Lumentum Holdings Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended October 1, 2016. Comparisons are with the three months ended September 26, 2015. Amounts are in U.S. dollars.
Business context
Lumentum supplies optical and photonic products through Optical Communications (OpComms) and Commercial Lasers (Lasers). Products serve telecom, datacom, consumer and industrial, and manufacturing markets. OpComms generated 84.6% of quarterly revenue; Lasers generated 15.4%.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Revenue | $258.1 million | $212.6 million |
| Gross profit / margin | $81.7 million / 31.7% | $66.9 million / 31.5% |
| Operating income (loss) | $16.8 million | $(2.5) million |
| Net loss | $(3.4) million | $(0.2) million |
| Net loss attributable to common stockholders per share | $(0.06) | $(0.17) |
| Operating cash flow | $36.3 million | $10.6 million |
| Capital expenditures | $28.9 million | $13.9 million |
- Revenue rose 21.4% year over year. OpComms revenue increased 23.3% to $218.3 million, primarily on demand for SuperTransport Blade and 100G Datacom products. Lasers revenue increased 12.1% to $39.8 million.
- OpComms gross margin improved to 32.5% from 31.4%; Lasers gross margin rose to 43.2% from 39.9%. Consolidated gross margin was nearly flat, up 0.2 percentage points.
- R&D expense increased 7.3% to $36.9 million. SG&A declined 26.2% to $25.1 million, partly because the prior-year quarter included Viavi corporate allocations before separation. Restructuring charges rose to $2.9 million from $1.0 million.
- Operating results were positive, but a $22.7 million unrealized loss on the preferred-stock conversion derivative contributed to the net loss. The prior-year period recorded a $2.2 million unrealized gain. The derivative is a Level 3 fair-value estimate sensitive to Lumentum’s share price.
- Cash and cash equivalents were $166.8 million at quarter-end, up from $157.1 million at fiscal year-end. Current assets were $489.3 million and current liabilities $163.5 million. The balance sheet reports no interest-bearing debt line item.
- Operating cash flow less capital expenditures was approximately $7.4 million. Cash flow included substantial non-cash adjustments, including the derivative loss. Investing cash outflow was $28.9 million; financing cash inflow was $2.3 million.
Changes, outlook, and risks
- Revenue growth was concentrated in OpComms, while geographic revenue mix shifted toward Asia-Pacific: 60.0% of revenue versus 45.1% a year earlier. Americas fell to 30.8% from 39.6%; EMEA to 9.2% from 15.3%.
- Management estimated annualized restructuring savings of $12.9 million. It expects R&D investment to increase in absolute dollars in future quarters.
- Management said cash and expected operating cash flows should meet liquidity and capital-spending needs for at least the next 12 months. Capital expenditures, strategic transactions, working-capital movements, customer payment timing, and foreign exchange could affect liquidity.
- Manufacturing capacity investment is underway: construction in progress was $54.0 million, primarily machinery and equipment expected to enter service within 12 months. Purchase obligations totaled $125.4 million, generally expected to be fulfilled within one year.
- Key disclosed risks include intense competition and pricing pressure, customer concentration and nonbinding purchase forecasts, reliance on limited suppliers and contract manufacturers, and execution risk in transferring production from the announced Bloomfield, Connecticut facility closure.
- Other exposures include foreign currency movements, tax-law and valuation-allowance uncertainty, potential litigation and environmental liabilities, and obligations under the Separation agreements. An October 4, 2016 foreign tax reassessment related to pre-separation years was disclosed; Viavi is expected to indemnify Lumentum for the assessed liability under the agreement.
- The Series A preferred stock carries cumulative dividends at 2.5%, may be converted beginning on the second anniversary at $24.63 per share, and may be redeemed by the holder from the fifth anniversary. Common-stock price changes can materially affect reported earnings through the derivative liability.
Important facts to verify
- Whether the strong OpComms and 100G Datacom demand continued, and whether revenue concentration by product, customer, or region changed.
- Whether gross-margin improvement and the estimated $12.9 million annualized restructuring savings are sustained, including the costs and timing of the Bloomfield transition.
- The drivers and valuation assumptions behind the $33.0 million derivative liability and its potential earnings impact.
- Whether capital spending, purchase commitments, inventory, and operating cash generation remain consistent with management’s stated 12-month liquidity outlook.
- The status and financial effect of tax audits, the foreign reassessment indemnity, and any changes to tax valuation allowances or international structure.