Lumentum Holdings Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 28, 2020 (fiscal 2020 Q3), not 2019 Q3. Comparisons are with the quarter ended March 30, 2019 and the corresponding nine-month periods. Amounts are in U.S. dollars.
Business context and reporting period
Lumentum supplies optical and photonic products through its Optical Communications (OpComms) and Commercial Lasers segments. The unaudited filing reports a 13-week quarter and the first nine months of fiscal 2020. OpComms includes telecom, datacom, consumer and industrial products; the company also sells lasers for manufacturing, inspection and life-science applications.
Financial performance and liquidity
- Quarterly revenue: $402.8 million, down 7.0% year over year. Operating income was $42.5 million, versus an operating loss of $76.4 million; net income was $43.4 million, versus a net loss of $74.3 million. Diluted EPS was $0.56, versus a loss of $0.98 per share.
- Quarterly margins: Gross profit was $157.7 million and gross margin was 39.2%, up from 20.4%. The filing attributes improvement to product mix and lower acquisition-related amortization and product-exit write-down charges.
- Nine-month results: Revenue was $1.311 billion, up 12.9%; gross profit was $514.5 million, up 51.7%, with gross margin of 39.3% versus 29.2%. Operating income was $177.1 million versus an operating loss of $7.8 million; net income was $140.1 million versus a net loss of $10.6 million. Diluted EPS was $1.80 versus a loss of $0.18.
- Segment revenue: Q3 OpComms revenue was $359.3 million, down 4.9%; Lasers revenue was $43.5 million, down 20.9%. For nine months, OpComms revenue rose 16.9% to $1.185 billion, while Lasers fell 14.7% to $125.7 million.
- Cash flow: Nine-month operating cash flow was $401.6 million, versus $202.4 million. Investing used $477.9 million and financing provided $332.5 million. Capital expenditures were $64.9 million.
- Liquidity: At March 28, cash and cash equivalents were $688.3 million and short-term investments were $763.1 million, totaling $1.451 billion. Current assets were $1.963 billion and current liabilities were $286.7 million. Management said cash and operating cash flows should meet liquidity and capital-spending needs for at least 12 months.
- Debt: The company had $1.5 billion principal amount of convertible notes outstanding: $450 million due 2024 and $1.05 billion due 2026. Their balance-sheet carrying value was $1.106 billion. The $497.5 million term loan was repaid in full during the period.
Material changes versus comparable periods
- Q3 revenue declined mainly on lower Telecom and Datacom sales and lower Lasers sales, partly offset by a $31.1 million increase in Consumer and Industrial sales. Higher 3D-sensing sales and Datacom chip growth helped offset weakness; Lasers weakness primarily reflected lower kilowatt-class fiber-laser revenue.
- Nine-month revenue benefited from the Oclaro acquisition and increased 3D-sensing sales. Results are not fully like-for-like because Oclaro was acquired in December 2018.
- The December 2019 issuance of 2026 convertible notes funded repayment of the term loan and, in part, a $200 million share repurchase. The transaction increased interest expense; the nine-month period also included an $8.0 million loss on early debt extinguishment.
- Q3 other income included a $13.8 million gain on the sale of certain Lithium Niobate product-line assets. The sale proceeds were $16.9 million net of a retainer.
Outlook, commentary and risks
- The company said COVID-19 did not materially adversely affect reported Q3 results, but expected the impact in Q4 and beyond to be greater. Manufacturing restrictions, supply-chain and logistics disruption, workforce limits and uncertain customer demand could affect revenue, costs and operations. No quantified revenue or earnings guidance is provided in the supplied filing.
- Management expected to continue investing in R&D and anticipated that R&D expense would increase in absolute dollars in future quarters. It said actions to discontinue or sell selected product lines were expected to continue through fiscal 2021, while shifting telecom transmission focus toward Indium Phosphide photonic integrated circuits and datacom chips.
- Key exposures include customer concentration (two customers represented 37% of Q3 revenue and 42% for nine months), substantial Asia-Pacific revenue, reliance on a small number of suppliers and contract manufacturers, and export and trade restrictions. Huawei-related demand and restrictions contributed to inventory risk; the filing reported $12.8 million of Huawei-driven excess and obsolete inventory charges for the nine months.
- One Oclaro merger-related putative class action remained pending; Lumentum was named in an amended complaint and a motion to dismiss was pending. The company recorded a $1.0 million litigation contingency and said it intended to defend the case.
Important facts for investors to verify
- Track whether COVID-related manufacturing and supply-chain disruption affects subsequent-quarter sales, margins, cash collection and inventory.
- Assess whether the Q3 margin improvement persists after the benefit of lower acquisition-related and product-exit charges and the one-time $13.8 million asset-sale gain.
- Review convertible-note terms, cash-settlement exposure, potential dilution and future interest expense; compare the $1.5 billion principal balance with liquidity and cash generation.
- Monitor customer concentration, Huawei-related restrictions and demand, and dependence on concentrated suppliers and contract manufacturers.
- Follow the pending merger litigation and the completion and costs of product-line exits and manufacturing transfers through fiscal 2021.