Lumentum(LITE) - 2022 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited financial statements, management's analysis, market risk disclosures, and control procedures Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the three months ended October 2, 2021, and September 26, 2020, along with detailed notes Condensed Consolidated Statements of Operations This section details the company's financial performance through its condensed consolidated statements of operations Consolidated Statements of Operations Highlights (in millions) | Metric | Three Months Ended Oct 2, 2021 | Three Months Ended Sep 26, 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net revenue | $448.4 | $452.4 | -0.9% | | Gross profit | $232.2 | $205.7 | +12.9% | | Income from operations | $115.9 | $99.0 | +17.1% | | Net income | $81.5 | $67.1 | +21.5% | | Diluted EPS | $1.08 | $0.86 | +25.6% | Condensed Consolidated Balance Sheets This section presents the company's financial position through its condensed consolidated balance sheets Consolidated Balance Sheet Highlights (in millions) | Metric | As of Oct 2, 2021 | As of July 3, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $611.0 | $774.3 | | Short-term investments | $1,273.6 | $1,171.7 | | Total current assets | $2,423.0 | $2,436.8 | | Total assets | $3,519.0 | $3,551.6 | | Total current liabilities | $611.7 | $664.6 | | Total liabilities | $1,547.6 | $1,578.8 | | Total stockholders' equity | $1,971.4 | $1,972.8 | Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows through its condensed consolidated statements of cash flows Consolidated Statements of Cash Flows Highlights (in millions) | Metric | Three Months Ended Oct 2, 2021 | Three Months Ended Sep 26, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $61.9 | $104.7 | | Net cash used in investing activities | $(116.9) | $(114.0) | | Net cash used in financing activities | $(108.3) | $(19.2) | | Decrease in cash and cash equivalents | $(163.3) | $(28.5) | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and context for the condensed consolidated financial statements - The company operates in two segments: Optical Communications (OpComms) and Commercial Lasers (Lasers), serving OEMs in networking, manufacturing, and consumer electronics (3D sensing)[23] Revenue by Segment (in millions) | Segment | Q1 FY22 (ended Oct 2, 2021) | Q1 FY21 (ended Sep 26, 2020) | YoY Change | | :--- | :--- | :--- | :--- | | OpComms | $406.0 | $428.5 | -5.3% | | Lasers | $42.4 | $23.9 | +77.4% | | Total Net Revenue | $448.4 | $452.4 | -0.9% | OpComms Revenue Disaggregation (in millions) | OpComms Market | Q1 FY22 (ended Oct 2, 2021) | Q1 FY21 (ended Sep 26, 2020) | YoY Change | | :--- | :--- | :--- | :--- | | Telecom and Datacom | $216.0 | $261.3 | -17.3% | | Consumer and Industrial | $190.0 | $167.2 | +13.6% | | Total OpComms | $406.0 | $428.5 | -5.3% | - Customer concentration remains high, with one customer accounting for 41% of total net revenue in Q1 FY22, up from 35% in Q1 FY21[128] - Subsequent to the quarter's end, on November 4, 2021, Lumentum announced a merger agreement to acquire NeoPhotonics Corporation for approximately $918 million in cash[134] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the first quarter fiscal 2022 financial results, highlighting revenue trends, gross margin improvements, and impacts of the COVID-19 pandemic and supply chain issues Results of Operations This section analyzes the company's financial performance, focusing on revenue, gross margin, and operating expenses by segment - OpComms revenue decreased by $22.5 million (5.3%) YoY, driven by a $45.3 million drop in Telecom and Datacom due to component shortages and 5G deployment delays, partially offset by a $22.8 million increase in Industrial and Consumer revenue[157] - Lasers revenue increased by $18.5 million (77.4%) YoY, primarily due to a recovery in customer demand for kilowatt-class fiber lasers following COVID-19 disruptions[158] - Overall gross margin increased to 51.8% from 45.5% YoY, driven by a more profitable product mix, particularly higher-margin 3D sensing products, and lower excess and obsolescence charges[166][169] - Operating expenses increased, with R&D up 7.3% to $54.1 million and SG&A up 12.4% to $63.3 million, primarily due to increased headcount and compensation expenses[171][173] Financial Condition, Liquidity and Capital Resources This section assesses the company's financial health, liquidity position, and capital management strategies - The company ended the quarter with $611.0 million in cash and cash equivalents and $1,273.6 million in short-term investments, with management believing liquidity is sufficient for at least the next 12 months[180][183] - Under its share buyback program, the company repurchased 1.1 million shares of common stock for an aggregate price of $91.7 million during the first quarter of fiscal 2022[192] - Cash from operations was $61.9 million, a decrease from $104.7 million in the prior-year period, mainly due to changes in operating assets and liabilities, including a $50.4 million increase in accounts receivable[196] - The 2024 Convertible Notes, with a carrying amount of $395.8 million, were reclassified to current liabilities as they became convertible at the option of the holders during the quarter[190] Quantitative and Qualitative Disclosures About Market Risk The company details its exposure to market risks, including foreign exchange fluctuations, equity price risk from convertible notes, and interest rate risk on its investment portfolio - The company is exposed to foreign exchange risk as a portion of its operating expenses are denominated in currencies other than the U.S. Dollar, including the Chinese Yuan, Canadian Dollar, Thai Baht, and Japanese Yen[204] - The fixed-income investment portfolio is subject to interest rate risk, where a hypothetical 1% (100 basis points) change would result in an approximate $9.6 million change in its fair value[208] - The company faces equity price risk related to the conversion options embedded in its 2026 and 2024 Convertible Notes, as their value fluctuates with the company's stock price[205][206] Controls and Procedures Based on an evaluation as of October 2, 2021, the company's Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[211] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[212] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and a list of exhibits filed with the report Legal Proceedings The company is involved in various claims that arise in the ordinary course of business, including ongoing litigation related to the Oclaro acquisition - The company is subject to various legal claims, including ongoing litigation related to its acquisition of Oclaro (the Karri Lawsuit), currently in the discovery phase[113][216] Risk Factors This section details significant business risks, including impacts from the COVID-19 pandemic, customer and supplier concentration, export restrictions, and strategic transaction complexities Risks Related to Our Business This section outlines key operational and strategic risks impacting the company's business performance - The COVID-19 pandemic continues to pose risks, causing disruptions in manufacturing, supply chain delays (particularly for semiconductor components), and limitations on R&D activities[225][226][227] - The company relies on a limited number of customers for a significant portion of sales, creating concentration risk where changes in their purchasing behavior could significantly impact revenue[232] - U.S. government restrictions on sales to Huawei and other entities on the Entity List have limited and will continue to limit business, potentially leading to excess inventory charges and underutilized capacity[233][234][236] - The pending acquisition of NeoPhotonics is subject to closing conditions, including regulatory approvals, and failure to complete the merger could result in significant termination fees and other adverse consequences[317][319][320] Legal, Regulatory and Compliance Risks This section addresses potential legal, regulatory, and compliance challenges affecting the company's operations - The company's sales are subject to U.S. export control laws, and failure to obtain necessary licenses could limit sales to certain countries and customers, particularly with increased scrutiny on Chinese entities[295][297] - Operations are subject to numerous worldwide regulations, including environmental (REACH, RoHS), conflict minerals disclosure, and data privacy laws (GDPR, CCPA), which could increase expenses and harm operating results if not complied with[301][302][303] Risks Related to Our Common Stock This section discusses risks specifically related to the company's common stock and convertible notes - Servicing the 2024 and 2026 convertible notes requires significant cash, and the company's ability to make payments depends on future performance, potentially limiting operational flexibility[307][309] - Conversion of the 2024 and 2026 notes could dilute the ownership interest of existing stockholders, and any sales of common stock issuable upon conversion could depress the stock price[311] Unregistered Sales of Equity Securities and Use of Proceeds This section provides details on the company's stock repurchase activities, including the 2021 share buyback program Issuer Purchases of Equity Securities (Q1 FY22) | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (approx. in millions) | | :--- | :--- | :--- | :--- | | July 4 - July 31, 2021 | 0 | $— | $0 | | Aug 1 - Aug 28, 2021 | 752,000 | $81.03 | $61.0 | | Aug 29 - Oct 2, 2021 | 360,000 | $85.43 | $30.7 | | Total | 1,112,000 | $82.45 | $91.7 | - The repurchases were made under the 2021 share buyback program, approved on May 7, 2021, which authorizes up to $700.0 million in share purchases over two years[328] Exhibits This section lists the exhibits filed with the Form 10-Q, including employment agreements and required certifications - The report includes several exhibits, such as an Amended and Restated Employment Agreement for CEO Alan Lowe, and certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[331]