Item 1. FINANCIAL STATEMENTS (UNAUDITED)

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Item 1. FINANCIAL STATEMENTS (UNAUDITED)

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Net revenue	$	395.4	$	419.5	$	1,290.5	$	1,350.7
Cost of sales	212.6		218.7		636.3		684.6
Amortization of acquired developed intangibles	15.6		15.8		47.3		45.8
Gross profit	167.2		185.0		606.9		620.3
Operating expenses:
Research and development	56.7		57.2		164.0		160.4
Selling, general and administrative	63.8		65.5		196.1		183.1
Restructuring and related charges	(0.1)		2.9		(1.1)		3.1
Merger termination fee and related costs, net	—		(207.5)		—		(207.5)

Total operating expenses	120.4		(81.9)		359.0		139.1
Income from operations	46.8		266.9		247.9		481.2
Interest expense	(19.7)		(16.4)		(53.7)		(48.7)
Other income (expense), net	2.2		2.4		3.8		2.1
Income before income taxes	29.3		252.9		198.0		434.6
Provision for income taxes	3.3		27.4		33.8		58.8
Net income	$	26.0	$	225.5	$	164.2	$	375.8

Net income per share:
Basic	$	0.37	$	2.97	$	2.28	$	4.97
Diluted	$	0.35	$	2.85	$	2.19	$	4.78

Shares used to compute net income per share:
Basic	71.0		75.8		72.0		75.6
Diluted	74.5		79.2		75.1		78.6

See accompanying Notes to Condensed Consolidated Financial Statements.

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

(Unaudited)


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Net income	$	26.0	$	225.5	$	164.2	$	375.8
Other comprehensive loss, net of tax:
Net change in unrealized gain (loss) on available-for-sale securities	(6.9)		(0.3)		(8.9)		(2.2)
Net change in defined benefit obligations	(0.5)		—		(0.5)		—

Other comprehensive loss, net of tax	(7.4)		(0.3)		(9.4)		(2.2)
Comprehensive income, net of tax	$	18.6	$	225.2	$	154.8	$	373.6

See accompanying Notes to Condensed Consolidated Financial Statements.

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except par value)

(Unaudited)


	April 2, 2022		July 3, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	1,130.3	$	774.3
Short-term investments	1,433.8		1,171.7
Accounts receivable, net	242.2		212.8
Inventories	224.0		196.4
Prepayments and other current assets	70.3		81.6
Total current assets	3,100.6		2,436.8
Property, plant and equipment, net	356.4		361.1
Operating lease right-of-use assets, net	74.3		67.4
Goodwill	368.9		368.9
Other intangible assets, net	176.9		241.2
Deferred tax asset	19.7		72.9
Other non-current assets	36.7		3.3
Total assets	$	4,133.5	$	3,551.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	126.8	$	116.9
Accrued payroll and related expenses	47.5		54.3
Accrued expenses	36.7		33.1
Convertible notes, current	406.1		390.7
Operating lease liabilities, current	12.0		11.8
Other current liabilities	31.6		57.8
Total current liabilities	660.7		664.6
Convertible notes, non-current	1,447.6		789.8
Operating lease liabilities, non-current	52.8		47.6
Deferred tax liability	17.5		35.9
Other non-current liabilities	42.8		40.9
Total liabilities	2,221.4		1,578.8
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.001 par value, 990 authorized shares, 69.1 and 73.0 shares issued and outstanding as of April 2, 2022 and July 3, 2021, respectively	0.1		0.1
Additional paid-in capital	1,973.7		1,743.6
Retained earnings (accumulated deficit)	(60.5)		220.9
Accumulated other comprehensive income (loss)	(1.2)		8.2
Total stockholders’ equity	1,912.1		1,972.8
Total liabilities and stockholders’ equity	$	4,133.5	$	3,551.6

See accompanying Notes to Condensed Consolidated Financial Statements.

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

(Unaudited)




	Common Stock		Additional Paid-In Capital		Retained Earnings (Accumulated) Deficit		Accumulated Other Comprehensive Income (Loss)				Total Stockholders' Equity
		Shares	Amount
Balance as of July 3, 2021		73.0	$	0.1	$	1,743.6	$	220.9	$	8.2		$	1,972.8
Net income		—	—		—		81.5		—			81.5
Other comprehensive income		—	—		—		—		0.3			0.3

Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.6	—		—		—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.2)	—		(16.6)		—		—			(16.6)


Repurchases of common stock		(1.1)					(91.7)					(91.7)
Stock-based compensation		—	—		25.1		—		—			25.1
Balance as of October 2, 2021		72.3	$	0.1	$	1,752.1	$	210.7	$	8.5		$	1,971.4
Net income		—	—		—		56.7		—			56.7
Other comprehensive loss		—	—		—		—		(2.3)			(2.3)

Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.2	—		—		—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.1)	—		(8.3)		—		—			(8.3)


ESPP shares issued		0.1	—		6.6		—		—			6.6
Repurchases of common stock		(0.3)	—		—		(29.9)		—			(29.9)
Stock-based compensation		—	—		27.7		—		—			27.7
Balance as of January 1, 2022		72.2	$	0.1	$	1,778.1	$	237.5	$	6.2		$	2,021.9
Net income		—	—		—		26.0		—			26.0
Other comprehensive income		—	—		—		—		(7.4)			(7.4)
Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.3	—		—		—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.1)	—		(7.9)		—		—			(7.9)
Equity component of the 2028 Notes, net of tax of $49.5 million and issuance costs of $1.9 million					179.8							179.8
Repurchases of common stock		(3.3)					(324.0)					(324.0)
Stock-based compensation		—	—		23.7		—		—			23.7
Balance as of April 2, 2022		69.1	$	0.1	$	1,973.7	$	(60.5)	$	(1.2)		$	1,912.1

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in millions)

(Unaudited)




	Common Stock		Additional Paid-In Capital					Accumulated Other Comprehensive Income				Total Stockholders' Equity
		Shares	Amount				Retained Earnings
Balance as of June 27, 2020		75.1	$	0.1	$	1,676.6		$	64.6	$	7.9		$	1,749.2
Net income		—	—		—			67.1		—			67.1
Other comprehensive loss		—	—		—			—		(1.5)			(1.5)

Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.6	—		—			—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.2)	—		(19.1)			—		—			(19.1)
Exercise of stock options		—	—		0.1			—		—			0.1
Stock-based compensation		—	—		20.3			—		—			20.3
Balance as of September 26, 2020		75.5	$	0.1	$	1,677.9		$	131.7	$	6.4		$	1,816.1
Net income		—	—		—			83.2		—			83.2
Other comprehensive loss		—	—		—			—		(0.4)			(0.4)

Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.2	—		—			—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.1)	—		(7.1)			—		—			(7.1)

ESPP shares issued		0.1	—		5.5			—		—			5.5

Stock-based compensation		—	—		24.6			—		—			24.6
Balance as of December 26, 2020		75.7	$	0.1	$	1,700.9		$	214.9	$	6.0		$	1,921.9
Net income		—	—		—			225.5		—			225.5
Other comprehensive loss		—	—		—			—		(0.3)			(0.3)
Issuance of shares in connection with vesting of restricted stock units and performance stock units		0.2	—		—			—		—			—
Withholding taxes related to net share settlement of restricted stock units		(0.1)	—		(7.6)			—		—			(7.6)
Exercise of stock options		—	—		0.1			—		—			0.1
Stock-based compensation		—	—		25.4			—		—			25.4
Balance as of April 3, 2021		75.8	$	0.1	$	1,718.8		$	440.4	$	5.7		$	2,165.0

See accompanying Notes to Condensed Consolidated Financial Statements.

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


	Nine Months Ended
	April 2, 2022				April 3, 2021
OPERATING ACTIVITIES:
Net income	$	164.2			$	375.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	61.2				70.4
Stock-based compensation	75.4				68.7



Gain on sale of product lines	—				(0.5)
Amortization of acquired intangibles	64.3				63.6
(Gain) loss on sales and dispositions of property, plant and equipment	(4.3)				5.4
Amortization of debt discount and debt issuance costs	48.6				43.9


Other non-cash expense	9.5				7.3
Changes in operating assets and liabilities:
Accounts receivable	(29.4)				8.2
Inventories	(26.5)				(20.2)
Operating lease right-of-use assets, net	(6.9)				8.4
Prepayments and other current and non-currents assets	(8.2)				(5.6)
Income taxes, net	(20.2)				28.2
Accounts payable	14.3				(41.6)
Accrued payroll and related expenses	(6.8)				(7.5)
Operating lease liabilities	5.4				(6.1)
Accrued expenses and other current and non-current liabilities	4.4				16.1
Net cash provided by operating activities	345.0				614.5
INVESTING ACTIVITIES:
Payments for acquisition of property, plant and equipment	(62.6)				(66.4)
Payment for asset acquisition	—				(10.0)

Proceeds from sale of product lines	—				1.3
Purchases of short-term investments	(946.8)				(1,515.7)
Proceeds from maturities and sales of short-term investments	664.0		$	—	1,394.5
Term loan funding provided to NeoPhotonics	(30.0)				—
Proceeds from the sales of property, plant and equipment	6.4				—
Net cash used in investing activities	(369.0)				(196.3)
FINANCING ACTIVITIES:
Repurchase of common stock	(448.6)				—
Proceeds from the issuance of 0.50% Convertible Notes due 2028, net of issuance costs	854.8				—

Payment of withholding taxes related to net share settlement of restricted stock units	(32.8)				(33.8)


Proceeds from employee stock plans	6.6				5.5


Principal payments on finance leases	—				(0.4)

Proceeds from the exercise of stock options	—				0.2

Net cash provided by (used in) financing activities	380.0				(28.5)

Increase in cash and cash equivalents	356.0				389.7
Cash and cash equivalents at beginning of period	774.3				298.0
Cash and cash equivalents at end of period	$	1,130.3			$	687.7



Supplemental disclosure of cash flow information:
Cash paid for taxes	$	53.8			$	30.9

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


Cash paid for interest	3.8	3.8

Supplemental disclosure of non-cash transactions:
Unpaid property, plant and equipment in accounts payable and accrued expenses	6.2	6.7
Repurchase of common stock pending settlement	2.1	—
Issuance costs in current liabilities	0.7	—
Right-of-use assets obtained in exchange for new operating lease liabilities	13.7	1.4

See accompanying Notes to Condensed Consolidated Financial Statements.

LUMENTUM HOLDINGS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)

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

Description of Business

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

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may be different from the estimates. Operating results for the quarter ended April 2, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 2, 2022. In the opinion of the Company’s management, the information presented herein reflects all normal and recurring adjustments necessary for a fair presentation of our results of operations, financial position, stockholders’ equity and cash flows.

Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are inventory valuation, revenue recognition, income taxes, long-lived asset valuation, goodwill and business combination.

We are now in the third year of the COVID-19 pandemic, and while the impact of the pandemic is lessening, new variants are causing continued concern. As these variants continue to emerge, efforts to mitigate or contain the impacts of the pandemic continue to evolve, and the duration and severity of the impact of the pandemic on our business and results of operations in future periods remain uncertain. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including but not limited to the duration and spread of the pandemic and its variants, duration of local, state and federal issued public health orders in each jurisdiction where we operate or in which our customers and suppliers operate, impact on our customers and our sales cycles, impact on our supply chain and manufacturing partners, impact on our employees and impact on regional and worldwide economies and financial markets in general, all of which are uncertain and cannot be predicted. We assessed the potential impact that this pandemic has on our estimates as of April 2, 2022 and determined that there were no material impacts. However, due to the global supply chain constraint, we have had to incur incremental supply and procurement costs in order to fulfill demand from our customers. These higher costs have increased our inventory balances as of April 2, 2022 and may decrease our gross margin in the near term.

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Fiscal Years

We utilize a 52-53 week fiscal year ending on the Saturday closest to June 30th. Every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the third quarter, making such quarter consist of 14 weeks. Our fiscal 2022 is a 52-week year ending on July 2, 2022, with the quarter ended April 2, 2022 being a 13-week quarterly period. Our fiscal 2021 was a 53-week year that ended on July 3, 2021, with the quarter ended April 3, 2021 being a 14-week quarterly period.

Principles of Consolidation

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

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

Accounting Policies

The condensed consolidated financial statements and accompanying related notes should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 3, 2021. There have been no significant changes to our accounting policies during the three and nine months ended April 2, 2022.

Business Combination

On November 4, 2021, Lumentum and NeoPhotonics Corporation (“NeoPhotonics”) announced a merger agreement (the “Merger Agreement”) pursuant to which Lumentum will acquire all outstanding shares of NeoPhotonics stock. Under the terms of the Merger Agreement, NeoPhotonics stockholders will receive $16.00 per share in cash for each NeoPhotonics share they own. As of April 2, 2022, the estimated total transaction consideration is expected to be approximately $918 million. The cash consideration will be funded from the combined company’s balance sheet.

The Merger Agreement contains certain termination rights for both Lumentum and NeoPhotonics and provides that upon termination of the Merger Agreement under specified circumstances (including termination by NeoPhotonics to accept a superior proposal), NeoPhotonics may be required to pay Lumentum a termination fee of $27.5 million. The Merger Agreement further provides that if the Merger Agreement is terminated for failure to obtain antitrust approval, Lumentum may be required to pay NeoPhotonics a termination fee of $55.1 million; and if Lumentum takes certain specified actions, (including entering into any definitive agreement for an acquisition by stock purchase, merger, consolidation, amalgamation, purchase of assets, license or otherwise of any ownership interest or assets of any Person) that cause a material delay in, or results in the failure of, the consummation of the Merger, Lumentum may be required to pay NeoPhotonics an additional termination fee of $36.7 million.

The Boards of Directors of Lumentum and NeoPhotonics have unanimously approved the transaction and the Merger Agreement. On January 21, 2022, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired with respect to the proposed acquisition. The transaction is subject to customary closing conditions, including the absence of certain legal impediments and receipt of any required antitrust and regulatory approvals. The transaction was approved by the NeoPhotonics stockholders on February 1, 2022. The transaction is not subject to any financing condition. We expect this transaction to be completed in the second half of calendar year 2022.

In connection with the Merger Agreement, on January 14, 2022, Lumentum and NeoPhotonics entered into a credit agreement where Lumentum agreed to make term loans (“loans”) to NeoPhotonics in an aggregate principal amount not to exceed $50.0 million to help fund capital expenditures and increased working capital associated with NeoPhotonics’ growth plans. During the three months ended April 2, 2022, the Company funded a $30.0 million loan request to NeoPhotonics, which bears interest at the Wall Street Journal “prime rate,” which was 3.5% as of April 2, 2022. The interest is payable monthly in arrears on the first day of each month. The loans will mature on January 14, 2024 unless earlier repaid or accelerated.

Termination of Coherent Merger Agreement

On January 18, 2021, Lumentum and Coherent, Inc. (“Coherent”) entered into a merger agreement, under which Lumentum would acquire all outstanding shares of Coherent common stock. As of the date of the merger agreement, the total transaction consideration was approximately $5.7 billion. In March 2021, Coherent terminated the merger agreement and paid

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Lumentum a termination fee of $217.6 million in accordance with the merger agreement. This gain was offset by $10.1 million of acquisition related expenses and the net amount is presented as “merger termination fee and related costs, net” in our condensed consolidated statements of operations for the three and nine months ended April 3, 2021.

Note 2. Recently Issued Accounting Pronouncements

Accounting Pronouncements Recently Adopted

In December 2019, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and which also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for us at the beginning of fiscal year 2022, including interim periods within that reporting period. We adopted ASU 2019-12 in our first quarter of fiscal year 2022 on a prospective basis with no material impact to our condensed consolidated financial statements.

Accounting Pronouncements Not Yet Effective

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805)—Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. This ASU is expected to improve comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 is effective for us in our first quarter of fiscal year 2024. The impact of the adoption of ASU 2021-08 will depend on the contract assets and liabilities acquired in a business combination after that date, unless early adopted.

In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (i) convertible debt with a cash conversion feature and (ii) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. ASU 2020-06 is effective for us in our first quarter of fiscal year 2023. We intend to adopt ASU 2020-06 on a modified retrospective basis. ASU 2020-06 will impact our accounting treatment for our convertible notes (as defined in Note 9). We currently separate our convertible notes into their liability and equity components. Following our adoption of ASU 2020-06, the previously bifurcated equity component may be recombined with the liability component, resulting in a single liability classified instrument. The carrying value of our convertible notes at transition will be determined by recalculating the basis of the convertible notes as if the convertible notes had not been bifurcated at issuance. Issuance costs related to the convertible notes that was initially allocated to the equity component will be reclassified from additional paid-in capital to the liability component, and the amortization of the debt issuance and debt discount will be recalculated through the transition date. The adoption of this guidance will result in a reduction in our additional paid-in capital, an increase in our convertible note liability balance, and a reduction to our accumulated deficit as of the transition date. In addition, we estimate that our diluted share count will increase and interest expense will decrease upon adoption of this standard.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 3. Earnings Per Share

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Numerator:
Net income - basic and diluted	$	26.0	$	225.5	$	164.2	$	375.8

Denominator:
Weighted average common shares outstanding - basic	71.0		75.8		72.0		75.6
Effect of dilutive securities from stock-based benefit plans	0.7		0.8		0.6		0.8
Shares issuable assuming conversion of the 2024 Notes	2.8		2.6		2.5		2.2
Weighted average common shares outstanding - diluted	74.5		79.2		75.1		78.6

Net income per share:
Basic	$	0.37	$	2.97	$	2.28	$	4.97
Diluted	$	0.35	$	2.85	$	2.19	$	4.78

Potentially dilutive common shares result from the assumed exercise of outstanding stock options, assumed vesting of outstanding equity awards, assumed issuance of stock under the employee stock purchase plan, and assumed conversion of our outstanding convertible notes, all using the treasury stock method.

We have the ability and intent to settle the face value of our convertible notes in cash. Therefore, we use the treasury stock method for calculating the dilutive impact of the convertible notes.

The 2026 Notes and the 2028 Notes will have no impact on diluted earnings per share until the average price of our common stock exceeds the conversion price of $99.29 and $131.03, respectively.
The potentially dilutive shares resulting from the 2024 Notes were included in the calculation of diluted income per share for the three and nine months ended April 2, 2022 and April 3, 2021, respectively, since the average price of our common stock exceeded the conversion price of $60.62 in all periods.

Anti-dilutive potential shares are excluded from the calculation of diluted earnings per share if their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method. Anti-dilutive shares excluded from the calculation of diluted earnings per share were less than 0.1 million for each of the three and nine months ended April 2, 2022. Anti-dilutive shares excluded from the calculation of diluted earnings per share were less than 0.1 million and 0.5 million shares for the three and nine months ended April 3, 2021, respectively.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 4. Cash, Cash Equivalents and Short-term Investments

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
April 2, 2022:
Cash	$	149.4	$	—	$	—	$	149.4
Cash equivalents:

Commercial paper	291.9		—		—		291.9
Corporate debt securities	10.2		—		—		10.2
Money market funds	178.4		—		—		178.4
U.S. Treasury securities	500.4		—		—		500.4



Total cash and cash equivalents	$	1,130.3	$	—	$	—	$	1,130.3
Short-term investments:
Certificates of deposit	$	11.3	$	—	$	—	$	11.3
Commercial paper	99.4		—		(0.1)		99.3

Corporate debt securities	649.7		—		(6.6)		643.1
Municipal bonds	1.0		—		—		1.0


U.S. Agency securities	65.2		—		(1.2)		64.0
U.S. Treasury securities	618.5		0.1		(3.5)		615.1
Total short-term investments	$	1,445.1	$	0.1	$	(11.4)	$	1,433.8

July 3, 2021:
Cash	$	128.3	$	—	$	—	$	128.3
Cash equivalents:
Commercial paper	7.5		—		—		7.5
Corporate debt securities	7.0		—		—		7.0
Money market funds	631.5		—		—		631.5


Total cash and cash equivalents	$	774.3	$	—	$	—	$	774.3
Short-term investments:
Certificates of deposit	$	28.5	$	—	$	—	$	28.5
Commercial paper	136.7		—		—		136.7

Corporate debt securities	626.0		0.3		(0.4)		625.9
Municipal bonds	1.0		—		—		1.0


U.S. Agency securities	29.3		—		—		29.3
U.S. Treasury securities	350.3		—		—		350.3
Total short-term investments	$	1,171.8	$	0.3	$	(0.4)	$	1,171.7

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We use the specific-identification method to determine any realized gains or losses from the sale of our short-term investments classified as available-for-sale. During the three and nine months ended April 2, 2022 and April 3, 2021, we did not realize significant gains or losses on a gross level from the sale of our short-term investments classified as available-for-sale.

During the three and nine months ended April 2, 2022, our other income (expense), net was $2.2 million income and $3.8 million income, respectively, which includes interest and investment income on cash equivalents and short-term investments of $1.1 million and $2.3 million, respectively. During the three and nine months ended April 3, 2021, our other income (expense), net was $2.4 million and $2.1 million, respectively, which includes interest and investment income on cash equivalents and short-term investments of $1.0 million and $4.9 million, respectively.

As of April 2, 2022 and July 3, 2021, we recorded interest receivables of $4.1 million and $4.1 million, respectively, in prepayments and other current assets within the condensed consolidated balance sheets. We did not recognize an allowance for credit losses against interest receivables in any of the periods presented as there were no such losses.

As of April 2, 2022 and July 3, 2021, the Company does not have any cash equivalents and short-term investments that have been in a continuous unrealized gain or loss position for more than 12 months as of the periods presented. The following table summarizes unrealized losses on our cash equivalents and short-term investments by category that have been in a continuous unrealized loss position for less than 12 months as of the periods presented (in millions):


	Fair Value		Unrealized Losses
April 2, 2022:
U.S. Agency securities	$	64.0	(1.2)
Certificates of deposit	11.3		—
Commercial paper	253.3		(0.1)

Corporate debt securities	639.3		(6.6)
Municipal bonds	1.0		—


U.S. government bonds	566.3		(3.5)
Total	$	1,535.2	$	(11.4)

July 3, 2021:
U.S. Agency securities	$	28.3	$	—
Certificates of deposit	6.0		—
Commercial paper	43.0		—
Corporate debt securities	432.3		(0.4)
Municipal bonds	1.0		—

U.S. government bonds	106.9		—
Total	$	617.5	$	(0.4)

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


	April 2, 2022				July 3, 2021
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in 1 year	$	1,044.6	$	1,039.1	$	587.0	$	587.1
Due in 1 year through 5 years	400.5		394.7		584.8		584.6


	$	1,445.1	$	1,433.8	$	1,171.8	$	1,171.7

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 5. Fair Value Measurements

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


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

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

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


	Level 1		Level 2		Level 3		Total
April 2, 2022: (1)
Assets:
Cash equivalents:

Commercial paper	$	—	$	291.9	$	—	$	291.9
Corporate debt securities	—		10.2		—		10.2
Money market funds	178.4		—		—		178.4
U.S. Treasury securities	500.4		—		—		500.4




Short-term investments:
Certificates of deposit	—		11.3		—		11.3
Commercial paper	—		99.3		—		99.3

Corporate debt securities	—		643.1		—		643.1
Municipal bonds	—		1.0		—		1.0


U.S. Agency securities	—		64.0		—		64.0
U.S. Treasury securities	615.1		—		—		615.1
Total assets	$	1,293.9	$	1,120.8	$	—	$	2,414.7

(1) Excludes $149.4 million in cash held in our bank accounts as of April 2, 2022.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


	Level 1		Level 2		Level 3		Total
July 3, 2021: (1)
Assets:
Cash equivalents:
Commercial paper	$	—	$	7.5	$	—	$	7.5
Corporate debt securities	—		7.0		—		7.0
Money market funds	631.5		—		—		631.5


Short-term investments:
Certificates of deposit	—		28.5		—		28.5
Commercial paper	—		136.7		—		136.7

Corporate debt securities	—		625.9		—		625.9
Municipal bonds	—		1.0		—		1.0


U.S. Agency securities	—		29.3		—		29.3
U.S. Treasury securities	350.3		—		—		350.3
Total assets	$	981.8	$	835.9	$	—	$	1,817.7

(1) Excludes $128.3 million in cash held in our bank accounts as of July 3, 2021.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

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

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


	April 2, 2022				July 3, 2021
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
2028 Notes	$	626.8	$	831.3	$	—	$	—
2026 Notes	820.8		1,208.0		789.8		1,146.1
2024 Notes	406.1		728.4		390.7		669.3
	$	1,853.7	$	2,767.7	$	1,180.5	$	1,815.4

Assets Measured at Fair Value on a Non-Recurring Basis

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

Management utilizes various valuation methods, including an income approach, a market approach and a cost approach, to estimate the fair value of intangibles and other long-lived assets. During the annual impairment testing performed in the fourth quarter of fiscal 2021, we concluded that our intangible and other long-lived assets were not impaired. We review our intangible and other long-lived assets for impairment at least annually in the fourth quarter of each fiscal year, absent any interim indicators of impairment. There were no indicators of impairment during the nine months ended April 2, 2022.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 6. Balance Sheet Details

Allowance for current expected credit losses

We did not have any allowance for credit losses other than our allowance for uncollectible accounts receivable. As of April 2, 2022 and July 3, 2021, the allowance for credit losses on our trade receivables was $0.2 million and $0.4 million, respectively.

Inventories

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


	April 2, 2022		July 3, 2021
Raw materials and purchased parts	$	78.0	$	64.4
Work in process	99.8		79.0
Finished goods	46.2		53.0
Inventories	$	224.0	$	196.4

Operating lease right-of-use assets, net

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


	April 2, 2022		July 3, 2021
Operating lease right-of-use assets	$	101.0	$	87.3
Less: accumulated amortization	(26.7)		(19.9)
Operating lease right-of-use assets, net	$	74.3	$	67.4

Property, plant and equipment, net

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


	April 2, 2022		July 3, 2021
Land	$	49.4	$	38.2
Buildings and improvement	98.9		92.7
Machinery and equipment	535.8		498.3
Computer equipment and software	31.0		28.6
Furniture and fixtures	8.8		8.8
Leasehold improvements	35.4		33.9
Finance lease right-of-use assets	—		28.1
Construction in progress	45.0		43.4
	804.3		772.0
Less: Accumulated depreciation	(447.9)		(410.9)
Property, plant and equipment, net	$	356.4	$	361.1

As of April 2, 2022, finance lease assets are fully amortized and there are no outstanding finance lease liabilities.

During the nine months ended April 2, 2022, we purchased land and buildings in Thailand and Slovenia with a fair value of $15.1 million in order to expand our manufacturing capacity.

During the three and nine months ended April 2, 2022, we recorded depreciation expense of $20.2 million and $61.2 million, respectively. During the three and nine months ended April 3, 2021, we recorded depreciation expense of $22.8 million and $70.4 million, respectively.

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Other current liabilities

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


	April 2, 2022		July 3, 2021
Restructuring accrual and related charges (1)	$	0.1	$	5.7
Warranty accrual (2)	9.1		5.0
Deferred revenue and customer deposits	—		0.6

Income tax payable (3)	17.1		43.5
Other current liabilities	5.3		3.0
Other current liabilities	$	31.6	$	57.8

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

(2) Refer to “Note 14. Commitments and Contingencies.”

(3) Refer to “Note 12. Income Taxes.”

Other non-current liabilities

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


	April 2, 2022		July 3, 2021
Asset retirement obligations	$	4.7	$	4.7
Pension and related accrual (1)	11.2		10.8

Unrecognized tax benefit	26.4		23.0
Other non-current liabilities	0.5		2.4
Other non-current liabilities	$	42.8	$	40.9

(1) We have defined benefit pension plans in Japan, Switzerland, and Thailand. As of April 2, 2022, the projected benefit obligations, net of plan assets, in Japan, Switzerland and Thailand were $2.8 million, $4.9 million and $3.5 million, respectively. As of July 3, 2021, the projected benefit obligations, net of plan assets, in Japan, Switzerland and Thailand were $2.9 million, $4.8 million and $3.1 million, respectively. We typically re-evaluate the assumptions related to the fair value of our defined benefit obligations annually and make any updates as necessary.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 7. Leases

We lease certain real and personal property from unrelated third parties under non-cancellable operating leases that expire at various dates through fiscal 2033. These operating leases are mainly for administrative offices, research-and-development and manufacturing facilities, as well as sales offices in various countries around the world. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably certain at lease commencement.

As of April 2, 2022, we sublease certain floors of our offices in the United Kingdom, the United States, Canada and Japan. These subleases will expire at various dates through fiscal year 2023. We anticipate receiving approximately $1.5 million in sublease income over the next year.

The components of lease costs, lease term and discount rate are as follows:


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022			April 3, 2021
(in millions, except for weighted average data)
Finance lease cost	$	—	$	0.1	$	—		$	0.4

Operating lease cost	3.3		3.4		10.0			10.6
Variable lease cost	0.3		0.5		1.1			1.5
Short-term lease cost	0.2		0.6		0.4			1.9
Sublease income	(0.8)		(0.7)		(2.4)			(2.1)
Total lease cost	$	3.0	$	3.9	$	9.1		$	12.3

					April 2, 2022			July 3, 2021
Weighted average remaining lease term (in years):
Operating leases					7.1			7.5

Weighted average discount rate (in percentages):
Operating leases					3.0		%	3.5		%

As of April 2, 2022, finance lease assets are fully amortized and there are no outstanding finance lease liabilities.

As of April 2, 2022, maturities of our operating lease liabilities, which do not include short-term leases and variable lease payments, were as follows (in millions):


Fiscal Years	Operating Leases (1)
Remainder of 2022	$	3.5
2023	13.4
2024	12.8
2025	9.4
2026	7.9
Thereafter	25.2
Total minimum lease payments	$	72.2
Less: amount representing interest	(7.4)
Present value of total lease liabilities	$	64.8

(1) Non-cancellable sublease proceeds for the remainder of fiscal 2022 and 2023 of $0.8 million and $0.7 million, respectively, are not included in the table above.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 8. Goodwill and Other Intangible Assets

Goodwill

The following table presents our goodwill balance by reportable segments as of April 2, 2022 and July 3, 2021 (in millions):


	Optical Communications		Commercial Lasers		Total










Balance as of April 2, 2022 and July 3, 2021	$	363.5	$	5.4	$	368.9

Impairment of Goodwill

We review goodwill for impairment during the fourth quarter of each fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred. In the fourth quarter of fiscal 2021, we completed the annual impairment test of goodwill, which indicated there was no goodwill impairment. There were no indicators of goodwill impairment during the three and nine months ended April 2, 2022.

Other Intangibles

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

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

The following tables present details of our other intangibles as of the periods presented (in millions, except for weighted average remaining amortization period):


April 2, 2022	Gross Carrying Amounts		Accumulated Amortization		Net Carrying Amounts		Weighted average remaining amortization period (years)
Acquired developed technologies	$	390.3	$	(287.5)	$	102.8	2.5
Customer relationships	145.0		(70.9)		74.1		4.7

Order backlog	22.0		(22.0)		—		—
Other intangibles	2.7		(2.7)		—		—
Total intangible assets	$	560.0	$	(383.1)	$	176.9


July 3, 2021	Gross Carrying Amounts		Accumulated Amortization		Net Carrying Amounts		Weighted average remaining amortization period (years)
Acquired developed technologies	$	390.3	$	(238.6)	$	151.7	3.0
Customer relationships	145.0		(55.5)		89.5		5.4

Order backlog	22.0		(22.0)		—		—
Other intangibles	2.7		(2.7)		—		—
Total intangible assets	$	560.0	$	(318.8)	$	241.2

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Cost of sales	$	15.6	$	15.8	$	47.3	$	45.8
Selling, general and administrative	5.8		6.2		17.0		17.8
Total amortization of intangibles	$	21.4	$	22.0	$	64.3	$	63.6

Based on the carrying amount of our acquired developed technologies and other intangibles as of April 2, 2022, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):


Fiscal Years
Remainder of 2022	$	21.2
2023	61.9
2024	40.5
2025	27.7
2026	18.1
Thereafter	7.5
Total future amortization	$	176.9

Note 9. Debt

Convertible Notes

2028 Notes

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

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

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

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

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

during any fiscal quarter commencing after July 2, 2022 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during the 30

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% if the applicable conversion price on each applicable trading day;

during the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the 2028 Notes for each trading day of such measurement was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day;
if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date; or
upon the occurrence of specified corporate events, as specified in the 2028 Indentures.

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

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

We bifurcated the principal amount of the 2028 Notes into liability and equity components. The liability component of the 2028 Notes was valued at $629.8 million based on the contractual cash flow discounted at an appropriate comparable market on non-convertible debt borrowing rate at the date of issuance, which was 5.7%, with the equity component representing the residual amount of the proceeds of $231.2 million, which was recorded as a debt discount. The issuance and other related costs of $6.9 million were allocated pro rata based on the relative carrying amounts of the liability and equity components.

The debt discount and debt issuance costs attributable to the liability component will be amortized to interest expense using an effective interest rate of 5.7% over the expected life of the 2028 Notes. Debt issuance costs attributable to the equity component are netted against the equity component in stockholders’ equity, and the equity component is not remeasured as long as it continues to meet the conditions for equity classification.

2026 Notes

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

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

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Prior to the close of business on the business day immediately preceding September 15, 2026, holders of the 2026 Notes may convert their 2026 Notes only under certain circumstances discussed in detail in our Annual Report on Form 10-K for the year ended July 3, 2021.

2024 Notes

In March 2017, we issued $450 million of 0.25% Convertible Notes due in 2024 (the “2024 Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2024 Notes are governed by an indenture between the Company, as the issuer, and U.S. Bank Trust Company National Association (as successor in interest to U.S. Bank National Association), as trustee (the “2024 Indenture”). The 2024 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.

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

The initial conversion rate of the 2024 Notes is 16.4965 shares of common stock per $1,000 principal amount of 2024 Notes, which is equivalent to an initial conversion price of approximately $60.62 per share. Prior to the close of business on the business day immediately preceding December 15, 2023, each holder of the 2024 Notes may convert their 2024 Notes only under certain circumstances discussed in detail in our Annual Report on Form 10-K for the year ended July 3, 2021.

During the nine months ended April 2, 2022, we received and settled in cash, conversion requests of less than $0.1 million principal amount of the 2024 Notes. From April 1, 2022 through May 4, 2022, we received requests for conversion of approximately $1.8 million in principal amount of the 2024 Notes. Such conversion will be settled in the fourth quarter of fiscal 2022 with a combination of cash and shares of the Company’s common stock in accordance with the applicable indenture.

Convertible Notes

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


Liability component:	April 2, 2022						July 3, 2021
	2024 Notes (1)		2026 Notes (2)		2028 Notes (3)		2024 Notes		2026 Notes
Principal	$	450.0	$	1,050.0	$	861.0	$	450.0	$	1,050.0
Unamortized debt discount and issuance costs	(43.9)		(229.2)		(234.2)		(59.3)		(260.2)
Net carrying amount of the liability component	$	406.1	$	820.8	$	626.8	$	390.7	$	789.8

(1) Since the closing price of our stock exceeded $78.80 (or 130% of the conversion price of $60.62) for 20 of the last 30 trading days of the third quarter of fiscal 2022, the 2024 Notes have become convertible at the option of the holders. Therefore, the debt component of our 2024 Notes as of April 2, 2022 has been classified as current liabilities in our condensed consolidated balance sheet.

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

(3) During any fiscal quarter commencing after July 2, 2022, if the closing price of our stock exceeds $170.34 (or 130% of the conversion price of $131.03) for 20 of the last 30 trading days of such quarter, our 2028 Notes would also become convertible at the option of the holders and the debt component would be reclassified to current liabilities in our condensed consolidated balance sheet.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Contractual interest expense	$	1.9	$	1.6	$	5.1	$	4.8
Amortization of the debt discount and debt issuance costs	17.8		14.8		48.6		43.9
Total interest expense	$	19.7	$	16.4	$	53.7	$	48.7

The future interest and principal payments related to our convertible notes are as follows as of April 2, 2022 (in millions):


Fiscal Years	2024 Notes		2026 Notes		2028 Notes		Total
Remainder of 2022	$	1.8	$	2.7	$	1.2	$	5.7
2023	1.1		5.3		4.3		10.7
2024	449.4		5.3		4.3		459.0
2025	—		5.3		4.3		9.6
2026	—		5.3		4.3		9.6
Thereafter	—		1,052.4		869.6		1,922.0
Total convertible notes payments	$	452.3	$	1,076.3	$	888.0	$	2,416.6

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 10. Accumulated Other Comprehensive Income (Loss)

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

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






	Foreign currency translation adjustments, net of tax (1)		Defined benefit obligations, net of tax (2)		Unrealized gain (loss) on available-for-sale securities, net of tax		Total
Beginning balance as of July 3, 2021	$	9.7	$	(1.4)	$	(0.1)	$	8.2
Other comprehensive income	—		—		0.3		0.3
Ending balance as of October 2, 2021	9.7		(1.4)		0.2		8.5
Other comprehensive loss	—		—		(2.3)		(2.3)
Ending balance as of January 1, 2022	9.7		(1.4)		(2.1)		6.2
Other comprehensive loss	—		(0.5)		(6.9)		(7.4)
Ending balance as of April 2, 2022	$	9.7	$	(1.9)	$	(9.0)	$	(1.2)

	Foreign currency translation adjustments, net of tax (1)		Defined benefit obligations, net of tax (2)		Unrealized gain (loss) on available-for-sale securities, net of tax		Total
Beginning balance as of June 27, 2020	$	9.7	$	(4.2)	$	2.4	$	7.9
Other comprehensive loss	—		—		(1.5)		(1.5)
Ending balance as of September 26, 2020	9.7		(4.2)		0.9		6.4
Other comprehensive loss	—		—		(0.4)		(0.4)
Ending balance as of December 26, 2020	9.7		(4.2)		0.5		6.0
Other comprehensive loss	—		—		(0.3)		(0.3)
Ending balance as of April 3, 2021	$	9.7	$	(4.2)	$	0.2	$	5.7

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

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

Note 11. Restructuring and Related Charges

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

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Balance as of beginning of period	$	0.3	$	4.6	$	5.7	$	5.2
Charges (reversals), net	(0.1)		2.9		(1.1)		3.1
Payments	(0.1)		(3.3)		(4.5)		(4.1)
Balance as of end of period	$	0.1	$	4.2	$	0.1	$	4.2

During the nine months ended April 2, 2022, we recorded a net reversal to our restructuring and related charges of $1.1 million in our condensed consolidated statements of operations which was primarily attributable to lower than anticipated employee severance charges due to retaining and re-assigning certain employees.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During the three and nine months ended April 3, 2021, we recorded restructuring and related charges of $2.9 million and $3.1 million, respectively, in our condensed consolidated statements of operations. The charges were mainly attributable to severance charges associated with the decision to cease manufacturing of certain products in San Jose, California.

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

Note 12. Income Taxes

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

We recorded a tax provision of $3.3 million and $33.8 million for the three and nine months ended April 2, 2022, respectively. Our tax provision for the three months ended April 2, 2022 includes a discrete tax benefit of $2.0 million, primarily related to currency re-measurement of certain tax related accounts and excess tax benefit related to stock-based compensation that vested during the quarter. Our estimated effective tax rate for fiscal 2022 differs from the 21% U.S. statutory rate primarily due to the income tax benefit from the earnings of our foreign subsidiaries being taxed at rates that differ from the U.S. statutory rate and U.S. federal R&D tax credits, partially offset by the income tax expense from the tax effect of Global Intangible Low-Taxed Income (“GILTI”), net of benefit for foreign tax credits, subpart F inclusion and non-deductible stock-based compensation.

As of April 2, 2022, we had $26.8 million of unrecognized tax benefits, which, if recognized, would affect the effective tax rate. We are subject to examination of income tax returns by various domestic and foreign tax authorities. The timing of resolution and closure of tax audits is highly unpredictable. Although it is possible that certain ongoing tax audits may be concluded within the next 12 months, we cannot reasonably estimate the impact to tax expense and net income from tax exams that could be resolved or closed within the next 12 months. Subject to audit timing and uncertainty, we expect the amount of unrecognized tax benefit that would become recognized due to expiration of the statute of limitations and affect the effective tax rate to decrease by $3.6 million over the next 12 months.

Note 13. Equity

Description of Lumentum Stock-Based Benefit Plans

Equity Incentive Plan

On November 19, 2021, our stockholders approved amendments to the Amended and Restated 2015 Equity Incentive Plan (the “2015 Plan”) to (i) increase the number of shares reserved for issuance under the 2015 Plan by an additional 3.0 million shares and (ii) make certain other changes to reflect changes in the law and/or good corporate governance practices.

As of April 2, 2022, we had 2.5 million shares subject to restricted stock units and performance stock units issued and outstanding under the 2015 Plan. Restricted stock units and performance stock units are performance-based, time-based or a combination of both. The fair value of these grants is based on the closing market price of our common stock on the date of award.

As of April 2, 2022, 3.9 million shares of common stock under the 2015 Plan were available for grant.

Restricted Stock Units

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

During the nine months ended April 2, 2022, our board of directors approved grants of 1.4 million shares which primarily vest over three years.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Performance Stock Units

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

During the nine months ended April 2, 2022, our board of directors approved a grant of 0.2 million PSUs with an aggregate grant date fair value of $16.7 million to certain executive officers and senior management. These PSUs will vest subject to the achievement of 3-year revenue targets and certain non-financial performance measurement, as well as service conditions.

Employee Stock Purchase Plan

Our 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a 15% purchase price discount as well as a 6-month look-back period. The 2015 Purchase Plan is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. The 2015 Purchase Plan will terminate upon the date on which all shares available for issuance have been sold. Of the 3.0 million shares authorized under the 2015 Purchase Plan, 1.5 million shares remained available for issuance as of April 2, 2022.

Stock-Based Compensation

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Cost of sales	$	5.4	$	5.3	$	15.2	$	13.8
Research and development	5.4		5.3		15.8		14.8
Selling, general and administrative	12.5		14.5		44.4		40.1
Total stock-based compensation	$	23.3	$	25.1	$	75.4	$	68.7

Included in stock-based compensation for the three and nine months ended April 2, 2022, is $2.2 million and $11.5 million, respectively, of stock-based compensation costs related to PSUs. Included in stock-based compensation for the three and nine months ended April 3, 2021, is $4.7 million and $11.9 million, respectively, of stock-based compensation costs related to PSUs. The amount of stock-based compensation expense recognized in any one period related to PSUs can vary based on the achievement or anticipated achievement of the performance conditions. If the performance conditions are not met or not expected to be met, no compensation cost would be recognized on the underlying PSUs, and any previously recognized compensation expense related to those PSUs would be reversed.

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Income tax benefit associated with stock-based compensation	$	2.7	$	3.4	$	10.9	$	12.2

Approximately $5.6 million and $4.6 million of stock-based compensation was capitalized to inventory as of April 2, 2022 and July 3, 2021, respectively.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Stock Award Activity

The following table summarizes our award activity for the nine months ended April 2, 2022 (in millions, except per share amounts):



	Restricted Stock Units		Performance Stock Units
		Number of Shares	Weighted-Average Grant Date Fair Value per Share		Number of Shares	Weighted-Average Grant Date Fair Value per Share





Balance as of July 3, 2021		1.8	$	76.02	0.3	$	75.68
Granted		1.4	87.92		0.2	85.72
Vested		(0.9)	73.71		(0.1)	76.43
Canceled		(0.2)	78.65		—	58.65
Balance as of April 2, 2022		2.1	$	84.70	0.4	$	81.27

As of April 2, 2022, $151.9 million of stock-based compensation cost related to RSU awards granted to our employees remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 2.0 years.

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


			Awards Available for Grant
Balance as of July 3, 2021			2.3
Authorized			3.0
Granted			(1.6)
Canceled			0.2
Balance as of April 2, 2022			3.9

Employee Stock Purchase Plan Activity

The 2015 Purchase Plan expense for the three and nine months ended April 2, 2022 was $1.0 million and $3.1 million, respectively. The 2015 Purchase Plan expense for the three and nine months ended April 3, 2021 was $1.2 million and $3.5 million, respectively. The expense related to the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During the nine months ended April 2, 2022, there were 0.1 million shares issued to employees through the 2015 Purchase Plan. During the nine months ended April 3, 2021, there were 0.1 million shares issued to employees through the 2015 Purchase Plan.

Repurchase and Retirement of Common Stock

Repurchase Made in Connection with Convertible Note Offering

In the third quarter of fiscal year 2022, concurrent with the issuance of the 2028 Notes, we repurchased 2.0 million shares of our common stock in privately negotiated transactions at an average price of $99.0 per share for an aggregate purchase price of $200.0 million. We recorded the $200.0 million aggregate purchase price as a reduction of retained earnings within our condensed consolidated balance sheet. These shares were retired immediately.

Share Buyback Program

On May 7, 2021, our board of directors approved the 2021 share buyback program, which authorizes us to use up to $700.0 million to purchase our own shares of common stock. The 2021 share buyback program was authorized for 2 years. On March 3, 2022, our board of directors approved an increase in our share buyback program, which authorizes us to use up to an aggregate amount of $1.0 billion (an increase from $700.0 million) to purchase our own shares of common stock through May 2024, but may be suspended or terminated by the board of directors at any time.

During the nine months ended April 2, 2022, we repurchased 2.7 million shares of our common stock at an average price of $89.80 per share for an aggregate purchase price of $245.5 million.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Since the share buyback program was approved by the board of directors, we have repurchased 5.8 million shares in aggregate at an average price of $83.45 per share for a total purchase price of $486.5 million. We recorded the $486.5 million aggregate purchase price as a reduction of retained earnings within our condensed consolidated balance sheet. All repurchased shares were retired immediately.

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

Note 14. Commitments and Contingencies

Purchase Obligations

Purchase obligations of $345.6 million as of April 2, 2022, represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements.

Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on our business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.

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

Product Warranties

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

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Balance as of beginning of period	$	8.6	$	5.7	$	5.0	$	5.0

Provision for warranty	1.5		1.7		7.0		5.8
Utilization of reserve	(1.0)		(1.8)		(2.9)		(5.2)
Balance as of end of period	$	9.1	$	5.6	$	9.1	$	5.6

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Environmental Liabilities

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

Legal Proceedings

We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in the aggregate, will not have a material adverse impact on our financial position, results of operations or statements of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss.

Oclaro Merger Litigation

In connection with our acquisition of Oclaro, seven lawsuits were filed by purported stockholders of Oclaro challenging the proposed merger (the “Merger”). Two of the seven suits were putative class actions filed against Oclaro, its directors, Lumentum, Prota Merger Sub, Inc. and Prota Merger, LLC: Nicholas Neinast v. Oclaro, Inc., et al., No. 3:18-cv-03112-VC, in the United States District Court for the Northern District of California (filed May 24, 2018) (the “Neinast Lawsuit”); and Adam Franchi v. Oclaro, Inc., et al., No. 1:18-cv-00817-GMS, in the United States District Court for the District of Delaware (filed June 9, 2018) (the “Franchi Lawsuit”). Both the Neinstat Lawsuit and the Franchi Lawsuit were voluntarily dismissed with prejudice.

The other five suits, styled as Gerald F. Wordehoff v. Oclaro, Inc., et al., No. 5:18-cv-03148-NC (the “Wordehoff Lawsuit”), Walter Ryan v. Oclaro, Inc., et al., No. 3:18-cv-03174-VC (the “Ryan Lawsuit”), Jayme Walker v. Oclaro, Inc., et al., No. 5:18-cv-03203-EJD (the “Walker Lawsuit”), Kevin Garcia v. Oclaro, Inc., et al., No. 5:18-cv-03262-VKD (the “Garcia Lawsuit”), and SaiSravan B. Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit” and, together with the other six lawsuits, the “Lawsuits”), were filed in the United States District Court for the Northern District of California on May 25, 2018, May 29, 2018, May 30, 2018, May 31, 2018, and June 9, 2018, respectively. These five Lawsuits named Oclaro and its directors as defendants only and did not name Lumentum. The Wordehoff, Ryan, Walker, and Garcia Lawsuits have been voluntarily dismissed, and the Wordehoff, Ryan, and Walker dismissals were with prejudice. The Karri Lawsuit has not yet been dismissed. The Ryan Lawsuit was, and the Karri Lawsuit is, a putative class action.

The Lawsuits generally alleged, among other things, that Oclaro and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder by disseminating an incomplete and misleading Form S-4, including proxy statement/prospectus. The Lawsuits further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act.

The remaining Lawsuit (the Karri Lawsuit) currently purports to seek, among other things, damages to be awarded to the plaintiff and any class, if a class is certified, and litigation costs, including attorneys’ fees. A lead plaintiff and counsel has been selected, and an amended complaint was filed on April 15, 2019, which also named Lumentum as a defendant. A motion to dismiss the amended complaint was granted in part and denied in part by the court on October 8, 2020. On December 1, 2020, defendants answered the amended complaint. On December 23, 2020, defendants filed a motion for leave to file a motion for reconsideration of the Court’s October 8th order on the motion to dismiss, which was denied on January 29, 2021. On June 22, 2021, the Court granted the parties’ stipulation to dismiss Lumentum as a defendant from the action. On September 17, 2021, lead plaintiff filed a second amended complaint (“SAC”). Defendants moved to stay discovery in light of the SAC, and on January 11, 2022 the Court struck the SAC as untimely, terminated defendants’ motions to dismiss as moot, and lifted the stay. The Karri Lawsuit remains pending with the parties currently in discovery. Defendants intend to defend the Karri Lawsuit vigorously.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NeoPhotonics Merger Litigation

In connection with our planned acquisition of NeoPhotonics Corporation (“NeoPhotonics”) announced in November 2021, ten lawsuits (the “NeoPhotonics Lawsuits”) were filed by purported stockholders of NeoPhotonics challenging the proposed merger (the “NeoPhotonics Merger”). Four of the NeoPhotonics Lawsuits, styled as Elaine Wang v. NeoPhotonics Corporation, et al., No. 1:21-cv-10338, Heather Smith v. NeoPhotonics Corporation, et al., No. 1:21-cv-10698, Matthew Hopkins v. NeoPhotonics Corporation, et al., No. 1:21-cv-10725, and John Ryan v. NeoPhotonics Corporation, et al., No. 1:22-cv-00046, were filed in the United States District Court for the Southern District of New York on December 3, 2021, December 14, 2021, December 15, 2021, and January 4, 2022, respectively. Three of the NeoPhotonics Lawsuits, styled as Mengsheng Ku v. NeoPhotonics Corporation, et al., No. 5:21-cv-09479, Stephen Bushansky v. NeoPhotonics Corporation, et al., No. 5:21-cv-09825, and James Parshall v. NeoPhotonics Corporation, et al., No. 5:22-cv-00055, were filed in the United States District Court for the Northern District of New York on December 8, 2021, December 20, 2021, and January 5, 2022, respectively. One NeoPhotonics Lawsuit, styled as James Hendrickson v. NeoPhotonics Corporation, et al., No. 1:21-cv-06919, was filed in the United States District Court for the Eastern District of New York on December 15, 2021. One NeoPhotonics Lawsuit, styled as Alex Ciccotelli v. NeoPhotonics Corporation, et al., No. 2:21-cv-05611, was filed in the United States District Court for the Eastern District of Pennsylvania on December 23, 2021. One NeoPhotonics Lawsuit, styled as Christopher Taylor v. NeoPhotonics Corporation, et al., No. 1:22-cv-00002, was filed in the United States District Court for the District of Delaware on January 3, 2022.

These ten NeoPhotonics Lawsuits name NeoPhotonics and its directors as defendants and do not name Lumentum.

The NeoPhotonics Lawsuits generally allege, among other things, that NeoPhotonics and its directors violated Section 14(a) of the Exchange Act, Rule 14a-9 promulgated thereunder, and 17 C.F.R. § 244.100 by disseminating an incomplete and misleading Preliminary Proxy Statement on Schedule 14A, filed with the SEC on December 1, 2021 regarding the NeoPhotonics Merger. The NeoPhotonics Lawsuits further allege that NeoPhotonics’ directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act. The complaints seek injunctive relief, rescission or rescissory damages, dissemination of a proxy statement that discloses certain information requested by the plaintiffs, and an award of plaintiffs’ costs, including attorneys’ fees and expenses.

Indemnifications

In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification. Exposure under these agreements is unknown because claims may be made against us in the future, and we may record charges in the future as a result of these indemnification obligations. As of April 2, 2022, we did not have any material indemnification claims that were probable or reasonably possible.

Audit Proceedings

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

Note 15. Operating Segments and Geographic Information

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

OpComms

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

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

Lasers

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

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

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

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

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


	Three Months Ended				Nine Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Net revenue:
OpComms	$	344.2	$	387.9	$	1,147.6	$	1,265.5
Lasers	51.2		31.6		142.9		85.2
Net revenue	$	395.4	$	419.5	$	1,290.5	$	1,350.7
Gross profit:
OpComms	$	168.5	$	194.3	$	596.2	$	660.9
Lasers	27.1		14.9		74.1		39.4
Total segment gross profit	195.6		209.2		670.3		700.3
Unallocated corporate items:
Stock-based compensation	(5.4)		(5.3)		(15.2)		(13.8)
Amortization of acquired intangibles	(15.6)		(15.8)		(47.3)		(45.8)

Inventory and fixed asset write down due to product line exits	—		—		(0.1)		(0.4)


Other (charges) gains (1)	(7.4)		(3.1)		(0.8)		(20.0)
Gross profit	$	167.2	$	185.0	$	606.9	$	620.3

(1) Other (charges) gains of unallocated corporate items for the three months ended April 2, 2022 primarily relate to $5.8 million of charges to acquire components from various brokers to satisfy customer demand.

Other (charges) gains of unallocated corporate items for the nine months ended April 2, 2022 primarily relate to $5.8 million of charges to acquire components from various brokers to satisfy customer demand, offset by a $5.9 million gain as a result of selling equipment that was no longer needed after we transferred certain product lines to new production facilities in fiscal 2021.

Other (charges) gains of unallocated corporate items for the three and nine months ended April 3, 2021 relate to costs of transferring product lines to new production facilities, including Thailand of $1.4 million and $6.5 million, respectively. We also incurred excess and obsolete inventory charges driven by U.S. trade restrictions and the related decline in demand from Huawei of $1.0 million and $7.7 million during the three and nine months ended April 3, 2021, respectively. Our excess and obsolete inventory charges related to Huawei were offset by $2.1 million of sale of inventory previously written down during the three and nine months ended April 3, 2021. During the nine months ended April 3, 2021, there was also a $5.0 million fixed asset write-off associated with excess capacity related to our Fiber laser business.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


	Three Months Ended								Nine Months Ended
	April 2, 2022				April 3, 2021				April 2, 2022				April 3, 2021
	Amount		% of Total		Amount		% of Total		Amount		% of Total		Amount		% of Total
Net revenue:
Americas:
United States	$	36.3	9.2	%	$	38.2	9.1	%	$	115.4	8.9	%	$	98.2	7.3	%
Mexico	42.3		10.7		16.3		3.9		113.6		8.8		107.4		8.0
Other Americas	3.0		0.7		3.7		0.9		7.7		0.6		10.5		0.7
Total Americas	$	81.6	20.6	%	$	58.2	13.9	%	$	236.7	18.3	%	$	216.1	16.0	%

Asia-Pacific:
Hong Kong	$	109.2	27.6	%	$	134.2	32.0	%	$	366.5	28.4	%	$	426.6	31.6	%
Philippines	2.5		0.6		30.9		7.4		20.5		1.6		134.3		9.9
South Korea	50.3		12.7		63.3		15.1		233.3		18.1		185.3		13.7
Japan	44.5		11.3		32.6		7.7		137.3		10.6		81.0		6.0
Other Asia-Pacific	78.9		20.0		64.0		15.2		212.8		16.5		201.2		14.9
Total Asia-Pacific	$	285.4	72.2	%	$	325.0	77.4	%	$	970.4	75.2	%	$	1,028.4	76.1	%

EMEA	$	28.4	7.2	%	$	36.3	8.7	%	$	83.4	6.5	%	$	106.2	7.9	%

Total net revenue	$	395.4			$	419.5			$	1,290.5			$	1,350.7

During the three and nine months ended April 2, 2022 compared to the three and nine months ended April 3, 2021, net revenue from Japan increased and net revenue from Philippines decreased due to changes in our customers’ chosen module integrator for specific new products.

During the three and nine months ended April 2, 2022, our net revenue from a single customer, who represented 10% or greater of total net revenue was concentrated with two customers, who collectively accounted for 38% and 43% of our total net revenue, respectively. During the three and nine months ended April 3, 2021, our net revenue from a single customer, which represented 10% or greater of total net revenue was concentrated with two and three customers who collectively accounted for 44% and 53% of our total net revenue, respectively.

Our accounts receivable was concentrated with one customer as of April 2, 2022, who represented 12% of gross accounts receivable, compared with two customers as of July 3, 2021, who represented 17% and 14% of gross accounts receivable, respectively.

LUMENTUM HOLDINGS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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


	April 2, 2022		July 3, 2021
Property, plant and equipment, net
United States	$	111.1	$	116.7
Thailand	100.9		103.9
China	35.8		41.3
Japan	36.9		36.4
Other countries	71.7		62.8
Total property, plant and equipment, net	$	356.4	$	361.1

We purchase a portion of our inventory from contract manufacturers and vendors located primarily in Taiwan, Thailand and Malaysia. During the three and nine months ended April 2, 2022, our net inventory purchases from a single contract manufacturer, which represented 10% or greater of total net purchases, were concentrated with two contract manufacturers, who collectively accounted for 52% and 58% of total net inventory purchases, respectively. During the three and nine months ended April 3, 2021, our net inventory purchases from a single contract manufacturer, which represented 10% or greater of total net purchases, were concentrated with two contract manufacturers, who collectively accounted for 62% and 64% of total net inventory purchases, respectively.

Note 16. Revenue Recognition

Disaggregation of Revenue

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

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


	Three Months Ended								Nine Months Ended
	April 2, 2022				April 3, 2021				April 2, 2022				April 3, 2021
OpComms:
Telecom and Datacom	$	243.5	61.6	%	$	255.8	61.0	%	$	726.6	56.3	%	$	803.3	59.5	%
Industrial and Consumer	100.7		25.5		132.1		31.5	%	421.0		32.6		462.2		34.2	%
Total OpComms	$	344.2	87.1	%	$	387.9	92.5	%	$	1,147.6	88.9	%	$	1,265.5	93.7	%
Lasers	51.2		12.9	%	31.6		7.5	%	142.9		11.1		85.2		6.3
Net Revenue	$	395.4			$	419.5			$	1,290.5			$	1,350.7

Contract Balances

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


Contract balances	Balance sheet location	April 2, 2022		July 3, 2021		Change		Percentage Change
Accounts receivable, net	Accounts receivable, net	$	242.2	$	212.8	$	29.4	13.8	%
Deferred revenue and customer deposits	Other current liabilities	$	—	$	0.6	$	(0.6)	(100.0)	%

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