Lumentum(LITE) - 2024 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Lumentum's unaudited financial statements detail performance, including Cloud Light acquisition, net loss, and segment reporting changes Condensed Consolidated Statements of Operations Net revenue and gross profit declined significantly, leading to a widened net loss for both the quarter and nine-month period Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended Mar 30, 2024 | Three Months Ended Apr 1, 2023 | Nine Months Ended Mar 30, 2024 | Nine Months Ended Apr 1, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $366.5 | $383.4 | $1,050.9 | $1,396.2 | | Gross profit | $59.5 | $112.0 | $200.2 | $479.4 | | Loss from operations | $(114.6) | $(51.4) | $(300.6) | $(59.8) | | Net loss | $(127.0) | $(39.3) | $(294.0) | $(71.4) | | Diluted net loss per share | $(1.88) | $(0.57) | $(4.38) | $(1.05) | - Restructuring and related charges increased significantly to $19.2 million for the quarter and $36.0 million for the nine-month period, compared to $1.6 million and $24.8 million in the respective prior-year periods[10] Condensed Consolidated Balance Sheets Total assets decreased due to reduced cash and investments, while goodwill and intangible assets rose significantly from the Cloud Light acquisition Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | March 30, 2024 | July 1, 2023 | | :--- | :--- | :--- | | Cash and cash equivalents | $425.0 | $859.0 | | Short-term investments | $445.9 | $1,154.6 | | Total current assets | $1,650.0 | $2,777.9 | | Goodwill | $1,055.9 | $695.1 | | Other intangible assets, net | $688.5 | $459.2 | | Total assets | $4,204.5 | $4,632.1 | | Convertible notes, non-current | $2,502.4 | $2,500.0 | | Total liabilities | $3,027.8 | $3,276.3 | | Total stockholders' equity | $1,176.7 | $1,355.8 | - The current portion of convertible notes decreased from $311.6 million to zero, reflecting the repayment of the 2024 Notes[16] Condensed Consolidated Statements of Cash Flows Operating cash flow shifted to a net use, investing activities focused on Cloud Light acquisition, and financing repaid convertible notes Cash Flow Summary (in millions) | Activity | Nine Months Ended Mar 30, 2024 | Nine Months Ended Apr 1, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(10.8) | $130.6 | | Net cash used in investing activities | $(86.8) | $(803.1) | | Net cash used in financing activities | $(336.4) | $(68.5) | | Decrease in cash and cash equivalents | $(434.0) | $(741.0) | | Cash and cash equivalents at end of period | $425.0 | $549.2 | - The acquisition of businesses, net of cash acquired, was a major use of cash in both periods, with $700.9 million spent in fiscal 2024 (Cloud Light) and $861.6 million in fiscal 2023 (NeoPhotonics)[18] - The company fully paid off its 0.25% Convertible Notes due 2024 with a payment of $323.1 million[18] Note 4. Business Combinations Lumentum acquired Cloud Light for $728.5 million to enhance its data center interconnect market position, recognizing significant goodwill and intangibles - Lumentum acquired Cloud Light Technology Limited on November 7, 2023, to strengthen its offerings for cloud and networking customers, especially in AI/ML infrastructure[46] Cloud Light Acquisition Purchase Price (in millions) | Consideration Type | Fair Value | | :--- | :--- | | Cash consideration | $705.0 | | Share-based consideration | $23.5 | | Total purchase price | $728.5 | - The acquisition resulted in preliminary goodwill of $360.8 million, assigned to the Cloud & Networking segment, and is attributed to expected revenue growth and synergies[51] - For the three and nine months ended March 30, 2024, Cloud Light contributed $84.6 million and $144.1 million to consolidated net revenue, respectively[52] Note 9. Debt Lumentum held $2.50 billion in non-current convertible notes and repaid $323.1 million of maturing 2024 notes during the quarter Net Carrying Amount of Convertible Notes (in millions) | Note Series | March 30, 2024 | July 1, 2023 | | :--- | :--- | :--- | | 2029 Notes | $599.1 | $598.6 | | 2028 Notes | $856.5 | $855.5 | | 2026 Notes | $1,046.8 | $1,045.9 | | 2024 Notes | — | $311.6 | | Total | $2,502.4 | $2,811.6 | - On March 15, 2024, the 2024 Notes matured, and the company fully repaid the remaining principal amount of $323.1 million[134] - In June 2023, the company issued $603.7 million of 1.50% Convertible Senior Notes due in 2029[99] Note 11. Restructuring and Related Charges Significant restructuring charges were incurred for cost reduction and manufacturing site consolidation, including factory shutdowns and facility consolidation Restructuring and Related Charges (in millions) | Period | Charges Incurred | | :--- | :--- | | Three Months Ended Mar 30, 2024 | $19.2 | | Three Months Ended Apr 1, 2023 | $1.6 | | Nine Months Ended Mar 30, 2024 | $36.0 | | Nine Months Ended Apr 1, 2023 | $24.8 | - Restructuring efforts include shutting down factories in China from the NeoPhotonics acquisition, ramping up production in Thailand, and consolidating wafer fabrication facilities in Japan[142] Note 15. Operating Segments and Geographic Information Lumentum reorganized into Cloud & Networking and Industrial Tech segments, both experiencing revenue and profit declines, with Asia-Pacific remaining a key market - The company changed its organizational structure and reportable segments to Cloud & Networking and Industrial Tech in Q1 2024. Prior period data has been recast[186][188] Segment Net Revenue and Profit (in millions) | Segment | Nine Months Ended Mar 30, 2024 | Nine Months Ended Apr 1, 2023 | | :--- | :--- | :--- | | Net Revenue | | | | Cloud & Networking | $830.2 | $1,036.0 | | Industrial Tech | $220.7 | $360.2 | | Total Net Revenue | $1,050.9 | $1,396.2 | | Segment Profit | | | | Cloud & Networking | $98.9 | $262.6 | | Industrial Tech | $25.3 | $140.6 | | Total Segment Profit | $124.2 | $403.2 | - For the nine months ended March 30, 2024, one customer (Customer C) accounted for 12.1% of total net revenue, and another (Customer A) accounted for 18.7%[201] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant revenue and profitability declines due to market conditions, trade restrictions, and restructuring efforts, partially offset by the Cloud Light acquisition Results of Operations Net revenue decreased 24.7% YoY, impacting both segments, while gross margin contracted sharply due to lower sales and unfavorable product mix - Nine-month net revenue decreased by $345.3 million (24.7%) YoY, driven by a $205.8 million decrease in Cloud & Networking and a $139.5 million decrease in Industrial Tech[231] - The revenue decline was primarily caused by customers managing down their inventory levels and increased market competition, partially offset by $144.1 million in revenue from the newly acquired Cloud Light[231] - Nine-month gross margin decreased from 34.3% to 19.1% YoY, impacted by a less profitable product mix, lower sales volumes, and $13.7 million of abnormal excess capacity charges related to manufacturing synergy plans and reduced demand[238] - SG&A expense for the nine-month period decreased by $44.7 million (15.9%) YoY, primarily due to reduced payroll from restructuring, lower consultant costs, and lower stock-based compensation[248] Liquidity and Capital Resources Cash and investments significantly decreased due to the Cloud Light acquisition and convertible note repayment, though liquidity is deemed sufficient - Cash and cash equivalents decreased by $434.0 million during the nine months ended March 30, 2024, primarily due to cash used in financing ($336.4M), investing ($86.8M), and operating activities ($10.8M)[275] - Major uses of cash included $700.9 million for the Cloud Light acquisition and $323.1 million for the repayment of the 2024 convertible notes[278][280] - As of March 30, 2024, the company had $569.6 million remaining under its share buyback program, with no repurchases made during the nine-month period[272] Item 3. Quantitative and Qualitative Disclosures About Market Risk Lumentum faces foreign exchange, equity price, and interest rate risks, with a 1% rate change impacting its investment portfolio by $2.7 million - The company faces foreign currency exchange risk as a portion of its expenses are denominated in currencies such as the Chinese Yuan, Thai Baht, and Japanese Yen[283] - The fixed-income investment portfolio is subject to interest rate risk. A hypothetical 1% (100 basis points) change in interest rates would result in a $2.7 million change in the portfolio's fair value[287] - The company is exposed to equity price risk through the conversion options embedded in its outstanding convertible notes (2026, 2028, and 2029 series)[284][285] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Based on an evaluation as of March 30, 2024, the Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[290] - No changes occurred during the quarter ended March 30, 2024, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[291] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is subject to various legal claims, with a $15.3 million settlement approved for the Oclaro Merger Litigation - In March 2024, the court approved a settlement of $15.3 million for the Karri Lawsuit related to the 2018 Oclaro merger. The company has recorded this amount as an accrued expense[182][183] Item 1A. Risk Factors Lumentum faces numerous risks including macroeconomic conditions, supply chain, competition, U.S.-China trade restrictions, and acquisition integration challenges - Key business risks include unfavorable economic conditions, reliance on a limited number of suppliers and customers, supply chain challenges, and intense competition[299][302][304] - U.S. trade restrictions, particularly those affecting customers like Huawei, have significantly limited business and negatively impacted revenue. The company stopped the majority of product shipments to its historically largest networking customer in China in early 2024 due to new export regulations[307][308][310] - The company faces significant risks related to the integration of its recent acquisition of Cloud Light, including potential difficulties, unforeseen liabilities, and challenges with employee and customer retention[301][417] - The company's ability to service its outstanding convertible notes depends on future performance, and the debt could limit operational flexibility[409] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Lumentum made no share repurchases during the quarter, with $569.6 million remaining available under its buyback program - The company did not repurchase any of its common stock during the third quarter of fiscal 2024[423] - As of March 30, 2024, $569.6 million remains available under the company's share buyback program, which is authorized through May 2025[423]