Lumentum Holdings Inc. — Form 10-K Summary
Period clarification: The filing covers the fiscal year ended June 27, 2015, not fiscal 2014. It also reports the quarter ended June 27, 2015; that quarter is compared below with the quarter ended June 28, 2014. Historical statements are combined statements for the business as part of Viavi, not financial statements reflecting a full year as an independent public company.
Business context and reporting period
Lumentum supplies optical and photonic products for telecommunications and datacom networks, commercial lasers, and emerging applications such as 3-D sensing. It reports two segments: Optical Communications (OpComms) and Commercial Lasers. On August 1, 2015, after fiscal year-end, Viavi distributed 80.1% of Lumentum’s shares to Viavi stockholders; Viavi retained 19.9%. Lumentum began regular-way Nasdaq trading as LITE on August 4, 2015.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $837.1 million | $817.9 million |
| Gross profit / margin | $257.9 million / 30.8% | $256.6 million / 31.4% |
| Operating income (loss) | $(23.4) million | $8.7 million |
| Net income (loss) | $(3.4) million | $10.7 million |
| Operating cash flow | $9.3 million | $62.8 million |
| Capital expenditures | $53.7 million | $64.2 million |
Revenue grew 2.3%. OpComms revenue was $694.1 million, down 0.1%; Lasers revenue was $143.0 million, up 16.4%. OpComms gross margin declined to 29.5% from 30.5%, and Lasers gross margin to 47.1% from 48.7%, mainly reflecting product mix. The fiscal 2015 tax benefit of $21.1 million included a $21.8 million benefit from settling a non-U.S. tax audit; without that unusual benefit, reported net results would have been materially different.
For the June 27, 2015 quarter, revenue was $208.9 million versus $201.0 million a year earlier; gross profit was $63.6 million versus $63.8 million; operating loss was $14.6 million versus $6.8 million; and net loss was $15.8 million versus $6.7 million. The quarter ended March 28, 2015 included a $21.8 million tax benefit and reported net income of $12.2 million.
At year-end, cash and cash equivalents were $14.5 million, working capital $188.7 million, total assets $512.6 million, and current liabilities $122.1 million. No standalone borrowings are shown; Viavi debt was not attributed to the historical combined statements. Operating cash flow fell sharply, while investing cash use was $53.5 million, largely capital expenditure. Financing provided $40.7 million through net transfers from Viavi. The filing says a $127.0 million cash contribution before the separation brought cash to $137.6 million. Management expected cash and operating cash flows to cover at least 12 months of operating and capital needs. Planned capital expenditures were approximately $50 million.
Material changes versus comparable periods
- Annual revenue increased modestly, but operating performance moved from $8.7 million operating income to a $23.4 million operating loss, reflecting higher operating expenses and restructuring charges.
- OpComms consumer and industrial revenue fell $40.9 million, primarily due to lower 3-D sensing demand from a key customer after its prior-year gaming-console launch. Datacom product ramps and higher Telecom demand substantially offset that decline.
- Lasers growth reflected next-generation products and the addition of Time-Bandwidth, acquired in January 2014 for $15.0 million.
- SG&A rose 19.1% to $128.9 million; the increase included $19.0 million of higher Viavi corporate allocations, primarily related to pre-separation advisory services. Total allocated costs were $87.9 million versus $64.7 million.
- Operating cash flow decreased from $62.8 million to $9.3 million, with working-capital uses including higher receivables, other assets, inventories, and lower income taxes payable.
Outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided. Management expected R&D spending to increase in absolute dollars and described continued investment in datacom transceivers, Telecom products, integration, 3-D sensing, and laser products.
- Restructuring charges were $11.6 million in fiscal 2015. Plans included closing the Bloomfield, Connecticut site and consolidating roles; approximately 200 employees were affected. Management estimated approximately $17.3 million in annualized savings from restructuring activities initiated in the prior year, excluding one-time charges.
- Key risks include customer concentration (the five largest customers generated over 41% of revenue), price pressure and commoditization, variable product mix and demand, competition, and dependence on sole- or limited-source suppliers and contract manufacturers. Ciena generated $120.4 million of fiscal 2015 revenue; Google generated $84.6 million and Cisco $98.7 million.
- The U.S. dollar’s strength may disadvantage the company against competitors with other currency cost bases. Management also cited uncertain European demand and industry consolidation.
- Separation risks include higher standalone costs, disruption to customer and supplier relationships, transitional arrangements, and indemnification and tax obligations to Viavi. Historical costs include Viavi allocations and may not represent future independent-company expenses.
- Purchase obligations were $94.8 million, of which $90.9 million were due in less than one year; operating lease obligations totaled $29.6 million. The Swiss pension plan was underfunded by $2.1 million. Routine legal claims were disclosed; management did not expect them, individually or in aggregate, to have a material impact, while noting outcomes are uncertain.
- The filing disclosed immaterial legal-expense and stock-compensation errors in previously presented nine-month 2015 interim results, corrected in the annual quarterly table. Management concluded the errors were not material to those interim statements.
- The auditor issued an unqualified opinion. Management said disclosure controls were effective; an internal-control assessment and auditor attestation were omitted under the newly public company transition rules.
Most important facts for investors to verify
- Whether post-separation costs, including corporate functions previously allocated by Viavi, materially exceed historical allocations.
- Whether operating cash flow recovers from $9.3 million and planned capital spending remains financeable using post-separation liquidity.
- Whether the lost 3-D sensing demand is replaced, and whether datacom and Lasers growth is sustainable and profitable.
- How the $21.8 million tax-audit settlement benefit affects comparisons, and the impact of tax arrangements and indemnities with Viavi.
- The terms, conversion, dividend, and redemption implications of the Series A Preferred Stock sold to Amada for $35.8 million after year-end.
- Customer concentration, supplier continuity, restructuring savings, and potential margin pressure from pricing and product mix.