Lumentum Holdings Inc. — Form 10-Q Summary
Period clarification: The request identifies “2020 Q3,” but the supplied filing is for the quarter ended April 3, 2021 (fiscal 2021 Q3) and nine months ended that date. The quarter included 14 weeks, versus 13 weeks in the prior-year comparison.
Business context and reporting period
Lumentum supplies optical and photonic products through two segments: Optical Communications (OpComms) and Commercial Lasers. OpComms serves telecom, datacom, consumer and industrial markets; Lasers serves manufacturing, inspection and life-science applications. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Quarter ended Apr. 3, 2021 | Prior-year quarter | Nine months ended Apr. 3, 2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $419.5M | $402.8M | $1,350.7M | $1,310.5M |
| Gross profit / margin | $185.0M / 44.1% | $157.7M / 39.2% | $620.3M / 45.9% | $514.5M / 39.3% |
| Income from operations | $266.9M | $42.5M | $481.2M | $177.1M |
| Net income | $225.5M | $43.4M | $375.8M | $140.1M |
| Diluted EPS | $2.85 | $0.56 | $4.78 | $1.80 |
| Operating cash flow | Not separately provided | Not separately provided | $614.5M | $401.6M |
Quarterly revenue increased 4.1%; nine-month revenue rose 3.1%. Quarter-end cash and cash equivalents were $687.7M, and short-term investments were $1,366.9M. Current assets were $2,569.8M and current liabilities $674.2M. Total liabilities were $1,580.9M and stockholders’ equity $2,165.0M.
Capital spending was $66.4M over nine months. Cash used in investing activities was $196.3M and cash used in financing activities was $28.5M. The company reported $1.50B principal of convertible notes: $450M of 2024 Notes and $1.05B of 2026 Notes. The $385.3M carrying amount of the 2024 Notes was classified as current because holders could convert them; the 2026 Notes’ carrying amount was $778.9M.
Material changes versus the prior comparable period
- Reported earnings included a $217.6M Coherent merger termination fee, net of $10.1M related costs, presented as a $207.5M net operating benefit. This was the principal reason reported operating income and net income increased sharply; reported earnings therefore do not reflect operating performance alone.
- OpComms revenue rose 8.0% for the quarter and 6.8% for the nine-month period. Lasers revenue fell 27.4% and 32.2%, respectively, largely because COVID-19 reduced demand for kilowatt-class fiber lasers.
- OpComms margin improved, supported by manufacturing volumes, product mix and operational improvements. Overall gross margin also benefited from the higher OpComms contribution. The extra fiscal-quarter week affected the comparison.
- Quarterly results included a $14.8M revenue deferral associated with delays in China 5G deployments. Nine-month OpComms growth also reflected datacom chip market-share gains and increased 3D-sensing content and adoption, while certain product lines being wound down reduced sales.
- Other income fell to $2.4M for the quarter from $21.7M, and to $2.1M for nine months from $27.9M. The prior-year periods included a $13.8M gain on the sale of the Lithium Niobate modulators business.
- Cash and cash equivalents increased by $389.7M from June 27, 2020, with operating cash flow including the Coherent termination payment.
Outlook, commentary, risks and unusual items
- Management expects R&D spending to increase in absolute dollars in future quarters and says continued investment in new products and technology is important to its strategy. No specific revenue or earnings guidance is provided in the supplied filing text.
- Management believed cash, cash equivalents and operating cash flow would be sufficient for liquidity and capital spending needs for at least the next 12 months. It also noted possible needs for investment, manufacturing expansion, strategic transactions or acquisitions.
- COVID-19 and semiconductor component shortages could disrupt supply, manufacturing, customer demand and logistics. Management said COVID-19 had not materially adversely affected reported third-quarter results, while emphasizing substantial ongoing uncertainty.
- Key exposures include customer and supplier concentration, export controls and U.S.–China trade restrictions, competition and pricing pressure, manufacturing and supply-chain disruption, and foreign-exchange, tax and market volatility. Asia-Pacific accounted for 77.4% of quarterly revenue by initial shipping location; two customers collectively represented 44% of quarterly revenue.
- The remaining Karri lawsuit relating to the Oclaro merger was in discovery; Lumentum said it intended to defend the case vigorously. Management did not believe ordinary-course claims would have a material adverse effect, but outcomes remain uncertain.
- On May 7, 2021, the board authorized a two-year share repurchase program of up to $700M. The authorization may be suspended or terminated and does not establish the amount or timing of actual repurchases.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers fiscal 2021 Q3, not 2020 Q3.
- Assess earnings excluding the $207.5M net Coherent termination benefit; the filing does not provide a comparable adjusted earnings figure.
- Track conversion, cash-settlement and classification implications for the $450M 2024 Notes, as well as the $1.05B 2026 Notes.
- Monitor whether China 5G delays, export restrictions and semiconductor shortages affect revenue, customer demand or inventory.
- Evaluate the durability of OpComms growth and margins against declining Lasers revenue and concentrated customers and suppliers.
- Review actual execution of the announced buyback, the pending litigation and developments in tax audits and unrecognized tax benefits.