Lumentum Holdings Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2016, the three months ended December 26, 2015; year-to-date results cover the six months ended that date. Comparisons are with the corresponding periods ended December 27, 2014, except balance-sheet comparisons, which are to June 27, 2015. Lumentum became independent of Viavi (formerly JDSU) in August 2015, so prior-period results include allocated corporate costs and are not necessarily comparable to stand-alone costs.
Business context and financial performance
Lumentum supplies optical and photonic products for telecom and datacom networks and commercial laser applications. Its reportable segments are Optical Communications (OpComms) and Commercial Lasers (Lasers).
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $218.3 million | $210.5 million | $430.9 million | $429.5 million |
| Gross profit / margin | $68.1 million / 31.2% | $66.9 million / 31.8% | $135.0 million / 31.3% | $137.2 million / 31.9% |
| Operating income (loss) | $6.2 million | $(3.2) million | $3.7 million | $2.0 million |
| Net income (loss) | $2.8 million | $(4.1) million | $2.6 million | $0.2 million |
| Net income (loss) available to common shareholders | $0.6 million | $(4.1) million | $(9.4) million | $0.2 million |
| Diluted earnings (loss) per common share | $0.01 | $(0.07) | $(0.16) | — |
Quarterly OpComms revenue rose 8.6% to $185.8 million; Lasers revenue fell 17.5% to $32.5 million. For the half year, OpComms revenue increased 4.3% to $362.9 million, while Lasers declined 16.6% to $68.0 million. Segment gross margins in Q2 were 30.7% for OpComms (up from 29.5%) and 43.7% for Lasers (down from 51.0%).
Operating cash flow was $53.0 million for the six months, versus $16.0 million a year earlier. Capital expenditures were $35.7 million, versus $24.7 million; operating cash flow less capital expenditures was $17.3 million. Financing provided $130.1 million, primarily from net transfers from Viavi. Cash and equivalents ended at $161.9 million, up from $14.5 million at fiscal year-end. Current assets were $478.7 million and current liabilities $157.4 million. The balance sheet lists no borrowings; Viavi’s debt was not attributed to Lumentum in the historical statements. It reports a $9.9 million derivative liability and $35.8 million of Series A preferred stock in mezzanine equity.
Material changes and unusual items
- Quarterly revenue increased 3.7%, driven principally by OpComms transport and 3-D sensing products; lower fiber-laser revenue offset part of the growth. Half-year revenue was nearly flat as lower Lasers sales offset OpComms growth.
- Quarterly gross margin declined 0.6 percentage points. Higher OpComms volume, cost reductions and improved manufacturing absorption supported that segment, while Lasers margin weakened due to product mix and lower volume.
- Quarterly operating expenses fell to $61.9 million from $70.1 million, including lower SG&A and restructuring charges. The comparison is affected by prior-period Viavi allocations; Q2 FY2016 had no allocated SG&A costs from Viavi, while the prior-year quarter included $19.8 million of allocated SG&A.
- Preferred-stock dividends and accretion materially reduced earnings attributable to common shareholders: six-month accretion was $11.7 million, in addition to $0.3 million of cumulative dividends. The filing also identifies an immaterial $2.0 million prior-quarter accretion error, affecting common earnings and EPS presentation but not net income; management states the prior filing remains reliable.
- The $2.4 million quarterly unrealized loss on the preferred-stock embedded derivative reflected fair-value changes, primarily linked to Lumentum’s common-stock price.
Liquidity, outlook, risks and contingencies
Management believes cash on hand and expected operating cash flows will meet liquidity and capital-spending needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management expects R&D investment to increase in absolute dollars in future quarters and intends to continue focusing on SG&A as a percentage of revenue. The company expects foreign operations to contribute an increasing share of pretax income and anticipates an effective tax rate below the U.S. statutory rate, but notes that realizing benefits from its contemplated international structure may take several years and is subject to tax-authority acceptance.
Key exposures include intense competition and pricing pressure, variable customer demand and limited customer purchase commitments, reliance on a limited number of suppliers and contract manufacturers, manufacturing yield and product-quality risks, and foreign-exchange and international-operating risks. The planned Bloomfield, Connecticut facility closure involves technology and production transfers that could disrupt supply. Purchase obligations totaled $145.5 million, generally expected to be fulfilled within one year; $57.7 million related to inventory. Operating lease commitments totaled $23.0 million. Management describes ordinary-course claims and suits but does not expect them to have a material adverse effect; outcomes remain uncertain. The company also has tax and indemnification obligations related to its separation from Viavi.
Important facts for investors to verify
- Whether OpComms growth can continue and whether the sharp Lasers revenue and margin declines stabilize.
- How much of the cash increase came from Viavi capitalization versus recurring operating cash generation, and the company’s subsequent cash and capital-spending needs.
- The economics, conversion/redemption terms and future accretion or dividend effects of the Series A preferred stock.
- Whether the $145.5 million of purchase obligations, supplier concentration and manufacturing transfers create inventory, supply or liquidity risks.
- Potential effects of Viavi’s retained 19.9% ownership, separation-related tax arrangements and indemnification provisions.
- Customer concentration, international revenue exposure and the assumptions underlying the expected tax-rate benefits.