Lumentum(US:LITE)2022-05-04 13:29PART I - FINANCIAL INFORMATION This section details the company's unaudited financial performance, condition, and cash flows for the reported periods Item 1. Financial Statements (Unaudited) Presents unaudited financial statements, with nine-month net revenue of $1,290.5 million and net income of $164.2 million Condensed Consolidated Statements of Operations Q3 FY22 net revenue decreased to $395.4 million, with net income at $26.0 million, impacted by a prior-year merger termination fee Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $395.4 | $419.5 | $1,290.5 | $1,350.7 | | Gross profit | $167.2 | $185.0 | $606.9 | $620.3 | | Income from operations | $46.8 | $266.9 | $247.9 | $481.2 | | Net income | $26.0 | $225.5 | $164.2 | $375.8 | | Diluted EPS | $0.35 | $2.85 | $2.19 | $4.78 | - The significant decrease in income from operations and net income for both the three and nine-month periods compared to the prior year is primarily due to the absence of the $207.5 million net merger termination fee received in the quarter ended April 3, 20211041 Condensed Consolidated Balance Sheets Total assets increased to $4,133.5 million, driven by cash and investments, while stockholders' equity slightly decreased Balance Sheet Summary (in millions) | Account | April 2, 2022 | July 3, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,130.3 | $774.3 | | Short-term investments | $1,433.8 | $1,171.7 | | Total current assets | $3,100.6 | $2,436.8 | | Total assets | $4,133.5 | $3,551.6 | | Convertible notes, non-current | $1,447.6 | $789.8 | | Total liabilities | $2,221.4 | $1,578.8 | | Total stockholders' equity | $1,912.1 | $1,972.8 | Condensed Consolidated Statements of Cash Flows Net cash from operations decreased to $345.0 million, with financing activities providing $380.0 million from new notes and share repurchases Cash Flow Summary (in millions) | Activity | Nine Months Ended April 2, 2022 | Nine Months Ended April 3, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $345.0 | $614.5 | | Net cash used in investing activities | ($369.0) | ($196.3) | | Net cash provided by (used in) financing activities | $380.0 | ($28.5) | | Increase in cash and cash equivalents | $356.0 | $389.7 | - Financing activities in the nine months ended April 2, 2022, were significantly impacted by the net proceeds of $854.8 million from the issuance of 0.50% Convertible Notes due 2028, partially offset by $448.6 million used for common stock repurchase23 Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, the pending NeoPhotonics acquisition, issuance of $861.0 million in convertible notes, and segment performance - On November 4, 2021, Lumentum announced a merger agreement to acquire NeoPhotonics Corporation for approximately $918 million in cash, expected to close in the second half of calendar year 20223638 - In March 2021, a prior merger agreement with Coherent, Inc. was terminated, resulting in Lumentum receiving a termination fee of $217.6 million, recorded as a net gain of $207.5 million in the prior fiscal year4041 - The company's two reportable segments are Optical Communications (OpComms) and Commercial Lasers (Lasers), with OpComms serving Telecom, Datacom, Consumer, and Industrial markets, and Lasers serving applications like sheet metal processing and precision machining146147149 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a 5.7% Q3 revenue decrease, segment performance, gross margin decline, the NeoPhotonics acquisition, and liquidity Results of Operations Q3 FY22 net revenue decreased 5.7% to $395.4 million, driven by OpComms decline and Lasers growth, with gross margin falling to 42.3% Net Revenue by Segment (in millions) | Segment | Three Months Ended April 2, 2022 | Three Months Ended April 3, 2021 | % Change | | :--- | :--- | :--- | :--- | | OpComms | $344.2 | $387.9 | (11.3)% | | Lasers | $51.2 | $31.6 | 62.0% | | Total Net Revenue | $395.4 | $419.5 | (5.7)% | - The decrease in OpComms revenue was primarily due to continued material and component shortages for Telecom products and a decrease in the average selling price for Industrial and Consumer chips due to a smaller design196 - The increase in Lasers revenue was driven by a return in customer demand for kilowatt class fiber lasers following the recovery in industrial production from COVID-19 disruptions197201 - Q3 FY22 gross margin decreased to 42.3% from 44.1% YoY, primarily due to a less profitable product mix, $5.8 million in charges to acquire components from brokers, and a temporary factory closure in China due to COVID-19 mandates210 Liquidity and Capital Resources Cash and investments totaled $2,564.1 million, with liquidity supported by $861.0 million in new convertible notes and $445.5 million in share repurchases Cash and Investments (in millions) | Item | April 2, 2022 | July 3, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $1,130.3 | $774.3 | | Short-term investments | $1,433.8 | $1,171.7 | | Total | $2,564.1 | $1,946.0 | - In March 2022, the company issued $861.0 million of 0.50% Convertible Notes due 2028, receiving net proceeds of $854.8 million7879251 - During the nine months ended April 2, 2022, the company repurchased a total of 4.7 million shares for an aggregate price of $445.5 million, including 2.7 million shares under the buyback program and 2.0 million shares concurrent with the 2028 Notes offering240242 - The company's 2024 Notes, with a carrying amount of $406.1 million, were reclassified to current liabilities as they became convertible at the option of the holders237 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including COVID-19 impacts, foreign exchange, equity price, and interest rate risks on its investment portfolio - Market risks related to the COVID-19 pandemic include potential bad debt expenses, inventory obsolescence from supply chain shortages, and impairment risk for long-term assets254258 - The company has foreign currency exchange risk related to expenses denominated in currencies such as the Chinese Yuan, Canadian Dollar, Thai Baht, and Japanese Yen257 - The fixed-income investment portfolio is subject to interest rate risk, where a hypothetical 1% (100 basis points) change in interest rates would result in an approximate $9.0 million change in the portfolio's fair value262 - Equity price risk exists due to the conversion options on the 2024, 2026, and 2028 Convertible Notes, as the value of shares distributed upon conversion fluctuates with the company's stock price259260 Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of April 2, 2022265 - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls266 PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and required exhibits Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not anticipate a material adverse impact on financial results - Management does not currently believe that resolving outstanding legal claims will have a material adverse impact on the company's financial position or results of operations270 Item 1A. Risk Factors Key risks include COVID-19 impacts, supply chain constraints, intense competition, customer concentration, Huawei restrictions, and NeoPhotonics acquisition challenges - The COVID-19 pandemic continues to negatively impact business through operational disruptions, supply chain delays, and limitations on manufacturing and R&D activities277278279 - The company is experiencing significant supply chain constraints, especially for semiconductor components, which has adversely affected availability, lead times, and costs, and has impacted the ability to meet customer demand282 - A significant portion of sales comes from a limited number of customers, and this concentration, particularly in 3D sensing and commercial lasers, makes the company vulnerable to changes in their purchasing behavior286 - U.S. Department of Commerce restrictions on Huawei have limited and will continue to limit business with this significant customer, potentially impacting financial results and leading to excess inventory charges287288290 - The proposed acquisition of NeoPhotonics is subject to closing conditions, including regulatory approvals in China, and faces risks such as failure to complete the transaction, integration challenges, and incurring significant transaction-related costs371373377 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 3.3 million shares for $97.74 average price in Q3 FY22, with $513.5 million remaining in the buyback program Issuer Purchases of Equity Securities (Q3 FY2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2 - Jan 29, 2022 | — | $— | | Jan 30 - Feb 26, 2022 | 1,032,469 | $96.38 | | Feb 27 - Apr 2, 2022 | 2,281,663 | $98.35 | | Total | 3,314,132 | $97.74 | - On March 3, 2022, the board of directors increased the share buyback program authorization from $700.0 million to an aggregate of $1.0 billion, extending through May 2024388 - As of April 2, 2022, approximately $513.5 million remained available for future repurchases under the authorized plan388 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including convertible notes indenture, purchase agreement, and certifications