What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2023-02-03 · 132 added, 116 removed, 293 unchanged (46% of the section changed)

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• Optical Security and Performance Products (OSP).

During the second quarter, we continued to experience a constrained demand outlook, currency headwinds, and inflationary pressures.

During the third quarter, we continued to experience a constrained demand outlook and inflationary pressures.

Weakness in service provider and network equipment manufacturer spending continues to create headwinds for our NE segment.

Demand for anti-counterfeiting is softening driven by fiscal tightening as central banks continue to normalize currency printing from elevated levels during the pandemic, creating pressure on OSP revenues.

Any prolonged disruption of manufacturing of our products, commerce and related activity or significant decrease in demand for our products could materially and adversely affect our results of business, operations, and financial conditions.

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Restructuring plan

On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the Plan) intended to improve operational efficiencies and better align the Company’s workforce with current business needs and strategic growth opportunities.

The Company expects approximately 5% of its global workforce to be affected and estimates it will incur charges of approximately $15 million in connection with the Plan.

On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the Plan) intended to reduce costs and better align the Company’s workforce with current business needs and strategic growth opportunities.

The Company expects approximately 5% of its global workforce to be affected.

The Company anticipates the Plan to be substantially complete by the end of fiscal 2023.

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We operate globally and sell our products in countries throughout the world.

Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between China and Taiwan, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations.

Recent escalation in regional conflicts, including the Russian invasion of Ukraine, resulting in ongoing economic sanctions, and the risk of increased tensions between China and the US, could curtail or prohibit our ability to transfer certain technologies, to sell our products and solutions, or to continue to operate in certain locations.

Moreover, international conflict has resulted in increased pressure on the supply chain and could further result in increased energy costs, which could increase the cost of manufacturing, selling and delivering products and solutions;

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As a result of the restrictions on exports to Russia, we suspended transactions in the region effective February 2022, which has negatively impacted our business.

While sales in this jurisdiction are not material to our total consolidated revenues or net income, 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 as of the date of issuance of this Quarterly Report on Form 10-Q.

Foreign companies with a presence in China are facing increasing operational challenges and enhanced scrutiny from governmental entities in region.

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 as of the date of issuance of this Quarterly Report on Form 10-Q.

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 geopolitical instability 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 remains uncertain.

The impact on our future operations and results remains uncertain.

COVID-19 Pandemic Update

The worldwide spread of the COVID-19 virus and global slowdown of economic activity could continue to impact demand for a broad variety of goods and services, including from the Company’s customers, while also continuing to disrupt sales channels and marketing activities for an unknown period of time.

New and potentially more contagious variants of the virus have emerged over the course of the pandemic, along with a surge in cases in several regions across the globe, including Europe and Asia, resulting in renewed shutdown, mandatory quarantines and shelter in place orders in certain regions.

The reopening of China and ending of its “zero-Covid” policy could have unforeseen impacts on our operations and facilities.

These events have led, at times, to slowdowns in shipping and commercial activities.

Through continued economic challenges, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures.

While the Covid pandemic has abated and normal business operations have largely resumed, events have led, at times, to slowdowns in shipping and commercial activities.

Through lingering economic turbulence, there continue to be periodic shipping and logistics challenges and continued supply chain constraints, shortages and delays, along with inflationary pricing pressures.

While the Company expects that all of this could have a negative impact to its sales and its results of operations, the Company is 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 as of the date of issuance of this Quarterly Report on Form 10-Q.

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Financial Highlights

Second quarter fiscal 2023 results included the following notable items:

Third quarter fiscal 2023 results included the following notable items:

• Net revenue of $247.8 million, down $67.7 million or 21.5% year-over-year.

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A reconciliation of Non-GAAP financial measures to GAAP financial measures is provided below (in millions, except EPS amounts):

Three Months Ended Six Months Ended

December 31, 2022 January 1, 2022 December 31, 2022 January 1, 2022

Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

Operating (Loss) Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin Operating Income Operating Margin

GAAP measures $ (2.1) (0.8) % $ 40.8 12.9 % $ 70.6 8.4 % $ 137.0 14.3 %

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Amortization of intangibles 8.0 3.2 % 9.6 3.1 % 25.2 3.0 % 30.2 3.2 %

Restructuring and related benefits — — % (0.1) — % — — % (0.1) — %

Restructuring and related charges (benefits) 10.2 4.1 % — — % 10.2 1.2 % (0.1) — %

Total related to Cost of Revenue and Operating Expenses 30.4 12.2 % 26.9 8.6 % 71.1 8.4 % 78.3 8.2 %

Non-GAAP measures $ 28.3 11.4 % $ 67.7 21.5 % $ 141.7 16.8 % $ 215.3 22.5 %

Three Months Ended Six Months Ended

December 31, 2022 January 1, 2022 December 31, 2022 January 1, 2022

Net Income Diluted EPS Net Income Diluted EPS Net Income Diluted

EPS Net Income (loss) Diluted

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

Net (loss) income Diluted EPS Net Income Diluted EPS Net Income Diluted

EPS Net (loss) income Diluted

GAAP measures $ (15.4) $ (0.07) $ 19.2 $ 0.08 $ 25.6 $ 0.11 $ (1.0) $ 0.00

Items reconciling GAAP net income (loss) and EPS to non-GAAP net income and EPS:

Items reconciling GAAP net (loss) income and EPS to non-GAAP net income and EPS:

Stock-based compensation 12.8 0.06 12.8 0.05 38.8 0.17 39.7 0.17

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Amortization of intangibles 8.0 0.04 9.6 0.04 25.2 0.11 30.2 0.13

Restructuring and related benefits — — (0.1) — — — (0.1) —

Restructuring and related charges (benefits) 10.2 0.05 — — 10.2 0.05 (0.1) —

Non-cash interest expense and other expense (2)

2.6 0.01 6.5 0.03 2.6 0.01 99.2 0.43

(Benefit from) provision for income taxes — — (6.1) (0.03) 2.3 0.01 (6.4) (0.03)

Provision for (benefit from) income taxes 0.4 — (0.6) — 2.7 0.01 (7.0) (0.03)

Total related to Net income and EPS 33.4 0.15 32.8 0.14 76.4 0.34 170.5 0.73

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Certain totals may not add due to rounding.

(1) Other items include charges (benefits) unrelated to core operating performance primarily consisting of acquisition and integration related charges, transformational initiatives such as site consolidations and reorganization, legal settlements, sale of investments and disposal of long-lived assets.

(2) The Company incurred a loss of $6.4M and $92.3M for the three and six months ended January 1, 2022 in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes.

(1) Other items include charges (benefits) unrelated to core operating performance primarily consisted of certain acquisition and integration related charges, transformational initiatives such as site consolidations, reorganization, accretion of debt discount, intangible impairment and loss on disposal of long-lived assets.

(2) The Company incurred a loss of $2.2 million for the three and nine months ended April 1, 2023 in connection with the modification of certain 1.00% Senior Convertible Notes.

The Company incurred a loss of $6.4M and $98.7M for the three and nine months ended April 2, 2022, respectively, in connection with the repurchase of certain 1.00% and 1.75% Senior Convertible Notes.

The Company eliminates this in calculating non-GAAP net income and non-GAAP net income per share, because it believes that in so doing, it can provide investors a clearer and more consistent view of the Company’s core operating performance.

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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

December 31, 2022 January 1, 2022 Change Percent Change December 31, 2022 January 1, 2022 Change Percent Change

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 Change Percent Change April 1, 2023 April 2, 2022 Change Percent Change

Segment net revenue:

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Percentage of net revenue 0.8 % 0.7 % 0.8 % 0.8 %

Restructuring and related benefits $ — $ (0.1) $ 0.1 (100.0) % $ — $ (0.1) $ 0.1 (100.0) %

Restructuring and related charges (benefits) $ 10.2 $ — $ 10.2 100.0 % $ 10.2 $ (0.1) $ 10.3 NM

Percentage of net revenue 4.1 % — % 1.2 % — %

Loss on convertible note exchange $ — $ (6.4) $ 6.4 (100.0) % $ — $ (92.3) $ 92.3 (100.0) %

Loss on convertible note settlement $ — $ (6.4) $ 6.4 (100.0) % $ — $ (98.7) $ 98.7 (100.0) %

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

Loss on convertible note modification $ (2.2) $ — $ (2.2) 100.0 % $ (2.2) $ — $ (2.2) 100.0 %

Percentage of net revenue 0.9 % — % 0.3 % — %

Interest income and other income, net $ 1.6 $ 0.6 $ 1.0 166.7 % $ 4.9 $ 3.1 $ 1.8 58.1 %

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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.

Three months ended December 31, 2022 and January 1, 2022

Net revenue decreased by $30.3 million, or 9.6%, during the three months ended December 31, 2022 compared to the same period a year ago.

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

Product revenues decreased by $35.9 million, or 12.9%, during the three months ended December 31, 2022 compared to the same period a year ago, driven by revenue decreases from our NE and SE segments, partially offset by revenue increase in our OSP segment.

Service revenues increased by $5.6 million, or 15.0%, during the three months ended December 31, 2022 compared to the same period a year ago.

This increase was due to revenue increase from our NE and SE segments.

NE net revenue decreased by $34.7 million, or 16.2%, during the three months ended December 31, 2022 compared to the same period a year ago.

This decrease was primarily driven by lower volumes in Field Instruments, Wireless and Lab & Production products compared to the prior year partially offset by Jackson Labs revenues not included in the same period a year ago.

SE net revenue decreased by $2.4 million, or 8.1%, during the three months ended December 31, 2022 compared to the same period a year ago, due to lower volumes.

OSP net revenue increased by $6.8 million, or 9.6%, during the three months ended December 31, 2022 compared to the same period a year ago.

This increase was primarily driven by higher volume in Anti-Counterfeiting and consumer and industrial compared to the same period a year ago.

Three months ended April 1, 2023 and April 2, 2022

Net revenue decreased by $67.7 million, or 21.5%, during the three months ended April 1, 2023 compared to the same period a year ago.

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

Product revenues decreased by $70.6 million, or 25.6%, during the three months ended April 1, 2023 compared to the same period a year ago, driven by revenue decreases in all segments.

Service revenues increased by $2.9 million, or 7.3%, during the three months ended April 1, 2023 compared to the same period a year ago.

This increase was due to revenue increases from our NE and SE segments.

NE net revenue decreased by $54.7 million, or 26.8%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower volumes in Field Instruments, Lab & Production and Wireless products compared to the prior year partially offset by PNT revenue not included in the same period a year ago.

SE net revenue increased by $1.2 million, or 4.5%, during the three months ended April 1, 2023 compared to the same period a year ago, primarily due to higher Assurance revenue.

OSP net revenue decreased by $14.2 million, or 16.8%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily driven by lower Anti-Counterfeiting and consumer and industrial revenue compared to the same period a year ago.

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

December 31, 2022 January 1, 2022 December 31, 2022 January 1, 2022

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 April 1, 2023 April 2, 2022

United States $ 82.5 33.3 % $ 87.4 27.7 % $ 271.6 32.2 % $ 280.9 29.4 %

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Total net revenue $ 247.8 100.0 % $ 315.5 100.0 % $ 842.5 100.0 % $ 957.1 100.0 %

Net revenue from customers outside the Americas during the three and six months ended December 31, 2022 represented 62.6% and 61.4% of net revenue, respectively.

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 nine months ended April 1, 2023 represented 59.5% and 60.9% 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.

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 decreased by 1.8 percentage points during the three months ended December 31, 2022 from 60.5% in the same period a year ago to 58.7% in the current period.

The decrease was primarily driven by gross margin reduction in all segments as discussed below in the Operating Segment Information section.

Gross margin decreased by 0.9 percentage points during the six months ended December 31, 2022 from 60.1% in the same period a year ago to 59.2% in the current period.

Gross margin decreased by 2.3 percentage points during the three months ended April 1, 2023 from 59.2% in the same period a year ago to 56.9% in the current period.

The decrease was primarily due to gross margin reduction from our NE and OSP segments, offset by gross margin increase in our SE segment, as discussed below in the Operating Segment Information section.

Gross margin decreased by 1.3 percentage points during the nine months ended April 1, 2023 from 59.8% in the same period a year ago to 58.5% in the current period.

The decrease was primarily driven by gross margin reduction in all segments as discussed below in the Operating Segment Information section.

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Amortization of Acquired Technologies and Other Intangibles

Amortization of acquired technologies and other intangibles decreased $2.1M or 21.0% during the three months ended December 31, 2022 compared to the same period a year ago.

Amortization of acquired technologies and other intangibles decreased $1.6M or 16.7% during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.

Amortization of acquired technologies and other intangibles decreased $3.4M or 16.5% during the six months ended December 31, 2022 compared to the same period a year ago.

Amortization of acquired technologies and other intangibles decreased $5.0M or 16.6% during the nine months ended April 1, 2023 compared to the same period a year ago.

This decrease is primarily due to certain intangible assets becoming fully amortized in fiscal 2022.

Research and Development

R&D expense increased by $1.4 million, or 2.8%, during the three months ended December 31, 2022 compared to the same period a year ago.

This increase was driven primarily by higher contractor and travel expenses.

As a percentage of net revenue, R&D expense increased by 2.2 percentage points during the three months ended December 31, 2022 compared to the same period a year ago.

R&D expense increased by $0.4 million or 0.4%, during the six months ended December 31, 2022 compared to the same period a year ago.

This increase was driven primarily by higher contractor expenses.

As a percentage of net revenue, R&D expense increased by 1.4 percentage points during the six months ended December 31, 2022 compared to the same period a year ago.

R&D expense decreased by $4.1 million, or 7.5%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was driven primarily by variable expense reductions and cost efficiencies realized during the period.

As a percentage of net revenue, R&D expense increased by 3.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.

R&D expense decreased by $3.7 million or 2.3%, during the nine months ended April 1, 2023 compared to the same period a year ago.

This decrease was driven primarily by variable expense reductions and cost efficiencies realized during the period.

As a percentage of net revenue, R&D expense increased by 1.8 percentage points during the nine months ended April 1, 2023 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 $1.8 million, or 2.0%, during the three months ended December 31, 2022 compared to the same period a year ago.

This increase was primarily due to fair value adjustment of contingent consideration related to acquisitions and outside service expenses.

As a percentage of net revenue, SG&A increased 3.6 percentage points during the three months ended December 31, 2022 compared to the same period a year ago.

SG&A expense decreased by $9.8 million, or 5.4%, during the six months ended December 31, 2022 compared to the same period a year ago.

SG&A expense decreased by $9.0 million, or 10.1%, during the three months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily due to fair value adjustment of contingent consideration related to acquisitions and variable expense reductions.

As a percentage of net revenue, SG&A increased 4.1 percentage points during the three months ended April 1, 2023 compared to the same period a year ago.

SG&A expense decreased by $18.8 million, or 7.0%, during the nine months ended April 1, 2023 compared to the same period a year ago.

This decrease was primarily due to the reversal of the U.K.

pension accrued liability, lower commission expense and foreign exchange impacts offset by fair value adjustment of contingent consideration related to acquisitions and outside service expenses.

As a percentage of net revenue, SG&A increased 0.5 percentage points during the six months ended December 31, 2022 compared to the same period a year ago.

Loss on convertible note exchange

During the three and six months ended December 31, 2022, the Company did not enter into any convertible note exchange agreements.

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.

pension accrued liability, lower commission expense and outside service expenses.

As a percentage of net revenue, SG&A increased 1.6 percentage points during the nine months ended April 1, 2023 compared to the same period a year ago.

Restructuring and related charges

The Company restructuring events are primarily intended to reduce costs, consolidate operations, integrate various acquisitions, streamline product manufacturing and address market conditions.

On February 1, 2023, the Company approved a restructuring and workforce reduction plan (the FY 2023 Plan) to better align the Company’s workforce with current business needs and strategic growth opportunities.

The Company expects approximately 5% of its global workforce to be affected with approximately $25.0 million of annual savings and anticipates to be substantially complete by the end of fiscal 2023.

During the three and nine months ended April 1, 2023, the Company recorded restructuring charges of $10.2 million related to the FY 2023 Plan.

The restructuring charges include severance, benefit and outplacement costs to eliminate a specified number of positions.

Refer to “Note 13.

Restructuring and Related Charges” for more information.

Loss on convertible note settlement

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 settlement 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.

The Company paid an aggregate 10.6 million shares of its common stock, par value $0.001 per share, and $255.5 million in cash in exchange for $114.3 million principal amount of the 2023 Notes and $206.3 million principal amount of the 2024 Notes.

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

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.

Loss on convertible note modification

During the three months ended April 1, 2023, the Company exchanged $127.5 million principal value of its 1.00% Senior Convertible Notes due 2024 for $132.0 million principal value of its 1.625% Senior Convertible Notes due 2026.

The Company incurred $4.2 million of issuance costs related to the modification, of which $ 2.2 million of the issuance costs were recorded as loss on convertible note modification on the Consolidated Statements of Operations.

The remaining issuance costs of $ 2.0 million was capitalized within long-term debt (as a contra-balance) on the Consolidated Balance Sheets and will be amortized as an adjustment to interest expense on a straight-line basis until maturity.

Interest income and other income, net

Interest income and other income, net, was $2.2 million during the three months ended December 31, 2022 compared to $1.1 million during the same period a year ago.

This $1.1 million increase was primarily driven by higher interest income during the current period.

Interest income and other income, net, was $3.3 million during the six months ended December 31, 2022 compared to $2.5 million during the same period a year ago.

Interest income and other income, net, was $1.6 million during the three months ended April 1, 2023 compared to $0.6 million during the same period a year ago.

This $1.0 million increase was primarily driven by higher interest income during the current period offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest income and other income, net, was $4.9 million during the nine months ended April 1, 2023 compared to $3.1 million during the same period a year ago.

This $1.8 million increase was primarily driven by higher interest income offset by an unfavorable foreign exchange impact as the balance sheet hedging program provided a less favorable offset to the remeasurement of underlying foreign exchange exposures during the current period.

Interest Expense

Interest expense decreased by $0.9 million, or 12.7%, during the three months ended December 31, 2022 compared to the same period a year ago.

This decrease was primarily driven by lower interest expense and amortization of issuance cost on our convertible notes as a result of convertible notes exchange transactions during November 2021, March 2022 and June 2022.

Interest expense increased by $1.6 million, or 15.0%, during the six months ended December 31, 2022 compared to the same period a year ago.

This increase was primarily driven by full six month interest expense on the Senior Notes due 2029 in the current period as a result of the issuance in September 2021.

Interest expense increased by $0.3 million, or 4.7%, during the three months ended April 1, 2023 compared to the same period a year ago.

This increase was primarily driven by the accretion of debt discount on the Senior Convertible Notes due 2026 as a result of the issuance in March 2023.

Interest expense increased by $1.9 million, or 11.1%, during the nine months ended April 1, 2023 compared to the same period a year ago.

This increase was primarily driven by full nine month interest expense on the Senior Notes due 2029 in the current period as a result of the issuance in September 2021 offset by lower interest expense on our convertible notes as a result of convertible notes settlement transactions during September 2021, November 2021, March 2022 and June 2022.

Provision for Income Taxes

We recorded an income tax provision of $10.5 million and $22.7 million for the three and six months ended December 31, 2022, respectively.

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

The income tax provision for the three and six months ended December 31, 2022 and January 1, 2022 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 $6.0 million and $28.7 million for the three and nine months ended April 1, 2023, respectively.

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.

The income tax provision for the three and nine months ended April 1, 2023 and April 2, 2022 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 December 31, 2022, and July 2, 2022, our unrecognized tax benefits totaling $50.3 million and $49.7 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $2.6 million accrued for the payment of interest and penalties as of December 31, 2022.

As of April 1, 2023, and July 2, 2022, our unrecognized tax benefits totaling $51.1 million and $49.7 million, respectively, are included in deferred taxes and other non-current tax liabilities, net.

We had $2.8 million accrued for the payment of interest and penalties as of April 1, 2023.

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

December 31, 2022 January 1, 2022 Change Percentage Change December 31, 2022 January 1, 2022 Change Percentage Change

Three Months Ended Nine Months Ended

April 1, 2023 April 2, 2022 Change Percentage Change April 1, 2023 April 2, 2022 Change Percentage Change

Network Enablement

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Network Enablement

During the three months ended December 31, 2022, NE gross margin decreased by 0.3 percentage points from 64.4% in the same period a year ago to 64.1% in the current period, reflecting lower volumes and unfavorable product mix.

During the six months ended December 31, 2022, NE gross margin decreased by 0.4 percentage points from 64.6% in the same period a year ago to 64.2% in the current period, reflecting lower volumes and unfavorable product mix.

During the three months ended April 1, 2023, NE gross margin decreased by 1.8 percentage points from 63.8% in the same period a year ago to 62.0% in the current period due to lower volumes.

During the nine months ended April 1, 2023, NE gross margin decreased by 0.7 percentage points from 64.3% in the same period a year ago to 63.6% in the current period due to lower volumes.

Service Enablement

During the three months ended December 31, 2022, SE gross margin decreased by 5.0 percentage points from 71.8% in the same period a year ago to 66.8% in the current period.

This decrease was primarily due to unfavorable product mix.

During the six months ended December 31, 2022, SE gross margin decreased by 1.6 percentage points from 68.4% in the same period a year ago to 66.8% in the current period.

This decrease was primarily due to unfavorable product mix.

During the three months ended April 1, 2023, SE gross margin increased by 1.3 percentage points from 69.1% in the same period a year ago to 70.4% in the current period.

This increase was primarily due to higher volumes and improved product mix.

During the nine months ended April 1, 2023, SE gross margin decreased by 0.6 percentage points from 68.6% in the same period a year ago to 68.0% in the current period.

This decrease was primarily due to lower volumes.

Network and Service Enablement

During the three months ended December 31, 2022, NSE operating margin decreased by 9.8 percentage points from 18.7% in the same period a year ago to 8.9% in the current period.

This decrease in operating margin was primarily driven by lower volumes and unfavorable product mix.

During the six months ended December 31, 2022, NSE operating margin decreased by 5.1 percentage points from 16.2% in the same period a year ago to 11.1% in the current period.

This decrease in operating margin was primarily driven by lower volumes and unfavorable product mix.

During the three months ended April 1, 2023, NSE operating margin decreased by 13.5 percentage points from 14.9% in the same period a year ago to 1.4% in the current period.

This decrease in operating margin was primarily driven by lower volumes.

During the nine months ended April 1, 2023, NSE operating margin decreased by 7.4 percentage points from 15.7% in the same period a year ago to 8.3% in the current period.

This decrease in operating margin was primarily driven by lower volumes.

Optical Security and Performance Products

During the three months ended December 31, 2022, OSP gross margin decreased by 3.9 percentage points from 56.2% in the same period a year ago to 52.3% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility partially offset by higher revenue.

During the six months ended December 31, 2022, OSP gross margin decreased by 2.4 percentage points from 57.1% in the same period a year ago to 54.7% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility.

OSP operating margin decreased by 3.7 percentage points during the three months ended December 31, 2022 from 39.2% in the same period a year ago to 35.5% in the current period.

During the three months ended April 1, 2023, OSP gross margin decreased by 4.9 percentage points from 55.5% in the same period a year ago to 50.6% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.

During the nine months ended April 1, 2023, OSP gross margin decreased by 3.1 percentage points from 56.6% in the same period a year ago to 53.5% in the current period.

This decrease was primarily due to unfavorable manufacturing variances and startup costs at our Chandler facility and lower volume.

OSP operating margin decreased by 2.7 percentage points during the three months ended April 1, 2023 from 39.3% in the same period a year ago to 36.6% in the current period.

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

OSP operating margin decreased by 2.9 percentage points during the six months ended December 31, 2022 from 42.1% in the same period a year ago to 39.2% in the current period.

OSP operating margin decreased by 2.7 percentage points during the nine months ended April 1, 2023 from 41.1% in the same period a year ago to 38.4% in the current period.

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

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

• While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt;

• 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;

• While the principal payment obligations of our 1.00% Senior Convertible Notes due 2024, our 1.75% Senior Convertible Notes due 2023, 1.625% Senior Convertible Notes due 2026 and our 3.75% Senior Notes due 2029 (together the “Notes”) are substantial and there are covenants that restrict our debt level and credit facility capacity, we may be able to incur substantially more debt;

• Issuance or repurchase of debt or equity securities, which may include open market purchases of our 2023 Notes, 2024 Notes, 2026 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;

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Unrealized gains and losses on available-for-sale investments are recorded as other comprehensive (loss) income and are reported as a separate component of stockholders’ equity.

As of December 31, 2022, U.S.

As of April 1, 2023, U.S.

subsidiaries owned approximately 47.2% of our cash and cash equivalents, short-term investments and restricted cash.

As of December 31, 2022, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

As of April 1, 2023, the majority of our cash investments have maturities of 90 days or less and are of high credit quality.

Nonetheless we could realize investment losses under adverse market conditions.

During the three months ended December 31, 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 1, 2023, 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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The Credit Agreement also provides that, under certain circumstances, we may increase the aggregate amount of revolving commitments thereunder by an aggregate amount of up to $100 million so long as certain conditions are met.

As of December 31, 2022, we had no borrowings under this facility and our available borrowing capacity was approximately $169.6 million.

As of April 1, 2023, we had no borrowings under this facility and our available borrowing capacity was approximately $169.4 million.

Refer to “Note 11.

Debt” for more information.

Cash Flows for the Six Months Ended December 31, 2022

As of December 31, 2022, our combined balance of cash and cash equivalents and restricted cash decreased by $75.9 million to $496.9 million from $572.8 million as of July 2, 2022.

During the six months ended December 31, 2022, Cash provided by operating activities was $72.8 million, consisting of net income of $41.0 million adjusted for non-cash charges (e.g.

depreciation, amortization, stock-based compensation and other non-cash items) which totaled $62.8 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $31.0 million.

Changes in our operating assets and liabilities related primarily to a decrease in accrued expenses and other current and non-current liabilities of $25.0 million, a decrease in accrued payroll and related expenses of $21.6 million, an increase in inventory of $14.4 million, a decrease in income taxes payable of $9.0 million, a decrease in deferred revenue of $8.3 million and a decrease in accounts payable of $6.9 million.

Cash Flows for the Nine Months Ended April 1, 2023

As of April 1, 2023, our combined balance of cash and cash equivalents and restricted cash increased by $20.4 million to $593.2 million from $572.8 million as of July 2, 2022.

During the nine months ended April 1, 2023, Cash provided by operating activities was $90.6 million, consisting of net income of $25.6 million adjusted for non-cash charges (e.g., depreciation, amortization, stock-based compensation and other non-cash items) which totaled $106.6 million, including changes in deferred tax balances, and changes in operating assets and liabilities that used $41.6 million.

Changes in our operating assets and liabilities related primarily to a decrease in accrued payroll and related expenses of $35.1 million, a decrease in accrued expenses and other current and non-current liabilities of $27.3 million, an increase in inventory of $20.0 million, a decrease in accounts payable of $13.3 million, a decrease in deferred revenue of $6.3 million and a decrease in income taxes payable of $6.2 million.

These were partially offset by a decrease in accounts receivable of $47.6 million and a decrease in other current and non-current assets of $19.0 million.

During the six months ended December 31, 2022, Cash used in investing activities was $95.9 million, primarily related to $64.4 million of cash used for acquisitions,$32.9 million of cash used for capital expenditures and $1.0 million for a purchase price adjustment related to business acquisition, offset by $2.4 million proceeds from sales of assets.

During the six months ended December 31, 2022, Cash used in financing activities was $52.7 million, primarily resulting from $43.9 million cash paid to repurchase common stock under our share repurchase program, $11.2 million in withholding tax payments on the vesting of restricted stock awards and $1.3 million in other payments, primarily acquisition related.

These were partially offset by $3.7 million in proceeds from the issuance of common stock under our employee stock purchase plan.

During the nine months ended April 1, 2023, Cash used in investing activities was $105.3 million, primarily related to $64.4 million used for acquisitions, $43.7 million used for capital expenditures and $0.7 million for a purchase price adjustment related to business acquisition, offset by $3.5 million proceeds from sales of assets.

During the nine months ended April 1, 2023, Cash provided by financing activities was $29.3 million, primarily resulting from $118.0 million proceeds from the issuance of 2026 Senior Convertible Notes and $7.9 million in proceeds from the issuance of common stock under our employee stock purchase plan.

These were offset by $73.9 million cash paid to repurchase common stock under our share repurchase program, $11.4 million in withholding tax payments on the vesting of restricted stock awards, $7.4 million in other payments, primarily acquisition related and $3.9 million for payments of debt issuance costs.

Share Repurchase Program

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The timing of repurchases under the plan will depend upon business and financial market conditions.

During the three months ended December 31, 2022, the Company repurchased 2.2 million shares of its common stock for $25.2 million under the 2022 Repurchase Plan.

As of December 31, 2022, the Company had remaining authorization of $274.8 million for future share repurchases under the 2022 Repurchase Plan.

During the three months ended April 1, 2023, the Company repurchased 2.8 million shares of its common stock for $30.0 million under the 2022 Repurchase Plan.

During the nine months ended April 1, 2023, the Company repurchased 5.0 million shares of its common stock for $55.2 million under the 2022 Repurchase Plan.

As of April 1, 2023, the Company had remaining authorization of $244.8 million for future share repurchases under the 2022 Repurchase Plan.

The 2022 Repurchase Plan replaces the $200 million stock repurchase plan that the Board previously authorized in September 2019 (“2019 Repurchase Plan”) and expired on September 30, 2022.

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Contractual Obligations

There were no material changes to our existing contractual commitments during the second quarter of fiscal 2023.

There were no material changes to our existing contractual commitments during the third quarter of fiscal 2023.

Off-Balance Sheet Arrangements

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

As of December 31, 2022, our pension plans were under-funded by $58.4 million since the PBO exceeded the fair value of plan assets.

As of April 1, 2023, our pension plans were under-funded by $57.4 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 December 31, 2022, the fair value of plan assets had decreased approximately 4.6% since July 2, 2022, our most recent fiscal year end.

As of April 1, 2023, the fair value of plan assets had increased approximately 2.1% since July 2, 2022, our most recent fiscal year end.

In estimating the expected return on plan assets, we consider historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of active management of the plan’s invested assets.

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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