[338](index=338&type=chunk) [Insufficient Proprietary Rights and Failure to Protect Rights](index=67&type=section&id=Insufficient%20Proprietary%20Rights%20and%20Failure%20to%20Protect%20Rights) This subsection details the risks associated with protecting the company's intellectual property - **Protecting proprietary rights** (patents, trade secrets, trademarks) is difficult, time-consuming, and expensive; steps taken may not prevent misappropriation or ensure competitive technologies are not developed[340](index=340&type=chunk) - Patents may not be issued or sufficiently broad, and existing patents or third-party licenses may be unavailable or on unfavorable terms, impeding new product development and sales[340](index=340&type=chunk) - Breaches of informat

Financial Data and Key Metrics Changes - The company reported revenue of $61 million for Q1 2021, which was in the upper half of the guidance range [10] - Non-GAAP gross margin was 22.4%, slightly above the expected range, driven by a favorable product mix and cost reductions [37] - Non-GAAP operating loss for the quarter was $7.8 million, resulting in a non-GAAP net loss of $7.5 million, equating to a loss per share of $0.15 [38][39] - The company ended the quarter with $111 million in cash, investments, and restricted cash, down $12 million from the previous quarter [40] Business Line Data and Key Metrics Changes - Revenue from products at 400 Gigabits and above grew 134% year-over-year, comprising 52% of total revenue in the quarter [10][36] - The company had four customers contributing 10% or more to revenue, together accounting for 74% of total revenue [12] Market Data and Key Metrics Changes - Demand for high-speed products remains strong, particularly in cloud and datacenter applications, although near-term demand in western carrier markets is muted due to pandemic-related deployment pauses and semiconductor shortages [19][21] - The China telecom market is also experiencing muted demand, with modest tenders from China Telecom and light business levels from China Mobile [20] Company Strategy and Development Direction - The company is focused on driving growth in its 400G and above product lines and expanding into the hyperscale market with new customers for its 400ZR and 400ZR+ modules [46] - The company anticipates a substantial revenue ramp in the second half of 2021, driven by unsatisfied demand from Q2 and stronger revenue from China [43] Management's Comments on Operating Environment and Future Outlook - Management noted that while demand for high-speed products is strong, supply chain constraints, particularly semiconductor shortages, are impacting the ability to meet demand [19][61] - The company expects to return to profitability in Q3 2021 on a non-GAAP basis, despite current challenges [46] Other Important Information - The company is conducting qualifications with multiple potential customers for its 400ZR modules, expecting initial deployments in the second half of 2021 [18] - The company is also exploring applications for its coherent technology in adjacent markets, including inter-satellite communication and LIDAR for autonomous vehicles [34] Q&A Session Summary Question: What is the definition of volume production for 400ZR? - Management defined volume production as 1,000 or more units per month [50] Question: What is the expected revenue impact from Huawei in Q2? - Management expects Huawei to be a modest-sized customer, contributing immaterial revenue in Q1 and a level of materiality in Q2 [54] Question: How should investors think about the break-even model for Q3? - Management indicated that break-even would require revenue of approximately $80-$85 million, with expected gross margins around 28%-29% [57] Question: What is the impact of chip shortages on current operations? - Management acknowledged that chip shortages are affecting the ability to meet demand, particularly for high-end products [61] Question: How does the company view the demand outlook in the U.S. and China? - Management noted current softness in demand in both markets but expects improvement in the second half of the year [21][102]

NeoPhotonics Q1'21 SUMMARY NYSE: NPTN April 2021 Forward Looking Statements and Other Important Cautions This presentation includes statements that qualify as forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements about the following topics: future financial results, demand for the Company's high-speed products, and the Company's market position. Forward-looking statements are subject to certain risks and uncertainties that ...

Financial Data and Key Metrics Changes - NeoPhotonics reported revenue of $371 million for 2020, an increase of 4% year-over-year despite restrictions on Huawei [10][36] - The company achieved a non-GAAP gross margin of 31%, up 4 percentage points from 2019, and a GAAP gross margin of 28%, a 3 percentage point increase year-over-year [36] - Non-GAAP profit for the year was $16.7 million, a significant increase from $0.4 million in the previous year, while GAAP losses decreased from $17 million in 2019 to $4 million in 2020 [37] - Free cash flow increased to $41 million from $25 million, with net cash nearly doubling from $47 million to $90 million [37] Business Line Data and Key Metrics Changes - Products for 400-gigabit and above applications grew 35% sequentially and accounted for 46% of revenue in Q4 2020, with a year-over-year growth of 92% [13][14] - The company expects 400-gig and faster revenues to more than double compared to the first quarter of the previous year [15] Market Data and Key Metrics Changes - Demand for high-speed products is strong, particularly in cloud and data center applications, which are driving growth and profitability [12][22] - The company has seen some softness in the North American cloud market due to bandwidth deployments being pulled into 2020 as a response to the pandemic [19][51] Company Strategy and Development Direction - NeoPhotonics aims to grow by focusing on high-speed over distance solutions at 400-gig and above for telecom equipment providers [15] - The company is ramping up production of 400ZR and 400ZR+ coherent modules, which are expected to significantly expand its addressable market [26][29] - The company is positioned to benefit from long-term trends in global bandwidth demand driven by cloud services, remote working, and 5G rollouts [33] Management's Comments on Operating Environment and Future Outlook - Management anticipates some ups and downs in deployment rates typical in data center interconnect build-outs, exacerbated by share shifts among network equipment manufacturers [20] - The company expects to return to operating profit in Q3 2021 and projects full-year revenue growth of 25% to 35%, excluding Huawei [52][53] - Management noted that Q1 is typically the lowest quarter for revenue and margins due to seasonal factors [54] Other Important Information - The company finished Q4 with $123 million in cash, investments, and restricted cash, the highest in its history [48] - Non-GAAP operating expenses for Q4 were $23.7 million, down from Q3, reflecting faster execution of spending reductions [41] Q&A Session Summary Question: Clarification on 10% customers - NeoPhotonics had four customers contributing 10% or more to revenue in Q4, totaling 67% of revenue [60] Question: Diversification and 400ZR revenue expectations - 400ZR could potentially reach 10% of annual revenue after qualifications, with production ramping primarily in the second half of the year [62] Question: Cash usage in the first half of 2021 - CapEx is expected to run at 4% to 6% of revenue, with inventory levels being managed due to prior orders [69] Question: Price adjustments and supply chain issues - Price reductions historically range from 10% to 15%, with current adjustments expected to be at the lower end of that range; no significant supply chain impacts have been reported yet [70][71] Question: First quarter outlook and high-speed optics - High-speed products, particularly 400-gig and above, are expected to continue growing, with 46% of revenue in Q4 coming from these products [76] Question: Demand softness and deployment timing - Demand is expected to be back-half loaded due to logistical issues related to COVID-19, affecting deployment rates [84][86] Question: Competitive landscape for 400ZR - NeoPhotonics is one of the few companies capable of meeting 400ZR specifications, with Acacia and Inphi as notable competitors [118]

PART I - FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The company's unaudited condensed consolidated financial statements show key operational and financial positions [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Net revenue, gross profit, and net income all increased significantly for the three and six-month periods | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $478.8 | $457.8 | 4.6% | | Gross Profit | $229.6 | $189.1 | 21.4% | | Net Income | $83.2 | $49.1 | 69.4% | | Diluted EPS | $1.06 | $0.63 | 68.3% | | Metric | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $931.2 | $907.7 | 2.6% | | Gross Profit | $435.3 | $356.8 | 22.0% | | Net Income | $150.3 | $96.7 | 55.4% | | Diluted EPS | $1.92 | $1.24 | 54.8% | [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Comprehensive income grew substantially, driven by higher net income despite a minor increase in other comprehensive loss | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Income | $83.2 | $49.1 | 69.4% | | Other Comprehensive Loss, net of tax | $(0.4) | $(0.2) | 100.0% | | Comprehensive Income, net of tax | $82.8 | $48.9 | 69.3% | | Metric | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Income | $150.3 | $96.7 | 55.4% | | Other Comprehensive Loss, net of tax | $(1.9) | $(0.1) | 1800.0% | | Comprehensive Income, net of tax | $148.4 | $96.6 | 53.6% | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and stockholders' equity grew, while current liabilities rose due to convertible note reclassification | Metric | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $3,468.2 | $3,292.6 | 5.3% | | Cash and Cash Equivalents | $321.3 | $298.0 | 7.8% | | Short-term Investments | $1,379.0 | $1,255.8 | 9.8% | | Accounts Receivable, net | $276.7 | $233.5 | 18.5% | | Total Current Liabilities | $647.3 | $283.0 | 128.7% | | Total Liabilities | $1,546.3 | $1,543.4 | 0.2% | | Total Stockholders' Equity | $1,921.9 | $1,749.2 | 9.9% | - The significant increase in total current liabilities is primarily due to the reclassification of **$380.3 million** of 2024 Convertible Notes to current liabilities, as the stock price exceeded the conversion threshold[16](index=16&type=chunk)[93](index=93&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity increased by 9.9%, driven primarily by net income and stock-based compensation | Metric | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $1,921.9 | $1,749.2 | 9.9% | | Retained Earnings | $214.9 | $64.6 | 232.7% | | Additional Paid-In Capital | $1,700.9 | $1,676.6 | 1.5% | - The increase in stockholders' equity was primarily driven by **net income of $150.3 million** and stock-based compensation of $44.9 million for the six months ended December 26, 2020, partially offset by share issuances pursuant to equity plans, net of tax withholdings[18](index=18&type=chunk)[116](index=116&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Operating activities generated $233.2 million in cash, offset by investing and financing activities | Cash Flow Activity | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | Change (Millions) | | :--- | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $233.2 | $249.8 | $(16.6) | | Net Cash (Used in) Provided by Investing Activities | $(189.0) | $57.8 | $(246.8) | | Net Cash (Used in) Provided by Financing Activities | $(20.9) | $344.8 | $(365.7) | | Increase in Cash and Cash Equivalents | $23.3 | $652.4 | $(629.1) | | Cash and Cash Equivalents at End of Period | $321.3 | $1,085.0 | $(763.7) | - Cash used in investing activities for the six months ended December 26, 2020, was primarily due to net purchases of **short-term investments ($129.8 million)** and capital expenditures ($50.5 million)[20](index=20&type=chunk)[240](index=240&type=chunk) - Cash used in financing activities for the six months ended December 26, 2020, was mainly driven by **tax payments related to restricted stock of $26.2 million**[20](index=20&type=chunk)[242](index=242&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section details accounting policies, financial statement components, and the subsequent Coherent acquisition [Note 1. Description of Business and Summary of Significant Accounting Policies](index=10&type=section&id=Note%201.%20Description%20of%20Business%20and%20Summary%20of%20Significant%20Accounting%20Policies) Lumentum provides optical products for OpComms and Lasers, with ongoing uncertainty from the COVID-19 pandemic - Lumentum is an industry-leading provider of optical and photonic products for **Optical Communications (OpComms)** and **Commercial Lasers**, with a focus on expanding into emerging markets such as 3D sensing for consumer electronics and diode light sources[25](index=25&type=chunk) - Critical accounting policies include **inventory valuation, revenue recognition, income taxes, and goodwill**[26](index=26&type=chunk) - The **COVID-19 pandemic** has created significant uncertainty, potentially disrupting the Company's business, financial condition, and results of operations, with the full extent of the impact being unpredictable[27](index=27&type=chunk) [Note 2. Recently Issued Accounting Pronouncements](index=11&type=section&id=Note%202.%20Recently%20Issued%20Accounting%20Pronouncements) The company adopted new accounting standards for fair value, cloud computing, and credit losses with no material impact - Adopted ASU 2018-13 (Fair Value Measurement) and ASU 2018-15 (Cloud Computing Arrangement Costs) in Q1 fiscal 2021 with **no impact** on condensed consolidated financial statements[32](index=32&type=chunk)[33](index=33&type=chunk) - Adopted Topic 326 (Credit Losses) in Q1 fiscal 2021 with **no material impact**; unrealized losses on available-for-sale investments are considered temporary, and the allowance for credit losses on trade receivables was $1.7 million as of December 26, 2020[34](index=34&type=chunk)[35](index=35&type=chunk)[36](index=36&type=chunk) - Currently evaluating the impact of ASU 2020-06 (Accounting for Convertible Instruments, effective fiscal 2023) and ASU 2019-12 (Simplifying the Accounting for Income Taxes, effective fiscal 2022)[37](index=37&type=chunk)[38](index=38&type=chunk) [Note 3. Earnings Per Share](index=12&type=section&id=Note%203.%20Earnings%20Per%20Share) Diluted earnings per share showed strong growth, with the 2024 Notes becoming dilutive during the period | Metric | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Basic Net Income Per Share | $1.10 | $0.64 | | Diluted Net Income Per Share | $1.06 | $0.63 | | Metric | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Basic Net Income Per Share | $1.99 | $1.26 | | Diluted Net Income Per Share | $1.92 | $1.24 | - The **2024 Notes were included in the calculation of diluted income per share** for the three and six months ended December 26, 2020, as the average price of common stock exceeded the conversion price of $60.62[42](index=42&type=chunk) [Note 4. Cash, Cash Equivalents and Short-term Investments](index=13&type=section&id=Note%204.%20Cash%2C%20Cash%20Equivalents%20and%20Short-term%20Investments) The company held $1.7 billion in cash and short-term investments, primarily in corporate and U.S. Treasury debt | Asset Category | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and Cash Equivalents | $321.3 | $298.0 | | Short-term Investments | $1,379.0 | $1,255.8 | - As of December 26, 2020, short-term investments primarily consisted of **U.S. Treasury securities ($677.2 million)**, corporate debt securities ($523.5 million), and commercial paper ($112.8 million)[46](index=46&type=chunk) | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Other income (expense), net | $(0.9) | $1.2 | | Interest income | $1.5 | $3.4 | | Metric | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Other income (expense), net | $(0.3) | $6.2 | | Interest income | $3.9 | $7.4 | [Note 5. Fair Value Measurements](index=14&type=section&id=Note%205.%20Fair%20Value%20Measurements) Most financial instruments are measured at fair value using Level 1 or Level 2 inputs, with no impairments found - Fair value measurements are categorized into **Level 1** (unadjusted quoted prices in active markets), **Level 2** (quoted prices for similar assets or observable inputs), and **Level 3** (unobservable inputs)[54](index=54&type=chunk) | Asset Category (Dec 26, 2020) | Level 1 (Millions) | Level 2 (Millions) | Total (Millions) | | :--- | :--- | :--- | :--- | | Cash Equivalents | $203.6 | $10.0 | $213.6 | | Short-term Investments | $677.2 | $701.8 | $1,379.0 | | **Total Assets** | **$880.8** | **$711.8** | **$1,592.6** | | Convertible Notes | Carrying Amount (Millions) | Estimated Fair Value (Millions) | | :--- | :--- | :--- | | 2026 Notes | $769.1 | $1,312.5 | | 2024 Notes | $380.3 | $765.1 | | **Total** | **$1,149.4** | **$2,077.6** | - Intangible and other long-lived assets are reviewed for impairment at least annually in the fourth quarter of each fiscal year; **no impairment was found** during the annual testing in fiscal 2020[62](index=62&type=chunk) [Note 6. Balance Sheet Details](index=16&type=section&id=Note%206.%20Balance%20Sheet%20Details) Inventories increased to $207.1 million, while the allowance for credit losses on trade receivables remained stable | Metric | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | | :--- | :--- | :--- | | Allowance for credit losses on trade receivables | $1.7 | $1.8 | | Inventories | $207.1 | $188.9 | | Property, plant and equipment, net | $385.8 | $393.0 | | Other current liabilities | $65.3 | $44.3 | - The increase in inventories was primarily driven by **raw materials and work in process**, and the increase in other current liabilities was mainly due to an increase in **income tax payable to $51.5 million**[64](index=64&type=chunk)[69](index=69&type=chunk) [Note 7. Leases](index=18&type=section&id=Note%207.%20Leases) Total lease cost decreased significantly year-over-year, with an average remaining operating lease term of 8.0 years | Lease Cost (Millions) | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Finance lease cost | $0.3 | $8.3 | | Operating lease cost | $7.2 | $8.0 | | Short-term and variable lease costs | $2.3 | $2.1 | | Sublease income | $(1.4) | $(1.2) | | **Total lease cost** | **$8.4** | **$17.2** | | Lease Metric | Dec 26, 2020 | Jun 27, 2020 | | :--- | :--- | :--- | | Weighted average remaining lease term (Operating leases) | 8.0 years | 8.6 years | | Weighted average discount rate (Operating leases) | 3.5% | 3.5% | - The company expects to receive approximately **$4.4 million in sublease income** over the next two years[73](index=73&type=chunk)[76](index=76&type=chunk) [Note 8. Goodwill and Other Intangible Assets](index=19&type=section&id=Note%208.%20Goodwill%20and%20Other%20Intangible%20Assets) Goodwill remained stable at $368.9 million with no impairment, while other intangible assets decreased due to amortization | Metric | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | | :--- | :--- | :--- | | Goodwill | $368.9 | $368.9 | | Other Intangible Assets, net | $285.2 | $316.8 | - **No goodwill impairment** was identified during the annual test in fiscal 2020 or the three and six months ended December 26, 2020[80](index=80&type=chunk) - On October 29, 2020, Lumentum purchased **$10.0 million in intellectual property** with an estimated useful life of 5 years[82](index=82&type=chunk) | Amortization (Millions) | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Total amortization of intangibles | $41.6 | $37.4 | [Note 9. Debt](index=21&type=section&id=Note%209.%20Debt) The 2024 Convertible Notes were reclassified to current liabilities, and total interest expense was $32.3 million - The company has **$1,050.0 million in 0.50% Convertible Notes due 2026** (conversion price $99.29/share) and **$450.0 million in 0.25% Convertible Notes due 2024** (conversion price $60.62/share)[85](index=85&type=chunk)[87](index=87&type=chunk)[89](index=89&type=chunk)[92](index=92&type=chunk) - The **2024 Notes (net carrying amount $380.3 million) were reclassified to current liabilities** as of December 26, 2020, because the closing stock price exceeded 130% of the conversion price for 20 of the last 30 trading days of the quarter[93](index=93&type=chunk) | Interest Expense (Millions) | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Contractual interest expense | $3.2 | $0.7 | | Amortization of debt discount and debt issuance costs | $29.1 | $10.8 | | **Total interest expense** | **$32.3** | **$11.5** | - The **Term Loan Facility was fully repaid** in the second quarter of fiscal 2020[97](index=97&type=chunk) [Note 10. Accumulated Other Comprehensive Income (Loss)](index=23&type=section&id=Note%2010.%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Accumulated other comprehensive income decreased to $6.0 million due to unrealized losses on available-for-sale securities | Component | Dec 26, 2020 (Millions) | Jun 27, 2020 (Millions) | | :--- | :--- | :--- | | Foreign currency translation adjustments, net of tax | $9.7 | $9.7 | | Defined benefit obligations, net of tax | $(4.2) | $(4.2) | | Unrealized gain (loss) on available-for-sale securities, net of tax | $0.5 | $2.4 | | **Total Accumulated Other Comprehensive Income** | **$6.0** | **$7.9** | - The decrease in accumulated other comprehensive income was primarily due to an **other comprehensive loss of $(1.9) million** for the six-month period, mainly from unrealized losses on available-for-sale securities[98](index=98&type=chunk)[99](index=99&type=chunk) [Note 11. Restructuring and Related Charges](index=24&type=section&id=Note%2011.%20Restructuring%20and%20Related%20Charges) Restructuring charges of $0.2 million were recorded, primarily related to moving manufacturing from San Jose to Thailand | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Restructuring and related charges | $0.2 | $0.9 | | Metric | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Restructuring and related charges | $0.2 | $2.2 | - Payments of $0.8 million during the six months ended December 26, 2020, were mainly attributable to **severance charges associated with moving certain manufacturing from San Jose, California to Thailand**[102](index=102&type=chunk) [Note 12. Income Taxes](index=24&type=section&id=Note%2012.%20Income%20Taxes) The company recorded a tax provision of $31.4 million for the six-month period, with unrecognized tax benefits of $27.6 million | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Provision for income taxes | $14.9 | $8.6 | | Metric | Six Months Ended Dec 26, 2020 (Millions) | Six Months Ended Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Provision for income taxes | $31.4 | $14.4 | - The tax provision for the three months ended December 26, 2020, included a **discrete tax benefit of $2.5 million**, mainly from the reversal of certain deferred tax liabilities and excess benefit related to stock-based compensation[106](index=106&type=chunk) - As of December 26, 2020, **unrecognized tax benefits totaled $27.6 million**, with an expected decrease of $5.3 million over the next 12 months[107](index=107&type=chunk)[226](index=226&type=chunk) [Note 13. Equity](index=25&type=section&id=Note%2013.%20Equity) Stock-based compensation expense was $43.6 million for the six-month period, with $168.0 million remaining to be amortized - As of December 26, 2020, **2.3 million shares were available for grant** under the 2015 Equity Incentive Plan[111](index=111&type=chunk)[120](index=120&type=chunk) | Stock-Based Compensation (Millions) | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | | :--- | :--- | :--- | | Cost of sales | $8.5 | $8.3 | | Research and development | $9.5 | $7.9 | | Selling, general and administrative | $25.6 | $20.7 | | **Total stock-based compensation** | **$43.6** | **$36.9** | - As of December 26, 2020, **$168.0 million of stock-based compensation cost remains to be amortized** over an estimated period of 2.0 years[119](index=119&type=chunk) [Note 14. Commitments and Contingencies](index=26&type=section&id=Note%2014.%20Commitments%20and%20Contingencies) The company has $219.8 million in purchase obligations and is involved in ongoing merger litigation - **Purchase obligations totaled $219.8 million** as of December 26, 2020, representing legally-binding commitments primarily for inventory, expected to be fulfilled within one year[122](index=122&type=chunk)[123](index=123&type=chunk) | Metric | Dec 26, 2020 (Millions) | Dec 28, 2019 (Millions) | | :--- | :--- | :--- | | Product Warranty Reserve | $5.7 | $6.8 | - The **Karri Lawsuit**, a merger litigation related to the Oclaro acquisition, remains pending with Lumentum named as a defendant, and the parties are currently in discovery[135](index=135&type=chunk) - Management believes that resolving current claims and suits **will not have a material adverse impact** on the company's financial position, results of operations, or cash flows[130](index=130&type=chunk) [Note 15. Operating Segments and Geographic Information](index=28&type=section&id=Note%2015.%20Operating%20Segments%20and%20Geographic%20Information) OpComms revenue grew while Lasers revenue declined, with Asia-Pacific remaining the largest geographic region - Lumentum has two operating segments: **Optical Communications (OpComms)** and **Commercial Lasers (Lasers)**[139](index=139&type=chunk) | Segment Net Revenue (Millions) | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | OpComms | $449.1 | $409.4 | 9.7% | | Lasers | $29.7 | $48.4 | (38.6)% | | **Total Net Revenue** | **$478.8** | **$457.8** | **4.6%** | | Segment Net Revenue (Millions) | Six Months Ended Dec 26, 2020 | Six Months Ended Dec 28, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | OpComms | $877.6 | $825.5 | 6.3% | | Lasers | $53.6 | $82.2 | (34.8)% | | **Total Net Revenue** | **$931.2** | **$907.7** | **2.6%** | | Geographic Region | Three Months Ended Dec 26, 2020 (% of Total) | Six Months Ended Dec 26, 2020 (% of Total) | | :--- | :--- | :--- | | Asia-Pacific | 72.8% | 75.5% | | Americas | 19.8% | 17.0% | | EMEA | 7.4% | 7.5% | - **Two customers collectively accounted for 45% of total net revenue** for both the three and six months ended December 26, 2020[158](index=158&type=chunk) [Note 16. Subsequent Event](index=33&type=section&id=Note%2016.%20Subsequent%20Event) Lumentum entered into a merger agreement to acquire Coherent, Inc for approximately $5.7 billion - On January 18, 2021, Lumentum entered into a merger agreement to acquire **Coherent, Inc. for approximately $5.7 billion**[164](index=164&type=chunk) - The consideration for each Coherent common stock share is **$100 in cash and 1.1851 shares of Lumentum common stock**[164](index=164&type=chunk) - The transaction will be funded by approximately **$3.2 billion in Lumentum common stock, $2.1 billion in new debt**, and the remaining amount from cash balances, and is expected to be completed in the second half of calendar 2021[166](index=166&type=chunk)[167](index=167&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net revenue and gross margin increased, driven by OpComms growth, while the pending Coherent acquisition is noted - Lumentum is an industry-leading provider of optical and photonic products (OpComms and Lasers), with a strategic focus on technology and product leadership in growing markets, including **3D sensing**[172](index=172&type=chunk)[173](index=173&type=chunk) - The COVID-19 pandemic **did not have a material adverse effect** on Q2 fiscal 2021 results, but the company continues to monitor its impact on operations, supply chain, and demand[179](index=179&type=chunk)[180](index=180&type=chunk) | Metric | Three Months Ended Dec 26, 2020 (Millions) | Three Months Ended Dec 28, 2019 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | $478.8 | $457.8 | 4.6% | | OpComms Net Revenue | $449.1 | $409.4 | 9.7% | | Lasers Net Revenue | $29.7 | $48.4 | (38.6)% | | Gross Profit | $229.6 | $189.1 | 21.4% | | Gross Margin | 48.0% | 41.3% | 6.7 pp | - **Gross margin improvement** was primarily driven by improved gross margins within Datacom, due to the sale and exit of the lower-margin Datacom transceiver module business and increased revenue from higher-margin Datacom chip products[199](index=199&type=chunk) | Operating Expense (Millions) | Three Months Ended Dec 26, 2020 | Three Months Ended Dec 28, 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Research and development | $52.8 | $51.0 | 3.5% | | Selling, general and administrative | $61.3 | $62.4 | (1.8)% | | Restructuring and related charges | $0.2 | $0.9 | (77.8)% | - The **2024 Notes**, with a debt component of $380.3 million, were reclassified to short-term liabilities as of December 26, 2020, because the stock price exceeded the conversion threshold[231](index=231&type=chunk) - On January 18, 2021, Lumentum entered into a merger agreement to acquire **Coherent, Inc. for approximately $5.7 billion**, to be funded by stock, new debt ($2.1 billion), and cash[174](index=174&type=chunk)[175](index=175&type=chunk)[176](index=176&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from the COVID-19 pandemic, foreign exchange, equity prices, and interest rates - The **COVID-19 pandemic heightens market risks**, including accounts receivable collectability, inventory, investment values, long-term asset impairment, and tax valuation[245](index=245&type=chunk) - The company faces **foreign exchange risk** due to international operations and expenses denominated in various foreign currencies (e.g., Chinese Yuan, Canadian Dollar, Thai Baht, Japanese Yen, UK Pound, Swiss Franc, Euro)[247](index=247&type=chunk)[248](index=248&type=chunk) - **Equity price risk** is related to the conversion options embedded in the 2026 Notes and 2024 Notes; the 2024 Notes became convertible as of December 26, 2020[249](index=249&type=chunk)[251](index=251&type=chunk) - **Interest rate fluctuation risk** could impact the fair value of the investment portfolio; a hypothetical 1% change in interest rates would result in an approximate **$8.2 million change** in the fair value of the $1,700.3 million portfolio[252](index=252&type=chunk)[253](index=253&type=chunk) - **Bank liquidity risk** exists for $107.7 million of unrestricted cash held in operating accounts with domestic and international financial institutions[254](index=254&type=chunk) [Item 4. Controls and Procedures](index=49&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes in internal controls - Management concluded that **disclosure controls and procedures were effective** as of December 26, 2020, providing reasonable assurance for timely and accurate reporting[256](index=256&type=chunk) - There were **no material changes** in internal control over financial reporting during the most recently completed fiscal quarter[257](index=257&type=chunk) - The company has not experienced any material impact to its internal controls over financial reporting despite most employees working remotely due to the **COVID-19 pandemic**, and continues to monitor the situation[257](index=257&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=50&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various legal proceedings, including ongoing merger litigation related to the Oclaro acquisition - Lumentum is subject to various claims and suits arising in the **ordinary course of business**[261](index=261&type=chunk) - The **Karri Lawsuit**, a merger litigation challenging the Oclaro acquisition, remains pending with Lumentum named as a defendant, and the parties are currently in discovery[265](index=265&type=chunk) - Management believes that resolving claims against the company **will not have a material adverse impact** on its financial position, results of operations, or cash flows, though these matters are subject to inherent uncertainties[261](index=261&type=chunk) [Item 1A. Risk Factors](index=51&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from the COVID-19 pandemic, competition, customer concentration, and the pending Coherent acquisition - The ongoing **COVID-19 pandemic** poses material adverse effects on business operations, financial performance, supply chain, and demand, with disruptions and delays experienced in manufacturing and R&D[271](index=271&type=chunk)[272](index=272&type=chunk)[273](index=273&type=chunk) - Lumentum faces **intense competition**, rapid technological change, and pricing pressures, requiring continuous innovation and cost control to maintain market share and profitability[275](index=275&type=chunk)[276](index=276&type=chunk) - Reliance on a **limited number of customers** for a significant portion of sales, particularly in 3D sensing and commercial lasers, creates vulnerability to changes in customer demand or purchasing behavior[277](index=277&type=chunk) - **U.S. export restrictions**, particularly those related to Huawei, have significantly limited sales to a major customer and may lead to excess and obsolete inventory charges[279](index=279&type=chunk)[280](index=280&type=chunk)[282](index=282&type=chunk) - The proposed **acquisition of Coherent, Inc. carries significant risks**, including potential non-completion, substantial costs, regulatory approval challenges, integration difficulties, increased debt, and impacts on employee and customer retention[348](index=348&type=chunk)[349](index=349&type=chunk)[350](index=350&type=chunk)[351](index=351&type=chunk)[353](index=353&type=chunk)[356](index=356&type=chunk) - Servicing the **2024 and 2026 Convertible Notes requires significant cash**, and future indebtedness, including that for the Coherent acquisition, may limit operating flexibility and potentially dilute existing stockholders[358](index=358&type=chunk)[359](index=359&type=chunk) - The company's **stock price may be volatile** due to various factors, and Lumentum does not expect to pay dividends on its common stock in the foreseeable future[357](index=357&type=chunk)[360](index=360&type=chunk) [Item 6. Exhibits](index=72&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including the Coherent merger agreement and officer certifications - **Exhibit 2.1**: Agreement and Plan of Merger, dated January 18, 2021, by and among Lumentum Holdings Inc., Coherent, Inc., and related entities[367](index=367&type=chunk) - **Exhibit 10.1**: Commitment Letter, dated January 18, 2021, by and among Lumentum Holdings Inc., Deutsche Bank Securities Inc. and Deutsche Bank AG New York Branch[367](index=367&type=chunk) - **Exhibits 31.1, 31.2, 32.1†, and 32.2†**: Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[367](index=367&type=chunk) - **Exhibits 101 and 104**: Financial information from the Quarterly Report on Form 10-Q formatted in Inline XBRL[367](index=367&type=chunk) [SIGNATURES](index=73&type=section&id=SIGNATURES) The report is certified and signed by the Executive Vice President and Chief Financial Officer on February 2, 2021 - The report was signed by **Wajid Ali, Executive Vice President, Chief Financial Officer**, on February 2, 2021[371](index=371&type=chunk)