Lumentum Holdings Inc. — Form 10-Q Summary
Business context and period. This unaudited report covers fiscal 2021 second quarter, the 13 weeks ended December 26, 2020, and the six months then ended. The comparable periods ended December 28, 2019. Lumentum supplies optical and photonic products through Optical Communications (OpComms) and Commercial Lasers (Lasers), serving communications, consumer, industrial and manufacturing markets.
Financial performance
| Metric | Quarter ended Dec. 26, 2020 | Prior-year quarter | Six months ended Dec. 26, 2020 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $478.8 million | $457.8 million | $931.2 million | $907.7 million |
| Gross profit / margin | $229.6 million / 48.0% | $189.1 million / 41.3% | $435.3 million / 46.7% | $356.8 million / 39.3% |
| Operating income | $115.3 million | $74.8 million | $214.3 million | $134.6 million |
| Net income | $83.2 million | $49.1 million | $150.3 million | $96.7 million |
| Diluted EPS | $1.06 | $0.63 | $1.92 | $1.24 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $233.2 million | $249.8 million |
- Quarterly revenue rose 4.6%; six-month revenue rose 2.6%. OpComms revenue increased 9.7% in the quarter to $449.1 million, while Lasers revenue fell 38.6% to $29.7 million. The six-month segment changes were +6.3% for OpComms and -34.8% for Lasers.
- Gross-margin improvement reflected a more favorable OpComms mix, including higher-margin Datacom chips and 3D-sensing products, and the exit of lower-margin Datacom transceiver modules. Lasers margins also improved, though lower fiber-laser demand reduced manufacturing levels.
- Six-month operating cash flow was below the prior-year period despite higher net income, with working-capital outflows including increased receivables and inventory and lower accounts payable. Capital expenditures were $50.5 million.
Balance sheet, debt and liquidity
- At December 26, 2020, cash and cash equivalents were $321.3 million and short-term investments were $1,379.0 million, totaling $1,700.3 million. Total current assets were $2,266.2 million and current liabilities were $647.3 million.
- Convertible notes had $1.5 billion aggregate principal outstanding: $450 million of 2024 Notes and $1.05 billion of 2026 Notes. Their combined carrying amount was $1,149.4 million. The 2024 Notes became convertible at holders’ option during the quarter, and their $380.3 million carrying amount was classified as current; Lumentum reported that no holder had requested conversion to date. The 2026 Notes were not then convertible under the disclosed share-price test.
- Management stated cash and operating cash flow should meet liquidity and capital-spending requirements for at least 12 months. That assessment preceded the announced Coherent transaction. Lumentum reported no material off-balance-sheet arrangements.
Material changes, outlook and risks
- Quarterly operating income and net income increased substantially year over year alongside improved gross margin. Revenue growth was modest and concentrated in OpComms; Lasers revenue declined, primarily due to weaker kilowatt-class fiber-laser demand.
- Management said COVID-19 had not materially adversely affected reported second-quarter results, but warned that pandemic-related manufacturing, supply-chain, logistics and customer disruptions could continue. It planned to continue investing in R&D and expected R&D spending to increase in absolute dollars in future quarters. The filing provides no numerical revenue or earnings guidance.
- U.S. export restrictions on Huawei and related demand impacts contributed to excess and obsolete inventory charges of $0.8 million in the quarter and $6.7 million in the six-month period. The company said it expected fiscal 2021 sales to Huawei to decline versus fiscal 2020. Quarter results also included a $4.6 million impairment charge for excess capacity in the fiber-laser business.
- Two customers collectively represented 45% of revenue in both the quarter and six-month period. Two contract manufacturers accounted for 67% of six-month net inventory purchases. Trade restrictions, customer concentration, supplier dependence, competition, foreign-exchange volatility and pandemic-related disruptions are material risks.
- On January 18, 2021, after quarter-end, Lumentum agreed to acquire Coherent for approximately $5.7 billion in cash and stock. The announced funding plan included approximately $3.2 billion in Lumentum stock, up to $2.1 billion in new debt and the balance from combined-company cash. Completion was expected in the second half of calendar 2021, subject to shareholder, regulatory and other conditions; the transaction is not subject to a financing condition. The deal could increase leverage, dilute existing shareholders and involve integration and approval risks.
- One Oclaro merger-related putative class action, the Karri Lawsuit, remained pending in discovery; Lumentum said it intended to defend it. Purchase obligations were $219.8 million. The company reported $27.6 million of unrecognized tax benefits and noted ongoing tax audits.
Important facts for investors to verify
- Coherent merger progress, regulatory and shareholder approvals, financing, transaction costs, and the eventual debt and dilution impact.
- Whether OpComms growth and higher-margin product mix can continue, and whether Lasers demand and fiber-laser capacity utilization recover.
- Revenue exposure to major customers, Huawei restrictions, and the resilience of the concentrated contract-manufacturer and supplier base.
- Status of 2024 Notes conversions and potential cash or share settlement obligations, as well as debt treatment under the Coherent financing plan.
- Effects of COVID-19, trade and export controls, working-capital changes, tax audits and the pending Karri litigation on future results and liquidity.