Lumentum(LITE) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Statements of Operations This chapter presents the company's revenues, costs, and profitability over recent fiscal periods Condensed Consolidated Statements of Operations | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $419.5 | $402.8 | $1,350.7 | $1,310.5 | | Gross profit | $185.0 | $157.7 | $620.3 | $514.5 | | Income from operations | $266.9 | $42.5 | $481.2 | $177.1 | | Net income | $225.5 | $43.4 | $375.8 | $140.1 | | Diluted Net income per share | $2.85 | $0.56 | $4.78 | $1.80 | - The company recorded a net gain of $207.5 million from a merger termination fee and related costs for both the three and nine months ended April 3, 2021, significantly impacting operating expenses and net income[10] Condensed Consolidated Statements of Comprehensive Income (Loss) This chapter details the company's comprehensive income, including net income and other comprehensive loss components Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Net income | $225.5 | $43.4 | $375.8 | $140.1 | | Other comprehensive loss, net of tax | $(0.3) | $(1.2) | $(2.2) | $(1.3) | | Comprehensive income, net of tax | $225.2 | $42.2 | $373.6 | $138.8 | Condensed Consolidated Balance Sheets This chapter provides a snapshot of the company's assets, liabilities, and stockholders' equity at specific points in time Condensed Consolidated Balance Sheets | Asset/Liability | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | | Total current assets | $2,569.8 | $2,050.0 | | Total assets | $3,745.9 | $3,292.6 | | Convertible notes, current | $385.3 | $— | | Total current liabilities | $674.2 | $283.0 | | Total liabilities | $1,580.9 | $1,543.4 | | Total stockholders' equity | $2,165.0 | $1,749.2 | Condensed Consolidated Statements of Stockholders' Equity This chapter outlines the changes in the company's equity accounts over the reporting period Condensed Consolidated Statements of Stockholders' Equity | Metric | Balance as of June 27, 2020 (Millions) | Balance as of April 3, 2021 (Millions) | | :--- | :--- | :--- | | Total Stockholders' Equity | $1,749.2 | $2,165.0 | - Net income for the nine months ended April 3, 2021, contributed $375.8 million to retained earnings, while stock-based compensation added $70.3 million to additional paid-in capital[18] Condensed Consolidated Statements of Cash Flows This chapter summarizes the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows | Activity | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $614.5 | $401.6 | | Net cash used in investing activities | $(196.3) | $(477.9) | | Net cash (used in) provided by financing activities | $(28.5) | $332.5 | | Increase in cash and cash equivalents | $389.7 | $256.2 | | Cash and cash equivalents at end of period | $687.7 | $688.8 | - Operating cash flow for the nine months ended April 3, 2021, included a significant contribution from the $207.5 million merger termination fee, net of related costs[24][240] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the accounting policies and specific items in the financial statements Note 1. Description of Business and Summary of Significant Accounting Policies This note describes the company's business operations, significant accounting policies, and the impact of the Coherent merger termination - Lumentum is an industry-leading provider of optical and photonic products for Optical Communications (OpComms) and Commercial Lasers, expanding into emerging markets like 3D sensing for consumer electronics and industrial applications[29] - The merger agreement with Coherent, Inc was terminated in March 2021, resulting in Lumentum receiving a $217.6 million termination fee, offset by $10.1 million in acquisition-related expenses[32] - The COVID-19 pandemic has created significant uncertainty in global financial markets, disrupting and potentially harming the company's business, financial condition, and results of operations[31] Note 2. Recently Issued Accounting Pronouncements This note discusses the adoption of recent accounting standards and their impact on the financial statements - The company adopted ASU 2018-13 (Fair Value Measurement), ASU 2018-15 (Internal-Use Software), and Topic 326 (Credit Losses) in the first quarter of fiscal 2021, with no material impact on its condensed consolidated financial statements[37][38][39] - Lumentum is currently evaluating the impact of ASU 2020-06 (Accounting for Convertible Instruments) and ASU 2019-12 (Simplifying the Accounting for Income Taxes), which are effective for fiscal years beginning after December 15, 2021, and at the beginning of fiscal year 2022, respectively[42][44] Note 3. Earnings Per Share This note provides a detailed calculation of basic and diluted earnings per share Earnings Per Share | Metric | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic Net income per share | $2.97 | $0.58 | $4.97 | $1.84 | | Diluted Net income per share | $2.85 | $0.56 | $4.78 | $1.80 | | Basic weighted average common shares outstanding (Millions) | 75.8 | 74.8 | 75.6 | 76.2 | | Diluted weighted average common shares outstanding (Millions) | 79.2 | 77.5 | 78.6 | 77.7 | - The potentially dilutive shares from the 2024 Notes were included in the diluted EPS calculation for the three and nine months ended April 3, 2021, as the average common stock price exceeded the conversion price of $60.62[47] Note 4. Cash, Cash Equivalents and Short-term Investments This note details the composition of the company's cash, cash equivalents, and short-term investments Cash, Cash Equivalents and Short-term Investments | Category | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | | Total cash, cash equivalents and short-term investments | $2,054.6 | $1,553.8 | - The company did not realize significant gains or losses from the sale of available-for-sale short-term investments during the three and nine months ended April 3, 2021, and March 28, 2020[50] - All available-for-sale securities are classified as current, reflecting management's intent and ability to use the funds in current operations[55] Note 5. Fair Value Measurements This note explains the methods used for fair value measurements of financial assets and liabilities Fair Value of Assets (April 3, 2021) | Asset Category (April 3, 2021) | Level 1 (Millions) | Level 2 (Millions) | Level 3 (Millions) | Total (Millions) | | :--- | :--- | :--- | :--- | :--- | | Cash equivalents | $529.4 | $43.5 | $— | $573.0 | | Short-term investments | $674.5 | $692.4 | $— | $1,366.9 | | Total assets measured at fair value | $1,203.9 | $735.9 | $— | $1,939.8 | Fair Value of Convertible Notes (April 3, 2021) | Convertible Notes (April 3, 2021) | Carrying Amount (Millions) | Estimated Fair Value (Millions) | | :--- | :--- | :--- | | 2026 Notes | $778.9 | $1,240.5 | | 2024 Notes | $385.3 | $730.9 | | Total | $1,164.2 | $1,971.4 | - The estimated fair value of the 2026 Notes and 2024 Notes is considered a Level 2 measurement, as they are not actively traded in markets[64] Note 6. Balance Sheet Details This note provides further detail on specific balance sheet accounts, including inventories and property, plant, and equipment Selected Balance Sheet Accounts | Account | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Allowance for credit losses on trade receivables | $1.8 | $1.8 | | Inventories | $210.7 | $188.9 | | Property, plant and equipment, net | $378.0 | $393.0 | | Income tax payable (current) | $73.1 | $28.8 | - Construction in progress primarily includes machinery and equipment expected to be placed in service within the next 12 months[73] Note 7. Leases This note discloses information about the company's operating leases, including costs and future commitments Lease Metrics | Lease Metric | April 3, 2021 | June 27, 2020 | | :--- | :--- | :--- | | Weighted average remaining operating lease term (years) | 7.6 | 8.6 | | Weighted average operating lease discount rate | 3.5% | 3.5% | | Total lease cost (Nine Months Ended April 3, 2021) | $12.3M | $26.3M | - The company anticipates receiving approximately $3.6 million in sublease income over the next two years from subleasing offices in the United Kingdom, the United States, Canada, and Japan[79] Note 8. Goodwill and Other Intangible Assets This note details the carrying amounts of goodwill and other intangible assets by segment Goodwill and Intangible Assets | Asset Category | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Goodwill | $368.9 | $368.9 | | Total intangible assets, net | $263.2 | $316.8 | | Total amortization of intangibles (Nine Months Ended April 3, 2021) | $63.6 | $57.4 | - Goodwill is primarily allocated to the Optical Communications segment ($363.5 million) and Commercial Lasers segment ($5.4 million)[82] - During the nine months ended April 3, 2021, the company reclassified $10 million from in-process research and development (IPR&D) to acquired developed technologies, which will be amortized over an estimated useful life of 3 years[87] Note 9. Debt This note describes the terms and status of the company's convertible debt instruments - The company has $1,050 million in 0.50% Convertible Notes due 2026 (conversion price $99.29/share) and $450 million in 0.25% Convertible Notes due 2024 (conversion price $60.62/share)[91][92][93][96][97][98] - The 2024 Notes, with a net carrying amount of $385.3 million, were reclassified to current liabilities as of April 3, 2021, because the stock's closing price exceeded 130% of the conversion price for 20 of the last 30 trading days[99] Total Interest Expense | Interest Expense Category | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Contractual interest expense | $1.6 | $1.6 | $4.8 | $2.3 | | Amortization of debt discount and debt issuance costs | $14.8 | $14.0 | $43.9 | $24.8 | | Total interest expense | $16.4 | $15.6 | $48.7 | $27.1 | Note 10. Accumulated Other Comprehensive Income (Loss) This note presents the components of accumulated other comprehensive income (loss) Accumulated Other Comprehensive Income (Loss) | Component | Balance as of June 27, 2020 (Millions) | Balance as of April 3, 2021 (Millions) | | :--- | :--- | :--- | | Foreign currency translation adjustments, net of tax | $9.7 | $9.7 | | Defined benefit obligations, net of tax | $(4.2) | $(4.2) | | Unrealized gain (loss) on available-for-sale securities, net of tax | $2.4 | $0.2 | | Total Accumulated Other Comprehensive Income (Loss) | $7.9 | $5.7 | - The company established the U.S. dollar as the functional currency for its worldwide operations in fiscal 2019, following the Oclaro acquisition[105] Note 11. Restructuring and Related Charges This note details charges related to restructuring activities, primarily severance costs Restructuring and Related Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Restructuring and related charges | $2.9 | $2.7 | $3.1 | $4.9 | - Charges for the three and nine months ended April 3, 2021, were mainly due to severance associated with the decision to cease manufacturing certain products in San Jose, California[108] - Charges for the three and nine months ended March 28, 2020, were primarily due to severance related to moving manufacturing from San Jose, California, to Thailand and other third-party vendors[109] Note 12. Income Taxes This note explains the components of the provision for income taxes and unrecognized tax benefits Provision for Income Taxes | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $27.4 | $5.2 | $58.8 | $19.6 | - The tax provision for the three months ended April 3, 2021, includes a discrete tax expense of $16.8 million primarily associated with the Coherent termination fee[112][223] - As of April 3, 2021, the company had $26.9 million in unrecognized tax benefits, with an expected decrease of $4.8 million over the next 12 months[113] Note 13. Equity This note provides details on stock-based compensation and the company's equity incentive plans Stock-Based Compensation | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Total stock-based compensation | $68.7 | $56.1 | | Income tax benefit associated with stock-based compensation | $12.2 | $9.0 | - As of April 3, 2021, $147.2 million of stock-based compensation cost remains to be amortized over an estimated period of 1.9 years[125] - The 2015 Equity Incentive Plan had 2.3 million shares available for grant as of April 3, 2021[117][126] Note 14. Commitments and Contingencies This note outlines the company's purchase obligations, warranty provisions, and ongoing litigation - Purchase obligations amounted to $224.9 million as of April 3, 2021, representing legally-binding commitments, mostly expected to be fulfilled within one year[128][129] Warranty Activity | Warranty Activity | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Provision for warranty | $5.8 | $2.5 | | Utilization of reserve | $(5.2) | $(4.6) | - The company is involved in ongoing merger litigation (Karri Lawsuit) related to the Oclaro acquisition, with Lumentum named as a defendant, and the case is currently in discovery[140] Note 15. Operating Segments and Geographic Information This note presents financial information for the company's operating segments and geographic regions - Lumentum operates in two segments: Optical Communications (OpComms), which includes Telecom and Datacom, and Consumer and Industrial markets; and Commercial Lasers (Lasers)[145] Segment Net Revenue | Segment Net Revenue | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | OpComms | $387.9 | $359.3 | $1,265.5 | $1,184.8 | | Lasers | $31.6 | $43.5 | $85.2 | $125.7 | | Total Net Revenue | $419.5 | $402.8 | $1,350.7 | $1,310.5 | - Net revenue from customers outside the United States represented 90.9% and 92.7% of total net revenue for the three and nine months ended April 3, 2021, respectively, with Asia-Pacific being the largest region[193] Note 16. Subsequent Event This note discloses a subsequent event regarding a new share buyback program - On May 7, 2021, the board of directors approved a new share buyback program, authorizing the company to purchase up to $700 million of its common stock over a two-year period[166] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Lumentum's financial performance, condition, and future outlook Forward-Looking Statements This section contains cautionary language regarding forward-looking statements and associated risks - This report contains forward-looking statements based on current expectations, which involve risks, uncertainties, and assumptions that could cause actual results to differ materially[169] - Key factors influencing future results include market and industry conditions, product strategy, export regulation changes, the impact of the COVID-19 pandemic, sales, gross margins, operating expenses, capital expenditures, liquidity, and US-China relations[169] Overview This section provides an overview of the company's business, operating segments, and market trends - Lumentum is an industry-leading provider of optical and photonic products, with two operating segments: Optical Communications (OpComms) and Commercial Lasers[171] - The company believes in robust, long-term global market trends driving demand for its photonics products, including increasing data flow in optical networks, demand for precision manufacturing, and growth in 3D sensing and LiDAR applications[172] - Lumentum continuously invests in new and differentiated products, technologies, and customer programs to maintain and grow its market and technology leadership positions[173] Termination of Coherent Merger Agreement This section details the financial impact of the terminated merger agreement with Coherent, Inc - Coherent, Inc terminated its merger agreement with Lumentum in March 2021, resulting in Lumentum receiving a $217.6 million termination fee[174] - The net amount of $207.5 million (after $10.1 million in acquisition-related expenses) is presented as 'merger termination fee and related costs, net' in the condensed consolidated statements of operations[174] Impact of COVID-19 to our Business This section discusses the operational and financial impacts of the COVID-19 pandemic on the business - The COVID-19 pandemic has caused a global slowdown, supply chain disruptions, and financial market volatility, leading to measures like work-from-home and limited onsite manufacturing, though Lumentum is deemed an essential business[175][176] - The company faces semiconductor component shortages, which could impact its ability to supply products and reduce revenue, with the impact potentially increasing in the near term[178] - Despite uncertainties, Lumentum believes its long-term opportunities are not diminished by COVID-19 and plans to continue strong investment in new products, technology, and customer programs[179] Critical Accounting Policies and Estimates This section identifies the company's most critical accounting policies and estimates - The company's critical accounting policies include Inventory Valuation, Revenue Recognition, Income Taxes, and Goodwill[181] - There have been no significant changes to these policies during the nine months ended April 3, 2021, except for updates resulting from the adoption of Topic 326[181] Recently Issued Accounting Pronouncements This section refers to Note 2 for details on recently issued accounting pronouncements - Refer to Note 2 for details on recently issued accounting pronouncements[182] Results of Operations This section provides a comparative analysis of the company's operating results for recent periods Key Metrics as a Percentage of Net Revenue | Metric (% of Net Revenue) | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Gross profit | 44.1% | 39.2% | 45.9% | 39.3% | | Income from operations | 63.6% | 10.6% | 35.6% | 13.5% | | Net income | 53.8% | 10.8% | 27.8% | 10.7% | Segment Net Revenue as a Percentage of Total | Segment Net Revenue (% of Total) | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | OpComms | 92.5% | 89.2% | 93.7% | 90.4% | | Lasers | 7.5% | 10.8% | 6.3% | 9.6% | Net Revenue This section analyzes the changes in net revenue by operating segment and product line Net Revenue by Segment | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue | $419.5 | $402.8 | 4.1% | $1,350.7 | $1,310.5 | 3.1% | | OpComms | $387.9 | $359.3 | 8.0% | $1,265.5 | $1,184.8 | 6.8% | | Lasers | $31.6 | $43.5 | (27.4)% | $85.2 | $125.7 | (32.2)% | - OpComms revenue growth was primarily driven by a $23.8 million increase in Industrial and Consumer sales due to expanded 3D sensing applications and higher adoption rates in consumer electronic devices[186][189] - Lasers net revenue decreased significantly due to reduced customer demand for kilowatt-class fiber lasers, primarily impacted by COVID-19[187][190] Gross Margin and Segment Gross Margin This section examines the factors affecting gross margin for the company and its operating segments Gross Margin by Segment | Gross Margin | Three Months Ended April 3, 2021 | Three Months Ended March 28, 2020 | Nine Months Ended April 3, 2021 | Nine Months Ended March 28, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Gross Margin | 44.1% | 39.2% | 45.9% | 39.3% | | OpComms Gross Margin | 50.1% | 45.0% | 52.2% | 46.4% | | Lasers Gross Margin | 47.2% | 49.7% | 46.2% | 44.7% | - OpComms gross margin increased due to higher manufacturing volumes, a more profitable product mix (including higher sales of 3D sensing and lower sales of Datacom transceiver modules and Lithium Niobate modulators), and ongoing operational improvements[204][205] - Lasers gross margin decreased in the three-month period due to lower manufacturing levels caused by reduced customer demand for kilowatt-class fiber products related to COVID-19[206] Research and Development ("R&D") This section details the changes and drivers of research and development expenses R&D Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | R&D expense | $57.2 | $48.7 | 17.5% | $160.4 | $149.6 | 7.2% | - The increase in R&D expense was primarily due to incremental headcount, an additional week in the quarter, and increased payroll-related expenses and stock-based compensation, partially offset by reduced discretionary travel due to COVID-19 restrictions[208][209] - The company plans to continue strong investments in R&D and new products to maintain market differentiation, expecting R&D investment to increase in absolute dollars in future quarters[210] Selling, General and Administrative ("SG&A") This section explains the fluctuations in selling, general, and administrative expenses SG&A Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | SG&A expense | $65.5 | $61.3 | 6.9% | $183.1 | $180.4 | 1.5% | - The increase in SG&A expense was primarily due to higher stock-based compensation, payroll-related expenses from incremental headcount, an additional week in the quarter, and increased acquisition-related costs, partially offset by lower discretionary travel and trade shows due to COVID-19[211][212] Restructuring and Related Charges This section discusses the nature and amount of restructuring charges incurred during the period Restructuring and Related Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | % Change (3 Months) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | % Change (9 Months) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Restructuring and related charges | $2.9 | $2.7 | 7.4% | $3.1 | $4.9 | (36.7)% | - Charges for the three and nine months ended April 3, 2021, were mainly attributable to severance costs associated with the decision to cease manufacturing certain products in San Jose, California[215] - Charges for the three and nine months ended March 28, 2020, were primarily due to severance costs related to moving manufacturing from San Jose, California, to Thailand and other third-party vendors[216] Merger Termination Fee and Related Costs, Net This section quantifies the net gain recognized from the Coherent merger termination fee Merger Termination Fee and Related Costs, Net | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Merger termination fee and related costs, net | $(207.5) | $— | $(207.5) | $— | - The company recorded a $217.6 million gain from the termination fee received from Coherent in March 2021, offset by $10.1 million in acquisition-related charges, resulting in a net gain of $207.5 million[217] Impairment Charges This section notes the absence of impairment charges in the current period compared to the prior year Impairment Charges | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Impairment charges | $— | $2.5 | $— | $2.5 | - Impairment charges of $2.5 million in the prior year were related to property, plant, and equipment due to the decision to exit the Datacom transceiver modules product line, with no impairments in fiscal 2021 related to this exit[218] Interest Expense This section analyzes the components and changes in interest expense related to company debt Interest Expense | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $16.4 | $15.6 | $48.7 | $45.3 | - The increase in interest expense for the nine months ended April 3, 2021, was mainly driven by higher amortization of debt discount and contractual interest expense of the 2026 Notes, partially offset by the full repayment of the term loan facility in fiscal 2020[221] Other Income (Expense), Net This section breaks down the components of other income and expense, including foreign exchange and interest income Other Income (Expense), Net | Component | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Foreign exchange gains (losses), net | $1.3 | $0.7 | $(3.8) | $(0.3) | | Interest income | $1.0 | $5.2 | $4.9 | $12.6 | | Other income (expense), net | $0.1 | $15.8 | $1.0 | $15.6 | | Total other income (expense), net | $2.4 | $21.7 | $2.1 | $27.9 | - The significant decrease in other income, net, was mainly due to a $13.8 million gain on the sale of the Lithium Niobate modulators business recognized in fiscal 2020[222] Provision for (Benefit from) Income Taxes This section explains the key factors influencing the provision for income taxes and the effective tax rate Provision for Income Taxes | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $27.4 | $5.2 | $58.8 | $19.6 | - The tax provision for the three months ended April 3, 2021, includes a discrete tax expense of $16.8 million mainly from the tax expense associated with the Coherent termination fee[223] - The estimated effective tax rate for fiscal 2021 differs from the 21% U.S. statutory rate due to foreign subsidiary earnings, U.S. federal R&D tax credits, non-deductible stock-based compensation, and the tax effect of GILTI[223] Contractual Obligations This section summarizes the company's future contractual payment obligations Contractual Obligations | Contractual Obligation | Total (Millions) | Less than 1 year (Millions) | 1 - 3 years (Millions) | 3 - 5 years (Millions) | More than 5 years (Millions) | | :--- | :--- | :--- | :--- | :--- | :--- | | Asset retirement obligations | $4.7 | $— | $0.9 | $2.3 | $1.5 | | Finance lease liabilities | $0.1 | $0.1 | $— | $— | $— | | Operating lease liabilities | $70.7 | $14.0 | $22.4 | $13.3 | $21.0 | | Pension plan contributions | $0.5 | $0.5 | $— | $— | $— | | Purchase obligations | $224.9 | $222.0 | $2.8 | $0.1 | $— | | Convertible notes - principal | $1,500.0 | $— | $450.0 | $— | $1,050.0 | | Convertible notes - interest | $34.9 | $6.4 | $12.7 | $10.5 | $5.3 | | Total | $1,835.8 | $243.0 | $488.8 | $26.2 | $1,077.8 | - The table excludes $26.6 million of unrecognized tax benefits for uncertain tax positions, as the timing of future payments cannot be reliably estimated[229] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements - The company does not have any off-balance sheet arrangements, as defined by SEC rules, that are material to its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources[230] Financial Condition This section provides an analysis of the company's liquidity, capital resources, and cash flows Liquidity and Capital Resources This subsection details the company's cash position, short-term investments, and capital allocation strategies Liquidity Position | Metric | April 3, 2021 (Millions) | June 27, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $687.7 | $298.0 | | Short-term investments | $1,366.9 | $1,255.8 | - The 2024 Notes, with a principal balance of $385.3 million, are presented in short-term liabilities as of April 3, 2021, due to the stock price exceeding the conversion threshold[234] - The board of directors approved a $700 million share buyback program on May 7, 2021, authorized for two years[235] Operating Cash Flow This subsection analyzes the sources and uses of cash from operating activities Operating Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $614.5 | $401.6 | - Operating cash flow for the nine months ended April 3, 2021, included $207.5 million from the Coherent merger termination fee, net of related costs[240] Investing Cash Flow This subsection details cash flows related to investments in assets and securities Investing Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash used in investing activities | $(196.3) | $(477.9) | | Payments for acquisition of property, plant and equipment | $(66.4) | $(64.9) | Financing Cash Flow This subsection outlines cash flows from debt, equity, and stock-related transactions Financing Cash Flow | Metric | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | | Net cash (used in) provided by financing activities | $(28.5) | $332.5 | - Cash used in financing activities for the nine months ended April 3, 2021, was primarily due to tax payments related to restricted stock ($33.8 million)[244] - Cash provided by financing activities in the prior year was mainly from the issuance of 2026 Convertible Notes ($1,042.4 million) and repayment of the term loan facility ($497.5 million)[245] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines Lumentum's exposure to various market risks, including those exacerbated by the COVID-19 pandemic COVID-19 Risk This section discusses how the COVID-19 pandemic exacerbates various market risks - The COVID-19 pandemic heightens various market risks, including accounts receivable collectability, inventory obsolescence, short-term investment values, long-term asset impairment, and tax valuation[246] - Foreign exchange markets could experience significant fluctuations, impacting future expenses, and dramatically reduced interest rates will likely negatively affect future investment income[247] Foreign Exchange Risk This section details the company's exposure to fluctuations in foreign currency exchange rates Foreign Exchange Gains (Losses), Net | Metric | Three Months Ended April 3, 2021 (Millions) | Three Months Ended March 28, 2020 (Millions) | Nine Months Ended April 3, 2021 (Millions) | Nine Months Ended March 28, 2020 (Millions) | | :--- | :--- | :--- | :--- | :--- | | Foreign exchange gains (losses), net | $1.3 | $0.7 | $(3.8) | $(0.3) | - The company is exposed to foreign currency exchange risks, particularly for expenses denominated in Chinese Yuan, Canadian Dollar, Thai Baht, Japanese Yen, UK Pound, Swiss Franc, and Euro, with increased volatility due to the COVID-19 pandemic[249][326] Equity Price Risk This section explains the equity price risk associated with the company's convertible notes - Lumentum is exposed to equity price risk related to the conversion options embedded in its 2026 Notes (conversion price $99.29 per share) and 2024 Notes (conversion price $60.62 per share)[250][251] - The 2024 Notes became convertible at the option of holders as of April 3, 2021, because the closing price of the company's stock exceeded $78.80 (130% of the conversion price) for 20 of the last 30 trading days of the quarter[252] Interest Rate Fluctuation Risk This section quantifies the potential impact of interest rate changes on the investment portfolio - As of April 3, 2021, the company held $2,054.6 million in cash, cash equivalents, and short-term investments, with a weighted-average life of approximately seven months for its investment portfolio[253] - A hypothetical 1% increase or decrease in interest rates would result in an approximate $8.8 million decrease or increase, respectively, in the fair value of the investment portfolio[254] Bank Liquidity Risk This section outlines the risk associated with cash balances held at financial institutions - The company held approximately $114.8 million of unrestricted cash in operating accounts with domestic and international financial institutions as of April 3, 2021[255] - These cash balances could become lost or inaccessible if the underlying financial institutions fail or are unable to meet liquidity requirements, potentially impacting the company's ability to fund operations in the short term[255] Item 4. Controls and Procedures This section details the evaluation of Lumentum's disclosure controls and procedures and internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms management's conclusion on the effectiveness of disclosure controls - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective as of April 3, 2021[257] - These controls provide reasonable assurance that required information is recorded, processed, summarized, and reported within SEC specified time periods[257] Changes in Internal Control over Financial Reporting This section states that no material changes were made to internal controls during the quarter - There were no changes in internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[258] Inherent Limitations on Effectiveness of Controls This section acknowledges the inherent limitations of any control system - Management acknowledges that disclosure controls and internal control over financial reporting can only provide reasonable, not absolute, assurance against errors and fraud due to inherent limitations and resource constraints[259] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section describes the legal proceedings Lumentum is involved in, primarily focusing on ongoing merger litigation Merger Litigation This section provides an update on the status of litigation related to the Oclaro acquisition - Seven lawsuits were filed challenging the Oclaro acquisition; two putative class actions were voluntarily dismissed with prejudice, and four other suits were also dismissed[263][264] - The remaining Karri Lawsuit, a putative class action, names Lumentum as a defendant and is currently in discovery, alleging violations of Section 14(a) and 20(a) of the Securities Exchange Act of 1934[265][266] - Defendants intend to vigorously defend the Karri Lawsuit, which seeks damages and litigation costs[266] Item 1A. Risk Factors This section details the significant risks and uncertainties that could adversely affect Lumentum's business and financial condition Risk Factor Summary This section provides a high-level summary of key risks across economic, operational, and regulatory categories - Key general economic risks include the impact of the COVID-19 pandemic and responsive measures[269] - Operational risks encompass changing technology, intense competition, reliance on limited customers and suppliers, manufacturing capabilities, international operations, strategic transactions, product defects, and the ability to hire and retain key personnel[270][271] - Regulatory and legal risks involve changes in tax laws, litigation, export controls, tariffs, and intellectual property rights, while financing risks include capital requirements and debt servicing[271][274] Risks Related to Our Business This section details specific risks related to the company's business operations and industry Impact of COVID-19 Pandemic This subsection elaborates on the operational and financial risks posed by the COVID-19 pandemic - The COVID-19 pandemic has negatively impacted Lumentum's operations, supply chain, and R&D activities through travel restrictions, limited onsite employees, and disruptions from manufacturing partners (e.g., Malaysia)[273][275] - The pandemic has created economic uncertainty and volatility, affecting demand for products, increasing collection risks, and impacting foreign exchange markets, with the full magnitude and duration remaining difficult to predict[276] Changing Technology and Intense Competition This subsection discusses risks from rapid technological change and a highly competitive market - The markets are characterized by rapid technological change, frequent new product introductions, substantial capital investment, and continuous price pressures, requiring Lumentum to constantly innovate and control product costs[277] - Failure to successfully develop, manufacture, market, or support new products on a timely basis, or to adjust cost structures for mature products, could materially and adversely affect financial condition and results of operations[277][278] Reliance on Limited Customers This subsection outlines the risks associated with dependency on a small number of major customers - Lumentum relies on a small number of customers for a significant portion of its sales, particularly in 3D sensing and commercial lasers, with many customers lacking contractual volume or long-term purchase commitments[279] - Changes in customer demand, business requirements, or purchasing behavior, especially from key customers, could significantly decrease sales, lead to order delays or cancellations, and increase the risk of quarterly fluctuations in revenues and operating results[279] Restrictions on Sales to Significant Customer (Huawei) This subsection details the business impact of U.S. government sales restrictions on Huawei - U.S. government restrictions, including Huawei's addition to the Entity List and amendments to the Foreign-Produced Direct Product Rule, limit Lumentum's ability to sell certain products to Huawei without a license[280][281] - These restrictions have reduced business with Huawei, potentially impacting future product developments and leading to excess and obsolete inventory charges for customized and common components[282][284] - Uncertainty regarding future U.S. government actions against Huawei or other Chinese entities could cause further delays or cancellations, adversely affecting business and financial results[283][284] Intense Competition and Industry Consolidation This subsection discusses competitive pressures and the impact of industry consolidation - The markets for optical subsystems, components, and laser diodes are highly competitive, with numerous domestic and international public and private companies, many possessing greater resources[285] - Industry consolidation (e.g., II-VI's acquisition of Finisar and Coherent, Cisco's acquisition of Acacia Communications) may result in competitors with greater resources, lower cost structures, and intensified competition, leading to price erosion, reduced revenue, or loss of market share[285] Risks from International Operations This subsection outlines the various risks associated with the company's extensive international operations - A majority of Lumentum's revenue is derived from international operations, exposing it to economic, business, regulatory, social, and political conditions in foreign countries[286][287] - Risks include trade protection laws, sanctions (e.g., on China's 5G deployment), conflicting local laws, global recession due to COVID-19, wage inflation, political developments (Brexit, Hong Kong), and natural disasters or epidemics[287][288][291] - Fluctuations in foreign currencies (e.g., U.K. pound, Chinese yuan, Thai baht) can negatively impact operating results by increasing costs when reported in U.S. dollars or reducing demand for products[289][326] Manufacturing Risks This subsection details risks related to complex manufacturing processes, yields, and supply chain dependencies - Lumentum's complex manufacturing processes, conducted in facilities across China, Japan, Thailand, U.K., and San Jose, California, are susceptible to problems achieving acceptable yields, delays, and disruptions from social, geopolitical, environmental, or health factors like COVID-19[293] - Reliance on independent contract manufacturers and a limited number of specialized suppliers for raw materials and components poses risks of supply stoppages, defective parts, insufficient resources, and increased costs[294][301] - Transferring manufacturing to other sites is costly, time-consuming, and can result in supply interruptions, impacting financial condition and results of operations[297] Customer Qualification of Manufacturing Lines This subsection discusses the risks associated with delays or failures in customer manufacturing line qualifications - Certain customers require qualification of manufacturing lines for volume production, and delays or failures in this process can harm Lumentum's reputation, operating results, and customer relationships[300] - Quality control issues can arise from setting up new lines, relocating existing ones, or introducing new products, potentially requiring re-qualification with customers[300] Bargaining Power of Large Customers This subsection outlines the risks from the significant bargaining power of large OEM customers - Large OEM and end-user service providers, comprising a significant portion of the customer base, possess considerable bargaining power, often demanding more favorable terms, including pricing, warranties, and indemnification[304] - Agreeing to onerous terms or failing to satisfy contract requirements could result in material liabilities, litigation, increased costs, loss of market share, and damage to reputation[304] Product Defects This subsection details the potential business impact of undetected software or hardware defects in products - Lumentum's complex products may contain undetected software or hardware defects, especially upon introduction or new version releases, which can be difficult to identify when embedded in customer products[305] - Such defects could lead to significant damages, warranty and repair costs, diversion of engineering resources, customer relation problems, loss of customers, or product liability suits, harming the business[305] Export Control Laws and Regulations This subsection discusses the risks and potential penalties associated with non-compliance with export control laws - Exports of certain products are subject to U.S. government export controls (EAR, ITAR), often requiring pre-shipment authorization, which can be difficult and time-consuming to obtain[306][307] - Failure to obtain export licenses or comply with regulations could significantly reduce revenue, adversely affect business, and lead to civil, criminal, monetary, and non-monetary penalties[307][309] - Increased government scrutiny and restrictions on foreign entities (e.g., Huawei, FiberHome) create risks of further export limitations, reputational harm, and disruptions to supply chains and customer relationships[308][309][310] Increasing Tariffs This subsection outlines the potential negative impact of increasing trade tariffs on the business - The threat of increasing tariffs, particularly between the United States and China, could negatively impact overall economic conditions, Lumentum's industry, and its business[311] - Imposition of tariffs or new trade regulations could increase product and product-related costs or decrease sales to customers in China or those selling to Chinese end-users, directly impacting business and results of operations[311] Strategic Transactions Risks This subsection details the inherent risks associated with pursuing acquisitions and divestitures - Lumentum's strategy involves acquisitions and strategic transactions, which carry risks such as diversion of management attention, unforeseen expenses, regulatory hurdles, and unanticipated changes in the acquired business[312][313] - Divestitures also involve risks, including difficulties in separating businesses, potential loss of revenue, negative impact on margins, and disruption of customer relationships[314] - Failure to successfully manage these risks in future acquisitions or divestitures could adversely impact business, financial condition, and results of operations[315] Acquisitions Strategy and Integration This subsection discusses the challenges and risks of integrating acquired companies and technologies - Challenges in implementing an acquisition strategy and integrating acquired companies include potential loss of customers, suppliers, or key employees, difficulties in conforming standards and systems, and coordinating new product development[317] - Integration difficulties can increase operational complexity, dilute current stockholders, expend cash, or incur unfavorable indebtedness, potentially disrupting business and adversely impacting financial results[317] Changes in Demand and Customer Requirements This subsection outlines the risks related to fluctuating production volumes and manufacturing yields - Manufacturing yields are dependent on production volume and changes in customer specifications, and modifications to processes or new product introductions can reduce yields, leading to low or negative margins[319] - An increase in the rejection rate of products during quality control, exacerbated by COVID-19, results in lower gross margins from reduced yields and additional rework costs, adversely affecting operating results[319] International Tax Structure This subsection discusses the risks associated with the company's international tax structure and potential challenges - Lumentum's international corporate structure aims to reduce its effective tax rate through intellectual property use and international procurement/sales operations in lower-tax jurisdictions[320] - Risks include the inability to fully operationalize the structure, substantial modifications due to acquisitions, negative impacts from changes in tax laws, or successful challenges by tax authorities, which could materially and adversely affect operating and financial results[320] Changes in Tax Laws This subsection details the risks from potential changes in domestic and international tax laws - Significant uncertainties exist regarding tax liabilities due to potential changes in tax laws (e.g., Tax Cuts and Jobs Act, BEPS Project) and adverse determinations on existing laws, which could increase tax obligations and impact the effective tax rate[321][322][324] - The expiration of the tax holiday for the Thailand subsidiary in fiscal 2025, if not extended, would subject income earned in Thailand to a higher statutory income tax rate, increasing the effective tax rate and reducing liquidity[325] Volatility Due to Foreign Currency Fluctuations This subsection explains the impact of foreign exchange rate volatility on operating results - Lumentum is exposed to foreign exchange risks, particularly for operating expenses incurred in currencies other than the U.S. dollar (e.g., U.K. pound sterling, Chinese yuan, Thai baht)[326] - Increased non-U.S. manufacturing and the COVID-19 pandemic have heightened foreign exchange volatility; U.S. dollar depreciation increases costs, while strengthening could reduce demand for products[326] Inability to Retain or Hire Key Personnel This subsection discusses the risks related to competition for and retention of key employees - Future success depends on the ability to recruit and retain highly qualified executive, engineering, sales, and marketing personnel, for whom competition is intense[327] - Increased employee mobility and turnover due to COVID-19, along with the complexity of replacing or training new employees, could delay new product development and negatively impact marketing, sales, and support[327] Need for Additional Capital This subsection outlines the potential need for future financing and the associated risks - Lumentum intends to continue investments for business growth and may require additional funds for new products, market expansion, strategic transactions, and infrastructure improvements[330] - Future equity or debt financings could result in significant dilution for existing stockholders or involve restrictive covenants that limit operational flexibility and access to additional capital[330] Impact of Immigration Laws on Hiring This subsection details how changes in immigration laws could affect the ability to hire skilled personnel - Foreign nationals are a crucial part of Lumentum's U.S. workforce, particularly in engineering and product development[331] - Changes in immigration laws, regulations, or procedures (e.g., U.S. government actions, Brexit) could adversely affect the ability to hire and retain these workers, increase operating expenses, and negatively impact product and service delivery[331] Information Technology Infrastructure and Security Risks This subsection discusses the risks of IT system failures and cybersecurity threats - Lumentum's business relies significantly on effective and secure information management systems; failures, disruptions, or security breaches could harm operations and lead to loss of proprietary information[332][336] - The company is subject to ongoing cyberattacks (hacking, malware, ransomware, social engineering), which have increased during the COVID-19 pandemic due to a distributed workforce and increased remote access[335] - Any actual or perceived security breach could cause significant damage to reputation, lead to theft of intellectual property, result in legal obligations, affect customer relationships, and incur significant mitigation costs[336] Volatility of Operating Results and Financial Predictions This subsection outlines the factors contributing to the volatility of operating results and the difficulty in forecasting - Operating results and financial predictions are subject to cyclical and uneven fluctuations in market spending, customer buying patterns, and new product releases, making future performance difficult to predict[337] - Adverse changes and uncertainty in the global economy, particularly due to COVID-19, may decrease demand, increase price competition, and lead to excess and obsolete inventories, materially impacting financial condition and results[338] Insufficient Proprietary Rights and Failure to Protect Rights This subsection details the risks associated with protecting the company's intellectual property - Protecting proprietary rights (patents, trade secrets, trademarks) is difficult, time-consuming, and expensive; steps taken may not prevent misappropriation or ensure competitive technologies are not developed[340] - Patents may not be issued or sufficiently broad, and existing patents or third-party licenses may be unavailable or on unfavorable terms, impeding new product development and sales[340] - Breaches of informat