Lumentum Holdings Inc

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

Financial data for the three months ended September 28, 2024

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

Net Revenue

Net revenue increased by $19.3 million, or 6.1%, during the three months ended September 28, 2024 compared to the three months ended September 30, 2023, driven by a $52.6 million increase in Cloud & Networking revenue offset by a $33.3 million decrease in Industrial Tech revenue. The increase in Cloud & Networking net revenue is primarily due to higher revenue from cloud and AI/ML customers, which increased by $71.0 million, inclusive of revenue from Cloud Light, which we acquired in the second quarter of fiscal 2024. This was partially offset by a reduction in shipments to a specific customer in China driven by U.S. trade restrictions. The decrease in Industrial Tech net revenue is primarily due to higher market competition in the consumer end-market, a reduction in demand due to declines in macro-economic factors globally year over year, and customers continuing to reduce high levels of inventory they purchased for security of supply during the COVID-19 pandemic.

During the three months ended September 28, 2024, two customers individually accounted for 15% and 12% of our total revenue, respectively. During the three months ended September 30, 2023, three customers individually accounted for 15%, 13% and 10% of our total net revenue, respectively. We had no other customers that represented 10% or greater of our total net revenue.

Revenue by Region

We operate in three geographic regions: Americas, Asia-Pacific, and EMEA (Europe, Middle East, and Africa). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers.

The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that generally represented 10% or more of our total net revenue(in millions, except percentage data):

For the three months ended September 28, 2024 and September 30, 2023, net revenue from customers outside the United States, based on customer shipping location, represented 80.6% and 87.1% of net revenue, respectively.

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

Gross Margin

Gross margin for the three months ended September 28, 2024 decreased to 23.1% from 24.1% for the three months ended September 30, 2023. The 1% decrease was primarily due to less profitable mix of products, which impacted gross margin by 2%, mainly due to higher sales of laser chips and modules driven by AI and the cloud, which together have a lower than average margin compared to our other products. This was mostly offset by the impact of higher revenue. Gross margin was negatively impacted by approximately 4% due to lower factory utilization as a result of lower production levels, as customers continue to work to reduce their elevated inventory levels, as well as $4.4 million of higher amortization of intangibles due to the Cloud Light acquisition. This was partially offset by a $8.4 million decrease in excess and obsolete inventory charges, and approximately $5.5 million of lower post-acquisition charges such as integration and manufacturing consolidation.

The markets in which we sell products are undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive, are price sensitive and/or are affected by customer seasonal and variants in buying patterns. We expect these factors to result in variability of our gross margin and our gross margin maybe subject to increasing downward pressure due to these factors.

Segment Profit (Loss)

The following table summarizes segment profit (loss) for each of our operating segments for the periods presented(in millions):

Cloud & Networking segment profit increased by $12.6 million, or 52.7%, during the three months ended September 28, 2024 as compared to the three months ended September 30, 2023 primarily due to higher sales of laser chips and modules driven by AI and cloud demand, partially offset by lower sales from telecom products. Industrial Tech segment profit decreased by $13.1 million, or 85.6%, during the three months ended September 28, 2024 as compared to the three months ended September 30, 2023 primarily due to lower revenue, including lower sales of imaging and sensing products.

Research and Development (“R&D”)

R&D expense increased by $0.8 million, or 1.1% for the three months ended September 28, 2024 compared to the three months ended September 30, 2023, primarily due to $2.9 million of higher spending in software and computer supplies used for R&D purposes and a charge of $1.9 million related to a write-off of in-process research and development intangible assets acquired from NeoPhotonics for projects that we subsequently decided not to pursue. These increases were partially offset by lower payroll related expenses as a result of restructuring actions.

We believe that continuing our investments in R&D is critical to attaining our strategic objectives. We plan to continue to invest in R&D and new products that we believe will further differentiate us in the marketplace.

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

SG&A expense increased by $3.3 million, or 4.5%, during the three months ended September 28, 2024 compared to the three months ended September 30, 2023. The increase was driven by $8.1 million of incremental amortization of intangible assets associated with the Cloud Light acquisition, substantially offset by a reduction in payroll related expenses as a result of recent restructuring actions and $3.2 million of lower outside consultant costs as a result of business and system integrations efforts being completed in the prior periods.

From time-to-time, we incur expenses that are not part of our ordinary operations, such as mergers and acquisition-related and litigation expenses, which generally increase our SG&A expenses and potentially impact our profitability expectations in any particular period.

Restructuring and Related Charges

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

During the three months ended September 28, 2024, we recorded restructuring and related charges of $9.7 million, which includes $6.0 million of asset write-offs primarily due to integration efforts to consolidate our sites, $3.0 million of charges related to the discontinuation of our in-house development of coherent DSPs and RFICs and the remaining restructuring charges due to company-wide cost reduction initiatives.

During the three months ended September 30, 2023, we recorded restructuring and related charges of$11.0 million in our condensed consolidated statements of operations, which were primarily due to company-wide cost reduction initiatives, as well as our integration efforts as a result of the merger with NeoPhotonics.

Interest Expense

For the three months ended September 28, 2024 and September 30, 2023, we recorded interest expense of $5.5 million and $9.7 million, respectively. Interest expense is primarily driven by the amortization of the debt discount and issuance costs of our convertible notes. The decrease in interest expense for the three months ended September 28, 2024 is mainly due to the repayment of our 2024 Notes (as defined below) upon maturity in March 2024.

Other Income, Net

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

Other income, net for the three months ended September 28, 2024 decreased by$12.5 million compared to the three months ended September 30, 2023 primarily due to the lower short term investment balances, as we used cash to purchase Cloud Light as well as the repayment of the 2024 Notes in March 2024.

Provision (Benefit) for Income Taxes

The following table summarizes provision (benefit) for income taxes for the periods presented (in millions):

We recorded a tax provision of $3.2 million and a tax benefit of $1.4 million for the three months ended September 28, 2024 and September 30, 2023, respectively. Our tax provision for the three months ended September 28, 2024 is primarily related to the tax expense associated with interest on uncertain tax positions, partially offset by the tax benefit from currency re-measurements. Our tax provision for the three months ended September 30, 2023 includes a discrete tax benefit of $1.8 million primarily related to a tax benefit from changes in prior year uncertain tax positions, partially offset by the tax expenses related to a shortfall in connection with stock-based compensation vested during the quarter and foreign return to provision differences.

Our estimated effective tax rate for the three months ended September 28, 2024 differs from the 21% U.S. statutory rate primarily due to the income tax expense from foreign rate differential, non-deductible stock-based compensation, uncertain tax positions, and current year valuation allowance changes, partially offset by the income tax benefit from various income tax credits.

We regularly assess our ability to realize our deferred tax assets on a quarterly basis and will establish a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. As of September 28, 2024, we maintain a full valuation allowance on U.S. federal and state and certain foreign deferred tax assets. We will continue to assess the need for a valuation allowance against our remaining deferred tax assets and may increase or decrease our valuation allowance materially in the future.

Our provision for incomes taxes may be impacted by changes in the geographic mix of earnings, acquisitions, changes in the realizability of deferred tax assets, changes in our uncertain tax positions, the results of income tax audits, settlements with tax authorities, the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, and changes in tax laws and regulations. It is also possible that significant negative or positive evidence may become available that causes us to change our conclusion regarding whether a valuation allowance is needed on certain of our deferred tax assets, which would affect our income tax provision in the period of such change.

We also evaluate changes to regulations and requirements in the international jurisdictions where we conduct our business. For additional information, refer to Part II Item 1A “Risk Factors”.

Financial Condition

Liquidity and Capital Resources

As of September 28, 2024 and June 29, 2024, our cash and cash equivalents were $489.2 million and $436.7 million, respectively. As of September 28, 2024 and June 29, 2024, our short-term investments of$426.9 million and $450.3 million, respectively, were all held in the United States. Cash equivalents and short-term investments are primarily comprised of money market funds, treasuries, agencies, high quality investment grade fixed income securities, certificates of deposit and commercial paper. Our investment policy and strategy provide for diversification of investments and is focused on the preservation of capital and supporting our liquidity requirements.

The total amount of cash held by the non-United States entities as of September 28, 2024 and June 29, 2024 was$394.8 million and $306.9 million, respectively, which was primarily held by entities incorporated in the United Kingdom, the British Virgin Islands, Japan, Hong Kong, China, Switzerland, the Cayman Islands, Thailand and Brazil. Although cash currently held in the United States, as well as cash generated in the United States from future operations, is expected to cover our normal operating requirements, a substantial amount of additional cash could be required for other purposes, such as capital expenditures to support our business and growth, including costs associated with increasing internal manufacturing capabilities, strategic transactions and partnerships, and future acquisitions.

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

Liquidity and Capital Resources Requirements

We believe that our cash and cash equivalents as of September 28, 2024 and cash flows from our operating activities will be sufficient to meet our liquidity and capital spending requirements for at least the next 12 months.

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

•global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers, including the impact of uncertainty in the banking and financial services industries;

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

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

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

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

•timing of payments to our suppliers;

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

•cost and availability of credit, which may impact available financing for us, our customers or others with whom we do business;

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

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

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

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

•acquisitions or strategic transactions, in particular our recently completed acquisition of Cloud Light;

•the settlement of any conversion or redemption of our convertible notes in cash; and

•common stock repurchases under the share buyback program.

Contractual Obligations

The following table summarizes our contractual obligations as of September 28, 2024, and the effect such obligations are expected to have on our liquidity and cash flow (in millions):

(1) The amounts of operating lease liabilitiesdo not include any sublease income amounts nor do they include payments for short-term leases or variable lease payments. As of September 28, 2024, we expect to receive sublease income of approximately $2.9 million over the sublease periods.

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

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

(4) The amounts related to convertible notes include principal and interest on our 0.50% Convertible Senior Notes due 2026 (the “2026 Notes”), principal and interest on our 0.50% Convertible Senior Notes due 2028 (the “2028 Notes”), and principal and interest on our 1.50% Convertible Senior Notes due 2029 (the “2029 Notes”). The 2026 Notes have a maturity date of December 15, 2026, the 2028 Notes have a maturity date of June 15, 2028, and the 2029 Notes have a maturity date of December 15, 2029. The principal balances of our convertible notes are reflected in the payment periods in the table above based on their respective contractual maturities assuming no conversions. On March 15, 2024, the maturity date of the 2024 Notes, we repaid the outstanding$323.1 million principal amount of the 2024 Notes in full. Refer to “Note 9. Debt” in the notes to condensed consolidated financial statements.

(5) The amounts related to term loans include principal and interest on our Sumitomo Mitsui Banking Corporation (“SMBC”) term loan with a fixed annual interest rate of 0.88% and Mizuho Bank, Ltd. (“Mizuho”) term loan with a fixed annual interest rate of 0.90%. The SMBC term loan requires monthly principal payments with the remaining principal due on the loan maturity date of July 31, 2029 while the Mizuho term loan requires quarterly principal payments with the final payment date on September 20, 2029.

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

Indebtedness

As of September 28, 2024, the net carrying amount of our 2029 Notes of$599.6 million (principal balance of$603.7 million maturing in 2029) is presented in non-current liabilities. If the closing price of our stock exceeds $90.40 (or 130% of the conversion price of $69.54) for 20 of the last 30 trading days of any future quarter, the 2029 Notes would become convertible at the option of the holders during the subsequent fiscal quarter and the debt would be reclassified to current liabilities in our consolidated balance sheets.

As of September 28, 2024, the net carrying amount of our 2028 Notes of$856.9 million (which have an aggregate principal amount of$861.0 million outstanding that matures in 2028) is presented in non-current liabilities in our condensed consolidated balance sheets. If the closing price of our stock exceeds $170.34 (or 130% ofthe conversion price of $131.03)for 20 of the last 30 trading days of any future fiscal quarter, our 2028 Notes would become convertible at the option of the holders during the subsequent fiscal quarter and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

As of September 28, 2024, the net carrying amount of our 2026 Notes of$1047.4 million (which have an aggregate principal amount of $1,050.0 million outstanding that matures in 2026) is presented in non-current liabilities in our condensed consolidated balance sheets. If the closing price of our stock exceeds $129.08 (or 130% ofthe conversion price of $99.29)for 20 of the last 30 trading days of any future fiscal quarter, our 2026 Notes would become convertible at the option of the holders during the subsequent fiscal quarter and the debt would be reclassified to current liabilities in our condensed consolidated balance sheet.

On March 15, 2024, our 0.25% Convertible Senior Notes due 2024 (the “2024 Notes”) reached maturity. We fully repaid the remaining principal amount of $323.1 million at the maturity date.

As of September 28, 2024, the Company has $44.5 million in principal amount outstanding on our SMBC term loan, of which the short-term portion of $4.5 million is recorded as current liabilities while the long-term portion of $40.0 million is recorded as long-term debt in the Company’s condensed consolidated balance sheets.

As of September 28, 2024, the Company has $31.6 million in principal amount outstanding on our Mizuho term loan, of which the short-term portion of $6.3 million is recorded as current liabilities while the long-term portion of $25.3 million is recorded as long-term debt in the Company’s condensed consolidated balance sheets.

Share Buyback Program

We have ashare buyback program that authorizes us to utilize up to an aggregate amount of $1.2 billion to purchase our own shares of common stock through May 2025. Duringthe three months ended September 28, 2024 and September 30, 2023, we did not repurchase any shares of our common stock. Since the board of directors initially approved the share buyback program, we have repurchased 7.7 million shares in aggregate at an average price of $81.66 per share for a total purchase price of $630.4 million. We recorded the $630.4 million aggregate purchase price as a reduction of retained earnings within our condensed consolidated balance sheet. All repurchased shares were retired immediately. As of September 28, 2024, we have

$569.6 million remaining under the share buyback program.

The price, timing, amount, and method of future repurchases will be determined based on the valuation of market conditions and other factors, at prices determined to be attractive and in the best interests of both the Company and our stockholders. The stock repurchase program may be suspended or terminated at any time.

Unrecognized Tax Benefits

As of September 28, 2024 and June 29, 2024, our other non-current liabilities include unrecognized tax benefit for uncertain tax positions of $94.4 million and$83.0 million, respectively. We are unable to reliably estimate the timing of future payments related to uncertain tax positions.

Cash Flows

Our balance of cash and cash equivalents increased by $52.5 million from $436.7 million as of June 29, 2024 to $489.2 million as of September 28, 2024. The increase in cash and cash equivalents during the three months ended September 28, 2024 was due to cash from financing activities of $60.0 million and cash from operating activities of $39.6 million, offset by cash used in investing activities of $47.1 million.

Operating Cash Flow

Cash from operating activities was $39.6 million during the three months ended September 28, 2024, which reflects a net loss of $82.4 million, offset by non-cash items of $112.1 million and changes in operating assets and liabilities of $9.9 million. Changes in operating assets and liabilities were primarily driven by an increase in accounts payable of $32.6 million primarily due to higher inventory purchases and capital expenditures and an increase in income tax liabilities of $7.2 million primarily due to income tax provision for the three months ended September 28, 2024, offset by an increase of $16.6 million in prepayments and other current and non-current assets related mainly to value-added-tax receivables driven by higher recent capital expenditures and inventory purchases, and a decrease of $9.7 million in accrued expenses and other current and non-current liabilities primarily due to payment of the net settlement amount of the Oclaro merger litigation.

Cash used in operating activities was $2.3 million during the three months ended September 30, 2023, which reflects a net loss of $67.9 million and non-cash items of $89.9 million for the three months ended September 30, 2023, offset by $24.3 million changes in our operating assets and liabilities. Changes in our operating assets and liabilities were mainly driven by an increase in inventories of $16.8 million primarily due to purchases made to support our manufacturing transition and lower shipments than expected, a decrease in accounts payable of $28.0 million primarily due to lower purchases from our contract manufactures and linearity of payments, and a decrease in income taxes of $19.9 million due to annual income tax payment in Japan, offset by a decrease in accounts receivable of $26.1 million due to lower revenue.

Investing Cash Flow

Cash used in investing activities of $47.1 million during the three months ended September 28, 2024 was attributable to capital expenditures of $74.1 million, offset by net proceeds from sales or maturities of short-term investments of $26.8 million and proceeds from sales of property and equipment of $0.2 million.

Cash provided by investing activities of $17.8 million during the three months ended September 30, 2023 was attributable to the net proceeds from sales or maturities of short-term investments of $78.6 million partially offset by capital expenditures of $57.8 million and a $3.0 million payment for an intangible asset acquisition.

Financing Cash Flow

Cash from financing activities of $60.0 million during the three months ended September 28, 2024 was attributable to $76.5 million of proceeds from SMBC and Mizuho term loans and $0.9 million of proceeds from the exercise of stock options, offset by tax payments related to net share settlement of restricted stock of $16.0 million, payment for an intangible asset acquisition holdback of $1.0 million and $0.4 million of principal payments on term loans.

Cash used in financing activities of $12.9 million during the three months ended September 30, 2023 was attributable to tax payments related to net share settlement of restricted stock of $12.9 million.