Lumentum Holdings Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the fiscal third quarter and nine months ended March 30, 2019 (13-week quarter); it is not a 2018 third-quarter filing. Lumentum supplies optical and photonic products through its Optical Communications (OpComms) and Commercial Lasers segments. Results include Oclaro from its acquisition date, December 10, 2018, so year-over-year comparisons are affected by the acquisition.
Key financial metrics
| Metric | Three months ended Mar. 30, 2019 | Nine months ended Mar. 30, 2019 |
|---|---|---|
| Net revenue | $432.9 million; up 44.9% | $1,160.7 million; up 22.6% |
| Gross profit / gross margin | $88.3 million / 20.4% | $339.1 million / 29.2% |
| Operating income (loss) | $(76.4) million | $(7.8) million |
| Net income (loss) | $(74.3) million; $(0.98) per diluted share | $(10.6) million; $(0.18) per diluted share |
| Operating cash flow | Not provided for the quarter | $202.4 million |
For the quarter, OpComms revenue was $377.9 million, up 53.4%; Lasers revenue was $55.0 million, up 4.8%. Segment gross margins were 38.0% for OpComms and 46.0% for Lasers. The reported consolidated margin was weighed down by acquisition-related intangible amortization, inventory step-up amortization, a $20.8 million inventory write-down, and other unallocated costs.
At March 30, 2019, cash and cash equivalents were $357.3 million on the balance sheet (cash-flow disclosure, including $1.0 million classified as held for sale, was $358.3 million); short-term investments were $340.2 million. Combined cash, equivalents and investments were $697.5 million. Current assets were $1,418.1 million and current liabilities $358.0 million.
Debt included a $500.0 million principal term loan, with $489.9 million net carrying value, and $450.0 million face value of 0.25% convertible notes, carried at $347.4 million. The term loan matures in December 2025; the notes mature in March 2024. The company reported compliance with term-loan covenants. Total liabilities were $1,267.5 million.
Material changes versus the prior comparable period
- Quarterly revenue increased by $134.1 million, primarily reflecting Oclaro and organic Telecom growth, including ROADM products. Nine-month revenue increased by $214.1 million.
- Quarterly gross margin fell from 32.5% to 20.4%; nine-month margin fell from 35.6% to 29.2%. Management cited acquisition amortization, start-up costs and the Datacom inventory write-down.
- Quarterly net loss compared with prior-year net income of $2.7 million. Nine-month net loss of $10.6 million compared with prior-year net income of $214.6 million; the prior-year period included a $112.9 million income-tax benefit.
- Operating expenses increased: quarterly R&D rose 51.0% to $57.7 million and SG&A rose 66.3% to $55.2 million. Restructuring charges were $21.1 million for the quarter and $30.2 million for nine months; a $30.7 million impairment was recorded.
- Operating cash flow was $202.4 million, versus $209.9 million in the prior-year nine-month period. Investing cash outflow was $725.3 million, including $619.8 million paid for Oclaro net of acquired cash; financing inflow was $484.1 million, principally term-loan proceeds.
Outlook, management commentary, risks and unusual items
- Management said available cash and expected operating cash flows should meet liquidity and capital spending requirements for at least 12 months. It expects R&D spending to increase in absolute dollars in future quarters. No numeric revenue or earnings guidance is provided in the filing.
- Following the Oclaro acquisition, Lumentum is rationalizing overlapping products and teams, discontinuing certain legacy Telecom product lines, and winding down Lithium Niobate modulator development and manufacturing. Management expects the rationalization to take about 9–12 months and expects gross-margin improvement over time.
- The company discontinued future Datacom transceiver development, citing intense competition and challenged gross margins. It expects transceiver sales to ramp down to zero over the next few months, while investing in Datacom chips and expecting chip sales to grow over time. The related quarter included $30.7 million of long-lived asset impairment and $20.8 million of inventory write-downs.
- The sale of several Japan-based Datacom product lines to Cambridge Industries Group closed April 18, 2019, after quarter-end. A separate May 6, 2019 agreement to buy San Jose property for $54.0 million was also subsequent to quarter-end.
- Customer and supplier concentration are notable: three customers each represented at least 10% of quarterly revenue, and one customer represented 17% of gross receivables. One contract manufacturer represented 60% of quarterly net inventory purchases. Management highlights pricing pressure, customer order volatility, supply interruptions, trade restrictions and tariffs, and acquisition integration as risks.
- One Oclaro merger-related putative class action, the Karri lawsuit, remained pending; Lumentum said it intended to defend it vigorously. Management reported no material claims or proceedings that were probable or reasonably possible at quarter-end. Disclosure controls were deemed effective; integration of Oclaro’s internal controls was ongoing.
Important facts for investors to verify
- How much revenue and margin growth is organic versus attributable to Oclaro, and whether Telecom and ROADM demand persists.
- Whether the expected Datacom and legacy Telecom exits, restructuring and integration deliver the anticipated margin improvement without material customer attrition or further charges.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the $500.0 million term-loan principal and $450.0 million convertible-note face value.
- Exposure to major customers, a highly concentrated contract manufacturer, and geopolitical, tariff and supply-chain disruptions.
- Progress and final purchase accounting for Oclaro, the outcome of the remaining merger litigation, and the financial impact of the post-quarter asset sale and property purchase.