Lumentum Holdings Inc. — Q1 FY2022 Form 10-Q
Business context and period: Lumentum supplies optical communications and commercial laser products. This unaudited quarter ended October 2, 2021; comparisons are with the three months ended September 26, 2020. Fiscal 2022 is a 52-week year.
Financial performance
| Metric | Q1 FY2022 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $448.4 million | $452.4 million | Down 0.9% |
| Gross profit / margin | $232.2 million / 51.8% | $205.7 million / 45.5% | Margin up 6.3 points |
| Operating income | $115.9 million | $99.0 million | Up 17.1% |
| Net income | $81.5 million | $67.1 million | Up 21.5% |
| Diluted EPS | $1.08 | $0.86 | Up 25.6% |
| Operating cash flow | $61.9 million | $104.7 million | Down $42.8 million |
| Capital expenditures | $17.9 million | $26.3 million |
Revenue mix: Optical Communications (OpComms) revenue fell 5.3% to $406.0 million, while Commercial Lasers revenue rose 77.4% to $42.4 million. Within OpComms, Telecom and Datacom revenue declined $45.3 million, largely due to component shortages and delayed 5G deployments; Consumer and Industrial rose $22.8 million. Lasers benefited from returning demand for kilowatt-class fiber lasers.
Margins and expenses: OpComms gross margin increased to 55.6% from 52.5%; Lasers increased to 49.1% from 43.5%. Management cited product mix, operational improvements, higher manufacturing levels and lower excess/obsolete inventory charges. Consolidated gross profit also benefited from a $5.9 million gain on sale of equipment; the prior-year quarter included product-transfer costs and inventory charges. R&D increased 7.3% to $54.1 million and SG&A increased 12.4% to $63.3 million. Restructuring was a $1.1 million net reversal.
Liquidity, debt and capital allocation
Cash and cash equivalents were $611.0 million at quarter-end, down from $774.3 million at July 3, 2021; short-term investments were $1,273.6 million, up from $1,171.7 million. Combined cash, cash equivalents and short-term investments totaled $1,884.6 million. Current assets were $2,423.0 million and current liabilities $611.7 million.
Operating cash flow was reduced by working-capital changes, particularly a $50.4 million increase in accounts receivable and a $10.3 million increase in inventory. Investing cash outflow was $116.9 million, including net purchases of short-term investments; financing cash outflow was $108.3 million, including $91.7 million of share repurchases. Operating cash flow less capital expenditures was approximately $44.0 million.
Convertible notes had $1.5 billion aggregate principal outstanding: $450 million due in 2024 and $1.05 billion due in 2026. Their combined balance-sheet carrying amount was $1,195.8 million. The 2024 Notes’ $395.8 million carrying amount was classified as current because holders could convert during the relevant period; the company said it could settle the face value in cash. The notes are unsecured and have no financial covenants. Lumentum repurchased 1.1 million shares for $91.7 million in the quarter; $367.3 million remained under the $700 million, two-year authorization.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects R&D investment to increase in absolute dollars in future quarters and says cash, cash flows and available resources should cover liquidity and capital spending needs for at least 12 months.
- Management reported no material adverse effect from COVID-19 on the quarter, but warned that semiconductor-component shortages and supply-chain constraints had already limited revenue from some products and could further affect deliveries, demand and margins. Delayed 5G deployments also pressured OpComms.
- Customer and supply concentration are significant: one customer represented 41% of quarterly revenue, and three customers represented 51% of gross accounts receivable in aggregate. Two contract manufacturers accounted for 64% of net inventory purchases.
- On November 4, 2021, after quarter-end, Lumentum announced an agreement to acquire NeoPhotonics for approximately $918 million in cash, with up to $50 million of interim debt financing for NeoPhotonics. Closing was expected in the second half of calendar 2022, subject to approvals and other conditions. The transaction is not reflected in quarter-end balances; termination fees may apply in specified circumstances.
- The Karri merger-related lawsuit remains pending in discovery. Management believes ordinary-course claims are not expected to have a material adverse impact, while noting litigation outcomes are uncertain. The company also disclosed tax audits and $27.5 million of unrecognized tax benefits.
- Other risks include export restrictions and trade policy, competition and pricing pressure, foreign-exchange and investment-value changes, and execution, financing and integration risks from acquisitions. Management identified no material impact from COVID-19 on estimates at quarter-end; disclosure controls were considered effective.
Important facts for investors to verify
- Whether component availability and delayed 5G deployments improve, and how they affect OpComms revenue, backlog and margins.
- Whether the exceptional 41% customer concentration and receivables exposure persist or change.
- Cash-flow conversion and working-capital trends, especially accounts receivable and inventory.
- NeoPhotonics’ approval, financing, closing timetable, cash impact and potential termination costs.
- Conversion or cash-settlement outcomes for the 2024 Notes, and the effect of buybacks and dilution on share count and per-share results.