Lumentum Holdings Inc. — Form 10-Q Summary
Business context and reporting period. Lumentum supplies optical and photonic products in Optical Communications (OpComms) and Commercial Lasers (Lasers). This report covers the fiscal second quarter and first six months of fiscal 2022, ended January 1, 2022. Comparable periods ended December 26, 2020; each quarter was 13 weeks. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended Jan. 1, 2022 | Year-over-year change | Six months ended Jan. 1, 2022 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $446.7 | Down 6.7% | $895.1 | Down 3.9% |
| Gross profit / margin | $207.5 / 46.5% | $229.6 / 48.0% prior year | $439.7 / 49.1% | $435.3 / 46.7% prior year |
| Operating income / margin | $85.2 / 19.1% | $115.3 / 24.1% prior year | $201.1 / 22.5% | $214.3 / 23.0% prior year |
| Net income | $56.7 | Down from $83.2 | $138.2 | Down from $150.3 |
| Diluted EPS | $0.75 | Down from $1.06 | $1.83 | Down from $1.92 |
Segment trends. Quarterly OpComms revenue fell 11.5% to $397.4, while Lasers revenue rose 66.0% to $49.3. For the six-month period, OpComms revenue declined 8.5% to $803.4 and Lasers revenue increased 71.1% to $91.7. Quarterly OpComms gross margin declined to 50.8% from 53.8%; six-month margin was flat at 53.2%. Lasers margins improved to 53.1% for the quarter and 51.3% for six months.
Cash flow and liquidity. Six-month operating cash flow was $268.4, compared with $233.2 a year earlier. Investing activities used $345.8, including net purchases of short-term investments of $307.8 and capital expenditures of $44.0. Financing activities used $144.9, including $126.6 of share repurchases and $24.9 of employee-award tax withholding payments. Cash and cash equivalents declined to $552.0 from $774.3 at fiscal year-end; short-term investments increased to $1,470.4 from $1,171.7. Combined cash and short-term investments were $2,022.4.
Debt and balance sheet. Convertible-note principal totaled $1,500.0: $450.0 due in 2024 and $1,050.0 due in 2026. The notes’ balance-sheet carrying amount was $1,211.3 after unamortized discounts and issuance costs. The 2024 Notes’ $401.0 carrying amount was classified as current because the notes became convertible at holders’ option; the 2026 Notes’ $810.3 carrying amount remained non-current. Total assets were $3,615.7 and total liabilities $1,593.8. Current assets were $2,540.1 and current liabilities $656.7.
Material changes and management commentary
- Management attributed the OpComms decline mainly to semiconductor and other component shortages, delayed 5G deployments, lower sales of higher-margin 3D-sensing products, and delays in customer product releases or qualification. Lasers growth reflected recovering industrial demand, particularly for kilowatt-class fiber lasers.
- Quarterly gross margin fell year over year due to product mix and $4.1 of higher Telecom and Datacom warranty costs. Management said incremental supply and procurement costs were increasing inventory and would weigh on near-term gross margin.
- Operating expenses rose: six-month R&D increased 4.0% to $107.3, and SG&A increased 12.5% to $132.3. SG&A increases included NeoPhotonics transaction fees, international-structure optimization costs, and higher stock-based compensation. Management expected R&D spending to rise in absolute dollars in future quarters.
- Management expected component supply to remain challenging at least through the third quarter of fiscal 2022. It gave no numerical revenue, earnings, or margin guidance in the provided filing text.
- COVID-19-related supply-chain disruption, labor and logistics constraints, customer demand uncertainty, and trade restrictions remained key risks. Two customers collectively represented 41% of quarterly revenue and 46% of six-month revenue; Asia-Pacific accounted for 72.9% and 76.5%, respectively.
Outlook, transactions, contingencies, and unusual items
- NeoPhotonics acquisition: Lumentum agreed to acquire NeoPhotonics for $16.00 per share in cash, with estimated consideration of approximately $918.0, funded from the combined company’s balance sheet. NeoPhotonics stockholders approved the deal on February 1, 2022, after the reporting-period end. Lumentum expected completion in the second half of calendar 2022, subject to remaining regulatory and other closing conditions. The parties also agreed to a delayed-draw loan facility of up to $50.0; no loans had been drawn as of the filing.
- Merger termination fees may apply in specified circumstances, including a potential Lumentum fee of $55.1 for failure to obtain antitrust approval and a further $36.7 fee under specified actions. The filing also describes up to $91.8 in potential fees under certain failure-to-obtain-approval circumstances.
- Purchase obligations totaled $314.5, generally expected to be fulfilled within one year. The company relies on a limited number of suppliers and contract manufacturers, without significant long-term guaranteed supply agreements.
- Ten lawsuits challenged the NeoPhotonics merger disclosure; they named NeoPhotonics and its directors, not Lumentum, as of the filing. A separate Oclaro-related stockholder lawsuit remained in discovery. Management stated that ordinary-course claims were not expected to have a material adverse effect, while noting litigation uncertainty.
- Warranty reserve increased to $8.6 from $5.0 at fiscal year-end, including a $3.8 quarterly provision. Six-month restructuring charges included a net reversal of $1.0, primarily due to lower-than-expected severance costs.
- Six-month repurchases under the $700.0 two-year authorization totaled 1.4 million shares for $121.6. Since the program began, 4.5 million shares had been repurchased for $362.6, leaving $337.4 authorized in the quarter-end issuer-purchase table.
- The company said cash, cash equivalents, and operating cash flows should meet liquidity and capital-spending needs for at least 12 months. The planned acquisition, share repurchases, working-capital needs, and note conversions or repayments could affect liquidity. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether semiconductor and other component availability improves as management expected, and how supply-related costs affect delivery capacity, revenue, inventory, and gross margin.
- Whether OpComms demand—particularly 5G and 3D sensing—recovers, and whether Lasers growth and improved utilization continue.
- NeoPhotonics closing timing, required regulatory approvals, final transaction cost, funding impact, and expected integration benefits and risks.
- Customer and supplier concentration, customer order changes, and potential exposure to export controls, U.S.-China trade restrictions, and Huawei-related limitations.
- The status and potential financial effect of merger-related and Oclaro-related litigation, tax audits, and other contingencies.
- The 2024 Notes’ convertibility and settlement implications, the 2026 Notes’ conversion threshold, and the effect of adopting ASU 2020-06 on diluted EPS.