Lumentum Holdings Inc. (NASDAQ:LITE) Q1 2022 Earnings Conference Call November 4, 2021 8:30 AM ET Company Participants Alan Lowe - President, Chief Executive Officer Wajid Ali - Executive Vice President, Chief Financial Officer Tim Jenks - Chairman, President, Chief Executive Officer, NeoPhotonics Chris Coldren - Senior Vice President, Strategy and Corporate Development Jim Fanucchi - Darrow Associates Conference Call Participants Rod Hall - Goldman Sachs Alex Henderson - Needham Samik Chatterjee - JP Morga ...

[PART I - FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section presents the unaudited financial statements, management's analysis, market risk disclosures, and control procedures [Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for the three months ended October 2, 2021, and September 26, 2020, along with detailed notes [Condensed Consolidated Statements of Operations](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section details the company's financial performance through its condensed consolidated statements of operations Consolidated Statements of Operations Highlights (in millions) | Metric | Three Months Ended Oct 2, 2021 | Three Months Ended Sep 26, 2020 | YoY Change | | :--- | :--- | :--- | :--- | | **Net revenue** | $448.4 | $452.4 | -0.9% | | **Gross profit** | $232.2 | $205.7 | +12.9% | | **Income from operations** | $115.9 | $99.0 | +17.1% | | **Net income** | $81.5 | $67.1 | +21.5% | | **Diluted EPS** | $1.08 | $0.86 | +25.6% | [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position through its condensed consolidated balance sheets Consolidated Balance Sheet Highlights (in millions) | Metric | As of Oct 2, 2021 | As of July 3, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $611.0 | $774.3 | | Short-term investments | $1,273.6 | $1,171.7 | | Total current assets | $2,423.0 | $2,436.8 | | **Total assets** | **$3,519.0** | **$3,551.6** | | Total current liabilities | $611.7 | $664.6 | | **Total liabilities** | **$1,547.6** | **$1,578.8** | | **Total stockholders' equity** | **$1,971.4** | **$1,972.8** | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the company's cash inflows and outflows through its condensed consolidated statements of cash flows Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Three Months Ended Oct 2, 2021 | Three Months Ended Sep 26, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $61.9 | $104.7 | | Net cash used in investing activities | $(116.9) | $(114.0) | | Net cash used in financing activities | $(108.3) | $(19.2) | | **Decrease in cash and cash equivalents** | **$(163.3)** | **$(28.5)** | [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and context for the condensed consolidated financial statements - The company operates in two segments: Optical Communications (OpComms) and Commercial Lasers (Lasers), serving OEMs in networking, manufacturing, and consumer electronics (3D sensing)[23](index=23&type=chunk) Revenue by Segment (in millions) | Segment | Q1 FY22 (ended Oct 2, 2021) | Q1 FY21 (ended Sep 26, 2020) | YoY Change | | :--- | :--- | :--- | :--- | | OpComms | $406.0 | $428.5 | -5.3% | | Lasers | $42.4 | $23.9 | +77.4% | | **Total Net Revenue** | **$448.4** | **$452.4** | **-0.9%** | OpComms Revenue Disaggregation (in millions) | OpComms Market | Q1 FY22 (ended Oct 2, 2021) | Q1 FY21 (ended Sep 26, 2020) | YoY Change | | :--- | :--- | :--- | :--- | | Telecom and Datacom | $216.0 | $261.3 | -17.3% | | Consumer and Industrial | $190.0 | $167.2 | +13.6% | | **Total OpComms** | **$406.0** | **$428.5** | **-5.3%** | - Customer concentration remains high, with one customer accounting for **41% of total net revenue in Q1 FY22**, up from **35% in Q1 FY21**[128](index=128&type=chunk) - Subsequent to the quarter's end, on November 4, 2021, Lumentum announced a merger agreement to acquire NeoPhotonics Corporation for approximately **$918 million in cash**[134](index=134&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=34&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the first quarter fiscal 2022 financial results, highlighting revenue trends, gross margin improvements, and impacts of the COVID-19 pandemic and supply chain issues [Results of Operations](index=37&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, focusing on revenue, gross margin, and operating expenses by segment - OpComms revenue decreased by **$22.5 million (5.3%) YoY**, driven by a **$45.3 million drop in Telecom and Datacom** due to component shortages and 5G deployment delays, partially offset by a **$22.8 million increase in Industrial and Consumer revenue**[157](index=157&type=chunk) - Lasers revenue increased by **$18.5 million (77.4%) YoY**, primarily due to a recovery in customer demand for kilowatt-class fiber lasers following COVID-19 disruptions[158](index=158&type=chunk) - Overall gross margin increased to **51.8% from 45.5% YoY**, driven by a more profitable product mix, particularly higher-margin 3D sensing products, and lower excess and obsolescence charges[166](index=166&type=chunk)[169](index=169&type=chunk) - Operating expenses increased, with R&D up **7.3% to $54.1 million** and SG&A up **12.4% to $63.3 million**, primarily due to increased headcount and compensation expenses[171](index=171&type=chunk)[173](index=173&type=chunk) [Financial Condition, Liquidity and Capital Resources](index=41&type=section&id=Financial%20Condition%2C%20Liquidity%20and%20Capital%20Resources) This section assesses the company's financial health, liquidity position, and capital management strategies - The company ended the quarter with **$611.0 million in cash and cash equivalents** and **$1,273.6 million in short-term investments**, with management believing liquidity is sufficient for at least the next 12 months[180](index=180&type=chunk)[183](index=183&type=chunk) - Under its share buyback program, the company repurchased **1.1 million shares** of common stock for an aggregate price of **$91.7 million** during the first quarter of fiscal 2022[192](index=192&type=chunk) - Cash from operations was **$61.9 million**, a decrease from **$104.7 million** in the prior-year period, mainly due to changes in operating assets and liabilities, including a **$50.4 million increase in accounts receivable**[196](index=196&type=chunk) - The **2024 Convertible Notes**, with a carrying amount of **$395.8 million**, were reclassified to current liabilities as they became convertible at the option of the holders during the quarter[190](index=190&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=45&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company details its exposure to market risks, including foreign exchange fluctuations, equity price risk from convertible notes, and interest rate risk on its investment portfolio - The company is exposed to foreign exchange risk as a portion of its operating expenses are denominated in currencies other than the U.S. Dollar, including the Chinese Yuan, Canadian Dollar, Thai Baht, and Japanese Yen[204](index=204&type=chunk) - The fixed-income investment portfolio is subject to interest rate risk, where a hypothetical **1% (100 basis points) change** would result in an approximate **$9.6 million change** in its fair value[208](index=208&type=chunk) - The company faces equity price risk related to the conversion options embedded in its **2026 and 2024 Convertible Notes**, as their value fluctuates with the company's stock price[205](index=205&type=chunk)[206](index=206&type=chunk) [Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Based on an evaluation as of October 2, 2021, the company's Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[211](index=211&type=chunk) - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[212](index=212&type=chunk) [PART II - OTHER INFORMATION](index=48&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section covers legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report [Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various claims that arise in the ordinary course of business, including ongoing litigation related to the Oclaro acquisition - The company is subject to various legal claims, including ongoing litigation related to its acquisition of Oclaro (the Karri Lawsuit), currently in the discovery phase[113](index=113&type=chunk)[216](index=216&type=chunk) [Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) This section details significant business risks, including impacts from the COVID-19 pandemic, customer and supplier concentration, export restrictions, and strategic transaction complexities [Risks Related to Our Business](index=50&type=section&id=Risks%20Related%20to%20Our%20Business) This section outlines key operational and strategic risks impacting the company's business performance - The COVID-19 pandemic continues to pose risks, causing disruptions in manufacturing, supply chain delays (particularly for semiconductor components), and limitations on R&D activities[225](index=225&type=chunk)[226](index=226&type=chunk)[227](index=227&type=chunk) - The company relies on a limited number of customers for a significant portion of sales, creating concentration risk where changes in their purchasing behavior could significantly impact revenue[232](index=232&type=chunk) - U.S. government restrictions on sales to Huawei and other entities on the Entity List have limited and will continue to limit business, potentially leading to excess inventory charges and underutilized capacity[233](index=233&type=chunk)[234](index=234&type=chunk)[236](index=236&type=chunk) - The pending acquisition of NeoPhotonics is subject to closing conditions, including regulatory approvals, and failure to complete the merger could result in significant termination fees and other adverse consequences[317](index=317&type=chunk)[319](index=319&type=chunk)[320](index=320&type=chunk) [Legal, Regulatory and Compliance Risks](index=66&type=section&id=Legal%2C%20Regulatory%20and%20Compliance%20Risks) This section addresses potential legal, regulatory, and compliance challenges affecting the company's operations - The company's sales are subject to U.S. export control laws, and failure to obtain necessary licenses could limit sales to certain countries and customers, particularly with increased scrutiny on Chinese entities[295](index=295&type=chunk)[297](index=297&type=chunk) - Operations are subject to numerous worldwide regulations, including environmental (REACH, RoHS), conflict minerals disclosure, and data privacy laws (GDPR, CCPA), which could increase expenses and harm operating results if not complied with[301](index=301&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk) [Risks Related to Our Common Stock](index=67&type=section&id=Risks%20Related%20to%20Our%20Common%20Stock) This section discusses risks specifically related to the company's common stock and convertible notes - Servicing the **2024 and 2026 convertible notes** requires significant cash, and the company's ability to make payments depends on future performance, potentially limiting operational flexibility[307](index=307&type=chunk)[309](index=309&type=chunk) - Conversion of the **2024 and 2026 notes** could dilute the ownership interest of existing stockholders, and any sales of common stock issuable upon conversion could depress the stock price[311](index=311&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=72&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides details on the company's stock repurchase activities, including the 2021 share buyback program Issuer Purchases of Equity Securities (Q1 FY22) | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (approx. in millions) | | :--- | :--- | :--- | :--- | | July 4 - July 31, 2021 | 0 | $— | $0 | | Aug 1 - Aug 28, 2021 | 752,000 | $81.03 | $61.0 | | Aug 29 - Oct 2, 2021 | 360,000 | $85.43 | $30.7 | | **Total** | **1,112,000** | **$82.45** | **$91.7** | - The repurchases were made under the **2021 share buyback program**, approved on May 7, 2021, which authorizes up to **$700.0 million** in share purchases over two years[328](index=328&type=chunk) [Exhibits](index=73&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including employment agreements and required certifications - The report includes several exhibits, such as an Amended and Restated Employment Agreement for CEO Alan Lowe, and certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[331](index=331&type=chunk)

```markdown PART I [ITEM 1. BUSINESS](index=4&type=section&id=ITEM%201.%20BUSINESS) Lumentum is a leading provider of optical and photonic products for OpComms and Lasers, expanding into 3D sensing and LiDAR, driven by data and precision manufacturing trends - **Lumentum is an industry-leading provider** of optical and photonic products for Optical Communications (OpComms) and Commercial Lasers (Lasers) markets[15](index=15&type=chunk) - **The company's strategy involves** expanding into attractive emerging markets such as **3D** sensing for consumer electronics and diode light sources for various applications, leveraging its core optical and photonic technology and volume manufacturing capability[15](index=15&type=chunk) - **Global market trends**, including increasing data reliance, demand for higher precision manufacturing, and the rapid development of **3D** sensing and LiDAR for security, industrial, and automotive applications, are expected to drive the need for Lumentum's photonics products[16](index=16&type=chunk) - **Lumentum operates in two reportable segments**: OpComms and Lasers, with a global marketing, sales, and manufacturing footprint across North America, Asia-Pacific, and Europe[17](index=17&type=chunk)[18](index=18&type=chunk) - **The company's history includes** its spin-off from JDS Uniphase Corporation in **2015** and strategic acquisitions like Oclaro in **2018**, which strengthened its product portfolio in optical networks and high-speed interconnects[19](index=19&type=chunk) - **The OpComms segment addresses** telecommunications, data communications, and consumer and industrial markets, providing components, modules, and subsystems for carrier networks, data centers, and **3D** sensing applications[30](index=30&type=chunk)[31](index=31&type=chunk)[32](index=32&type=chunk) - **The Lasers segment serves** markets such as sheet metal processing, general manufacturing, biotechnology, graphics and imaging, remote sensing, and precision machining with a portfolio including diode-pumped solid-state, fiber, diode, direct-diode, and gas lasers[50](index=50&type=chunk)[51](index=51&type=chunk)[53](index=53&type=chunk) - **Lumentum invests significantly in R&D** to develop new and enhanced products, focusing on technology leadership, cost efficiency, and functional integration in both OpComms (e.g., ROADMs, tunable devices, DML/EML/VCSEL chips, **3D** sensing) and Lasers (e.g., solid-state and fiber lasers for various industrial and scientific applications)[64](index=64&type=chunk)[65](index=65&type=chunk)[66](index=66&type=chunk) - **The company utilizes a combination of internal manufacturing facilities** (US, Thailand, China, UK, Slovenia, Japan) and contract manufacturers (Thailand, Taiwan, Malaysia) for production[67](index=67&type=chunk)[71](index=71&type=chunk) - **Lumentum holds approximately 950 U.S. patents** and **865** foreign patents, with **580** patent applications pending, to protect its intellectual property[73](index=73&type=chunk) - **As of July 3, 2021, Lumentum employed approximately 5,618** full-time employees globally, with a strong focus on diversity, inclusion, and belonging, and a commitment to pay equity and increasing representation of underrepresented populations[18](index=18&type=chunk)[77](index=77&type=chunk)[79](index=79&type=chunk)[80](index=80&type=chunk) - **International operations account for a significant majority of net revenue** (**92.3%** in fiscal **2021**), exposing the company to various economic, business, regulatory, social, and political conditions in foreign countries[86](index=86&type=chunk)[111](index=111&type=chunk) [ITEM 1A. RISK FACTORS](index=15&type=section&id=ITEM%201A.%20RISK%20FACTORS) Lumentum faces high risks from COVID-19, intense competition, limited customer base, supply chain dependencies, manufacturing challenges, IP protection, and international regulations - **The COVID-19 pandemic has negatively impacted** Lumentum's business operations, manufacturing, R&D, and supply chain due to travel restrictions, social distancing, and component shortages, particularly semiconductors[26](index=26&type=chunk)[96](index=96&type=chunk)[97](index=97&type=chunk)[98](index=98&type=chunk)[100](index=100&type=chunk) - **Lumentum operates in dynamic and complex markets** characterized by rapid technological change, intense competition (especially from Asia-Pacific competitors), and continuous price pressures, requiring constant innovation and cost control[101](index=101&type=chunk)[102](index=102&type=chunk)[109](index=109&type=chunk) - **The company relies on a limited number of customers** for a significant portion of its sales, with Apple (**30.2%**), Huawei (**10.8%**), and Ciena (**10.1%**) being major customers in fiscal **2021**. The majority of customers do not have contractual purchase commitments, leading to potential volatility from order changes or cancellations[34](index=34&type=chunk)[103](index=103&type=chunk)[270](index=270&type=chunk) - **U.S. government restrictions**, such as those imposed by the BIS on Huawei Technologies Co. Ltd., have limited Lumentum's ability to sell certain products to Huawei, impacting revenue and potentially leading to excess inventory charges[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk) - **Manufacturing operations are complex** and rely on internal facilities and contract manufacturers, primarily in Asia. Disruptions from natural disasters, COVID-19, or supply chain issues (e.g., semiconductor shortages) could severely impact production and financial results[26](index=26&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk)[123](index=123&type=chunk) - **Lumentum depends on a limited number of suppliers** for raw materials and components, with some being sole sources. Failures or delays from these suppliers, or increased costs due to supply constraints, could adversely affect business and operations[125](index=125&type=chunk) - **The company faces risks related to strategic transactions**, including difficulties in identifying, completing, and integrating acquisitions (as seen with the terminated Coherent merger agreement) and potential challenges with divestitures[129](index=129&type=chunk)[130](index=130&type=chunk)[132](index=132&type=chunk)[133](index=133&type=chunk)[134](index=134&type=chunk) - **Protecting intellectual property** (patents, trade secrets, trademarks) is critical but challenging, with risks of infringement claims from third parties (including patent-holding companies) and the need for licenses to third-party technologies[153](index=153&type=chunk)[157](index=157&type=chunk) - **International operations** (**92.3%** of net revenue in fiscal **2021**) expose Lumentum to economic, regulatory, social, and political risks in foreign countries, including trade protection laws, tariffs, sanctions, and foreign currency fluctuations[86](index=86&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk) - **Changes in tax laws** (e.g., proposed U.S. corporate tax rate increase, global minimum tax) and interpretations of existing laws could materially affect Lumentum's effective tax rate, cash tax expenses, and deferred tax assets[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk) - **The company's ability to recruit and retain key personnel**, especially specialized engineers and sales staff, is critical to its success, and challenges in this area (including increased employee mobility due to remote work) could harm product development and market efforts[166](index=166&type=chunk) - **Lumentum is subject to various legal proceedings and claims**, including merger litigation (Karri Lawsuit related to Oclaro acquisition), which can be costly, time-consuming, and divert management attention[159](index=159&type=chunk)[193](index=193&type=chunk)[197](index=197&type=chunk) - **The company's stock price may be volatile** due to general economic conditions, market fluctuations, operating results, competition, and corporate actions, and it does not expect to pay dividends in the foreseeable future[179](index=179&type=chunk)[183](index=183&type=chunk) [ITEM 1B. UNRESOLVED STAFF COMMENTS](index=35&type=section&id=ITEM%201B.%20UNRESOLVED%20STAFF%20COMMENTS) There are no unresolved staff comments from the SEC - **No unresolved staff comments**[188](index=188&type=chunk) [ITEM 2. PROPERTIES](index=36&type=section&id=ITEM%202.%20PROPERTIES) Lumentum owns and leases approximately 1.8 million square feet of global properties for operations, including headquarters and manufacturing sites - **Lumentum owns and leases approximately 1.8 million** square feet of properties across the United States and eleven other countries[190](index=190&type=chunk) - **The properties are used for** executive and administrative offices, data centers, product development, customer service, and manufacturing facilities[190](index=190&type=chunk) - **Key owned properties include the 238,000** sq ft corporate headquarters in San Jose, California, a **560,000** sq ft manufacturing site in Thailand, and a **25,000** sq ft manufacturing site in Slovenia[190](index=190&type=chunk) - **Larger leased sites are located in** Canada, China, Japan, Italy, the United Kingdom, and the United States[190](index=190&type=chunk) [ITEM 3. LEGAL PROCEEDINGS](index=37&type=section&id=ITEM%203.%20LEGAL%20PROCEEDINGS) Lumentum is involved in various legal proceedings, including Oclaro merger litigation, which could materially impact financial position - **Lumentum is subject to various claims and suits** in the ordinary course of business, with management believing current resolutions will not materially impact financial position[193](index=193&type=chunk) - **Merger litigation related to the Oclaro acquisition** involved seven lawsuits, with one (Karri Lawsuit) remaining pending as of the report date, alleging violations of the Securities Exchange Act of **1934**[194](index=194&type=chunk)[195](index=195&type=chunk)[196](index=196&type=chunk)[197](index=197&type=chunk) - **The Karri Lawsuit**, which now names Lumentum as a defendant, is in discovery, and defendants intend to vigorously defend it[197](index=197&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=37&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) Lumentum has no disclosures related to mine safety - **No mine safety disclosures are applicable** to Lumentum[198](index=198&type=chunk) PART II [ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES](index=38&type=section&id=ITEM%205.%20MARKET%20FOR%20REGISTRANT%27S%20COMMON%20EQUITY%2C%20RELATED%20STOCKHOLDER%20MATTERS%20AND%20ISSUER%20PURCHASES%20OF%20EQUITY%20SECURITIES) Lumentum's common stock trades on NASDAQ, with no foreseeable dividends, and the company executed share repurchases in fiscal 2019 and 2021 - **Lumentum's common stock is listed** on the Nasdaq Global Select Market under the symbol "LITE"[201](index=201&type=chunk) - **As of August 23, 2021, the company had 2,519** stockholders of record[201](index=201&type=chunk) - **Lumentum does not expect to pay cash dividends** on its common stock in the foreseeable future[183](index=183&type=chunk)[201](index=201&type=chunk) - **In December 2019, Lumentum repurchased approximately $200.0 million** (**2.9 million** shares) of its common stock[206](index=206&type=chunk)[601](index=601&type=chunk) - **On May 7, 2021, the board approved a $700.0 million** share buyback program, authorized for **2** years. In Q4 fiscal **2021**, the company repurchased **3.1 million** shares for **$241.0 million**[207](index=207&type=chunk)[210](index=210&type=chunk)[317](index=317&type=chunk)[602](index=602&type=chunk) Share Repurchase Activity (May 7, 2021 - July 3, 2021) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased under Publicly Announced Plans | Maximum Dollar Value Remaining | | :----------------------- | :--------------------- | :--------------------------- | :-------------------------------------------- | :----------------------------- | | May 7, 2021 to May 29, 2021 | 2,104,427 | $76.01 | 2,104,427 | $540.0 million | | May 30, 2021 to July 3, 2021 | 992,000 | $81.72 | 992,000 | $459.0 million | [ITEM 6. SELECTED FINANCIAL DATA](index=40&type=section&id=ITEM%206.%20SELECTED%20FINANCIAL%20DATA) This section summarizes Lumentum's selected consolidated financial data for five fiscal years, highlighting impacts from the Coherent termination fee and Oclaro acquisition Consolidated Statements of Operations Data (in millions, except per share amounts) | Years Ended | July 3, 2021 | June 27, 2020 | June 29, 2019 | June 30, 2018 | July 1, 2017 | | :------------------------------------------------ | :------------- | :-------------- | :-------------- | :-------------- | :------------- | | Net revenue | $1,742.8 | $1,678.6 | $1,565.3 | $1,247.7 | $1,001.6 | | Gross profit | $783.1 | $650.2 | $425.9 | $432.1 | $318.1 | | Income (loss) from operations | $527.0 | $204.1 | $(21.6) | $139.9 | $47.6 | | Net income (loss) | $397.3 | $135.5 | $(36.4) | $248.1 | $(102.5) | | Net income (loss) attributable to common stockholders | $397.3 | $135.5 | $(37.9) | $241.5 | $(103.4) | | Basic EPS | $5.27 | $1.79 | $(0.54) | $3.88 | $(1.71) | | Diluted EPS | $5.07 | $1.75 | $(0.54) | $3.82 | $(1.71) | | Basic Shares | 75.4 | 75.9 | 70.7 | 62.3 | 60.6 | | Diluted Shares | 78.4 | 77.6 | 70.7 | 63.3 | 60.6 | Consolidated Balance Sheet Data (in millions) | As of | July 3, 2021 | June 27, 2020 | June 29, 2019 | June 30, 2018 | July 1, 2017 | | :---------------------- | :------------- | :-------------- | :-------------- | :-------------- | :------------- | | Cash and cash equivalents | $774.3 | $298.0 | $432.6 | $397.3 | $272.9 | | Short-term investments | $1,171.7 | $1,255.8 | $335.9 | $314.2 | $282.4 | | Total assets | $3,551.6 | $3,292.6 | $2,716.6 | $1,581.5 | $1,232.9 | | Convertible notes | $1,180.5 | $1,120.3 | $351.9 | $334.2 | $317.5 | | Term loan, non-current | — | — | $484.0 | — | — | | Total stockholders' equity| $1,972.8 | $1,749.2 | $1,497.1 | $926.1 | $618.8 | - **Fiscal 2021 results include a $217.6 million** merger termination fee from Coherent, offset by **$10.1 million** in acquisition-related expenses[209](index=209&type=chunk) - **In fiscal 2020, Lumentum fully repaid** its Term Loan Facility and issued **$1,050.0 million** in **2026** Notes[211](index=211&type=chunk) - **Fiscal 2019 includes the acquisition of Oclaro for $1.4 billion**, funded by stock, new debt, and cash[211](index=211&type=chunk) [ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=42&type=section&id=ITEM%207.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section analyzes Lumentum's financial performance for fiscal years 2021-2019, covering business, COVID-19 impact, accounting policies, revenue, gross profit, and operating expenses - **Lumentum is an industry-leading provider of optical and photonic products**, operating in two segments: OpComms and Lasers, driven by long-term trends in data, precision manufacturing, and **3D** sensing[213](index=213&type=chunk)[214](index=214&type=chunk) - **The COVID-19 pandemic has caused global economic slowdowns**, supply chain disruptions, and volatility, impacting Lumentum's manufacturing and ability to supply products, with semiconductor shortages expected to affect fiscal **2022** revenue[228](index=228&type=chunk)[231](index=231&type=chunk) - **Lumentum's critical accounting policies include** Inventory Valuation, Revenue Recognition, Income Taxes, Long-lived Asset Valuation, and Goodwill, which involve significant management estimates and judgments[235](index=235&type=chunk)[379](index=379&type=chunk) Net Revenue by Segment (in millions) | Segment | 2021 | 2020 | Change (2021 vs 2020) | 2019 | Change (2020 vs 2019) | | :-------- | :---------- | :---------- | :-------------------- | :---------- | :-------------------- | | OpComms | $1,620.7 | $1,515.1 | $105.6 (7.0%) | $1,370.2 | $144.9 (10.6%) | | Lasers | $122.1 | $163.5 | $(41.4) (-25.3%) | $195.1 | $(31.6) (-16.2%) | | **Total** | **$1,742.8**| **$1,678.6**| **$64.2 (3.8%)** | **$1,565.3**| **$113.3 (7.2%)** | - **OpComms revenue growth in fiscal 2021 was driven by** increased **3D** sensing lasers and Telecom/Datacom products, offsetting declines from exited product lines and **5G** deployment delays in China[266](index=266&type=chunk) - **Lasers net revenue decreased in fiscal 2021** due to reduced customer demand for kilowatt-class fiber lasers, impacted by COVID-19[267](index=267&type=chunk) Gross Profit and Gross Margin by Segment (in millions, except percentages) | Segment | 2021 Gross Profit | 2020 Gross Profit | 2019 Gross Profit | 2021 Gross Margin | 2020 Gross Margin | 2019 Gross Margin | | :-------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | OpComms | $830.2 | $704.0 | $534.1 | 51.2% | 46.5% | 39.0% | | Lasers | $57.3 | $76.2 | $84.4 | 46.9% | 46.6% | 43.3% | | **Total** | **$783.1** | **$650.2** | **$425.9** | **44.9%** | **38.7%** | **27.2%** | - **Gross margin improved in fiscal 2021** due to a higher mix of profitable products (**3D** sensing, pump lasers, HiRel components) and the exit of lower-margin product lines[275](index=275&type=chunk)[279](index=279&type=chunk) - **R&D expense increased by 8.0%** in fiscal **2021** to **$214.5 million**, primarily due to higher payroll and stock-based compensation, reflecting continued investment in new products and technology[264](index=264&type=chunk)[283](index=283&type=chunk)[285](index=285&type=chunk) - **SG&A expense increased by 2.6%** in fiscal **2021** to **$241.4 million**, driven by payroll, stock-based compensation, and legal expenses, partially offset by reduced travel. A **$8.3 million** gain from a property sale also offset expenses[264](index=264&type=chunk)[286](index=286&type=chunk) - **Lumentum recorded a net gain of $207.5 million** in fiscal **2021** from the Coherent merger termination fee, offset by **$10.1 million** in related acquisition expenses[264](index=264&type=chunk)[294](index=294&type=chunk) - **Interest expense increased to $66.7 million** in fiscal **2021**, mainly due to amortization of debt discount and contractual interest on **2026** Notes[297](index=297&type=chunk) - **Other income, net, decreased significantly** in fiscal **2021** to **$2.8 million**, primarily due to lower interest and investment income and the absence of a large gain from the Lithium Niobate business sale recognized in fiscal **2020**[299](index=299&type=chunk) - **The provision for income taxes was $65.8 million** in fiscal **2021**, influenced by foreign subsidiary earnings, tax credits, and U.S. income inclusions[303](index=303&type=chunk)[304](index=304&type=chunk)[305](index=305&type=chunk) [ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=56&type=section&id=ITEM%207A.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) Lumentum faces market risks including COVID-19 impacts, foreign exchange, equity price, interest rate fluctuations, and bank liquidity - **COVID-19 has heightened market risks**, including accounts receivable collectability, inventory excess and obsolescence, short-term investment values, long-term asset impairment, and tax valuation of Net Operating Losses (NOLs)[332](index=332&type=chunk) - **Lumentum faces foreign exchange risk** from expenses denominated in currencies other than the U.S. Dollar (e.g., Chinese Yuan, Thai Baht, Japanese Yen, UK Pound), which can impact operating results[334](index=334&type=chunk)[335](index=335&type=chunk) Foreign Exchange Losses, Net (in millions) | Year Ended | Foreign Exchange Losses, Net | | :----------- | :--------------------------- | | July 3, 2021 | $(4.4) | | June 27, 2020| $(1.4) | | June 29, 2019| $(0.6) | - **The company is exposed to equity price risk** related to the conversion options of its **2026** Notes and **2024** Notes, whose potential value changes with Lumentum's stock price[336](index=336&type=chunk)[337](index=337&type=chunk) - **The 2024 Notes became convertible** at holders' option in Q4 fiscal **2021** as the stock price exceeded **$78.80**, and the **2026** Notes would become convertible if the stock price exceeds **$129.08**[338](index=338&type=chunk) - **Lumentum's $1,946.0 million cash**, cash equivalents, and short-term investments are subject to interest rate fluctuation risk; a hypothetical **1%** change in interest rates would impact the portfolio's fair value by approximately **$9.6 million**[339](index=339&type=chunk)[340](index=340&type=chunk) - **The company holds $128.3 million** in unrestricted cash in operating accounts with domestic and international financial institutions, exposing it to bank liquidity risk if these institutions fail[341](index=341&type=chunk) [ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA](index=62&type=section&id=ITEM%208.%20FINANCIAL%20STATEMENTS%20AND%20SUPPLEMENTARY%20DATA) This section presents Lumentum's audited consolidated financial statements for fiscal years 2021-2019, with auditor reports and detailed notes - **The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion** on Lumentum's financial statements and internal control over financial reporting as of July **3, 2021**[344](index=344&type=chunk)[345](index=345&type=chunk) - **The valuation of inventory**, particularly management's estimates for excess and obsolete write-downs based on forecasted demand, was identified as a critical audit matter due to the significant assumptions and high degree of auditor judgment required[350](index=350&type=chunk)[351](index=351&type=chunk) Consolidated Statements of Operations (in millions, except per share data) | Years Ended | July 3, 2021 | June 27, 2020 | June 29, 2019 | | :---------------------------------------------- | :----------- | :------------ | :------------ | | Net revenue | $1,742.8 | $1,678.6 | $1,565.3 | | Cost of sales | $898.0 | $974.6 | $1,092.9 | | Amortization of acquired developed intangibles | $61.7 | $53.8 | $46.5 | | Gross profit | $783.1 | $650.2 | $425.9 | | Total operating expenses | $256.1 | $446.1 | $447.5 | | Income (loss) from operations | $527.0 | $204.1 | $(21.6) | | Net income (loss) | $397.3 | $135.5 | $(36.4) | | Basic EPS | $5.27 | $1.79 | $(0.54) | | Diluted EPS | $5.07 | $1.75 | $(0.54) | Consolidated Balance Sheets (in millions) | ASSETS | July 3, 2021 | June 27, 2020 | | :-------------------------------------- | :----------- | :------------ | | Cash and cash equivalents | $774.3 | $298.0 | | Short-term investments | $1,171.7 | $1,255.8 | | Accounts receivable, net | $212.8 | $233.5 | | Inventories | $196.4 | $188.9 | | Total current assets | $2,436.8 | $2,050.0 | | Property, plant and equipment, net | $361.1 | $393.0 | | Goodwill | $368.9 | $368.9 | | Total assets | $3,551.6 | $3,292.6 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Accounts payable | $116.9 | $150.8 | | Convertible notes, current | $390.7 | — | | Total current liabilities | $664.6 | $283.0 | | Convertible notes, non-current | $789.8 | $1,120.3 | | Total liabilities | $1,578.8 | $1,543.4 | | Total stockholders' equity | $1,972.8 | $1,749.2 | Consolidated Statements of Cash Flows (in millions) | Years Ended | July 3, 2021 | June 27, 2020 | June 29, 2019 | | :---------------------------------------------- | :----------- | :------------ | :------------ | | Net cash provided by operating activities | $738.7 | $524.3 | $330.1 | | Net cash provided by (used in) investing activities | $1.0 | $(987.7) | $(779.7) | | Net cash (used in) provided by financing activities | $(263.4) | $328.8 | $485.1 | | Increase (decrease) in cash and cash equivalents | $476.3 | $(134.6) | $35.3 | | Cash and cash equivalents at end of period | $774.3 | $298.0 | $432.6 | - **Lumentum adopted Topic 842 (Leases) in fiscal 2020**, using a modified retrospective approach, recognizing operating lease assets of **$91.5 million** and liabilities of **$81.5 million** at adoption[346](index=346&type=chunk)[392](index=392&type=chunk)[516](index=516&type=chunk)[518](index=518&type=chunk) - **The company's revenue recognition policy follows Topic 606**, recognizing revenue when control of goods or services transfers to customers, typically upon shipment or delivery, or when inventory is pulled from VMI hubs[237](index=237&type=chunk)[398](index=398&type=chunk) - **Lumentum's 2024 Notes (0.25% due 2024) and 2026 Notes (0.50% due 2026) are convertible debt instruments**. The **2024** Notes were classified as current liabilities as of July **3, 2021**, due to the stock price exceeding the conversion threshold[538](index=538&type=chunk)[539](index=539&type=chunk)[540](index=540&type=chunk)[546](index=546&type=chunk)[547](index=547&type=chunk)[548](index=548&type=chunk)[555](index=555&type=chunk) - **The company's defined benefit pension plans in Japan, Switzerland, and Thailand had a total projected benefit obligation (PBO) of $20.6 million** as of July **3, 2021**, with a funded status of **$(10.8) million**[605](index=605&type=chunk)[606](index=606&type=chunk)[608](index=608&type=chunk)[609](index=609&type=chunk) - **Lumentum disaggregates revenue by geography and product**, with OpComms (Telecom & Datacom, Consumer & Industrial) and Lasers segments. In fiscal **2021**, OpComms accounted for **93.0%** of net revenue and Lasers for **7.0%**[249](index=249&type=chunk)[410](index=410&type=chunk)[644](index=644&type=chunk)[645](index=645&type=chunk) Net Revenue by Geographic Region (in millions, except percentages) | Region | July 3, 2021 | June 27, 2020 | June 29, 2019 | | :------------ | :----------- | :------------ | :------------ | | Americas | $280.3 (16.1%) | $278.1 (16.5%) | $320.1 (20.4%) | | Asia-Pacific | $1,322.3 (75.9%) | $1,276.8 (76.1%) | $1,082.4 (69.1%) | | EMEA | $140.2 (8.0%) | $123.7 (7.4%) | $162.8 (10.5%) | | **Total** | **$1,742.8** | **$1,678.6** | **$1,565.3** | Net Revenue from Key Customers (Percentage of Total Net Revenue) | Customer | July 3, 2021 | June 27, 2020 | June 29, 2019 | | :--------- | :----------- | :------------ | :------------ | | Apple | 30.2% | 26.0% | 21.0% | | Huawei | 10.8% | 13.2% | 15.2% | | Ciena | 10.1% | * | 13.7% | *Represents less than 10% of total net revenue. [Note 1. Description of Business and Summary of Significant Accounting Policies](index=70&type=section&id=Note%201.%20Description%20of%20Business%20and%20Summary%20of%20Significant%20Accounting%20Policies) This note describes Lumentum's business and outlines its significant accounting policies [Note 2. Recently Issued Accounting Pronouncements](index=79&type=section&id=Note%202.%20Recently%20Issued%20Accounting%20Pronouncements) This note details recently issued accounting pronouncements relevant to Lumentum's financial reporting [Note 3. Earnings Per Share](index=81&type=section&id=Note%203.%20Earnings%20Per%20Share) This note provides details on the calculation of Lumentum's basic and diluted earnings per share [Note 4. Business Combinations](index=82&type=section&id=Note%204.%20Business%20Combinations) This note outlines information regarding Lumentum's business combinations and acquisitions [Note 5. Assets Held For Sale and Related Dispositions](index=84&type=section&id=Note%205.%20Assets%20Held%20For%20Sale%20and%20Related%20Dispositions) This note describes assets classified as held for sale and related disposition activities [Note 6. Cash, Cash Equivalents and Short-term Investments](index=85&type=section&id=Note%206.%20Cash%2C%20Cash%20Equivalents%20and%20Short-term%20Investments) This note provides details on Lumentum's cash, cash equivalents, and short-term investment balances [Note 7. Fair Value Measurements](index=87&type=section&id=Note%207.%20Fair%20Value%20Measurements) This note explains Lumentum's fair value measurements for financial and non-financial assets and liabilities [Note 8. Balance Sheet Details](index=89&type=section&id=Note%208.%20Balance%20Sheet%20Details) This note provides additional details and breakdowns for various balance sheet accounts [Note 9. Leases](index=91&type=section&id=Note%209.%20Leases) This note outlines Lumentum's accounting policies and disclosures related to lease arrangements [Note 10. Goodwill and Other Intangible Assets](index=93&type=section&id=Note%2010.%20Goodwill%20and%20Other%20Intangible%20Assets) This note details Lumentum's goodwill and other intangible assets, including their carrying values and impairment testing [Note 11. Non-Controlling Interest Redeemable Convertible Preferred Stock and Derivative Liability](index=94&type=section&id=Note%2011.%20Non-Controlling%20Interest%20Redeemable%20Convertible%20Preferred%20Stock%20and%20Derivative%20Liability) This note describes the accounting for non-controlling interest redeemable convertible preferred stock and derivative liabilities [Note 12. Debt](index=95&type=section&id=Note%2012.%20Debt) This note provides information on Lumentum's outstanding debt instruments, including convertible notes and term loans [Note 13. Accumulated Other Comprehensive Income](index=98&type=section&id=Note%2013.%20Accumulated%20Other%20Comprehensive%20Income) This note details the components of Lumentum's accumulated other comprehensive income (loss) [Note 14. Restructuring and Related Charges](index=99&type=section&id=Note%2014.%20Restructuring%20and%20Related%20Charges) This note outlines Lumentum's restructuring activities and associated charges [Note 15. Impairment and Other Charges](index=99&type=section&id=Note%2015.%20Impairment%20and%20Other%20Charges) This note describes impairment charges and other significant non-operating charges incurred by Lumentum [Note 16. Income Taxes](index=100&type=section&id=Note%2016.%20Income%20Taxes) This note provides details on Lumentum's income tax provision, deferred taxes, and effective tax rate [Note 17. Equity](index=103&type=section&id=Note%2017.%20Equity) This note details Lumentum's equity accounts, including common stock, additional paid-in capital, and treasury stock [Note 18. Employee Retirement Plans](index=106&type=section&id=Note%2018.%20Employee%20Retirement%20Plans) This note describes Lumentum's employee retirement plans, including defined benefit and defined contribution plans [Note 19. Commitments and Contingencies](index=110&type=section&id=Note%2019.%20Commitments%20and%20Contingencies) This note outlines Lumentum's significant commitments and contingencies, including legal matters and guarantees [Note 20. Operating Segments and Geographic Information](index=112&type=section&id=Note%2020.%20Operating%20Segments%20and%20Geographic%20Information) This note provides financial information by Lumentum's operating segments and geographic regions [Note 21. Quarterly Financial Information (Unaudited)](index=115&type=section&id=Note%2021.%20Quarterly%20Financial%20Information%20(Unaudited)) This note presents unaudited quarterly financial information for Lumentum [ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE](index=117&type=section&id=ITEM%209.%20CHANGES%20IN%20AND%20DISAGREEMENTS%20WITH%20ACCOUNTANTS%20ON%20ACCOUNTING%20AND%20FINANCIAL%20DISCLOSURE) There have been no changes in or disagreements with accountants on accounting and financial disclosure - **No changes in or disagreements with accountants on accounting and financial disclosure**[653](index=653&type=chunk) [ITEM 9A. CONTROLS AND PROCEDURES](index=117&type=section&id=ITEM%209A.%20CONTROLS%20AND%20PROCEDURES) Management and auditors concluded Lumentum's disclosure controls and internal control over financial reporting were effective as of July 3, 2021 - **Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures** as of July **3, 2021**, concluding they were effective at a reasonable assurance level[654](index=654&type=chunk) - **Management concluded that its internal control over financial reporting was effective** as of July **3, 2021**, providing reasonable assurance regarding financial reporting reliability[655](index=655&type=chunk) - **Deloitte & Touche LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting** as of July **3, 2021**[656](index=656&type=chunk)[660](index=660&type=chunk) - **There were no material changes in internal control over financial reporting** during the most recently completed fiscal quarter, and remote work due to COVID-19 did not impact these controls[657](index=657&type=chunk) - **Management acknowledges that control systems provide only reasonable, not absolute, assurance** and are subject to inherent limitations[658](index=658&type=chunk)[665](index=665&type=chunk) [ITEM 9B. OTHER INFORMATION](index=119&type=section&id=ITEM%209B.%20OTHER%20INFORMATION) There is no other information to report under this item - **No other information to report**[666](index=666&type=chunk) [ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS](index=119&type=section&id=ITEM%209C.%20DISCLOSURE%20REGARDING%20FOREIGN%20JURISDICTIONS%20THAT%20PREVENT%20INSPECTIONS) This item is not applicable to Lumentum - **This item is not applicable**[667](index=667&type=chunk) PART III [ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE](index=120&type=section&id=ITEM%2010.%20DIRECTORS%2C%20EXECUTIVE%20OFFICERS%20AND%20CORPORATE%20GOVERNANCE) Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement - **Information for this item is incorporated by reference from the definitive proxy statement for the annual meeting of stockholders**[671](index=671&type=chunk) [ITEM 11. EXECUTIVE COMPENSATION](index=120&type=section&id=ITEM%2011.%20EXECUTIVE%20COMPENSATION) Information on executive compensation is incorporated by reference from the definitive proxy statement - **Information for this item is incorporated by reference from the definitive proxy statement for the annual meeting of stockholders**[672](index=672&type=chunk) [ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS](index=120&type=section&id=ITEM%2012.%20SECURITY%20OWNERSHIP%20OF%20CERTAIN%20BENEFICIAL%20OWNERS%20AND%20MANAGEMENT%20AND%20RELATED%20STOCKHOLDER%20MATTERS) Information on security ownership and related stockholder matters is incorporated by reference from the definitive proxy statement - **Information for this item is incorporated by reference from the definitive proxy statement for the annual meeting of stockholders**[673](index=673&type=chunk) [ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE](index=120&type=section&id=ITEM%2013.%20CERTAIN%20RELATIONSHIPS%20AND%20RELATED%20TRANSACTIONS%20AND%20DIRECTOR%20INDEPENDENCE) Information on certain relationships, related transactions, and director independence is incorporated by reference from the proxy statement - **Information for this item is incorporated by reference from the definitive proxy statement for the annual meeting of stockholders**[674](index=674&type=chunk) [ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES](index=120&type=section&id=ITEM%2014.%20PRINCIPAL%20ACCOUNTING%20FEES%20AND%20SERVICES) Information on principal accounting fees and services is incorporated by reference from the definitive proxy statement - **Information for this item is incorporated by reference from the definitive proxy statement for the annual meeting of stockholders**[675](index=675&type=chunk) PART IV [ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES](index=121&type=section&id=ITEM%2015.%20EXHIBITS%2C%20FINANCIAL%20STATEMENTS%20SCHEDULES) This section lists financial statements, schedules, and exhibits filed as part of the 10-K report - **The section lists the financial statements, financial statement schedules, and exhibits included in the report**[678](index=678&type=chunk) - **Financial statements include Consolidated Statements of Operations, Comprehensive Income (Loss), Balance Sheets, Cash Flows, and Redeemable Convertible Preferred Stock and Stockholders' Equity, along with Notes to Consolidated Financial Statements**[679](index=679&type=chunk) - **Financial statement schedules, such as Schedule II - Valuation and Qualifying Accounts, are provided**[680](index=680&type=chunk)[682](index=682&type=chunk) - **Exhibits include various agreements** (e.g., merger agreements, separation agreement), corporate documents (e.g., certificate of incorporation, bylaws), debt instruments (e.g., indentures for convertible notes), and certifications (e.g., CEO/CFO certifications)[686](index=686&type=chunk)[687](index=687&type=chunk)[689](index=689&type=chunk) [ITEM 16. FORM 10-K SUMMARY](index=125&type=section&id=ITEM%2016.%20FORM%2010-K%20SUMMARY) There is no Form 10-K summary provided in this report - **No Form 10-K summary is included**[692](index=692&type=chunk) [SIGNATURES](index=126&type=section&id=SIGNATURES) This section contains the required signatures for the Annual Report on Form 10-K from key executives and directors - **The Annual Report on Form 10-K is signed by the Registrant's authorized representatives**, including the President, CEO, CFO, Chief Accounting Officer, and Directors[694](index=694&type=chunk)[695](index=695&type=chunk)[697](index=697&type=chunk)[699](index=699&type=chunk) - **Signatures confirm the filing of the report pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934**[694](index=694&type=chunk)[697](index=697&type=chunk) ```

Lumentum Holdings Inc. (NASDAQ:LITE) Q4 2021 Earnings Conference Call August 18, 2021 8:30 AM ET Company Participants Jim Fanucchi - IR, Darrow Associates, Inc. Alan Lowe - President and Chief Executive Officer Wajid Ali - Executive Vice President and Chief Financial Officer Chris Coldren - Senior Vice President, Strategy and Corporate Development Conference Call Participants Tom O'Malley - Barclays Rod Hall - Goldman Sachs Alex Henderson - Needham Meta Marshall - Morgan Stanley Samik Chatterjee - JPMorgan ...

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