What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-05 compared with 2022-02-07 · 105 added, 107 removed, 273 unchanged (44% of the section changed)

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• Our expectations regarding the impact of the COVID-19 pandemic on our business, financial condition and results of operations;

• The possible impact of the Russia-Ukraine conflict on our business;

• Our expectations regarding demand for our products, including industry trends and technological advancements that may drive such demand, the role we will play in those advancements and our ability to benefit from such advancements;

• Our plans for growth and innovation opportunities;

• Financial projections and expectations, including profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;

• Financial projections and expectations, including our capital markets and liquidity strategy, profitability of certain business units, plans to reduce costs and improve efficiencies, the effects of seasonality on certain business units, continued reliance on key customers for a significant portion of our revenue, future sources of revenue, competition and pricing pressures, the future impact of certain accounting pronouncements and our estimation of the potential impact and materiality of litigation;

• Our plans for continued development, use and protection of our intellectual property;

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NE customers include CSPs, NEMs, government organizations and large corporate customers, such as major telecom, mobility and cable operators, chip and infrastructure vendors, storage device manufacturers, storage network and switch vendors, radio and avionics commercial companies, OEMs, and civil, state and federal agencies.

Our customers include América Móvil, AT&T Inc., Lumen Technologies (formerly CenturyLink Inc.), Cisco Systems, Inc., Nokia, and Verizon Communications, Inc.

Our customers include América Móvil, AT&T Inc., Lumen Technologies (formerly CenturyLink Inc.), Cisco Systems, Inc., Nokia, British Telecom Openreach, Deutsche Telekom AG and Verizon Communications, Inc.

Service Enablement

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Worldwide distribution by central governments of the vaccines commenced in late 2020.

There have been logistical and operational challenges with the rollout and global demand for the vaccine, particularly in developing nations, has far exceeded supply.

There have been logistical and operational challenges with the rollout and global demand for the vaccine, particularly in developing nations, has exceeded supply.

New and potentially more contagious variants of the virus have developed in several countries and regions in which we operate.

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Our supply chain team has been working to meet our customer needs by executing on a risk mitigation plan, including multi-sourcing, pre-ordering components, transforming our logistics network, prioritizing critical customers, working with local government agencies to understand challenges, and partnering on solutions that limit disruptions to our operations while ensuring the safety of our employees, partners and suppliers.

Nonetheless, surges in infection rate, new shutdowns, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner.

Nonetheless, surges in infection rate, new shutdowns or quarantines, emergence of new and potentially more contagious variants of the virus and staffing and labor supply challenges may impact our suppliers and our ability to source materials in a timely manner.

Although COVID-19 has brought unprecedented challenges, we believe that we have a robust and adaptable supply chain.

While our industry faced supply chain challenges resulting from the COVID-19 pandemic such as diminished manufacturing capacity and material shortages resulted in extended lead-times, increased logistics costs, and product volume impact, these factors did not materially impact our business in fiscal year 2021.

In the first six months of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure.

In the first nine months of fiscal year 2022, we experienced higher than expected supply chain and commodity costs, including manufacturing, logistics and procurement, due to inflationary pressure.

We expect these high costs to continue through the remainder of fiscal year 2022.

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In December 2021, we terminated this facility and entered into a $300 million asset-based secured credit facility.

While capital markets and worldwide economies have stabilized and recovered since being significantly impacted by the COVID-19 pandemic, in the event of a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.

We intend to comply with US Federal and other governmental vaccine mandates.

While capital markets and worldwide economies have stabilized and recovered since being acutely impacted by the COVID-19 pandemic, in the event of a prolonged global recession, we could face future liquidity challenges and may not be able to obtain additional financing on favorable terms or at all.

We intend to comply with applicable governmental vaccine and/or quarantine mandates.

Such mandates could, in some circumstances, result in skilled labor impacts including voluntary attrition or difficulty finding labor, or otherwise adversely affect our ability to operate our manufacturing facilities, obtain supplies, or deliver our products in a timely manner.

Additional vaccine mandates may be announced in other countries in which we operate or source inputs.

Some laws and directives may also hinder our ability to move certain products across borders.

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We expect 5G Wireless and Fiber to continue driving growth and profitability in fiscal 2022.

Recent Global Events

Due to the ongoing conflict between Russia and Ukraine, the US, EU and UK have broadened restrictions on exports to Russia, thereby blocking shipments of technology, telecommunications and consumer electronics products to Russia.

This caused us to suspend transactions in the region effective February 2022 and has negatively impacted our business in the region.

While sales in the region are not material to our total consolidated revenues or net income and we are not aware of any specific event or circumstances that would require an update to the estimates or judgments or a revision of the carrying value of assets or liabilities at this time.

However, these estimates may change, as new events occur and additional information becomes available.

Actual results may differ materially from these estimates assumptions or conditions due to risks and uncertainties, including the ongoing situation in Ukraine as well as the potential for additional trade actions or retaliatory cyber-attacks aimed at infrastructure or supply chains, the impact on our future operations and results in the region remains uncertain.

Recently Issued Accounting Pronouncements

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The following table summarizes selected Consolidated Statements of Operations items ( in millions, except for percentages ):

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 Change Percent Change January 1, 2022 January 2, 2021 Change Percent Change

Three Months Ended Nine Months Ended

April 2, 2022 April 3, 2021 Change Percent Change April 2, 2022 April 3, 2021 Change Percent Change

Segment net revenue:

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Total net revenue $ 315.5 $ 303.4 $ 12.1 4.0 % $ 957.1 $ 888.0 $ 69.1 7.8 %

Amortization of acquired technologies $ 7.4 $ 8.3 $ (0.9) (10.8) % $ 22.7 $ 24.9 $ (2.2) (8.8) %

Percentage of net revenue 2.3 % 2.7 % 2.4 % 2.8 %

Gross profit $ 186.9 $ 182.0 $ 4.9 2.7 % $ 572.4 $ 531.5 $ 40.9 7.7 %

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Percentage of net revenue 28.2 % 28.4 % 28.1 % 27.8 %

Amortization of other intangibles $ 2.2 $ 8.3 $ (6.1) (73.5) % $ 7.5 $ 24.9 $ (17.4) (69.9) %

Percentage of net revenue 0.7 % 2.7 % 0.8 % 2.8 %

Restructuring and related charges (benefits) $ — $ (0.4) $ 0.4 (100.0) % $ (0.1) $ (0.8) $ 0.7 (87.5) %

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Percentage of net revenue 2.0 % — % 10.3 % — %

Interest income and other income, net $ 1.1 $ 1.1 $ — — % $ 2.5 $ 1.7 $ 0.8 47.1 %

Interest income and other income (loss), net $ 0.6 $ (0.9) $ 1.5 (166.7) % $ 3.1 $ 0.8 $ 2.3 287.5 %

Percentage of net revenue 0.2 % 0.3 % 0.3 % 0.1 %

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Consequently, the following discussion of business segment performance focuses on total net revenue, gross profit, and operating income consistent with our approach for managing the business.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations.

In these circumstances, there may be developments outside our control requiring us to adjust our operating plan.

As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the ultimate impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, if the COVID-19 pandemic is prolonged, the vaccine rollouts lag globally, new, and potentially more virulent variants continue to emerge, and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.

Three months ended January 1, 2022 and January 2, 2021

Net revenue increased by $14.9 million, or 5.0%, during the three months ended January 1, 2022 compared to the same period a year ago.

Given the dynamic nature of this situation, the Company cannot reasonably estimate the ultimate impacts of COVID-19 on our financial condition, results of operations or cash flows in the future.

However, if new, and potentially more virulent variants continue to emerge, and there are continued delays in resumption of normal business operations and activities, we expect that it could have a material negative impact on our future revenue growth as well as our overall profitability.

Three months ended April 2, 2022 and April 3, 2021

Net revenue increased by $12.1 million, or 4.0%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was due to revenue increase from our NE and SE segments, partially offset by revenue decrease in our OSP segment.

Product revenues increased by $15.3 million, or 5.8%, during the three months ended January 1, 2022 compared to the same period a year ago.

Product revenues increased by $9.2 million, or 3.5%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was due to revenue increase from our NE and SE segments, partially offset by revenue decrease in our OSP segment.

Service revenues decreased by $0.4 million, or 1.1%, during the three months ended January 1, 2022 compared to the same period a year ago.

This decrease was due to revenue decrease from our SE and OSP segments, partially offset by revenue increase in our NE segment.

NE net revenue increased by $33.5 million, or 18.5%, during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily driven by increased revenue volume from our Field Instruments and Lab and Production Equipment, including Fiber and Wireless products.

SE net revenue increased by $4.0 million, or 15.5%, during the three months ended January 1, 2022 compared to the same period a year ago.

Service revenues increased by $2.9 million, or 7.9%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was due to revenue increase from our NE and OSP segments, partially offset by revenue decrease in our SE segment.

NE net revenue increased by $13.4 million, or 7.0%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was primarily driven by increased revenue volume from our Field Instruments and Lab and Production Equipment, including Fiber products.

SE net revenue increased by $6.2 million, or 30.5%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was primarily driven by increased revenue from our Growth Assurance and Data Center products.

OSP net revenue decreased by $22.6 million, or 24.2%, during the three months ended January 1, 2022 compared to the same period a year ago.

This decrease was primarily driven by decreased revenue from our 3D Sensing and Anti-Counterfeiting Product lines.

OSP net revenue decreased by $7.5 million, or 8.1%, during the three months ended April 2, 2022 compared to the same period a year ago.

This decrease was primarily driven by decreased revenue from our Anti-Counterfeiting Product lines.

Going forward, we expect to continue to encounter a number of industry and market risks and uncertainties that may limit our visibility, and consequently, our ability to predict future revenue, seasonality, profitability, and general financial performance, which could create period over period variability in our financial measures and present foreign exchange rate risks.

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The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10% of our total net revenue ( in millions ):

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 January 1, 2022 January 2, 2021

Three Months Ended Nine Months Ended

April 2, 2022 April 3, 2021 April 2, 2022 April 3, 2021

United States $ 87.4 27.7 % $ 77.4 25.5 % $ 280.9 29.4 % $ 243.8 27.5 %

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Total net revenue $ 315.5 100.0 % $ 303.4 100.0 % $ 957.1 100.0 % $ 888.0 100.0 %

Net revenue from customers outside the Americas during the three and six months ended January 1, 2022 represented 60.1% and 61.5% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and six months ended January 2, 2021 represented 63.8% and 65.1% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended April 2, 2022 represented 65.5% and 62.8% of net revenue, respectively.

Net revenue from customers outside the Americas during the three and nine months ended April 3, 2021 represented 66.4% and 65.5% of net revenue, respectively.

We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities.

Gross margin increased by 0.4 percentage points during the three months ended January 1, 2022 from 60.1% in the same period a year ago to 60.5% in the current period.

This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments.

This increase was partially offset by gross margin reduction in our OSP segment as discussed below in the Operating Segment Information section.

Gross margin increased by 0.3 percentage points during the six months ended January 1, 2022 from 59.8% in the same period a year ago to 60.1% in the current period.

This increase was primarily driven by higher revenue volume and favorable product mix within our NSE segments.

This increase was partially offset by gross margin reduction in our OSP segment as discussed below in the Operating Segment Information section.

Gross margin decreased by 0.8 percentage points during the three months ended April 2, 2022 from 60.0% in the same period a year ago to 59.2% in the current period.

This decrease was primarily driven by gross margin reduction in our NE and OSP segment as discussed below in the Operating Segment Information section.

This decrease was partially offset by higher revenue volume and favorable product mix within our SE segments.

Gross margin decreased by 0.1 percentage points during the nine months ended April 2, 2022 from 59.9% in the same period a year ago to 59.8% in the current period.

This decrease was primarily driven by gross margin reduction in our OSP segment as discussed below in the Operating Segment Information section.

This decrease was partially offset by higher revenue volume and favorable product mix within our NE and SE segments.

As discussed in more detail under “Net Revenue” above, we sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive (increasingly due to Asia-Pacific-based competition), are price sensitive and/or are affected by customer seasonal and mix variant buying patterns.

We expect these factors to continue to result in variability of our gross margin.

Amortization of Acquired Technologies and Intangibles

Amortization of acquired technologies and intangibles decreased $7.0M or 42.2% during the three months ended April 2, 2022 compared to the same period a year ago.

This decrease is primarily due to the runoff of intangible assets becoming fully amortized in fiscal 2021.

Amortization of acquired technologies and intangibles decreased $19.6M or 39.4% during the nine months ended April 2, 2022 compared to the same period a year ago.

This decrease is primarily due to the runoff of intangible assets becoming fully amortized in fiscal 2021.

Research and Development

R&D expense increased by $0.5 million, or 1.0%, during the three months ended January 1, 2022 compared to the same period a year ago.

R&D expense increased by $2.8 million, or 5.4%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was driven by targeted investments to support increased demand for our key product lines.

As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.

R&D expense increased by $5.3 million, or 5.4%, during the six months ended January 1, 2022 compared to the same period a year ago.

As a percentage of net revenue, R&D expense increased by 0.2 percentage points during the three months ended April 2, 2022 compared to the same period a year ago.

R&D expense increased by $8.1 million, or 5.4%, during the nine months ended April 2, 2022 compared to the same period a year ago.

This increase was driven by targeted investments to support increased demand for our key product lines.

As a percentage of net revenue, R&D expense decreased by 0.7 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.

As a percentage of net revenue, R&D expense decreased by 0.4 percentage points during the nine months ended April 2, 2022 compared to the same period a year ago.

We believe that continuing our investments in R&D is critical to attaining our strategic objectives.

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Selling, General and Administrative

SG&A expense increased by $8.7 million, or 10.9%, during the three months ended January 1, 2022 compared to the same period a year ago.

SG&A expense increased by $2.9 million, or 3.4%, during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was primarily due to targeted investments in people, processes and technology.

As a percentage of net revenue, SG&A increased 1.5 percentage points during the three months ended January 1, 2022 compared to the same period a year ago.

SG&A expense increased by $19.1 million, or 11.9%, during the six months ended January 1, 2022 compared to the same period a year ago.

As a percentage of net revenue, SG&A decreased 0.2 percentage points during the three months ended April 2, 2022 compared to the same period a year ago.

SG&A expense increased by $22.0 million, or 8.9%, during the nine months ended April 2, 2022 compared to the same period a year ago.

This increase was primarily due to targeted investments in people, processes and technology.

As a percentage of net revenue, SG&A increased 0.6 percentage points during the six months ended January 1, 2022 compared to the same period a year ago.

As a percentage of net revenue, SG&A increased 0.3 percentage points during the nine months ended April 2, 2022 compared to the same period a year ago.

Restructuring and Related Charges

From time to time we have initiated strategic restructuring events primarily intended to reduce costs, consolidate our operations, integrate various acquisitions, rationalize the manufacturing of our products and align our businesses to address market conditions.

As of January 1, 2022 the Company did not have a restructuring accrual compared to an accrual of $0.5 million as of July 3, 2021.

During the three and six months ended January 1, 2022, the Company recorded restructuring and related benefits of $(0.1) million and $(0.1) million, respectively.

During the three and six months ended January 2, 2021, the Company recorded restructuring and related charges (benefits) of $0.2 million and $(0.4) million, respectively.

As of April 2, 2022 the Company did not have a restructuring accrual compared to an accrual of $0.5 million as of July 3, 2021.

For the three months ended April 2, 2022, there were no restructuring charges or benefits recorded.

During the nine months ended April 2, 2022, the Company recorded restructuring benefits of $0.1 million.

During the three and nine months ended April 3, 2021, the Company recorded restructuring and related benefits of $0.4 million and $0.8 million, respectively.

Refer to “Note 13.

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Loss on convertible note exchange

During the three months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

During the three months ended April 2, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

The Company paid $64.7 million in cash in exchange for $23.2 million principal amount of the 2023 Notes and $26.8 million principal amount of the 2024 Notes.

The Company recorded a loss of $6.4 million in connection with the transactions.

During the six months ended January 1, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

During the nine months ended April 2, 2022, the Company entered into separate privately-negotiated agreements with certain holders of its 1.75% Senior Convertible Notes due 2023 and 1.00% Senior Convertible Notes due 2024.

The Company paid an aggregate of 10.6 million shares of its common stock, par value $0.001 per share, and $320.2 million in cash in exchange for $137.6 million principal amount of the 2023 Notes and $233.0 million principal amount of the 2024 Notes.

The Company recorded a loss of $98.7 million in connection with the settlement transactions.

Interest income and other income, net

Interest income and other income, net, was $1.1 million during the three months ended January 1, 2022 and January 2, 2021, respectively.

Interest income and other income, net, was $2.5 million during the six months ended January 1, 2022 compared to $1.7 million the same period a year ago.

This $0.8 million increase was primarily driven by higher interest income and foreign exchange gains.

Interest income and other income (loss), net

Interest income and other income (loss), net, was $0.6 million during the three months ended April 2, 2022 compared to $(0.9) million during the same period a year ago.

This $1.5 million increase was primarily driven by a favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest income and other income, net, was $3.1 million during the nine months ended April 2, 2022 compared to $0.8 million during the same period a year ago.

This $2.3 million increase was primarily driven by a favorable foreign exchange impact as the balance sheet hedging program provided a more favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest Expense

Interest expense increased by $3.5 million or 97.2% during the three months ended January 1, 2022 compared to the same period a year ago.

This increase was primarily due to higher debt levels, higher interest rate on Senior Notes due 2029 and amortization of issuance costs as a result of the issuance of Senior Notes due 2029 in September 2021.

Interest expense increased by $3.5 million or 48.6% during the six months ended January 1, 2022 compared to the same period a year ago.

Interest expense increased by $2.8 million or 77.8% during the three months ended April 2, 2022 compared to the same period a year ago.

This increase was primarily due to higher debt levels, the higher interest rate on Senior Notes due 2029 and amortization of issuance costs as a result of the issuance of Senior Notes due 2029 in September 2021.

Interest expense increased by $6.3 million or 58.3% during the nine months ended April 2, 2022 compared to the same period a year ago.

Provision for Income Taxes

We recorded an income tax expense of $2.3 million and $15.9 million for the three and six months ended January 1, 2022, respectively.

We recorded an income tax expense of $12.5 million and $21.1 million for the three and six months ended January 2, 2021, respectively.

The income tax expense for the three and six months ended January 1, 2022 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss for the respective fiscal year offset by a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.

The income tax expense for the three and six months ended January 2, 2021 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss.

We recorded an income tax provision of $9.4 million and $25.3 million for the three and nine months ended April 2, 2022, respectively.

We recorded an income tax provision of $14.2 million and $35.3 million for the three and nine months ended April 3, 2021, respectively.

The income tax provision for the three and nine months ended April 2, 2022 and April 3, 2021 primarily relates to income tax in certain foreign and state jurisdictions based on our forecasted pre-tax income or loss.

The income tax provision for the nine months ended April 2, 2022 includes a $8.1 million tax benefit recognized upon the statute of limitations on a transfer pricing reserve in a non-US jurisdiction.

The income tax provision recorded differs from the expected tax provision that would be calculated by applying the federal statutory rate to our income from continuing operations before taxes primarily due to the changes in valuation allowance for deferred tax assets attributable to our domestic and foreign income from continuing operations.

As of January 1, 2022, and July 3, 2021 , our unrecognized tax benefits totaled $50.0 million and $55.5 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $1.7 million accrued for the payment of interest and penalties as of January 1, 2022.

As of April 2, 2022, and July 3, 2021, our unrecognized tax benefits totaled $50.2 million and $55.5 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $1.6 million accrued for the payment of interest and penalties as of April 2, 2022.

The timing and resolution of income tax examinations is uncertain, and the amounts ultimately paid, if any, upon resolution of issues raised by the taxing authorities may differ from the amounts accrued for each year.

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Information related to our operating segments were as follows, (in millions):

Three Months Ended Six Months Ended

January 1, 2022 January 2, 2021 Change

Percentage Change

January 1, 2022 January 2, 2021 Change Percentage Change

Three Months Ended Nine Months Ended

April 2, 2022 April 3, 2021 Change Percentage Change April 2, 2022 April 3, 2021 Change Percentage Change

Network Enablement

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Network Enablement

During the three months ended January 1, 2022, NE gross margin increased by 1.8 percentage points from 62.6% in the same period a year ago to 64.4% in the current period, reflecting higher revenue volumes and favorable product mix.

During the six months ended January 1, 2022, NE gross margin increased by 1.4 percentage points from 63.2% in the same period a year ago to 64.6% in the current period, reflecting higher revenue volumes and favorable product mix.

During the three months ended April 2, 2022, NE gross margin decreased by 0.7 percentage points from 64.5% in the same period a year ago to 63.8% in the current period, reflecting an unfavorable product mix.

During the nine months ended April 2, 2022, NE gross margin increased by 0.6 percentage points from 63.7% in the same period a year ago to 64.3% in the current period, reflecting higher revenue volumes and favorable product mix.

Service Enablement

During the three months ended January 1, 2022, SE gross margin increased by 3.6 percentage points from 68.2% in the same period a year ago to 71.8% in the current period.

During the three months ended April 2, 2022, SE gross margin increased by 8.0 percentage points from 61.1% in the same period a year ago to 69.1% in the current period.

This increase was primarily due to higher revenue and favorable product mix.

During the six months ended January 1, 2022, SE gross margin increased by 0.8 percentage points from 67.6% in the same period a year ago to 68.4% in the current period.

During the nine months ended April 2, 2022, SE gross margin increased by 3.0 percentage points from 65.6% in the same period a year ago to 68.6% in the current period.

This increase was primarily due to higher revenue and favorable product mix.

Network and Service Enablement (NSE)

During the three months ended January 1, 2022, NSE operating margin increased by 8.0 percentage points from 10.7% in the same period a year ago to 18.7% in the current period.

During the three months ended April 2, 2022, NSE operating margin increased by 5.0 percentage points from 9.9% in the same period a year ago to 14.9% in the current period.

This increase in operating margin was primarily driven by higher revenue volume.

During the six months ended January 1, 2022, NSE operating margin increased by 7.1 percentage points from 9.1% in the same period a year ago to 16.2% in the current period.

During the nine months ended April 2, 2022, NSE operating margin increased by 6.3 percentage points from 9.4% in the same period a year ago to 15.7% in the current period.

This increase in operating margin was primarily driven by higher revenue volume.

Optical Security and Performance Products

During the three months ended January 1, 2022, OSP gross margin decreased by 6.5 percentage points from 62.7% in the same period a year ago to 56.2% in the current period.

During the three months ended April 2, 2022, OSP gross margin decreased by 5.1 percentage points from 60.6% in the same period a year ago to 55.5% in the current period.

This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.

During the six months ended January 1, 2022, OSP gross margin decreased by 4.3 percentage points from 61.4% in the same period a year ago to 57.1% in the current period.

During the nine months ended April 2, 2022, OSP gross margin decreased by 4.6 percentage points from 61.2% in the same period a year ago to 56.6% in the current period.

This decrease was primarily due to lower revenue, corresponding reduced manufacturing absorption and unfavorable product mix.

OSP operating margin decreased by 8.7 percentage points during the three months ended January 1, 2022 from 47.9% in the same period a year ago to 39.2% in the current period.

OSP operating margin decreased by 4.6 percentage points during the three months ended April 2, 2022 from 43.9% in the same period a year ago to 39.3% in the current period.

The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.

OSP operating margin decreased by 5.2 percentage points during the six months ended January 1, 2022 from 47.3% in the same period a year ago to 42.1% in the current period.

OSP operating margin decreased by 5.1 percentage points during the nine months ended April 2, 2022 from 46.2% in the same period a year ago to 41.1% in the current period.

The decrease in operating margin was primarily due to the aforementioned reduction in gross margin.

Liquidity and Capital Resources

As of January 1, 2022 and July 3, 2021, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $738.5 million and $703.7 million, respectively.

As of April 2, 2022 and July 3, 2021, we had assets classified as cash and cash equivalents, as well as short-term investments and short-term restricted cash, in an aggregate amount of $596.0 million and $703.7 million, respectively.

Our cash investments are made in accordance with an investment policy approved by the Audit Committee of our Board of Directors and has not changed from that disclosed in our Form 10-K for the fiscal year ended July 3, 2021.

As of January 1, 2022, U.S.

As of April 2, 2022, U.S.

entities owned approximately 36.4% of our cash and cash equivalents, short-term investments and short-term restricted cash.

The recent COVID-19 pandemic has caused disruption in global capital markets and over time may impact our ability to obtain credit and/or negotiate acceptable financing terms.

As of January 1, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

As of April 2, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

Although we intend to hold these investments to maturity, in the event that we are required to sell any of these securities under adverse market conditions, losses could be recognized on such sales.

During the three months ended January 1, 2022, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

During the three months ended April 2, 2022, we have not realized material investment losses but can provide no assurance that the value or the liquidity of our investments will not be impacted by adverse conditions in the financial markets.

In addition, we maintain cash balances in operating accounts that are with third-party financial institutions.

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In addition, the Credit Agreement contains certain financial covenants that require the Company to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 if excess availability under the facility is less than the greater of 10% of the lesser of maximum revolver amount and borrowing base and $20 million.

As of January 1, 2022, we had no amounts outstanding under the Credit Agreement.

As of April 2, 2022, we had no amounts outstanding under the Credit Agreement.

In connection with the entry into the Credit Agreement described above, the Company terminated its existing $300 million revolving credit agreement, dated May 5, 2020.

Six Months Ended January 1, 2022

As of January 1, 2022, our combined balance of cash and cash equivalents and restricted cash increased by $35.3 million to $743.7 million from $708.4 million as of July 3, 2021.

During the six months ended January 1, 2022, Cash provided by operating activities was $75.6 million, consisting of net loss of $20.2 million adjusted for non-cash charges (e.g., loss on convertible note settlement, depreciation, amortization, stock-based compensation and other non-cash items) which totaled $156.4 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $60.6 million.

Changes in our operating assets and liabilities related primarily to an increase in inventory of $24.3 million, a decrease in income taxes payable of $21.1 million, an increase in other current and non-current assets of $9.4 million, a decrease in deferred revenue of $6.9 million and an increase in accounts receivable of $6.0 million.

These were partially offset by an increase in accounts payable of $5.4 million and increase in accrued payroll and related expenses of $2.2 million.

During the six months ended January 1, 2022, Cash used in investing activities was $32.5 million, primarily related to $34.1 million of cash used for capital expenditures and $1.2 million of cash used for acquisitions, offset by $2.8 million proceeds from sales of assets.

During the six months ended January 1, 2022, Cash used in financing activities was $2.9 million, primarily resulting from $259.3 million paid in connection with the Convertible Note Exchange transactions, $125.6 million cash paid to repurchase common stock under our share repurchase program, $10.9 million in withholding tax payments on the vesting of restricted stock awards and $9.6 million debt issuance costs paid in the period.

Nine Months Ended April 2, 2022

As of April 2, 2022, our combined balance of cash and cash equivalents and restricted cash decreased by $106.9 million to $601.5 million from $708.4 million as of July 3, 2021.

During the nine months ended April 2, 2022, Cash provided by operating activities was $104.5 million, consisting of net loss of $1.0 million adjusted for non-cash charges (e.g., loss on convertible note settlement, depreciation, amortization, stock-based compensation and other non-cash items) which totaled $192.1 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $86.6 million.

Changes in our operating assets and liabilities related primarily to a decrease in income taxes payable of $27.5 million, an increase in inventory of $26.5 million, an increase in accounts receivable of $19.2 million, a decrease in accrued payroll and related expenses of $16.9 million, a decrease in accounts payable of $4.9 million and an increase in other current and non-current assets of $2.5 million.

These were partially offset by an increase in deferred revenue of $9.8 million and an increase in accrued expenses and other current and non-current liabilities of $1.1 million.

During the nine months ended April 2, 2022, Cash used in investing activities was $51.2 million, primarily related to $53.4 million of cash used for capital expenditures and $1.2 million of cash used for acquisitions, offset by $3.4 million proceeds from sales of assets.

During the nine months ended April 2, 2022, Cash used in financing activities was $151.3 million, primarily resulting from $324.3 million paid in connection with the Convertible Note Exchange transactions, $207.0 million cash paid to repurchase common stock under our share repurchase program, $12.5 million in withholding tax payments on the vesting of restricted stock awards, $10.2 million debt issuance costs paid in the period and $5.1 million in other payments, primarily acquisition related.

These were partially offset by $400.0 million gross proceeds from issuance of the 3.75% Notes due 2029, and $7.8 million in proceeds from the issuance of common stock under our employee stock purchase plan.

We believe that our existing cash balances and investments will be sufficient to meet our liquidity and capital spending requirements over the next twelve months.

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

• Global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers;

• Impact of the COVID-19 pandemic on our financial condition;

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

• Increase in capital expenditure to support the revenue growth opportunity of our business;

• Changes in customer payment terms and patterns, which typically results in customers delaying payments or negotiating favorable payment terms to manage their own liquidity positions;

• Timing of payments to our suppliers;

• Factoring or sale of accounts receivable;

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

• Volatility in foreign exchange market which impacts our financial results;

• Possible investments or acquisitions of complementary businesses, products or technologies;

• Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes and/or 2029 Notes prior to their maturity or of our common stock;

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

• Compliance with covenants and other terms and conditions related to our financing arrangements;

• The risks and uncertainties detailed in Item 1A “Risk Factors” section of our Annual Report on Form 10-K, filed with the SEC on August 23, 2021.

However, there are a number of risks and uncertainties that could positively or negatively impact our liquidity position, which are detailed in Item 1A “Risk Factors.”

Contractual Obligations

There were no material changes to our existing contractual commitments during the second quarter of fiscal 2022.

There were no material changes to our existing contractual commitments during the third quarter of fiscal 2022.

Off-Balance Sheet Arrangements

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plan is partially funded, and the other Germany plans, which were initially established as “pay-as-you-go” plans, are unfunded.

As of January 1, 2022, our pension plans were under funded by $98 million since the PBO exceeded the fair value of plan assets.

As of April 2, 2022, our pension plans were under-funded by $92 million since the PBO exceeded the fair value of plan assets.

Similarly, we had a liability of $0.4 million related to our non-pension post-retirement benefit plan.

Pension plan assets are managed by external third parties and we monitor the performance of our investment managers.

As of January 1, 2022, the fair value of plan assets had increased approximately 2.1% since July 3, 2021, our most recent fiscal year end.

As of April 2, 2022, the fair value of plan assets had decreased approximately 4.8% since July 3, 2021, our most recent fiscal year end.

A key actuarial assumption in calculating the net periodic cost and the PBO is the discount rate.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis