Lumentum Holdings Inc. — FY2018 Form 10-K Summary
Period note: The supplied filing is the annual report for the fiscal year ended June 30, 2018, not a standalone 2017 Q4 filing. Fiscal 2018 had 52 weeks; fiscal 2017 had 53 weeks. The filing also provides unaudited quarterly data, including the quarter ended June 30, 2018.
Business context and reporting period
Lumentum supplies optical communications products and commercial lasers through its Optical Communications (OpComms) and Lasers segments. Its markets include telecom, datacom, consumer and industrial 3D sensing, and laser-based manufacturing. Fiscal 2018 growth was led by 3D sensing for mobile devices, with additional strength in commercial and industrial lasers.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1,247.7 million | $1,001.6 million |
| Gross profit / margin | $432.1 million / 34.6% | $318.1 million / 31.8% |
| Operating income / margin | $139.9 million / 11.2% | $47.6 million / 4.8% |
| Net income (loss) | $248.1 million | $(102.5) million |
| Diluted EPS attributable to common stockholders | $3.82 | $(1.71) |
| Operating cash flow | $247.5 million | $85.0 million |
| Capital expenditures | $93.2 million | $138.1 million |
Revenue grew 24.6%. OpComms revenue increased 23.5% to $1,059.2 million; Lasers revenue increased 31.1% to $188.5 million. OpComms gross margin rose to 38.0% from 33.5%, and Lasers gross margin rose to 43.9% from 41.7%. The company reported approximately $154.3 million of operating cash flow less capital expenditures.
FY2018 net income included a $118.7 million income tax benefit, principally reflecting a $207.2 million release of valuation allowance on U.S. federal and certain state deferred tax assets, partly offset by $80.5 million of tax expense from remeasuring deferred tax assets after U.S. tax-rate changes. The result therefore includes a substantial tax-related benefit and is not directly comparable with operating performance alone.
At June 30, 2018, cash and cash equivalents were $397.3 million and short-term investments were $314.2 million. Current assets were $1,127.2 million against current liabilities of $214.0 million. The 0.25% convertible notes due 2024 had $450 million principal and a $334.2 million net carrying amount; the balance sheet also included a $52.4 million derivative liability and $35.8 million of redeemable convertible preferred stock. Stockholders’ equity was $926.1 million.
Fourth-quarter FY2018 revenue was $301.1 million, operating income was $20.9 million, net income was $33.5 million, and diluted EPS attributable to common stockholders was $0.40.
Material changes versus the prior comparable period
- Revenue rose $246.1 million, driven by record 3D sensing, TrueFlex ROADMs, commercial lasers, and industrial diode lasers. Consumer and Industrial products represented 34.7% of revenue, up from 4.5%; Telecom fell to 38.1% from 61.0%, and Datacom to 12.1% from 20.1%.
- Gross margin improved 2.8 percentage points, helped by higher-margin 3D sensing and laser sales. The benefit was partly offset by underutilized telecom/datacom capacity and $27.0 million of Thailand facility setup and manufacturing-transfer costs, versus $1.8 million in FY2017.
- Operating cash flow increased to $247.5 million. Cash and cash equivalents rose $124.4 million year over year.
- Net income swung from a loss to profit, but FY2017 included a $104.2 million unrealized derivative loss, while FY2018 benefited from the tax valuation-allowance release. These items materially affect the comparison.
- Apple accounted for 30.0% of FY2018 revenue; Huawei and Ciena each accounted for 11.0%. No customer had reached 10% in FY2017 for Apple, while Huawei, Ciena, and Cisco each exceeded that threshold.
Outlook, commentary, risks, and unusual items
- Management cited long-term demand drivers including higher network and data-center capacity, 3D sensing, and precision laser manufacturing. It planned continued R&D investment and expected R&D spending to increase in absolute dollars.
- Management said FY2018 cash and expected operating cash flows should meet liquidity and capital-spending needs for at least 12 months. No quantified revenue or earnings guidance is provided in the supplied filing text.
- The proposed Oclaro acquisition was pending at filing. Oclaro shareholders approved it and U.S. antitrust clearance was obtained, but Chinese antitrust approval remained outstanding. As of August 23, 2018, consideration was expected to be approximately $1.7 billion, funded with about $700 million in Lumentum stock, $500 million in new debt, and the balance from combined-company cash. A regulatory-related termination could trigger an $80 million fee. The filing described a committed term loan of up to $550 million, with an additional facility provision up to $250 million.
- Key risks include dependence on a concentrated customer base and nonbinding forecasts; volatile 3D-sensing demand; telecom/datacom price pressure and commoditization; China-related demand, tariffs, export controls, and supplier exposure; manufacturing yields and the transition of production from China to Thailand; and reliance on limited-source suppliers and contract manufacturers.
- Other notable matters: a fourth-quarter restructuring charge of $3.4 million included severance for 52 employees; total FY2018 restructuring charges were $7.2 million. One Oclaro-merger stockholder lawsuit remained pending. Management said ordinary-course claims were not expected to have a material adverse effect, while noting the inherent uncertainty of litigation and tax audits.
- The company’s 2024 notes carry 0.25% stated interest but a 5.4% effective interest rate because of discount amortization. The Swiss pension plan was underfunded by $3.5 million. Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- How much of reported profit and EPS is attributable to the tax valuation-allowance release and other nonrecurring accounting effects.
- Whether 3D-sensing revenue and the 30% Apple concentration are sustainable, and how customer purchasing patterns affect quarterly results.
- Progress and final terms of the Oclaro transaction, including Chinese regulatory approval, actual debt raised, cash usage, dilution, integration costs, and realized synergies.
- Whether Thailand manufacturing transfer costs and capacity utilization improve, and whether the transition avoids supply disruptions or margin pressure.
- Cash conversion, working-capital needs, convertible-note obligations, and the impact of new borrowing on liquidity and financial flexibility.
- Potential changes from tax audits, the Tax Act’s provisional accounting, and the Thailand tax holiday, which is expected to expire in fiscal 2025 unless extended and eligibility requirements continue to be met.