Item1. Financial Statements (Unaudited)
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Net revenue
|
$
|
402.8
|
|
|
$
|
432.9
|
|
|
$
|
1,310.5
|
|
|
$
|
1,160.7
|
|
|
Cost of sales
|
231.2
|
|
|
316.5
|
|
|
757.2
|
|
|
788.3
|
|
|
Amortization of acquired developed intangibles
|
13.9
|
|
|
28.1
|
|
|
38.8
|
|
|
33.3
|
|
|
Gross profit
|
157.7
|
|
|
88.3
|
|
|
514.5
|
|
|
339.1
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
48.7
|
|
|
57.7
|
|
|
149.6
|
|
|
135.1
|
|
|
Selling, general and administrative
|
61.3
|
|
|
55.2
|
|
|
180.4
|
|
|
150.9
|
|
|
Restructuring and related charges
|
2.7
|
|
|
21.1
|
|
|
4.9
|
|
|
30.2
|
|
|
Impairment charges
|
2.5
|
|
|
30.7
|
|
|
2.5
|
|
|
30.7
|
|
|
Total operating expenses
|
115.2
|
|
|
164.7
|
|
|
337.4
|
|
|
346.9
|
|
|
Income (loss) from operations
|
42.5
|
|
|
(76.4
|
)
|
|
177.1
|
|
|
(7.8
|
)
|
|
Unrealized gain on derivative liability
|
—
|
|
|
—
|
|
|
—
|
|
|
8.8
|
|
|
Interest expense
|
(15.6
|
)
|
|
(11.3
|
)
|
|
(45.3
|
)
|
|
(24.9
|
)
|
|
Other income (expense), net
|
21.7
|
|
|
5.2
|
|
|
27.9
|
|
|
11.7
|
|
|
Income (loss) before income taxes
|
48.6
|
|
|
(82.5
|
)
|
|
159.7
|
|
|
(12.2
|
)
|
|
Provision for (benefit from) income taxes
|
5.2
|
|
|
(8.2
|
)
|
|
19.6
|
|
|
(1.6
|
)
|
|
Net income (loss)
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
Items reconciling net income to net income attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Less: Cumulative dividends on Series A Preferred Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
Less: Earnings allocated to Series A Preferred Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
Net income (loss) attributable to common stockholders - Basic
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(12.1
|
)
|
|
Net income (loss) attributable to common stockholders - Diluted
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.58
|
|
|
$
|
(0.98
|
)
|
|
$
|
1.84
|
|
|
$
|
(0.18
|
)
|
|
Diluted
|
$
|
0.56
|
|
|
$
|
(0.98
|
)
|
|
$
|
1.80
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute net income (loss) per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
Basic
|
74.8
|
|
|
76.2
|
|
|
76.2
|
|
|
68.7
|
|
|
Diluted
|
77.5
|
|
|
76.2
|
|
|
77.7
|
|
|
68.7
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Net income (loss)
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(10.6
|
)
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Net change in cumulative translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
Net change in unrealized gain (loss) on available-for-sale securities
|
(1.2
|
)
|
|
1.3
|
|
|
(1.3
|
)
|
|
1.8
|
|
|
Net change in defined benefit obligations
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Other comprehensive income (loss), net of tax
|
(1.2
|
)
|
|
1.3
|
|
|
(1.3
|
)
|
|
1.1
|
|
|
Comprehensive income (loss), net of tax
|
$
|
42.2
|
|
|
$
|
(73.0
|
)
|
|
$
|
138.8
|
|
|
$
|
(9.5
|
)
|
See accompanying Notes to Condensed Consolidated Financial Statements.
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
688.3
|
|
|
$
|
432.6
|
|
|
Short-term investments
|
763.1
|
|
|
335.9
|
|
|
Accounts receivable, net
|
261.8
|
|
|
238.0
|
|
|
Inventories
|
172.7
|
|
|
228.8
|
|
|
Prepayments and other current assets
|
77.1
|
|
|
97.5
|
|
|
Total current assets
|
1,963.0
|
|
|
1,332.8
|
|
|
Property, plant and equipment, net
|
410.1
|
|
|
433.3
|
|
|
Operating lease right-of-use assets, net
|
81.7
|
|
|
—
|
|
|
Goodwill
|
368.9
|
|
|
368.9
|
|
|
Other intangible assets, net
|
338.0
|
|
|
395.4
|
|
|
Deferred income taxes
|
102.7
|
|
|
169.6
|
|
|
Other non-current assets
|
4.3
|
|
|
16.6
|
|
|
Total assets
|
$
|
3,268.7
|
|
|
$
|
2,716.6
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
144.6
|
|
|
$
|
160.8
|
|
|
Accrued payroll and related expenses
|
50.9
|
|
|
42.3
|
|
|
Accrued expenses
|
32.9
|
|
|
46.7
|
|
|
Term loan, current
|
—
|
|
|
5.0
|
|
|
Operating lease liabilities, current
|
11.5
|
|
|
—
|
|
|
Other current liabilities
|
46.8
|
|
|
39.2
|
|
|
Total current liabilities
|
286.7
|
|
|
294.0
|
|
|
Convertible notes
|
1,106.0
|
|
|
351.9
|
|
|
Term loan, non-current
|
—
|
|
|
484.0
|
|
|
Operating lease liabilities, non-current
|
59.1
|
|
|
—
|
|
|
Deferred tax liability
|
49.0
|
|
|
55.9
|
|
|
Other non-current liabilities
|
33.7
|
|
|
33.7
|
|
|
Total liabilities
|
1,534.5
|
|
|
1,219.5
|
|
|
Commitments and contingencies (Note 17)
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
Common stock, $0.001 par value, 990,000,000 authorized shares, 74,874,176 and 76,653,478 shares issued and outstanding as of March 28, 2020 and June 29, 2019, respectively
|
0.1
|
|
|
0.1
|
|
|
Additional paid-in capital
|
1,659.1
|
|
|
1,360.8
|
|
|
Retained earnings
|
69.2
|
|
|
129.1
|
|
|
Accumulated other comprehensive income
|
5.8
|
|
|
7.1
|
|
|
Total stockholders’ equity
|
1,734.2
|
|
|
1,497.1
|
|
|
Total liabilities and stockholders’ equity
|
$
|
3,268.7
|
|
|
$
|
2,716.6
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Total Stockholders' Equity
|
|
|
Shares
|
|
Amount
|
|
|
Retained Earnings
|
|
|
|
Balance as of June 29, 2019
|
76.7
|
|
|
$
|
0.1
|
|
|
$
|
1,360.8
|
|
|
$
|
129.1
|
|
|
$
|
7.1
|
|
|
$
|
1,497.1
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
47.6
|
|
|
—
|
|
|
47.6
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
16.5
|
|
|
—
|
|
|
—
|
|
|
16.5
|
|
|
Balance as of September 28, 2019
|
77.2
|
|
|
$
|
0.1
|
|
|
$
|
1,377.3
|
|
|
$
|
176.7
|
|
|
$
|
7.2
|
|
|
$
|
1,561.3
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
49.1
|
|
|
—
|
|
|
49.1
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercise of stock options
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
Equity component of the 2026 Notes, net of tax of $67.0 million and issuance costs of $2.3 million
|
—
|
|
|
—
|
|
|
245.9
|
|
|
—
|
|
|
—
|
|
|
245.9
|
|
|
ESPP shares issued
|
0.1
|
|
|
—
|
|
|
4.9
|
|
|
—
|
|
|
—
|
|
|
4.9
|
|
|
Repurchases of common stock
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
(200.0
|
)
|
|
—
|
|
|
(200.0
|
)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
20.3
|
|
|
—
|
|
|
—
|
|
|
20.3
|
|
|
Balance as of December 28, 2019
|
74.7
|
|
|
$
|
0.1
|
|
|
$
|
1,648.7
|
|
|
$
|
25.8
|
|
|
$
|
7.0
|
|
|
$
|
1,681.6
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
43.4
|
|
|
—
|
|
|
43.4
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
(1.2
|
)
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
0.2
|
|
|
—
|
|
|
(8.6
|
)
|
|
—
|
|
|
—
|
|
|
(8.6
|
)
|
|
Exercise of stock options
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
18.8
|
|
|
—
|
|
|
—
|
|
|
18.8
|
|
|
Balance as of March 28, 2020
|
74.9
|
|
|
$
|
0.1
|
|
|
$
|
1,659.1
|
|
|
$
|
69.2
|
|
|
$
|
5.8
|
|
|
$
|
1,734.2
|
|
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Controlling Interest Redeemable Convertible Series A Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Total Stockholders' Equity
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Retained Earnings
|
|
|
|
Balance as of June 30, 2018
|
—
|
|
|
$
|
35.8
|
|
|
62.8
|
|
|
$
|
0.1
|
|
|
$
|
753.2
|
|
|
$
|
166.4
|
|
|
$
|
6.4
|
|
|
$
|
926.1
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47.4
|
|
|
—
|
|
|
47.4
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
Declared dividend for preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10.3
|
|
|
—
|
|
|
—
|
|
|
10.3
|
|
|
Cumulative-effect adjustment for adoption of Topic 606
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
Balance as of September 29, 2018
|
—
|
|
|
$
|
35.8
|
|
|
63.3
|
|
|
$
|
0.1
|
|
|
$
|
763.5
|
|
|
$
|
213.0
|
|
|
$
|
6.9
|
|
|
$
|
983.5
|
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.3
|
|
|
—
|
|
|
16.3
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
(0.7
|
)
|
|
Declared dividend for preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
Issuance of shares pursuant to merger agreement, net of tax withholdings
|
—
|
|
|
—
|
|
|
11.0
|
|
|
—
|
|
|
460.1
|
|
|
—
|
|
|
—
|
|
|
460.1
|
|
|
ESPP shares issued
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
4.7
|
|
|
—
|
|
|
—
|
|
|
4.7
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17.3
|
|
|
—
|
|
|
—
|
|
|
17.3
|
|
|
Conversion of preferred stock to common stock
|
—
|
|
|
(35.8
|
)
|
|
1.5
|
|
|
—
|
|
|
79.4
|
|
|
—
|
|
|
—
|
|
|
79.4
|
|
|
Balance as of December 29, 2018
|
—
|
|
|
$
|
—
|
|
|
76.1
|
|
|
$
|
0.1
|
|
|
$
|
1,324.2
|
|
|
$
|
229.2
|
|
|
$
|
6.2
|
|
|
$
|
1,559.7
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(74.3
|
)
|
|
—
|
|
|
(74.3
|
)
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1.3
|
|
|
Issuance of shares pursuant to equity plans, net of tax withholdings
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17.1
|
|
|
—
|
|
|
—
|
|
|
17.1
|
|
|
Balance as of March 30, 2019
|
—
|
|
|
$
|
—
|
|
|
76.3
|
|
|
$
|
0.1
|
|
|
$
|
1,341.4
|
|
|
$
|
154.9
|
|
|
$
|
7.5
|
|
|
$
|
1,503.9
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
OPERATING ACTIVITIES:
|
March 28, 2020
|
|
March 30, 2019
|
|
Net income (loss)
|
$
|
140.1
|
|
|
$
|
(10.6
|
)
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation expense
|
87.8
|
|
|
74.7
|
|
|
Stock-based compensation
|
56.1
|
|
|
46.5
|
|
|
Loss on early extinguishment of debt
|
8.0
|
|
|
—
|
|
|
Unrealized gain on derivative liability
|
—
|
|
|
(8.8
|
)
|
|
Gain on sale of product lines
|
(13.8
|
)
|
|
—
|
|
|
Amortization of acquired intangibles
|
57.4
|
|
|
37.7
|
|
|
Loss and impairment charges on property, plant and equipment
|
8.9
|
|
|
30.7
|
|
|
Amortization of debt discount and debt issuance costs
|
25.3
|
|
|
13.6
|
|
|
Amortization of inventory fair value adjustment in connection with Oclaro acquisition
|
5.8
|
|
|
15.8
|
|
|
Other non-cash income
|
(2.7
|
)
|
|
(0.2
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
(23.8
|
)
|
|
(37.2
|
)
|
|
Inventories
|
48.3
|
|
|
14.0
|
|
|
Operating lease right-of-use assets, net
|
9.6
|
|
|
—
|
|
|
Prepayments and other current and non-currents assets
|
16.5
|
|
|
(10.6
|
)
|
|
Income taxes, net
|
13.0
|
|
|
(5.1
|
)
|
|
Accounts payable
|
(15.3
|
)
|
|
15.7
|
|
|
Accrued payroll and related expenses
|
8.6
|
|
|
(1.4
|
)
|
|
Operating lease liabilities
|
(10.4
|
)
|
|
—
|
|
|
Accrued expenses and other current and non-current liabilities
|
(17.8
|
)
|
|
27.6
|
|
|
Net cash provided by operating activities
|
401.6
|
|
|
202.4
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
Payments for acquisition of property, plant and equipment
|
(64.9
|
)
|
|
(80.5
|
)
|
|
Payment for asset acquisition
|
(4.0
|
)
|
|
(1.3
|
)
|
|
Payment for Oclaro acquisition, net of cash acquired
|
—
|
|
|
(619.8
|
)
|
|
Proceeds from sale of product lines
|
18.9
|
|
|
—
|
|
|
Purchases of short-term investments
|
(692.8
|
)
|
|
(196.1
|
)
|
|
Proceeds from maturities and sales of short-term investments
|
264.9
|
|
|
172.4
|
|
|
Net cash used in investing activities
|
(477.9
|
)
|
|
(725.3
|
)
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
Repurchase of common stock
|
(200.0
|
)
|
|
—
|
|
|
Proceeds from the issuance of 0.50% Convertible Notes due 2026, net of issuance costs
|
1,042.4
|
|
|
—
|
|
|
Tax payments related to restricted stock
|
(8.6
|
)
|
|
(2.4
|
)
|
|
Payment of dividends - Series A Preferred Stock
|
—
|
|
|
(0.7
|
)
|
|
Payment of acquisition related holdback
|
—
|
|
|
(1.0
|
)
|
|
Proceeds from employee stock plans
|
4.9
|
|
|
4.7
|
|
|
Proceeds from term loan, net of issuance costs
|
—
|
|
|
490.8
|
|
|
Principal payments on finance leases
|
(9.2
|
)
|
|
(6.1
|
)
|
|
Proceeds from the exercise of stock options
|
0.5
|
|
|
0.1
|
|
|
Repayment of term loan
|
(497.5
|
)
|
|
(1.3
|
)
|
|
Net cash provided by financing activities
|
332.5
|
|
|
484.1
|
|
|
Effect of exchange rates on cash and cash equivalents
|
—
|
|
|
(0.2
|
)
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash
|
256.2
|
|
|
(39.0
|
)
|
|
Cash and cash equivalents at beginning of period
|
432.6
|
|
|
397.3
|
|
|
Cash, cash equivalents, and restricted cash at end of period
|
$
|
688.8
|
|
|
$
|
358.3
|
|
LUMENTUM HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents, and restricted cash, reported within the condensed consolidated balance sheets to the total amounts reported on the condensed consolidated statements of cash flows:
|
|
|
|
|
Cash and cash equivalents
|
$
|
688.3
|
|
|
$
|
358.3
|
|
|
Restricted cash
|
0.5
|
|
|
—
|
|
|
Total cash, cash equivalents, and restricted cash at end of period
|
$
|
688.8
|
|
|
$
|
358.3
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Cash paid for taxes
|
$
|
6.6
|
|
|
$
|
3.3
|
|
|
Cash paid for interest
|
10.7
|
|
|
8.7
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions:
|
|
|
|
|
Unpaid property, plant and equipment in accounts payable and accrued expenses
|
$
|
11.7
|
|
|
$
|
26.0
|
|
|
Issuance costs in current liabilities
|
0.2
|
|
|
—
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
2.2
|
|
|
—
|
|
|
Issuance of common stock upon conversion of Series A Preferred Stock
|
—
|
|
|
79.4
|
|
|
Net transfer of assets from property plant and equipment to assets held-for-sale
|
—
|
|
|
31.4
|
|
|
Issuance of common stock and replacement awards in connection with Oclaro acquisition
|
—
|
|
|
460.1
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Lumentum (“we,” “us,” “our” or the “Company”) is an industry-leading provider of optical and photonic products defined by revenue and market share addressing a range of end market applications including Optical Communications (“OpComms”) and Lasers for manufacturing, inspection and life-science applications. We seek to use our core optical and photonic technology and our volume manufacturing capability to expand into attractive emerging markets that benefit from advantages that optical or photonics based solutions provide, including 3D sensing for consumer electronics and diode light sources for a variety of consumer and industrial applications. The majority of our customers tend to be Original Equipment Manufacturers (“OEMs”) that incorporate our products into their products which then address end-market applications. For example, we sell fiber optic components that Network Equipment Manufacturers’ (“NEMs”) customers assemble into communications networking systems, which they sell to network service providers or enterprises with their own networks. Similarly, many of our customers for our Lasers products incorporate our products into tools they produce, which are used for manufacturing processes by their customers. For 3D sensing, we sell diode lasers to manufacturers of consumer electronics products for mobile, personal computing, gaming, and other applications who then integrate our devices within their products, for eventual resale to consumers and also into other industrial applications. Further, we have begun shipping prototype units of diode lasers and optical subassemblies containing diode lasers and other optical devices to automotive customers for sensing and LiDAR applications.
Basis of Presentation
The preparation of the condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are inventory valuation, revenue recognition, income taxes, long-lived asset valuation, business combinations and goodwill.
On December 10, 2018, we completed our merger with Oclaro, Inc. (“Oclaro”), a provider of optical components and modules for the long-haul, metro and data center markets. Our condensed consolidated financial statements include the operating results of Oclaro beginning from the date of acquisition. Refer to “Note 4. Business Combinations” for further discussion of the merger.
The COVID-19 pandemic has created and may continue to create significant uncertainty in global financial markets, which has disrupted and harmed, and may continue to disrupt and harm, the Company's business, financial condition, and results of operations. The extent of the impact of COVID-19 on the Company's operational and financial performance will depend on certain developments, including but not limited to the duration and spread of the outbreak, duration of local, state and federal issued public health orders in each jurisdiction where we operate or in which our customers and suppliers operate, impact on our customers and our sales cycles, impact on our supply chain and manufacturing partners, impact on our employees and impact on regional and worldwide economies and financial markets in general, all of which are uncertain and cannot be predicted.
Fiscal Years
We utilize a 52-53 week fiscal year ending on the Saturday closest to June 30th. Every fifth or sixth fiscal year will have a 53-week period. The additional week in a 53-week year is added to the third quarter, making such quarter consist of 14 weeks. Our fiscal 2021 will be a 53-week year. Our fiscal 2020 is a 52-week year ending on June 27, 2020, with the quarter ended March 28, 2020 being a 13-week quarterly period. Our fiscal 2019 was a 52-week year that ended on June 29, 2019, with the quarter ended March 30, 2019 being a 13-week quarterly period.
Principles of Consolidation
These interim unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current period presentation, including the reclassification of capital lease obligations that existed as of June 29, 2019 to finance lease liabilities within other current liabilities and other non-current liabilities in our condensed consolidated balance sheets, as a result of the adoption of the new accounting guidance for leases. Refer to “Note 2. Recently Issued Accounting Pronouncements” for details. The reclassification of the prior period amounts did not impact previously reported condensed consolidated financial statements.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accounting Policies
The accompanying condensed consolidated financial statements and accompanying related notes should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended June 29, 2019.
Except for the accounting policies for lease accounting as a result of the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), there have been no significant changes to our significant accounting policies as of and for the three months ended March 28, 2020, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended June 29, 2019.
Adoption of Leases (Topic 842)
On June 30, 2019, the first day of fiscal year 2020, we adopted Topic 842, using the modified retrospective transition approach. Refer to “Note 2. Recently Issued Accounting Pronouncements” regarding the impact of adoption.
We determine if an arrangement is a lease at inception for arrangements with an initial term of more than 12 months, and classify it as either finance or operating.
Finance leases are generally those that allow us to substantially utilize or pay for the entire asset over its estimated useful life. Finance leases are recorded in property, plant and equipment, net, and finance lease liabilities within other current and other non-current liabilities on our condensed consolidated balance sheets. We have lease arrangements with lease and non-lease components, and the non-lease components for our finance leases are accounted for separately, based on estimated stand-alone values, and are not included in the initial measurement of our finance lease assets and corresponding liabilities. Finance lease assets are amortized in operating expenses on a straight-line basis over the shorter of the estimated useful lives of the assets or the lease term, with the interest component included in interest expense and recognized using the effective interest method over the lease term.
Operating leases are recorded in operating lease right-of-use assets, net, and operating lease liabilities, current and non-current on our condensed consolidated balance sheets. For operating leases of buildings, we account for non-lease components, such as common area maintenance, as a component of the lease, and include it in the initial measurement of our operating lease assets and corresponding liabilities. Operating lease assets are amortized on a straight-line basis in operating expenses over the lease term.
Our lease liabilities are recognized based on the present value of the remaining fixed lease payments, over the lease term, using a discount rate of similarly secured borrowings available to us. For the purpose of lease liability measurement, we consider only payments that are fixed and determinable at the time of commencement. Any variable payments that depend on an index or rate are expensed as incurred. Our lease terms may include options to extend when it is reasonably certain that we will exercise that option. Our lease assets also include any lease payments made and exclude any lease incentives received prior to commencement. Our lease assets are tested for impairment in the same manner as long-lived assets used in operations. We generally recognize sublease income on a straight-line basis over the sublease term.
Note 2. Recently Issued Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Effective June 30, 2019, we adopted Topic 842, using the modified retrospective transition approach. We applied the new guidance to all leases existing as of the date of adoption. Our reported results beginning with the first quarter of fiscal 2020 reflect the application of Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under Topic 840.
We elected the practical expedient package permitted under the transition approach. As such, we did not reassess whether any expired or existing contracts are or contain leases, we did not reassess our historical lease classification, and we did not reassess our initial direct costs for any leases that existed prior to June 30, 2019. We have also elected to combine lease and non-lease components at a portfolio level for our operating leases of buildings and not to report leases with an initial term of 12 months or less on our balance sheet.
As of the date of adoption, we recognized operating lease assets of $91.5 million, with corresponding operating lease liabilities of $81.5 million on the condensed consolidated balance sheets. The difference between the operating lease right-of-use assets and operating lease liabilities primarily represents the existing asset recognized in relation to the favorable terms of an operating lease acquired through a business combination offset by our deferred rent and ASC 420 “cease-use” balances.
All existing leases that were classified as capital leases under Topic 840 are classified as finance leases under the new guidance. As of adoption, we recognized finance lease assets of $12.4 million in property, plant and equipment, net, with corresponding finance lease liabilities of $12.4 million on the condensed consolidated balance sheets. For further information regarding the impact of Topic 842 adoption, see “Note 1. Description of Business and Summary of Significant Accounting Policies” and “Note 9. Leases”.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In February 2018, FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows companies to reclassify stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”), from accumulated other comprehensive income to retained earnings. The guidance also requires certain new disclosures regardless of the election. The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We adopted ASU 2018-02 in the first quarter of fiscal 2020 with no impact to our condensed consolidated financial statements.
In January 2017, FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment charge will be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The amendments contained in ASU 2017-04 are effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, which should be applied prospectively. We early adopted ASU 2017-04 in our first quarter of fiscal 2020. The implementation of ASU 2017-04 did not have an impact on our condensed consolidated financial statements.
Accounting Pronouncements Not Yet Effective
In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and which also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for us at the beginning of fiscal 2022, including interim periods within that reporting period, although early adoption is permitted. We are currently evaluating the impact of ASU 2019-12 on our condensed consolidated financial statements.
In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. ASU 2018-14 modifies the disclosure requirements for defined benefit pension plans and other post-retirement benefit plans. The new guidance is effective for fiscal years ending after December 15, 2020, with early adoption permitted. ASU 2018-14 should be applied retrospectively to all periods presented and is effective for us in our first quarter of fiscal 2022. We are currently evaluating the impact of ASU 2018-14 on our condensed consolidated financial statements.
In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements for fair value measurements. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. ASU 2018-13 requires that certain of the amendments be applied prospectively, while other amendments should be applied retrospectively to all periods presented. ASU 2018-13 is effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of ASU 2018-13 on our condensed consolidated financial statements and related disclosures.
In August 2018, FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard requires capitalization of the implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Further, the standard also requires the Company to expense the capitalized implementation costs of a hosting arrangement over the term of the hosting arrangement. This standard is effective for us in our first quarter of fiscal 2021. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and a subsequent amendment, ASU 2018-19 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for annual periods beginning after December 15, 2019, including interim periods within those periods, with early adoption permitted. ASU 2016-13 is effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of our pending adoption of Topic 326 on our condensed consolidated financial statements.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3. Earnings Per Share
The following table sets forth the computation of basic and diluted net income attributable to common stockholders per share (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Basic Earnings per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(10.6
|
)
|
|
Less: Cumulative dividends on Series A Preferred Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
|
Less: Earnings allocated to Series A Preferred Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
Net income (loss) attributable to common stockholders - Basic
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding including Series A Preferred Stock
|
74.8
|
|
|
76.2
|
|
|
76.2
|
|
|
69.4
|
|
|
Less: Weighted average Series A Preferred Stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
Basic weighted average common shares outstanding
|
74.8
|
|
|
76.2
|
|
|
76.2
|
|
|
68.7
|
|
|
Net income (loss) per share attributable to common stockholders - Basic
|
$
|
0.58
|
|
|
$
|
(0.98
|
)
|
|
$
|
1.84
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders - Basic
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(12.1
|
)
|
|
Net income (loss) attributable to common stockholders - Diluted
|
$
|
43.4
|
|
|
$
|
(74.3
|
)
|
|
$
|
140.1
|
|
|
$
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding for basic earnings per common share
|
74.8
|
|
|
76.2
|
|
|
76.2
|
|
|
68.7
|
|
|
Effect of dilutive securities from 2015 Equity Incentive Plan
|
1.0
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
Shares issuable assuming conversion of the 2024 Notes
|
1.7
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
Diluted weighted average common shares outstanding
|
77.5
|
|
|
76.2
|
|
|
77.7
|
|
|
68.7
|
|
|
Net income (loss) per share attributable to common stockholders - Diluted
|
$
|
0.56
|
|
|
$
|
(0.98
|
)
|
|
$
|
1.80
|
|
|
$
|
(0.18
|
)
|
Our Series A Preferred Stock was considered a participating security, meaning that it had the right to participate in undistributed earnings with our common stock. On November 2, 2018, the remaining 35,805 shares of our Series A Preferred Stock were converted into 1.5 million shares of our common stock. Refer to “Note 11. Non-Controlling Interest Redeemable Convertible Preferred Stock and Derivative Liability” for further discussion. Prior to conversion, the holders of our Series A Preferred Stock were entitled to share in dividends, on an as-converted basis, if the holders of our common stock were to receive dividends. Through the date of conversion, we used the two-class method to compute earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In determining the amount of net earnings to allocate to common stockholders, earnings are allocated to both common and participating securities based on their respective weighted-average shares outstanding during the period. Diluted earnings per common share is calculated similar to basic earnings per common share except that it gives effect to all potentially dilutive common stock equivalents outstanding for the period, using the treasury stock method. Diluted earnings per common share is computed using the more dilutive of the treasury stock method or the if-converted method.
Potentially dilutive common shares result from the assumed exercise of outstanding stock options, assumed vesting of outstanding equity awards, assumed issuance of stock under the employee stock purchase plan, and assumed conversion of our outstanding $450 million in aggregate principal amount of 0.25% Convertible Notes due in 2024 (the “2024 Notes”) and $1,050 million in aggregate principal amount of 0.50% Convertible Notes due in 2026 (the “2026 Notes” and together with the 2024 Notes, the “convertible notes”), all using the treasury stock method.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We have the ability and intent to settle the face value of our convertible notes in cash. Therefore, we use the treasury stock method for calculating the dilutive impact of the convertible notes. The 2026 Notes will have no impact on diluted earnings per share until the average price of our common stock exceeds the conversion price of $99.29. The potentially dilutive shares resulting from the 2024 Notes were included in the calculation of diluted income per share for the three and nine months ended March 28, 2020 since the average price of our common stock exceeded the conversion price of $60.62. Refer to “Note 12. Debt” for further discussion.
Anti-dilutive potential shares from the 2015 Equity Incentive Plan are excluded from the calculation of diluted earnings per share if their exercise price exceeded the average market price during the period or the share-based awards were determined to be anti-dilutive based on applying the treasury stock method. Anti-dilutive shares excluded from the calculation of diluted earnings per share were not material for the three and nine months ended March 28, 2020, respectively. Anti-dilutive shares excluded from the calculation of diluted earnings per share were 0.7 million shares and 0.6 million shares, respectively, for the three and nine months ended March 30, 2019, respectively.
Note 4. Business Combinations
On December 10, 2018, we acquired all of the outstanding common stock of Oclaro, a provider of optical components and modules for the long-haul, metro and data center markets. Oclaro’s products provide differentiated solutions for optical networks and high-speed interconnects driving the next wave of streaming video, cloud computing, application virtualization and other bandwidth-intensive and high-speed applications.
The total fair value of consideration given in connection with the acquisition of Oclaro consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
Per Share
|
Total Consideration
(in millions)
|
|
Cash paid for outstanding Oclaro common stock
|
|
|
$
|
964.8
|
|
|
Lumentum common shares issued to Oclaro stockholders
|
10,941,436
|
|
$
|
41.80
|
|
457.4
|
|
|
Replacement equity awards for Oclaro equity awards
|
|
|
2.7
|
|
|
Total consideration
|
|
|
$
|
1,424.9
|
|
The total transaction consideration was funded by the issuance of Lumentum common stock, new debt, and cash balances of the combined company.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our allocation of the purchase price of Oclaro based on the estimated fair values of the assets acquired and liabilities assumed is as follows (in millions):
|
|
|
|
|
|
|
|
|
As Previously Reported on June 29, 2019
|
|
Cash and cash equivalents
|
$
|
345.0
|
|
|
Accounts receivable, net
|
68.0
|
|
|
Inventories
|
155.0
|
|
|
Prepayments and other current assets
|
33.7
|
|
|
Property, plant and equipment, net
|
134.7
|
|
|
Intangibles
|
444.0
|
|
|
Deferred income tax asset
|
42.6
|
|
|
Other non-current assets
|
16.6
|
|
|
Accounts payable
|
(57.8
|
)
|
|
Accrued payroll and related expenses
|
(11.4
|
)
|
|
Accrued expenses
|
(8.3
|
)
|
|
Other current liabilities
|
(6.1
|
)
|
|
Deferred tax liability
|
(75.8
|
)
|
|
Other non-current liabilities
|
(12.9
|
)
|
|
Goodwill
|
357.6
|
|
|
Total purchase price
|
$
|
1,424.9
|
|
The amounts presented in the table above pertained to the preliminary purchase price allocation reported in our Form 10-K for the year ended June 29, 2019, filed with the Securities and Exchange Commission on August 27, 2019. There have been no measurement period adjustments during the three and nine months ended March 28, 2020.
On April 18, 2019, we completed the sale of our Datacom transceiver module business based in Sagamihara, Japan and the transfer of related employees to Cambridge Industries Group (“CIG”) for $25.5 million in net cash. These product lines were initially acquired by us through the acquisition of Oclaro. This business did not meet the criteria for assets held-for-sale under the relevant accounting guidance as of December 10, 2018, the date of our acquisition of Oclaro, in our purchase price allocation. The assets and liabilities transferred to CIG were $33.5 million and $7.0 million, respectively.
Supplemental Pro Forma Information
The supplemental pro forma financial information presented below is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the date indicated, does not reflect synergies that might have been achieved, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon currently available information and certain assumptions we believe are reasonable under the circumstances.
The following supplemental pro forma information presents the combined results of operations for the nine months ended March 30, 2019, as if Oclaro had been acquired as of the beginning of fiscal year 2018. The supplemental pro forma information includes adjustments to amortization and depreciation for acquired intangible assets and property and equipment, adjustments to share-based compensation expense, the fair value adjustments on the inventories acquired, transaction costs, interest expense and amortization of the term loan debt issuance costs.
The unaudited supplemental pro forma financial information for the period presented is as follows (in millions):
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
March 30, 2019
|
|
|
|
|
|
Net revenue
|
$
|
1,374.8
|
|
|
Net loss
|
(18.2
|
)
|
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5. Assets and Liabilities Held For Sale
We continually evaluate our existing portfolio of businesses to maximize long-term shareholder value. We consider assets and liabilities as held-for-sale when management approves and commits to a plan to actively market assets or a group of assets for sale. Assets held-for-sale are recorded initially at the lower of its carrying value or its estimated fair value, less estimated costs to sell. Upon designation as an asset held-for-sale, we discontinue recording depreciation expense on such asset.
Lithium Niobate modulators
Following our acquisition of Oclaro, we announced our plan to discontinue development and manufacturing of Lithium Niobate modulators and wind down these operations in our San Donato, Italy site. In the second quarter of fiscal year 2020, we entered into an agreement with Advanced Fiber Resources (Zhuhai) Ltd. ("AFR"), a leading provider of passive optical components, to sell the assets associated with certain Lithium Niobate product lines manufactured by our San Donato site for $17 million. This sale was completed in the third quarter of fiscal year 2020, and we received the final proceeds of $16.9 million, net of $0.1 million retainer from AFR. The assets sold of $6.6 million primarily consisted of property, plant and equipment, net, inventory, and operating lease right-of-use assets, net, offset by liabilities transferred of $3.5 million primarily attributable to operating lease liabilities. During the three months ended March 28, 2020, we recognized a gain of $13.8 million, which was recorded in our other income (expense), net in the condensed consolidated statements of operations. With the close of this transaction, our telecom transmission product strategy is now focused on Indium Phosphide photonic integrated circuits, as well as components and modules that incorporate these Indium Phosphide photonic integrated circuits.
Datacom transceiver modules
As of June 29, 2019, we had $4.9 million of long-lived assets related to our plan to discontinue the development of future Datacom transceiver modules. As these assets were not deemed to be useful, we retired them from active use and classified them as held-for-sale on our balance sheet. This is a result of the strategic change we made in the third quarter of fiscal year 2019 when we announced the exit from the Datacom transceiver modules and investments in the new Datacom chips development. In the third quarter of fiscal year 2020, we sold $2.0 million and impaired $1.6 million of these assets held-for-sale. As of March 28, 2020, the remaining balance of $1.3 million is expected to be sold in the subsequent quarters.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 6. Cash, Cash Equivalents and Short-term Investments
The following table summarizes our cash, cash equivalents and short-term investments by category for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
March 28, 2020:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
121.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121.3
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Commercial paper
|
72.6
|
|
|
—
|
|
|
—
|
|
|
72.6
|
|
|
Corporate debt securities
|
3.0
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
|
Money market funds
|
426.2
|
|
|
—
|
|
|
—
|
|
|
426.2
|
|
|
U.S. Treasury securities
|
65.1
|
|
|
0.1
|
|
|
—
|
|
|
65.2
|
|
|
Total cash and cash equivalents
|
$
|
688.2
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
688.3
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
4.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4.4
|
|
|
Commercial paper
|
88.1
|
|
|
—
|
|
|
—
|
|
|
88.1
|
|
|
Corporate debt securities
|
343.2
|
|
|
0.2
|
|
|
(2.5
|
)
|
|
340.9
|
|
|
Foreign government bonds
|
4.0
|
|
|
—
|
|
|
—
|
|
|
4.0
|
|
|
U.S. Agency securities
|
23.0
|
|
|
0.1
|
|
|
—
|
|
|
23.1
|
|
|
U.S. Treasury securities
|
300.7
|
|
|
1.9
|
|
|
—
|
|
|
302.6
|
|
|
Total short-term investments
|
$
|
763.4
|
|
|
$
|
2.2
|
|
|
$
|
(2.5
|
)
|
|
$
|
763.1
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019:
|
|
|
|
|
|
|
|
|
Cash
|
$
|
213.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
213.8
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Commercial paper
|
37.4
|
|
|
—
|
|
|
—
|
|
|
37.4
|
|
|
Money market funds
|
168.1
|
|
|
—
|
|
|
—
|
|
|
168.1
|
|
|
U.S. Treasury securities
|
13.3
|
|
|
—
|
|
|
—
|
|
|
13.3
|
|
|
Total cash and cash equivalents
|
$
|
432.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
432.6
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
$
|
1.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
Commercial paper
|
22.3
|
|
|
—
|
|
|
—
|
|
|
22.3
|
|
|
Asset-backed securities
|
54.9
|
|
|
0.2
|
|
|
—
|
|
|
55.1
|
|
|
Corporate debt securities
|
207.6
|
|
|
0.9
|
|
|
(0.1
|
)
|
|
208.4
|
|
|
Municipal bonds
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
Mortgage-backed securities
|
6.6
|
|
|
—
|
|
|
—
|
|
|
6.6
|
|
|
Foreign government bonds
|
6.2
|
|
|
—
|
|
|
—
|
|
|
6.2
|
|
|
U.S. Agency securities
|
4.6
|
|
|
—
|
|
|
—
|
|
|
4.6
|
|
|
U.S. Treasury securities
|
29.4
|
|
|
0.1
|
|
|
—
|
|
|
29.5
|
|
|
Total short-term investments
|
$
|
334.8
|
|
|
$
|
1.2
|
|
|
$
|
(0.1
|
)
|
|
$
|
335.9
|
|
We use the specific-identification method to determine any realized gains or losses from the sale of our short-term investments classified as available-for-sale. During the three and nine months ended March 28, 2020 and March 30, 2019, we did not realize significant gains or losses on a gross level from the sale of our short-term investments classified as available-for-sale.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three and nine months ended March 28, 2020, our other income (expense), net was $21.7 million and $27.9 million, respectively, and includes interest income on cash equivalents and short-term investments of $5.2 million and $12.6 million, respectively. During the three and nine months ended March 30, 2019, our other income (expense), net was $5.2 million and $11.7 million, respectively, and includes interest income on cash equivalents and short-term investments of $3.9 million and $10.0 million, respectively.
The following table summarizes unrealized losses on our cash equivalents and short-term investments by category and length of time the investment has been in a continuous unrealized loss position as of the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 Months or Greater
|
|
Total
|
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
March 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Agency securities
|
$
|
8.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.0
|
|
|
$
|
—
|
|
|
Certificates of deposit
|
2.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
Commercial paper
|
55.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55.2
|
|
|
—
|
|
|
Corporate debt securities
|
301.1
|
|
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
301.1
|
|
|
(2.5
|
)
|
|
Total
|
$
|
366.8
|
|
|
$
|
(2.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
366.8
|
|
|
$
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
$
|
4.2
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
|
$
|
—
|
|
|
$
|
10.1
|
|
|
$
|
—
|
|
|
Corporate debt securities
|
9.6
|
|
|
—
|
|
|
35.9
|
|
|
(0.1
|
)
|
|
45.5
|
|
|
(0.1
|
)
|
|
Foreign government bonds
|
—
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
U.S. government bonds
|
6.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
Total
|
$
|
20.7
|
|
|
$
|
—
|
|
|
$
|
43.9
|
|
|
$
|
(0.1
|
)
|
|
$
|
64.6
|
|
|
$
|
(0.1
|
)
|
The following table classifies our short-term investments by contractual maturities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
Due in 1 year
|
$
|
720.1
|
|
|
$
|
720.0
|
|
|
$
|
178.9
|
|
|
$
|
179.1
|
|
|
Due in 1 year through 5 years
|
43.3
|
|
|
43.1
|
|
|
148.1
|
|
|
149.0
|
|
|
Due in 5 years through 10 years
|
—
|
|
|
—
|
|
|
6.0
|
|
|
6.0
|
|
|
Due after 10 years
|
—
|
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
|
|
$
|
763.4
|
|
|
$
|
763.1
|
|
|
$
|
334.8
|
|
|
$
|
335.9
|
|
All available-for-sale securities have been classified as current, based on management’s intent and ability to use the funds in current operations.
Note 7. Fair Value Measurements
We determine fair value based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value assumes that the transaction to sell the asset or transfer the liability occurs in the principal or most advantageous market for the asset or liability and establishes that the fair value of an asset or liability shall be determined based on the assumptions that market participants would use in pricing the asset or liability. The classification of a financial asset or liability within the hierarchy is based upon the lowest level input that is significant to the fair value measurement. The fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
Level 1:
|
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
Level 2:
|
Inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.
|
|
Level 3:
|
Inputs are unobservable inputs based on our assumptions.
|
The fair value of our Level 1 financial instruments, such as money market funds, which are traded in active markets, is based on quoted market prices for identical instruments. The fair value of our Level 2 fixed income securities is obtained from an independent pricing service, which may use quoted market prices for identical or comparable instruments or model driven valuations using observable market data or inputs corroborated by observable market data. Our marketable securities are held by custodians who obtain investment prices from a third-party pricing provider that incorporates standard inputs in various asset price models. Our procedures include controls to ensure that appropriate fair values are recorded, including comparing the fair values obtained from our pricing service against fair values obtained from another independent source.
Based on quoted market prices as of March 28, 2020, the fair values of the 2026 Notes and the 2024 Notes (refer to “Note 12. Debt”) were approximately $1.0 billion and $581.0 million, respectively, determined using Level 2 inputs as they are not actively traded in markets.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
March 28, 2020: (1)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
—
|
|
|
$
|
72.6
|
|
|
$
|
—
|
|
|
$
|
72.6
|
|
|
Corporate debt securities
|
—
|
|
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
Money market funds
|
426.2
|
|
|
—
|
|
|
—
|
|
|
426.2
|
|
|
U.S. Treasury securities
|
65.2
|
|
|
—
|
|
|
—
|
|
|
65.2
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
—
|
|
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
Commercial paper
|
—
|
|
|
88.1
|
|
|
—
|
|
|
88.1
|
|
|
Corporate debt securities
|
—
|
|
|
340.9
|
|
|
—
|
|
|
340.9
|
|
|
Foreign government bonds
|
—
|
|
|
4.0
|
|
|
—
|
|
|
4.0
|
|
|
U.S. Agency securities
|
—
|
|
|
23.1
|
|
|
—
|
|
|
23.1
|
|
|
U.S. Treasury securities
|
302.6
|
|
|
—
|
|
|
—
|
|
|
302.6
|
|
|
Total assets
|
$
|
794.0
|
|
|
$
|
536.1
|
|
|
$
|
—
|
|
|
$
|
1,330.1
|
|
(1) Excludes $121.3 million in cash held in our bank accounts at March 28, 2020.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
June 29, 2019: (1)
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
Commercial paper
|
$
|
—
|
|
|
$
|
37.4
|
|
|
$
|
—
|
|
|
$
|
37.4
|
|
|
Money market funds
|
168.1
|
|
|
—
|
|
|
—
|
|
|
168.1
|
|
|
U.S. Treasury securities
|
13.3
|
|
|
—
|
|
|
—
|
|
|
13.3
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
—
|
|
|
1.9
|
|
|
—
|
|
|
1.9
|
|
|
Commercial paper
|
—
|
|
|
22.3
|
|
|
—
|
|
|
22.3
|
|
|
Asset-backed securities
|
—
|
|
|
55.1
|
|
|
—
|
|
|
55.1
|
|
|
Corporate debt securities
|
—
|
|
|
208.4
|
|
|
—
|
|
|
208.4
|
|
|
Municipal bonds
|
—
|
|
|
1.3
|
|
|
—
|
|
|
1.3
|
|
|
Mortgage-backed securities
|
—
|
|
|
6.6
|
|
|
—
|
|
|
6.6
|
|
|
Foreign government bonds
|
—
|
|
|
6.2
|
|
|
—
|
|
|
6.2
|
|
|
U.S. Agency securities
|
—
|
|
|
4.6
|
|
|
—
|
|
|
4.6
|
|
|
U.S. Treasury securities
|
29.5
|
|
|
—
|
|
|
—
|
|
|
29.5
|
|
|
Total assets
|
$
|
210.9
|
|
|
$
|
343.8
|
|
|
$
|
—
|
|
|
$
|
554.7
|
|
|
Other accrued liabilities:
|
|
|
|
|
|
|
|
|
Acquisition contingency
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
2.7
|
|
|
Total other accrued liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
2.7
|
|
(1) Excludes $213.8 million in cash held in our bank accounts as of June 29, 2019.
Assets Measured at Fair Value on a Non-Recurring Basis
We periodically review our intangible and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted cash flows resulting from use of the asset and its eventual disposition. If not recoverable, an impairment loss would be calculated based on the excess of the carrying amount over the fair value.
Management utilizes various valuation methods, including an income approach, a market approach and a cost approach, to estimate the fair value of intangible and other long-lived assets. During the annual impairment testing performed in fiscal 2019, we concluded that our intangible and other long-lived assets were not impaired.
No impairment charges were recorded during the three and nine months ended March 28, 2020 and March 30, 2019. Refer to “Note 10. Goodwill and Other Intangible Assets”.
Note 8. Balance Sheet Details
Accounts receivable allowances
As of March 28, 2020 and June 29, 2019, our accounts receivable allowance balance was $1.7 million and $4.5 million, respectively.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Inventories
The components of inventories were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Raw materials and purchased parts
|
$
|
55.4
|
|
|
$
|
78.3
|
|
|
Work in process
|
67.9
|
|
|
72.5
|
|
|
Finished goods
|
49.4
|
|
|
78.0
|
|
|
Inventories (1)
|
$
|
172.7
|
|
|
$
|
228.8
|
|
(1) The inventory balance as of June 29, 2019 includes $5.7 million, net of amortization, related to the inventory step-up adjustment from the Oclaro acquisition. As of March 28, 2020, the inventory step-up adjustment from the Oclaro acquisition was fully amortized.
Prepayments and other current assets
The components of prepayments and other current assets were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Prepayments
|
$
|
29.7
|
|
|
$
|
32.4
|
|
|
Vendor receivable
|
29.8
|
|
|
36.3
|
|
|
Value added tax receivable
|
11.5
|
|
|
11.9
|
|
|
Advances to contract manufacturers
|
—
|
|
|
8.7
|
|
|
Assets held-for-sale
|
1.3
|
|
|
4.9
|
|
|
Other current assets
|
4.8
|
|
|
3.3
|
|
|
Prepayments and other current assets
|
$
|
77.1
|
|
|
$
|
97.5
|
|
Operating lease right-of-use assets, net
Operating lease right-of-use assets, net were as follows (in millions):
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
Operating lease right-of-use assets
|
$
|
90.3
|
|
|
Less: accumulated amortization
|
(8.6
|
)
|
|
Operating lease right-of-use assets, net
|
$
|
81.7
|
|
Property, plant and equipment, net
The components of property, plant and equipment, net were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Land
|
$
|
44.2
|
|
|
$
|
44.2
|
|
|
Buildings and improvement
|
112.9
|
|
|
103.7
|
|
|
Machinery and equipment (1)
|
514.1
|
|
|
500.5
|
|
|
Computer equipment and software
|
25.6
|
|
|
25.4
|
|
|
Furniture and fixtures
|
6.6
|
|
|
4.9
|
|
|
Leasehold improvements
|
28.1
|
|
|
31.2
|
|
|
Finance lease right-of-use assets (1)
|
28.1
|
|
|
16.0
|
|
|
Construction in progress
|
53.0
|
|
|
46.8
|
|
|
|
812.6
|
|
|
772.7
|
|
|
Less: Accumulated depreciation (1)
|
(402.5
|
)
|
|
(339.4
|
)
|
|
Property, plant and equipment, net
|
$
|
410.1
|
|
|
$
|
433.3
|
|
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Included in the table above is our equipment acquired under finance leases. As of March 28, 2020 and June 29, 2019, the accumulated depreciation of finance lease right-of-use assets was $24.2 million and $11.2 million, respectively. For fiscal 2019 in accordance with Topic 842, we have reclassified $16.0 million of equipment acquired under finance leases from machinery and equipment to finance lease right-of-use assets to conform to current period presentation.
During the three and nine months ended March 28, 2020, we recorded depreciation expense of $27.5 million and $87.8 million, respectively. During the three and nine months ended March 30, 2019, we recorded depreciation expense of $29.0 million and $74.7 million, respectively.
Included in these amounts were depreciation expense for equipment acquired under finance leases in the amount of $4.8 million and $13.0 million for the three and nine months ended March 28, 2020, respectively, and $1.5 million and $4.6 million for the three and nine months ended March 30, 2019, respectively.
In fiscal 2019, we purchased a property in San Jose, California for $54.6 million in cash. We relocated our corporate headquarters to this new San Jose location in the second quarter of fiscal 2020. The allocations of value were $21.7 million to buildings and improvement and $32.9 million to the land.
Our construction in progress primarily includes machinery and equipment that we expect to place in service in the next 12 months.
Other current liabilities
The components of other current liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Restructuring accrual and related charges (1)
|
$
|
2.6
|
|
|
$
|
14.6
|
|
|
Warranty accrual (2)
|
5.4
|
|
|
7.5
|
|
|
Deferred revenue and customer deposits
|
1.7
|
|
|
2.9
|
|
|
Finance lease liabilities, current (3)
|
3.9
|
|
|
0.4
|
|
|
Income tax payable
|
30.4
|
|
|
8.7
|
|
|
Other current liabilities
|
2.8
|
|
|
5.1
|
|
|
Other current liabilities
|
$
|
46.8
|
|
|
$
|
39.2
|
|
(1) Refer to “Note 14. Restructuring and Related Charges.”
(2) Refer to “Note 17. Commitments and Contingencies.”
(3) For fiscal 2019 in accordance with Topic 842, we have reclassified amounts from capital lease obligations to finance lease liabilities to conform to current period presentation. In addition to the $3.9 million of finance lease liabilities recorded within other current liabilities as of March 28, 2020, we also recorded $0.1 million within other non-current liabilities in the condensed consolidated balance sheet. Refer to “Note 9. Leases.”
Other non-current liabilities
The components of other non-current liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Asset retirement obligations
|
$
|
4.9
|
|
|
$
|
4.5
|
|
|
Pension and related accrual (1)
|
10.0
|
|
|
7.9
|
|
|
Deferred rent
|
—
|
|
|
2.2
|
|
|
Unrecognized tax benefit
|
18.1
|
|
|
18.7
|
|
|
Finance lease liabilities, non-current
|
0.1
|
|
|
—
|
|
|
Other non-current liabilities
|
0.6
|
|
|
0.4
|
|
|
Other non-current liabilities
|
$
|
33.7
|
|
|
$
|
33.7
|
|
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) We have defined benefit pension plans in Japan, Switzerland, and Thailand. As of March 28, 2020, the projected benefit obligations in Japan, Switzerland, and Thailand were $2.8 million, $4.7 million, and $2.5 million, respectively. As of June 29, 2019, the projected benefit obligations for Japan and Switzerland were $2.8 million and $5.0 million, respectively. Pension and related accruals as of June 29, 2019 also include $0.1 million attributable to post-retirement benefits for executives.
Note 9. Leases
We lease certain real and personal property from unrelated third parties under non-cancellable operating leases that expire at various dates through fiscal 2033. These operating leases are mainly for administrative offices, research-and-development and manufacturing facilities, as well as sales offices in various countries around the world. Certain leases require us to pay property taxes, insurance and routine maintenance, and include escalation clauses. Many leases include one or more options to renew. We do not assume renewals in our determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement.
We have also entered into various finance leases to obtain servers and certain other equipment for our operations. These arrangements are typically for two to four years.
As of March 28, 2020, we sublease certain floors of our offices in the United Kingdom, the United States, Canada, and Japan. These subleases will expire at various dates by fiscal year 2023. We anticipate receiving approximately $5.9 million in sublease income over the next three years.
The components of lease costs, lease term, and discount rate are as follows:
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 28, 2020
|
|
Finance lease cost (in millions):
|
|
|
|
|
Amortization of right-of-use assets
|
$
|
4.8
|
|
|
$
|
13.0
|
|
|
Interest
|
—
|
|
|
0.1
|
|
|
Operating lease cost
|
3.9
|
|
|
11.9
|
|
|
Variable lease cost
|
0.4
|
|
|
1.5
|
|
|
Short-term lease cost
|
0.7
|
|
|
1.7
|
|
|
Sublease income
|
(0.7
|
)
|
|
(1.9
|
)
|
|
Total lease cost
|
$
|
9.1
|
|
|
$
|
26.3
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
|
8.9
|
|
|
Finance leases
|
|
|
0.7
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
3.65
|
%
|
|
Finance leases
|
|
|
4.38
|
%
|
As of March 28, 2020, maturities of our operating and finance lease liabilities, which do not include short-term leases and variable lease payments, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
Operating Leases (1)
|
|
Finance Leases
|
|
Total
|
|
Remainder of 2020
|
|
$
|
3.3
|
|
|
$
|
3.4
|
|
|
$
|
6.7
|
|
|
2021
|
|
13.1
|
|
|
0.6
|
|
|
13.7
|
|
|
2022
|
|
12.3
|
|
|
—
|
|
|
12.3
|
|
|
2023
|
|
11.1
|
|
|
—
|
|
|
11.1
|
|
|
2024
|
|
9.4
|
|
|
—
|
|
|
9.4
|
|
|
Thereafter
|
|
31.4
|
|
|
—
|
|
|
31.4
|
|
|
Total minimum lease payments
|
|
$
|
80.6
|
|
|
$
|
4.0
|
|
|
$
|
84.6
|
|
|
Less: amount representing interest
|
|
(10.0
|
)
|
|
—
|
|
|
(10.0
|
)
|
|
Present value of total lease liabilities
|
|
$
|
70.6
|
|
|
$
|
4.0
|
|
|
$
|
74.6
|
|
(1) Non-cancellable sublease proceeds for the remainder of fiscal 2020, and fiscal 2021, 2022, and 2023 of $0.7 million, $2.4 million, $2.2 million, and $0.6 million, respectively, are not included in the table above.
Prior to our adoption of Topic 842, future minimum lease payments as of June 29, 2019, which were undiscounted, were net of our sublease income amounts, and included lease and non-lease components, were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
|
2020
|
|
$
|
13.9
|
|
|
$
|
0.8
|
|
|
$
|
14.7
|
|
|
2021
|
|
12.1
|
|
|
—
|
|
|
12.1
|
|
|
2022
|
|
11.2
|
|
|
—
|
|
|
11.2
|
|
|
2023
|
|
11.3
|
|
|
—
|
|
|
11.3
|
|
|
2024
|
|
9.8
|
|
|
—
|
|
|
9.8
|
|
|
Thereafter
|
|
31.7
|
|
|
—
|
|
|
31.7
|
|
|
Total minimum operating lease payments
|
|
$
|
90.0
|
|
|
$
|
0.8
|
|
|
$
|
90.8
|
|
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 10. Goodwill and Other Intangible Assets
Goodwill
On December 10, 2018, we completed the acquisition of Oclaro. We recognized goodwill in the amount of $357.6 million for the acquisition of Oclaro and allocated it to our OpComms segment. There have been no measurement periods or other adjustments to goodwill during the three and nine months ended March 28, 2020. The following table presents our goodwill balance by the reportable segments as of March 28, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Optical Communications
|
|
Commercial Lasers
|
|
Total
|
|
Balance as of March 28, 2020
|
$
|
363.5
|
|
|
$
|
5.4
|
|
|
$
|
368.9
|
|
Impairment of Goodwill
We review goodwill for impairment during the fourth quarter of each fiscal year or more frequently if events or circumstances indicate that an impairment loss may have occurred. In the fourth quarter of fiscal 2019, we completed the annual impairment test of goodwill, which indicated there was no goodwill impairment.
We considered the impacts of COVID-19 pandemic on our business and determined that there were no indicators of goodwill impairment as of March 28, 2020.
Other Intangibles
In connection with our acquisition of Oclaro in fiscal year 2019, we recorded $443.0 million as the fair value of the acquired developed technologies and other intangible assets. This amount excludes $1.0 million of in-process research and development assets that were subsequently sold to CIG. Refer to “Note 4. Business Combinations”.
The intangible assets are amortized on a straight-line basis over the estimated useful lives, except for customer relationships and order backlog, which are amortized using an accelerated method of amortization over the expected customer lives, which more accurately reflects the pattern of realization of economic benefits expected to be obtained. Acquired developed technologies and order backlog are amortized to cost of sales and customer relationships is amortized to selling, general and administrative. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When an IPR&D project is completed, the IPR&D is reclassified as an amortizable purchased intangible asset and amortized over the asset’s estimated useful life expected to range between 4 to 9 years.
The following tables present details of our other intangibles, including those acquired in connection with the Oclaro acquisition, as of the periods presented (in millions, except for weighted average remaining amortization period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
Gross Carrying Amounts
|
|
Accumulated Amortization
|
|
Net Carrying Amounts
|
|
Weighted average remaining amortization period (years)
|
|
Acquired developed technologies (1)
|
$
|
346.5
|
|
|
$
|
(161.9
|
)
|
|
$
|
184.6
|
|
|
3.5
|
|
Customer relationships
|
149.3
|
|
|
(30.9
|
)
|
|
118.4
|
|
|
6.7
|
|
In-process research and development (1)
|
35.0
|
|
|
—
|
|
|
35.0
|
|
|
n/a
|
|
Order backlog
|
22.0
|
|
|
(22.0
|
)
|
|
—
|
|
|
—
|
|
Other intangibles
|
2.7
|
|
|
(2.7
|
)
|
|
—
|
|
|
—
|
|
Total intangible assets
|
$
|
555.5
|
|
|
$
|
(217.5
|
)
|
|
$
|
338.0
|
|
|
|
(1) During the three and nine months ended March 28, 2020, we completed $7 million and $59 million of IPR&D projects, respectively, and reclassified the value assigned to them to acquired developed technologies. The amount will be amortized over the assets’ estimated useful life of 4 to 5 years.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29, 2019
|
Gross Carrying Amounts
|
|
Accumulated Amortization
|
|
Net Carrying Amounts
|
|
Weighted average remaining amortization period (years)
|
|
Acquired developed technologies
|
$
|
287.5
|
|
|
$
|
(125.2
|
)
|
|
$
|
162.3
|
|
|
3.8
|
|
Customer relationships
|
149.3
|
|
|
(12.3
|
)
|
|
137.0
|
|
|
7.5
|
|
In-process research and development
|
94.0
|
|
|
—
|
|
|
94.0
|
|
|
n/a
|
|
Order backlog
|
22.0
|
|
|
(19.9
|
)
|
|
2.1
|
|
|
0.5
|
|
Other intangibles
|
2.7
|
|
|
(2.7
|
)
|
|
—
|
|
|
—
|
|
Total intangible assets
|
$
|
555.5
|
|
|
$
|
(160.1
|
)
|
|
$
|
395.4
|
|
|
|
The following table presents details of amortization for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Cost of sales
|
$
|
13.9
|
|
|
$
|
28.1
|
|
|
$
|
38.8
|
|
|
$
|
33.3
|
|
|
Selling, general and administrative
|
6.1
|
|
|
3.6
|
|
|
18.6
|
|
|
4.4
|
|
|
Total amortization of intangibles
|
$
|
20.0
|
|
|
$
|
31.7
|
|
|
$
|
57.4
|
|
|
$
|
37.7
|
|
Based on the carrying amount of our acquired developed technologies and other intangibles, excluding IPR&D, as of March 28, 2020, and assuming no future impairment of the underlying assets, the estimated future amortization is as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
Remainder of 2020
|
$
|
20.3
|
|
|
2021
|
78.9
|
|
|
2022
|
76.4
|
|
|
2023
|
52.9
|
|
|
2024
|
33.1
|
|
|
Thereafter
|
41.4
|
|
|
Total future amortization
|
$
|
303.0
|
|
Note 11. Non-Controlling Interest Redeemable Convertible Preferred Stock and Derivative Liability
On July 31, 2015, our wholly-owned subsidiary, Lumentum Inc., issued 40,000 shares of its Series A Preferred Stock to Viavi Solutions Inc. (“Viavi”). Pursuant to a securities purchase agreement between us, Viavi and Amada Holdings Co., Ltd. (“Amada”), 35,805 shares of Series A Preferred Stock were sold by Viavi to Amada in August 2015. The remaining 4,195 shares of the Series A Preferred Stock were canceled.
As of June 30, 2018, the Series A Preferred Stock was referred to as our Non-Controlling Interest Redeemable Convertible Preferred Stock within these condensed consolidated financial statements, and was recorded at $35.8 million.
On October 15, 2018, we issued a 30-day notice of intent to the holders of Series A Preferred Stock to convert all shares of Series A Preferred Stock at a conversion price equal to the Issuance Value divided by $24.63 plus the accrued and unpaid dividends on each share and any past due dividends, whether or not authorized or declared. On November 2, 2018, we received notice from Amada of their intent to convert the Series A Preferred Stock and we issued 1.5 million shares of our common stock to Amada upon the conversion of the 35,805 shares of Series A Preferred Stock and recorded $79.4 million in additional paid in capital in the condensed consolidated balance sheet.
Through the date of conversion, the Series A Preferred Stock conversion feature was bifurcated from the Series A Preferred Stock and accounted for separately as a derivative liability. The derivative liability was measured at fair value each reporting period, and at the date of conversion, with the change in fair value recorded in the condensed consolidated statements of operations.
Through the date of conversion, holders of Series A Preferred Stock, in preference to holders of common stock or any other class or series of our outstanding capital stock ranking in any such event junior to the Series A Preferred Stock, were entitled to
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
receive, when and as declared by the board of directors, quarterly cumulative cash dividends at the annual rate of 2.5% of the Issuance Value per share on each outstanding share of Series A Preferred Stock. The accrued dividends were payable on March 31, June 30, September 30 and December 31 of each year commencing on September 30, 2015. The accrued dividends as of November 2, 2018, the effective date of the conversion of all outstanding Series A Preferred Stock, was $0.3 million. During the three months ended March 30, 2019, we paid $0.4 million in dividends to the holders of Series A Preferred Stock.
In connection with the conversion of the Series A Preferred Stock on November 2, 2018, we recorded $79.4 million in additional paid in capital which is reflected within the condensed consolidated balance sheets as of March 28, 2020 and June 29, 2019. For the nine months ended March 30, 2019, we recorded $8.8 million unrealized gain to our condensed consolidated statements of operations.
Note 12. Debt
Convertible Notes
2026 Notes
In December 2019, we issued $1,050.0 million in aggregate principal amount of the 2026 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2026 Notes are governed by an indenture between the Company and U.S. Bank National Association (the “2026 Indenture”). We used approximately $196 million of the net proceeds of the offering to repay in full all amounts outstanding under our term loan credit facility, and a portion of the net proceeds of the offering to purchase approximately $200 million of our common stock concurrently with the pricing of the offering in privately negotiated transactions. The 2026 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.
The 2026 Notes will bear interest at a rate of 0.50% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on June 15, 2020. The 2026 Notes will mature on December 15, 2026, unless earlier redeemed, repurchased by us, or converted pursuant to their terms.
The initial conversion rate is 10.0711 shares of common stock per $1,000 principal amount of the 2026 Notes (which is equivalent to an initial conversion price of approximately $99.29 per share). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for accrued and unpaid interest. In addition, upon the occurrence of a make-whole fundamental change or our issuance of a notice of redemption, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert the 2026 Notes in connection with such make-whole fundamental change or notice of redemption.
Prior to the close of business on the business day immediately preceding September 15, 2026, holders of the 2026 Notes may convert their 2026 Notes only under the following circumstances:
|
|
|
|
•
|
during any fiscal quarter commencing after the fiscal quarter ended on March 28, 2020 (and only during such fiscal quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price of the 2026 Notes on each applicable trading day;
|
|
|
|
|
•
|
during the five business day period after any five consecutive trading day period (the "2026 measurement period") in which the trading price per $1,000 principal amount of the 2026 Notes for each trading day of the 2026 measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the notes on each such trading day;
|
|
|
|
|
•
|
if we call any or all of the 2026 Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the relevant redemption date; or
|
|
|
|
|
•
|
upon the occurrence of specified corporate events, as specified in each indenture governing the 2026 Notes.
|
On or after September 15, 2026 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert the 2026 Notes at any time. Upon conversion, we may satisfy our conversion obligation in cash, shares of common stock or a combination of cash and shares of common stock, at our election.
We may redeem for cash, stock or combination of both for all or any portion of the 2026 Notes, at our option, on or after December 20, 2023, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide a notice of redemption at a redemption price equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2026 Notes. Upon the occurrence of a fundamental change (as defined in the 2026 Indenture), holders may require us to repurchase all or a portion of the 2026 Notes for cash at a price equal to 100% of the principal amount of the 2026 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
In accordance with accounting for debt with conversions and other options, we bifurcated the principal amount of the 2026 Notes into liability and equity components. The liability component of the 2026 Notes was valued at $734.8 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.8% with the equity component representing the residual amount of the proceeds of $315.2 million, which was recorded as a debt discount.
We incurred approximately $7.8 million in transaction costs in connection with the issuance of the 2026 Notes and these costs were allocated pro rata based on the relative carrying amounts of the liability and equity components. The debt discount and debt issuance costs attributable to the liability component will be amortized to interest expense using an effective interest rate of 5.8% over the expected life of the 2026 Notes. Debt issuance costs attributable to the equity component are netted with the equity component in stockholders’ equity, and the equity component is not remeasured as long as it continues to meet the conditions for equity classification.
2024 Notes
In March 2017, we issued $450.0 million of the 2024 Notes in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2024 Notes are governed by an indenture between the Company, as the issuer, and U.S. Bank National Association, as trustee (the “2024 Indenture”). The 2024 Notes are unsecured and do not contain any financial covenants, restrictions on dividends, incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us.
The 2024 Notes bear interest at a rate of 0.25% per year. Interest on the 2024 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2017. The 2024 Notes will mature on March 15, 2024, unless earlier repurchased by us or converted pursuant to their terms.
The initial conversion rate of the 2024 Notes is 16.4965 shares of common stock per $1,000 principal amount of 2024 Notes, which is equivalent to an initial conversion price of approximately $60.62 per share, a 132.5% premium to the fair market value at the date of issuance.
Prior to the close of business on the business day immediately preceding December 15, 2023, each holder of the 2024 Notes may convert their 2024 Notes only under the following circumstances:
|
|
|
|
•
|
during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price, or $78.80 on each applicable trading day;
|
|
|
|
|
•
|
during the five consecutive business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day; or
|
|
|
|
|
•
|
upon the occurrence of specified corporate events.
|
On or after December 15, 2023 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2024 Notes at any time. In addition, upon the occurrence of a make-whole fundamental change (as defined in the 2024 Indenture), we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert 2024 Notes in connection with such make-whole fundamental change.
We may not redeem the 2024 Notes prior to their maturity date and no sinking fund is provided for the 2024 Notes. Upon the occurrence of a fundamental change, holders may require us to repurchase all or a portion of their 2024 Notes for cash at a price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus any accrued and unpaid interest.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We considered the features embedded in the 2024 Notes other than the conversion feature, including the holders’ put feature, our call feature, and the make-whole feature, and concluded that they are not required to be bifurcated and accounted for separately from the host debt instrument.
Prior to the Tax Matters Agreement settlement condition (“TMA settlement condition”), because we could only settle the 2024 Notes in cash, we determined that the conversion feature met the definition of a derivative liability. We separated the derivative liability from the host debt instrument based on the fair value of the derivative liability. As of the issuance date, March 8, 2017, the derivative liability fair value of $129.9 million was calculated using the binomial valuation approach. The residual principal amount of the 2024 Notes of $320.1 million before issuance costs was allocated to the debt component. We incurred approximately $7.7 million in transaction costs in connection with the issuance of the 2024 Notes. These costs were allocated to the debt component and recognized as a debt discount. We amortize the debt discount, including both the initial value of the derivative liability and the transaction costs, over the term of the 2024 Notes using the effective interest method. The effective interest rate of the 2024 Notes is 5.4% per year.
During the fiscal year ended July 1, 2017, we satisfied the TMA settlement condition. As such, the value of the conversion option will no longer be marked to market and was reclassified to additional paid-in capital within stockholders’ equity on our condensed consolidated balance sheet. The value of the conversion option at the time of issuance will be treated as an original issue discount for purposes of accounting for the debt component of the 2024 Notes. The debt component will accrete up to the principal amount over the expected term of the debt.
Our convertible notes consisted of the following components as of the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability component:
|
March 28, 2020
|
|
June 29, 2019
|
|
|
2024 Notes
|
|
2026 Notes
|
|
2024 Notes
|
|
Principal
|
$
|
450.0
|
|
|
$
|
1,050.0
|
|
|
$
|
450.0
|
|
|
Unamortized debt discount and debt issuance costs
|
(84.2
|
)
|
|
(309.8
|
)
|
|
(98.1
|
)
|
|
Net carrying amount of the liability component
|
$
|
365.8
|
|
|
$
|
740.2
|
|
|
$
|
351.9
|
|
The following table sets forth interest expense information related to the convertible notes for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Contractual interest expense
|
$
|
1.6
|
|
|
$
|
0.3
|
|
|
$
|
2.3
|
|
|
$
|
0.9
|
|
|
Amortization of the debt discount and debt issuance costs
|
14.0
|
|
|
4.5
|
|
|
24.8
|
|
|
13.2
|
|
|
Total interest expense
|
$
|
15.6
|
|
|
$
|
4.8
|
|
|
$
|
27.1
|
|
|
$
|
14.1
|
|
The future interest and principal payments related to our convertible notes are as follows as of March 28, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
2024 Notes
|
|
2026 Notes
|
|
Total
|
|
Remainder of 2020
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
2.7
|
|
|
2021
|
1.1
|
|
|
5.2
|
|
|
6.3
|
|
|
2022
|
1.1
|
|
|
5.3
|
|
|
6.4
|
|
|
2023
|
1.1
|
|
|
5.2
|
|
|
6.3
|
|
|
2024
|
451.2
|
|
|
5.3
|
|
|
456.5
|
|
|
Thereafter
|
—
|
|
|
1,063.1
|
|
|
1,063.1
|
|
|
Total convertible notes payments
|
$
|
454.5
|
|
|
$
|
1,086.8
|
|
|
$
|
1,541.3
|
|
Term Loan Facility
On December 10, 2018 (the “Closing Date”), concurrent with the closing of the Oclaro merger, we entered into a Credit and Guarantee Agreement (the “Credit Agreement”), by and among us, certain of our subsidiaries, the lenders party thereto, and
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Deutsche Bank, as administrative agent and collateral agent for the lenders. The Credit Agreement provides for a senior secured term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $500.0 million. The term loans available under the Term Loan Facility were fully drawn on the Closing Date and the proceeds of the term loans were used to consummate the merger and pay fees and expenses in connection with the merger and the Term Loan Facility.
In fiscal 2019, we incurred $9.3 million of debt issuance costs in connection with the Term Loan Facility which were capitalized and recorded as a contra liability in our condensed consolidated balance sheet. These costs were amortized to interest expense using the effective interest rate method from the issuance date of December 10, 2018.
In fiscal 2020, we repaid, in full, all amounts outstanding under our Term Loan Facility. During the nine months ended March 28, 2020, we incurred an $8.0 million loss for the unamortized debt issuance costs as a result of this full repayment.
The following table sets forth interest expense information related to the term loan for the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Contractual interest expense
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
9.6
|
|
|
$
|
10.2
|
|
|
Amortization of the debt issuance costs
|
—
|
|
|
0.4
|
|
|
0.5
|
|
|
0.5
|
|
|
Loss on early extinguishment of debt
|
—
|
|
|
—
|
|
|
8.0
|
|
|
—
|
|
|
Total interest expense
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
18.1
|
|
|
$
|
10.7
|
|
For the nine months ended March 28, 2020, we also recorded $0.1 million interest expense related to our finance leases.
The following table sets forth balance sheet information related to the term loan as of the periods presented (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Principal
|
$
|
497.5
|
|
|
$
|
500.0
|
|
|
Repayment of principal
|
(497.5
|
)
|
|
(2.5
|
)
|
|
Unamortized value of the debt issuance costs
|
—
|
|
|
(8.5
|
)
|
|
Net carrying value
|
$
|
—
|
|
|
$
|
489.0
|
|
|
|
|
|
|
|
Term loan, current
|
$
|
—
|
|
|
$
|
5.0
|
|
|
Term loan, non-current
|
$
|
—
|
|
|
$
|
484.0
|
|
Note 13. Accumulated Other Comprehensive Income (Loss)
Our accumulated other comprehensive income (loss) consists of the accumulated net unrealized gains or losses on foreign currency translation adjustments, the defined benefit obligations, and available-for-sale securities.
The changes in accumulated other comprehensive income (loss) by component and related tax effects for each period presented were as follows (in millions):
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax (1)
|
|
Defined benefit obligations, net of tax (2)
|
|
Unrealized gain (loss) on available-for-sale securities, net of tax (3)
|
|
Total
|
|
Beginning balance as of June 29, 2019 (3)
|
$
|
9.7
|
|
|
$
|
(3.5
|
)
|
|
$
|
0.9
|
|
|
$
|
7.1
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Ending balance as of September 28, 2019 (3)
|
9.7
|
|
|
(3.5
|
)
|
|
1.0
|
|
|
7.2
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Ending balance as of December 28, 2019 (3)
|
9.7
|
|
|
(3.5
|
)
|
|
0.8
|
|
|
7.0
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
(1.2
|
)
|
|
(1.2
|
)
|
|
Ending balance as of March 28, 2020 (3)
|
$
|
9.7
|
|
|
$
|
(3.5
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of June 30, 2018
|
$
|
10.3
|
|
|
$
|
(2.3
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
6.4
|
|
|
Other comprehensive income
|
0.1
|
|
|
—
|
|
|
0.4
|
|
|
0.5
|
|
|
Ending balance as of September 29, 2018
|
10.4
|
|
|
(2.3
|
)
|
|
(1.2
|
)
|
|
6.9
|
|
|
Other comprehensive income (loss)
|
(0.7
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
|
(0.7
|
)
|
|
Ending balance as of December 29, 2018
|
9.7
|
|
|
(2.4
|
)
|
|
(1.1
|
)
|
|
6.2
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
1.3
|
|
|
1.3
|
|
|
Ending balance as of March 30, 2019
|
$
|
9.7
|
|
|
$
|
(2.4
|
)
|
|
$
|
0.2
|
|
|
$
|
7.5
|
|
(1) In fiscal 2019, as a result of significant changes in economic facts and circumstances, primarily due to the acquisition of Oclaro, we established the functional currency for our worldwide operations as the U.S. dollar. Translation adjustments reported prior to December 10, 2018, remain as a component of accumulated other comprehensive income in our condensed consolidated balance sheets, until all or a part of the investment in the subsidiaries is sold or liquidated.
(2) We evaluate the assumptions over the fair value of our defined benefit obligations annually and make changes as necessary.
(3) Fiscal 2020 balances of unrealized gain (loss) on available-for-sale securities are net of tax of $0.2 million.
Note 14. Restructuring and Related Charges
We have initiated various strategic restructuring actions primarily intended to reduce costs, consolidate our operations, streamline the manufacturing of our products and align our business in response to market conditions and as a result of our acquisition of Oclaro on December 10, 2018.
The following table summarizes the activity of restructuring and related charges during the three and nine months ended March 28, 2020 and March 30, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Balance as of beginning of period
|
$
|
5.0
|
|
|
$
|
3.5
|
|
|
$
|
14.6
|
|
|
$
|
1.9
|
|
|
Charges
|
2.7
|
|
|
21.1
|
|
|
4.9
|
|
|
30.2
|
|
|
Payments
|
(5.1
|
)
|
|
(6.6
|
)
|
|
(16.9
|
)
|
|
(14.1
|
)
|
|
Balance as of end of period
|
$
|
2.6
|
|
|
$
|
18.0
|
|
|
$
|
2.6
|
|
|
$
|
18.0
|
|
During the three and nine months ended March 28, 2020, we recorded $2.7 million and $4.9 million, respectively, in restructuring and related charges in our condensed consolidated statements of operations. The charges were mainly attributable to severance charges associated with the decision to move certain manufacturing from San Jose, California to our facility in Thailand.
During the three and nine months ended March 30, 2019, we recorded $21.1 million and $30.2 million, respectively, in restructuring and related charges in our condensed consolidated statements of operations, primarily attributable to severance and employee related benefits associated with the wind down of operations for Lithium Niobate modulators and Datacom modules
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
resulting in $18.0 million of severance charges and $1.6 million of lease restructuring charges. During the three and nine months ended March 30, 2019, we also recorded restructuring charges primarily associated with acquisition related synergies. In addition, the nine month period charges included severance and employee related benefits associated with Oclaro’s executive severance and retention agreements. These retention agreements provided, under certain circumstances, for payments and benefits upon an involuntary termination of employment.
Any changes in the estimates of executing our restructuring activities will be reflected in our future results of operations.
Note 15. Income Taxes
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items, if any, that arise during the period. Each quarter, we update our estimate of the annual effective tax rate, and if the estimated annual effective tax rate changes, we make a cumulative adjustment in such period. Our quarterly tax provision and estimate of our annual effective tax rate are subject to variation due to several factors, including variability in pre-tax income (or loss), the mix of jurisdictions to which such income relates, changes in how we do business, and tax law developments.
We recorded a tax provision of $5.2 million and $19.6 million for the three and nine months ended March 28, 2020, respectively. We recognized a discrete tax benefit of $4.1 million during the three months ended March 28, 2020 from the release of uncertain tax positions related to the fiscal 2016 U.S. federal income tax return as a result of the expiration of statute of limitations during the quarter. Our estimated effective tax rate for fiscal 2020 differs from the 21% U.S. statutory rate primarily due to the income tax benefit of the earnings of our foreign subsidiaries being taxed at rates that differ from the U.S. statutory rate as well as the U.S. federal R&D and foreign tax credits, partially offset by the income tax expense from non-deductible stock-based compensation and the tax effect of Global Intangible Low-Taxed Income (“GILTI”), Base Erosion and Anti-Abuse Tax (“BEAT”), and subpart F inclusion.
As of March 28, 2020, we had $18.1 million of unrecognized tax benefits, which, if recognized, would affect the effective tax rate. We are subject to examination of income tax returns by various domestic and foreign tax authorities. The timing of commencement, resolution and closure of tax audits is highly unpredictable. Although it is possible that certain ongoing tax audits may be concluded within the next 12 months, we cannot reasonably estimate the impact to tax expense and net income from tax exams that could be resolved or closed within the next 12 months. Subject to audit timing and uncertainty, we expect our unrecognized tax benefit amount that could affect the effective tax rate to decrease by $1.2 million over the next 12 months.
We believe that we have adequately provided under GAAP for potential outcomes related to our tax audits. However, there can be no assurances as to the possible outcomes or any related financial statement effect thereof.
On June 7, 2019, the U.S. Court of Appeals for the Ninth Circuit, reversing a previous decision of the U.S. Tax Court, held that the U.S. Treasury Department’s regulations requiring the inclusion of stock-based compensation expense in a taxpayer’s cost-sharing calculations were valid. On November 12, 2019, the U.S. Court of Appeals for the Ninth Circuit denied the en banc rehearing request filed by the taxpayer on July 22, 2019. Our financial statements have been prepared consistent with this outcome, but we will continue to monitor any ongoing developments, including a potential appeal to the U.S. Supreme Court, to determine if future changes are required.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020 and accelerates a corporation’s ability to recover AMT refundable credits. The Company is currently evaluating the impact of the CARES Act, but at present does not expect that the provisions of the CARES Act would result in a material cash benefit.
Note 16. Stockholders' Equity
Description of Lumentum Stock-Based Benefit Plans
Equity Incentive Plan
As of March 28, 2020, we had 2.4 million shares subject to stock options, restricted stock units, restricted stock awards, and performance stock units issued and outstanding under the 2015 Equity Incentive Plan (the “2015 Plan”).
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Restricted stock units, restricted stock awards and performance stock units are performance-based, time-based or a combination of both. The fair value of these grants is based on the closing market price of our common stock on the date of award.
As of March 28, 2020, 3.6 million shares of common stock under the 2015 Plan were available for grant.
Restricted Stock Units
Restricted stock units (“RSUs”) under the 2015 Plan are grants of shares of our common stock, the vesting of which is based on the requisite service requirement. Generally, our RSUs are subject to forfeiture and are expected to vest over one to four years. For annual refresh grants, RSUs generally vest ratably on an annual, or combination of annual and quarterly, basis over three years.
Restricted Stock Awards
Restricted stock awards (“RSAs”) under the 2015 Plan are grants of shares of our common stock that are subject to various restrictions, including restrictions on transferability and forfeiture provisions. RSAs are expected to vest over one to four years, and the shares acquired may not be transferred by the holder until the vesting conditions (if any) are satisfied.
Performance Stock Units
Performance stock units (“PSUs”) under the 2015 Plan are grants of shares of our common stock that vest upon the achievement of certain performance and service conditions. We begin recognizing compensation expense when we conclude that it is probable that the performance conditions will be achieved. We reassess the probability of vesting at each reporting period and adjust our compensation cost based on this probability assessment. Our PSUs are subject to risk of forfeiture until performance and service conditions are satisfied and generally vest over three years.
Employee Stock Purchase Plan
Our 2015 Employee Stock Purchase Plan (the “2015 Purchase Plan”) provides eligible employees with the opportunity to acquire an ownership interest in the Company through periodic payroll deductions and provides a 15% purchase price discount as well as a six-month look-back period. The 2015 Purchase Plan is structured as a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. The 2015 Purchase Plan will terminate upon the date on which all shares available for issuance have been sold. Of the 3.0 million shares authorized under the 2015 Purchase Plan, 1.9 million shares remained available for issuance as of March 28, 2020.
Stock-Based Compensation Expense
The impact on our results of operations of recording stock-based compensation by function for the three and nine months ended March 28, 2020 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Cost of sales
|
$
|
4.3
|
|
|
$
|
3.2
|
|
|
$
|
12.6
|
|
|
$
|
11.7
|
|
|
Research and development
|
4.2
|
|
|
4.5
|
|
|
12.1
|
|
|
10.7
|
|
|
Selling, general and administrative
|
10.7
|
|
|
8.3
|
|
|
31.4
|
|
|
34.1
|
|
|
Total stock-based compensation
|
$
|
19.2
|
|
|
$
|
16.0
|
|
|
$
|
56.1
|
|
|
$
|
56.5
|
|
Total income tax benefit associated with stock-based compensation recognized in our consolidated statements of operations during the years presented was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Income tax benefit associated with stock-based compensation
|
$
|
2.4
|
|
|
$
|
2.1
|
|
|
$
|
9.0
|
|
|
$
|
8.8
|
|
Approximately $3.0 million and $3.5 million of stock-based compensation was capitalized to inventory as of March 28, 2020 and June 29, 2019, respectively.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Stock Award Activity
The following table summarizes our awards activity for the nine months ended March 28, 2020 (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Restricted Stock Awards
|
|
Performance Stock Units
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
Number of Shares
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
Balance as of June 29, 2019
|
|
2.2
|
|
|
$
|
52.4
|
|
|
—
|
|
|
$
|
32.5
|
|
|
0.2
|
|
|
$
|
56.0
|
|
|
Granted
|
|
1.0
|
|
|
59.3
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
61.9
|
|
|
Vested/Exercised
|
|
(1.0
|
)
|
|
52.1
|
|
|
—
|
|
|
32.5
|
|
|
(0.1
|
)
|
|
54.6
|
|
|
Canceled
|
|
(0.2
|
)
|
|
51.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57.3
|
|
|
Balance as of March 28, 2020
|
|
2.0
|
|
|
$
|
55.6
|
|
|
—
|
|
|
$
|
—
|
|
|
0.3
|
|
|
$
|
60.2
|
|
As of March 28, 2020, $111.6 million of stock-based compensation cost related to awards granted to our employees remains to be amortized. That cost is expected to be recognized over an estimated amortization period of 1.9 years.
A summary of awards available for grant is as follows (in millions):
|
|
|
|
|
|
|
|
Awards Available for Grant
|
|
Balance as of June 29, 2019
|
4.7
|
|
|
Granted
|
(1.2
|
)
|
|
Canceled
|
0.1
|
|
|
Balance as of March 28, 2020
|
3.6
|
|
Employee Stock Purchase Plan Activity
The 2015 Purchase Plan expense for each of the three months ended March 28, 2020 and March 30, 2019 was $0.8 million and $1.1 million, respectively. The 2015 Purchase Plan expense for the nine months ended March 28, 2020 and March 30, 2019 was $2.5 million and $2.9 million, respectively. The expense related to the 2015 Purchase Plan is recorded on a straight-line basis over the relevant subscription period. During the three and nine months ended March 28, 2020 there were 0.1 million shares issued to employees through the 2015 Purchase Plan.
We estimate the fair value of the 2015 Purchase Plan shares on the date of grant using the Black-Scholes option-pricing model. During each of the three and nine months ended March 28, 2020 and March 30, 2019, the assumptions used to estimate the fair value of the 2015 Purchase Plan shares to be issued were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Expected term (years)
|
0.5
|
|
|
0.5
|
|
|
Expected volatility
|
44.6
|
%
|
|
71.3
|
%
|
|
Risk-free interest rate
|
1.59
|
%
|
|
2.52
|
%
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Repurchase and Retirement of Common Stock
In December 2019, concurrently with the issuance of the 2026 Notes, we repurchased 2.9 million shares of our common stock in privately negotiated transactions at an average price of $69.68 per share for an aggregate purchase price of $200 million. These shares were retired immediately.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 17. Commitments and Contingencies
Purchase Obligations
Purchase obligations of $257.2 million as of March 28, 2020, represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements.
Although open purchase orders are considered enforceable and legally binding, the terms generally allow the option to cancel, reschedule and adjust the requirements based on our business needs prior to the delivery of goods or performance of services. Obligations to purchase inventory and other commitments are generally expected to be fulfilled within one year.
We depend on a limited number of contract manufacturers, subcontractors and suppliers for raw materials, packages and standard components. We generally purchase these single or limited source products through standard purchase orders or one-year supply agreements and have no significant long-term guaranteed supply agreements with such vendors. While we seek to maintain a sufficient safety stock of such products and maintain on-going communications with our suppliers to guard against interruptions or cessation of supply, our business and results of operations could be adversely affected by a stoppage or delay of supply, substitution of more expensive or less reliable products, receipt of defective parts or contaminated materials, increases in the price of such supplies, or our inability to obtain reduced pricing from our suppliers in response to competitive pressures.
Product Warranties
We provide reserves for the estimated costs of product warranties at the time revenue is recognized. We typically offer a twelve month warranty for most of our products. However, in some instances depending upon the product, product components or application of our products by the end customer, our warranties can vary and generally range from six months to five years. We estimate the costs of our warranty obligations on an annualized basis based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise with specific products. We assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary.
The following table presents the changes in our warranty reserve during the three and nine months ended March 28, 2020 and March 30, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Balance as of beginning of period
|
$
|
6.8
|
|
|
$
|
9.7
|
|
|
$
|
7.5
|
|
|
$
|
6.6
|
|
|
Warranties assumed in Oclaro acquisition
|
—
|
|
|
—
|
|
|
—
|
|
|
3.8
|
|
|
Provision for warranty
|
0.7
|
|
|
1.5
|
|
|
2.5
|
|
|
3.4
|
|
|
Utilization of reserve
|
(2.1
|
)
|
|
(1.4
|
)
|
|
(4.6
|
)
|
|
(4.0
|
)
|
|
Balance as of end of period
|
$
|
5.4
|
|
|
$
|
9.8
|
|
|
$
|
5.4
|
|
|
$
|
9.8
|
|
Environmental Liabilities
Our research and development (“R&D”), manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. We apply strict standards for protection of the environment and occupational health and safety to sites inside and outside the United States, even if not subject to regulations imposed by foreign governments. We believe that our properties and operations at our facilities comply in all material respects with applicable environmental laws and occupational health and safety laws. However, the risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental and health and safety laws will not require us to incur significant expenditures. We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements. The environmental, product content/disposal and recycling laws are gradually becoming more stringent and may cause us to incur significant expenditures in the future.
Legal Proceedings
We are subject to a variety of claims and suits that arise from time to time in the ordinary course of our business. While management currently believes that resolving claims against us, individually or in the aggregate, will not have a material adverse
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
impact on our financial position, results of operations or statements of cash flows, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. We accrue for loss contingencies when it is both probable that we will incur the loss and when we can reasonably estimate the amount of the loss or range of loss. We have recorded $1.0 million of litigation contingency in other current liabilities on the condensed consolidated balance sheet as of March 28, 2020.
Merger Litigation
In connection with our acquisition of Oclaro, seven lawsuits were filed by purported stockholders of Oclaro challenging the proposed merger (the “Merger”). Two of the seven suits were putative class actions filed against Oclaro, its directors, Lumentum, Prota Merger Sub, Inc. and Prota Merger, LLC: Nicholas Neinast v. Oclaro, Inc., et al., No. 3:18-cv-03112-VC, in the United States District Court for the Northern District of California (filed May 24, 2018) (the “Neinast Lawsuit”); and Adam Franchi v. Oclaro, Inc., et al., No. 1:18-cv-00817-GMS, in the United States District Court for the District of Delaware (filed June 9, 2018) (the “Franchi Lawsuit”). Both the Neinstat Lawsuit and the Franchi Lawsuit were voluntarily dismissed with prejudice.
The other five suits, styled as Gerald F. Wordehoff v. Oclaro, Inc., et al., No. 5:18-cv-03148-NC (the “Wordehoff Lawsuit”), Walter Ryan v. Oclaro, Inc., et al., No. 3:18-cv-03174-VC (the “Ryan Lawsuit”), Jayme Walker v. Oclaro, Inc., et al., No. 5:18-cv-03203-EJD (the “Walker Lawsuit”), Kevin Garcia v. Oclaro, Inc., et al., No. 5:18-cv-03262-VKD (the “Garcia Lawsuit”), and SaiSravan B. Karri v. Oclaro, Inc., et al., No. 3:18-cv-03435-JD (the “Karri Lawsuit” and, together with the other six lawsuits, the “Lawsuits”), were filed in the United States District Court for the Northern District of California on May 25, 2018, May 29, 2018, May 30, 2018, May 31, 2018, and June 9, 2018, respectively. These five Lawsuits named Oclaro and its directors as defendants only and did not name Lumentum. The Wordehoff, Ryan, Walker, and Garcia Lawsuits have been voluntarily dismissed, and the Wordehoff, Ryan, and Walker dismissals were with prejudice. The Karri Lawsuit has not yet been dismissed. The Ryan Lawsuit was, and the Karri Lawsuit is, a putative class action.
The Lawsuits generally alleged, among other things, that Oclaro and its directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 14a-9 promulgated thereunder by disseminating an incomplete and misleading Form S-4, including proxy statement/prospectus. The Lawsuits further alleged that Oclaro’s directors violated Section 20(a) of the Exchange Act by failing to exercise proper control over the person(s) who violated Section 14(a) of the Exchange Act.
The remaining Lawsuit (the Karri Lawsuit) currently purports to seek, among other things, damages to be awarded to the plaintiff and any class, if a class is certified, and litigation costs, including attorneys’ fees. A lead plaintiff and counsel has been selected, and an amended complaint was filed on April 15, 2019, which also names Lumentum as a defendant. A motion to dismiss the amended complaint has been fully briefed and is currently pending, and defendants intend to defend the Karri Lawsuit vigorously.
Indemnifications
In the normal course of business, we enter into agreements that contain a variety of representations and warranties and provide for general indemnification. Exposure under these agreements is unknown because claims may be made against us in the future and we may record charges in the future as a result of these indemnification obligations. As of March 28, 2020, we did not have any material indemnification claims that were probable or reasonably possible.
Audit Proceedings
We are under audit by various domestic and foreign tax authorities with regards to income tax and indirect tax matters. In some, although not all cases, we have reserved for potential adjustments to our provision for income taxes and accrual of indirect taxes that may result from examinations by these tax authorities or final outcomes in judicial proceedings, and we believe that the final outcome of these examinations, agreements or judicial proceedings will not have a material effect on our results of operations. If events occur which indicate payment of these amounts is unnecessary, the reversal of the liabilities would result in the recognition of benefits in the period we determine the liabilities are no longer necessary. If our estimates of the federal, state, and foreign income tax liabilities and indirect tax liabilities are less than the ultimate assessment, it could result in a further charge to expense.
In connection with our acquisition of Oclaro, we recorded $1.1 million in Malaysia Goods and Services Tax (“GST”) refund claims within prepaid expenses and other current assets in our condensed consolidated balance sheet. The refund claim represents an initial claim of $2.5 million of GST, net of reserves, that was previously denied by the Malaysian tax authorities in 2016. During the nine months ended March 28, 2020, we were able to favorably resolve this audit and received refunds for all of our outstanding GST claims.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 18. Operating Segments and Geographic Information
Our chief executive officer is our Chief Operating Decision Maker (“CODM”). The CODM allocates resources to the segments based on their business prospects, competitive factors, net revenue and gross margin. We do not track all of our property, plant and equipment by operating segments. The geographic identification of these assets is set forth below.
We are an industry leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications including optical communications and commercial lasers. We have two operating segments, Optical Communications, which we refer to as OpComms, and Commercial Lasers, which we refer to as Lasers. Our OpComms products address the following markets: telecommunications and data communications (“Telecom and Datacom”), and consumer and industrial (“Consumer and Industrial”), and include product lines from the recent acquisition of Oclaro. The two operating segments were primarily determined based on how the CODM views and evaluates our operations. Operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments.
We do not allocate research and development, sales and marketing, or general and administrative expenses to our segments because management does not include the information in its measurement of the performance of the operating segments. In addition, we do not allocate amortization and impairment of acquisition-related intangible assets, stock-based compensation and certain other charges impacting the gross margin of each segment because management does not include this information in its measurement of the performance of the operating segments.
Information on reportable segments utilized by our CODM is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
OpComms
|
$
|
359.3
|
|
|
$
|
377.9
|
|
|
$
|
1,184.8
|
|
|
$
|
1,013.4
|
|
|
Lasers
|
43.5
|
|
|
55.0
|
|
|
125.7
|
|
|
147.3
|
|
|
Net revenue
|
$
|
402.8
|
|
|
$
|
432.9
|
|
|
$
|
1,310.5
|
|
|
$
|
1,160.7
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
OpComms
|
$
|
161.8
|
|
|
$
|
143.5
|
|
|
$
|
550.1
|
|
|
$
|
397.5
|
|
|
Lasers
|
21.6
|
|
|
25.3
|
|
|
56.2
|
|
|
63.6
|
|
|
Total segment gross profit
|
183.4
|
|
|
168.8
|
|
|
606.3
|
|
|
461.1
|
|
|
Unallocated corporate items:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
(4.3
|
)
|
|
(3.2
|
)
|
|
(12.6
|
)
|
|
(11.7
|
)
|
|
Amortization of acquired intangibles
|
(13.9
|
)
|
|
(28.1
|
)
|
|
(38.8
|
)
|
|
(33.3
|
)
|
|
Amortization of fair value adjustments
|
(1.5
|
)
|
|
(14.5
|
)
|
|
(5.8
|
)
|
|
(15.8
|
)
|
|
Inventory and fixed asset write down due to product lines exit
|
(2.3
|
)
|
|
(19.4
|
)
|
|
(6.0
|
)
|
|
(19.4
|
)
|
|
Integration related costs
|
0.3
|
|
|
(2.8
|
)
|
|
(3.1
|
)
|
|
(2.8
|
)
|
|
Other charges (1)
|
(4.0
|
)
|
|
(12.5
|
)
|
|
(25.5
|
)
|
|
(39.0
|
)
|
|
Gross profit
|
$
|
157.7
|
|
|
$
|
88.3
|
|
|
$
|
514.5
|
|
|
$
|
339.1
|
|
(1) “Other charges” of unallocated corporate items for the three and nine months ended March 28, 2020 primarily include costs of transferring product lines to new production facilities, including Thailand of $0.4 million and $8.5 million, respectively. We also incurred excess and obsolete inventory charges driven by the decline in demand from Huawei of $0.1 million and $12.8 million during the three and nine months ended March 28, 2020. In addition, there were expenses of $1.6 million related to COVID-19 outbreak during the three and nine months ended March 28, 2020, which include incremental costs for payroll expense such as overtime pay, facilities costs such as gloves, masks and temperature gauges, and under-utilized capacity at certain facilities, in which manufacturing output was impacted. These COVID-19 related costs are offset by benefits realized from government credits for employers’ payroll tax.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three and nine months ended March 30, 2019, “other charges” of unallocated corporate items included costs of transferring product lines to Thailand of $12.0 million and $38.7 million, respectively.
Disaggregation of Revenue
We disaggregate revenue by product and by geography. We do not present other levels of disaggregation, such as by type of products, customer, markets, contracts, duration of contracts, timing of transfer of control and sales channels, as this information is not used by our CODM to manage the business.
The table below discloses our total net revenue attributable to each of our two reportable segments. In addition, it discloses the percentage of our total net revenue attributable to our product offerings which serve Telecom and Datacom, and Consumer and Industrial markets which accounted for 10% or more of our total net revenue during the periods presented (in millions, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
OpComms:
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecom and Datacom
|
$
|
251.0
|
|
62.3
|
%
|
|
$
|
300.7
|
|
69.5
|
%
|
|
$
|
765.4
|
|
58.4
|
%
|
|
$
|
683.7
|
|
58.9
|
%
|
|
Consumer and Industrial
|
108.3
|
|
26.9
|
|
|
77.2
|
|
17.8
|
|
|
419.4
|
|
32.0
|
|
|
329.7
|
|
28.4
|
|
|
Total OpComms
|
$
|
359.3
|
|
89.2
|
%
|
|
$
|
377.9
|
|
87.3
|
%
|
|
$
|
1,184.8
|
|
90.4
|
%
|
|
$
|
1,013.4
|
|
87.3
|
%
|
|
Lasers
|
43.5
|
|
10.8
|
|
|
55.0
|
|
12.7
|
|
|
125.7
|
|
9.6
|
|
|
147.3
|
|
12.7
|
|
|
Total Revenue
|
$
|
402.8
|
|
|
|
|
$
|
432.9
|
|
|
|
$
|
1,310.5
|
|
|
|
$
|
1,160.7
|
|
|
We operate in three geographic regions: Americas, Asia-Pacific, and EMEA (Europe, Middle East, and Africa). Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, which may differ from the location of their end customers. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries that represented 10% or more of our total net revenue (in millions, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
38.6
|
|
|
9.6
|
%
|
|
$
|
29.7
|
|
|
6.9
|
%
|
|
$
|
118.9
|
|
|
9.1
|
%
|
|
$
|
72.3
|
|
|
6.3
|
%
|
|
Mexico
|
33.2
|
|
|
8.2
|
|
|
53.5
|
|
|
12.3
|
|
|
88.3
|
|
|
6.7
|
|
|
164.8
|
|
|
14.2
|
|
|
Other Americas
|
1.4
|
|
|
0.3
|
|
|
0.9
|
|
|
0.2
|
|
|
3.2
|
|
|
0.3
|
|
|
2.7
|
|
|
0.2
|
|
|
Total Americas
|
$
|
73.2
|
|
|
18.1
|
%
|
|
$
|
84.1
|
|
|
19.4
|
%
|
|
$
|
210.4
|
|
|
16.1
|
%
|
|
$
|
239.8
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
$
|
125.9
|
|
|
31.3
|
%
|
|
$
|
124.1
|
|
|
28.6
|
%
|
|
$
|
404.2
|
|
|
30.8
|
%
|
|
$
|
289.6
|
|
|
25.0
|
%
|
|
South Korea
|
63.3
|
|
|
15.7
|
|
|
23.6
|
|
|
5.5
|
|
|
239.9
|
|
|
18.3
|
|
|
154.9
|
|
|
13.3
|
|
|
Japan
|
35.8
|
|
|
8.9
|
|
|
50.0
|
|
|
11.6
|
|
|
110.4
|
|
|
8.4
|
|
|
129.2
|
|
|
11.1
|
|
|
Other Asia-Pacific
|
77.2
|
|
|
19.2
|
|
|
98.4
|
|
|
22.7
|
|
|
248.8
|
|
|
19.0
|
|
|
234.4
|
|
|
20.2
|
|
|
Total Asia-Pacific
|
$
|
302.2
|
|
|
75.1
|
%
|
|
$
|
296.1
|
|
|
68.4
|
%
|
|
$
|
1,003.3
|
|
|
76.5
|
%
|
|
$
|
808.1
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
27.4
|
|
|
6.8
|
%
|
|
$
|
52.7
|
|
|
12.2
|
%
|
|
$
|
96.8
|
|
|
7.4
|
%
|
|
$
|
112.8
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
$
|
402.8
|
|
|
|
|
|
$
|
432.9
|
|
|
|
|
|
$
|
1,310.5
|
|
|
|
|
|
$
|
1,160.7
|
|
|
|
|
During the three and nine months ended March 28, 2020, net revenue from customers outside the United States, based on customer shipping location, represented 90.4% and 90.9% of net revenue, respectively.
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three and nine months ended March 30, 2019, net revenue from customers outside the United States, based on customer shipping location, represented 93.1% and 93.7% of net revenue, respectively.
The increase in our net revenue from the United States during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019 is mainly due to the acquisition of Oclaro, which had a higher concentration of customers who manufacture in the United States, as well as a change in shipment destination for some shipments to one of our large customers from Mexico to the United States. During the nine months ended March 28, 2020, our net revenue from South Korea increased due to higher demand in 3D sensing products, while net revenue from Hong Kong increased as a result of higher sales of 3D sensing products and Datacom chips.
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future for backlog related performance obligations that are unsatisfied as of March 28, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
Less than 1 year
|
1-2 years
|
Greater than 2 years
|
Total
|
|
Performance obligations
|
$513.9
|
$32.7
|
$—
|
$546.6
|
Contract Balances
The following table reflects the changes in contract balances as of March 28, 2020 (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract balances
|
Balance sheet location
|
March 28, 2020
|
|
June 29, 2019
|
|
Change
|
|
Percentage Change
|
|
Accounts receivable, net
|
Accounts receivable, net
|
$261.8
|
|
$238.0
|
|
$23.8
|
|
10.0%
|
|
Deferred revenue and customer deposits
|
Other current liabilities
|
$1.7
|
|
$2.9
|
|
$(1.2)
|
|
(41.4)%
|
During the three and nine months ended March 28, 2020, our net revenue was concentrated with two customers, who collectively accounted for 37% and 42% of our total net revenue, respectively.
During the three and nine months ended March 30, 2019, our net revenue was concentrated with three customers, who collectively accounted for 44% and 52% of our total net revenue, respectively.
As of March 28, 2020 and June 29, 2019, our accounts receivable balance was concentrated with two and three customers, who collectively represented 27% and 44% of gross accounts receivable, respectively.
Long-lived assets, namely net property, plant and equipment, net, were identified based on the physical location of the assets in the corresponding geographic areas as of the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
June 29, 2019
|
|
Property, plant and equipment, net
|
|
|
|
|
United States
|
$
|
145.8
|
|
|
$
|
156.2
|
|
|
Thailand
|
135.3
|
|
|
157.1
|
|
|
China
|
43.3
|
|
|
33.5
|
|
|
Japan
|
29.2
|
|
|
28.3
|
|
|
Other countries
|
56.5
|
|
|
58.2
|
|
|
Total long-lived assets
|
$
|
410.1
|
|
|
$
|
433.3
|
|
LUMENTUM HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We purchase a substantial portion of our inventory from contract manufacturers and vendors located primarily in Taiwan, Thailand, and Malaysia. During the three and nine months ended March 28, 2020, net inventory purchases which represented 10% or greater of total net purchases, were concentrated with two contract manufacturers, who collectively accounted for 88% and 85% of total net inventory purchases, respectively. During the three and nine months ended March 30, 2019, net inventory purchases were concentrated with three contract manufacturers, who collectively accounted for 85% and 85% of total net inventory purchases, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and the corresponding notes included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”). This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Please see “Risk Factors” and “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on our current expectations and involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. These statements relate to, among other things, our markets and industry, products and strategy, the impact of the COVID-19 pandemic and related responses of business and governments to the pandemic on our business and results of operations, sales, gross margins, operating expenses, capital expenditures and requirements, liquidity, product development and R&D efforts, manufacturing plans, litigation, effective tax rates and tax reserves, our corporate and financial reporting structure, our plans for growth and innovation, our plans to discontinue certain operations and product lines, our expectations regarding US-China relations, market and regulatory conditions, the successful integration of Oclaro’s business (including personnel), and our expected synergies and non-GAAP earnings accretion from the acquisition of Oclaro, and are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” “contemplate,” “believe,” “predict,” “potential” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management, which are in turn based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Risk Factors” included under Part II, Item 1A of this Quarterly Report. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Overview
We are an industry-leading provider of optical and photonic products defined by revenue and market share addressing a range of end-market applications including Optical Communications, which we refer to as OpComms, and Lasers for manufacturing, inspection and life-science applications. We seek to use our core optical and photonic technology and our volume manufacturing capability to expand into attractive emerging markets that benefit from advantages that optical or photonics-based solutions provide, including 3D sensing for consumer electronics and diode light sources for a variety of consumer and industrial applications. We have two operating segments, OpComms and Lasers. The two operating segments were primarily determined based on how the Chief Operating Decision Maker (“CODM”) views and evaluates our operations. Operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segments and to assess their performance. Other factors, including market separation and customer specific applications, go-to-market channels, products and manufacturing, are considered in determining the formation of these operating segments.
We believe the world is becoming more reliant on ever-increasing amounts of data flowing through optical networks and data centers, which demand new networks and data centers to be built to satisfy this insatiable demand for data. As higher levels of precision, new materials, factory and energy efficiency are being demanded by manufacturers, suppliers of manufacturing tools globally are turning more and more to laser based approaches, including the types of lasers Lumentum supplies. Laser based 3D sensing is a rapidly developing market. The technology enables computer vision applications that enhance security, safety, and new functionality in the electronic devices that people rely on every day. We believe the global markets in which Lumentum participates have fundamentally robust, long-term trends that increase the need for our photonics products and technologies.
On December 10, 2018, we completed the acquisition of Oclaro, a provider of optical components and modules for the long-haul, metro and data center markets. Refer to “Note 4. Business Combinations” in the notes to condensed consolidated financial statements for further discussion of the merger.
Following the acquisition of Oclaro, during our fiscal 2019, we began making several strategic changes to our OpComms business to better position it for growth and profitability. These changes include attaining acquisition cost synergies related to redundant capabilities, the discontinuing of Telecom Lithium Niobate modulators and Datacom transceiver modules because of their muted growth and profitability trends. We expect actions related to these changes to be completed in fiscal 2021. We don’t believe we are diminishing our profit potential in discontinuing and/or selling these product lines. We expect our Indium Phosphide photonic integrated circuits will continue to replace Lithium Niobate modulators over time and focusing on the development and sale of Datacom chips will enable to profitably participate in the growth in the Datacom and 5G wireless markets.
Related to the strategic changes in our OpComms business, we entered into two strategic transactions to sell some of the discontinued product lines. In the second quarter of fiscal year 2020, we entered into an agreement with Advanced Fiber Resources (Zhuhai) Ltd. (“AFR”), a leading provider of passive optical components, to acquire the assets associated with certain Lithium Niobate product lines manufactured by our San Donato site for $17 million. The transaction was closed in the third quarter of fiscal year 2020. For further information regarding this transaction, refer to “Note 5. Assets and Liabilities Held For Sale” in the notes to condensed consolidated financial statements. On April 18, 2019, we closed a transaction selling many of our Datacom transceiver module product lines to Cambridge Industries Group (“CIG”). For further information regarding this transaction, refer to “Note 4. Business Combinations” in the notes to condensed consolidated financial statements.
Impact of COVID-19 to our Business
The outbreak of the COVID-19 has been declared a pandemic by the World Health Organization and continues to spread globally. The spread of COVID-19 has caused public health officials to recommend, and governments to enact, precautions to mitigate the spread of the virus, including travel restrictions and bans, extensive social distancing guidelines and issuing a “shelter-in-place” order in many regions of the world. The pandemic and these related responses have caused, and are expected to continue to cause a global slowdown of economic activity (including the decrease in demand for a broad variety of goods and services), disruptions in global supply chains and significant volatility and disruption of financial markets We have adopted several measures in response to the COVID-19 outbreak including complying with local, state or federal orders that require employees to work from home, instructing employees to work from home in certain jurisdictions, limiting the number of employees onsite which slowed our manufacturing operations in certain countries, enhanced use of personal protective equipment and restricting non-critical business travel by our employees.
In the geographies we have operations, we have in general been deemed an essential business and been permitted to continue manufacturing and new product development operations in a more limited capacity during the pandemic. This stems from our critical role in global supply chains for the world’s communications and health-care systems. Given the rapidly evolving situation, it is difficult to predict precisely when our ability to supply our products will improve or the magnitude and duration of the impact of the COVID-19 pandemic to our markets. The Company will continue to actively monitor the situation and may take further actions altering our business operations that we determine are in the best interests of our employees, customers, communities, business partners, suppliers, and stockholders, or as required by federal, state, or local authorities. It is not clear what the potential
effects any such alterations or modifications may have on our business, including the effects on the Company's customers, employees, and prospects, or on our financial results for the remainder of fiscal year 2020.
While the recent outbreak of the COVID-19 did not have a material adverse effect on our reported results for our third quarter, we are actively monitoring the impact of the coronavirus outbreak. Due to the severity of COVID-19 in the United States and the timing of the most significant responses thereto in March, we believe the impact on our business in the fourth quarter and beyond will be greater than it was in the third quarter of 2020. The extent to which our operations will be impacted by the outbreak will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities and private businesses to contain the outbreak or recover from its impact, among other things.
Our primary strategic focus for several years has been technology and product leadership combined with close customer relationships in long-term healthy and growing markets. We believe this strategy is even more apt, and our long-term opportunity is not diminished with COVID-19. We believe there may be long-term opportunities, as the world’s experience with COVID-19 could drive an increasingly digital and virtual world touching all aspects of life and work that increasingly emphasizes communications systems, cloud services, augmented and virtual reality, and enhanced security. Additionally, ever advancing electronic devices are needed to consume, produce, and communicate digital and virtual content. All these trends could drive the need for higher volumes of higher performing optical devices that we could supply. As such, we expect to continue to invest strongly in new products, technology, and customer programs.
For more information on risks associated with the COVID-19 outbreak, see the section titled “Risk Factors” in Item 1A of Part II.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) as set forth in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”), and we consider the various staff accounting bulletins and other applicable guidance issued by the United States Securities and Exchange Commission (“SEC”). GAAP, as set forth within the ASC, requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. Our management does not believe COVID-19 will have a significant impact on our critical accounting policies. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
• Inventory Valuation
• Revenue Recognition
• Income Taxes
• Long-lived Asset Valuation
• Business Combinations
• Goodwill
Except for the adoption of ASU 2016-02, Leases (Topic 842) and the resulting changes in our accounting policies and disclosures for lease accounting, there have been no significant changes to our significant accounting policies as of and for the three months ended March 28, 2020, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended June 29, 2019. Refer to “Note 1. Description of Business and Summary of Significant Accounting Policies” for the details of ASU 2016-02 (Topic 842) adoption. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 29, 2019 provides a more complete discussion of our critical accounting policies and estimates.
Recently Issued Accounting Pronouncements
Refer to “Note 2. Recently Issued Accounting Pronouncements” in the notes to condensed consolidated financial statements.
Results of Operations
The results of operations for the periods presented are not necessarily indicative of results to be expected for future periods. The following table summarizes selected unaudited condensed consolidated statements of operations items as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Segment net revenue:
|
|
|
|
|
|
|
|
|
OpComms
|
89.2
|
%
|
|
87.3
|
%
|
|
90.4
|
%
|
|
87.3
|
%
|
|
Lasers
|
10.8
|
|
|
12.7
|
|
|
9.6
|
|
|
12.7
|
|
|
Net revenue
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
100.0
|
|
|
Cost of sales
|
57.4
|
|
|
73.1
|
|
|
57.8
|
|
|
67.9
|
|
|
Amortization of acquired developed technologies
|
3.5
|
|
|
6.5
|
|
|
3.0
|
|
|
2.9
|
|
|
Gross profit
|
39.2
|
|
|
20.4
|
|
|
39.3
|
|
|
29.2
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
12.1
|
|
|
13.3
|
|
|
11.4
|
|
|
11.6
|
|
|
Selling, general and administrative
|
15.2
|
|
|
12.8
|
|
|
13.8
|
|
|
13.0
|
|
|
Restructuring and related charges
|
0.7
|
|
|
4.9
|
|
|
0.4
|
|
|
2.6
|
|
|
Impairment charges
|
0.6
|
|
|
7.0
|
|
|
0.2
|
|
|
2.7
|
|
|
Total operating expenses
|
28.6
|
|
|
38.0
|
|
|
25.7
|
|
|
29.9
|
|
|
Income (loss) from operations
|
10.6
|
|
|
(17.6
|
)
|
|
13.5
|
|
|
(0.7
|
)
|
|
Unrealized gain on derivative liability
|
—
|
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
Interest expense
|
(3.9
|
)
|
|
(2.6
|
)
|
|
(3.5
|
)
|
|
(2.1
|
)
|
|
Other income (expense), net
|
5.4
|
|
|
1.2
|
|
|
2.1
|
|
|
1.0
|
|
|
Income (loss) before income taxes
|
12.1
|
|
|
(19.0
|
)
|
|
12.2
|
|
|
(1.0
|
)
|
|
Provision for (benefit from) income taxes
|
1.3
|
|
|
(1.9
|
)
|
|
1.5
|
|
|
(0.1
|
)
|
|
Net income (loss)
|
10.8
|
%
|
|
(17.1
|
)%
|
|
10.7
|
%
|
|
(0.9
|
)%
|
Financial Data for the three and nine months ended March 28, 2020 and March 30, 2019
The following table summarizes selected unaudited condensed consolidated statements of operations items (in millions, except for percentages):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Change
|
|
Percentage Change
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Change
|
|
Percentage Change
|
|
Segment net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OpComms
|
$
|
359.3
|
|
|
$
|
377.9
|
|
|
$
|
(18.6
|
)
|
|
(4.9
|
)%
|
|
$
|
1,184.8
|
|
|
$
|
1,013.4
|
|
|
$
|
171.4
|
|
|
16.9
|
%
|
|
Lasers
|
43.5
|
|
|
55.0
|
|
|
(11.5
|
)
|
|
(20.9
|
)
|
|
125.7
|
|
|
147.3
|
|
|
(21.6
|
)
|
|
(14.7
|
)
|
|
Net revenue
|
$
|
402.8
|
|
|
$
|
432.9
|
|
|
$
|
(30.1
|
)
|
|
(7.0
|
)%
|
|
$
|
1,310.5
|
|
|
$
|
1,160.7
|
|
|
$
|
149.8
|
|
|
12.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
$
|
157.7
|
|
|
$
|
88.3
|
|
|
$
|
69.4
|
|
|
78.6
|
%
|
|
$
|
514.5
|
|
|
$
|
339.1
|
|
|
$
|
175.4
|
|
|
51.7
|
%
|
|
Gross margin
|
39.2
|
%
|
|
20.4
|
%
|
|
|
|
|
|
39.3
|
%
|
|
29.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
$
|
48.7
|
|
|
$
|
57.7
|
|
|
$
|
(9.0
|
)
|
|
(15.6
|
)%
|
|
$
|
149.6
|
|
|
$
|
135.1
|
|
|
$
|
14.5
|
|
|
10.7
|
%
|
|
Percentage of net revenue
|
12.1
|
%
|
|
13.3
|
%
|
|
|
|
|
|
11.4
|
%
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
$
|
61.3
|
|
|
$
|
55.2
|
|
|
$
|
6.1
|
|
|
11.1
|
%
|
|
$
|
180.4
|
|
|
$
|
150.9
|
|
|
$
|
29.5
|
|
|
19.5
|
%
|
|
Percentage of net revenue
|
15.2
|
%
|
|
12.8
|
%
|
|
|
|
|
|
13.8
|
%
|
|
13.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and related charges
|
$
|
2.7
|
|
|
$
|
21.1
|
|
|
$
|
(18.4
|
)
|
|
(87.2
|
)%
|
|
$
|
4.9
|
|
|
$
|
30.2
|
|
|
$
|
(25.3
|
)
|
|
(83.8
|
)%
|
|
Percentage of net revenue
|
0.7
|
%
|
|
4.9
|
%
|
|
|
|
|
|
0.4
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charge
|
$
|
2.5
|
|
|
$
|
30.7
|
|
|
$
|
(28.2
|
)
|
|
(91.9
|
)%
|
|
$
|
2.5
|
|
|
$
|
30.7
|
|
|
$
|
(28.2
|
)
|
|
(91.9
|
)%
|
|
Percentage of net revenue
|
0.6
|
%
|
|
7.0
|
%
|
|
|
|
|
|
0.2
|
%
|
|
2.6
|
%
|
|
|
|
|
Net Revenue
Net revenue decreased by $30.1 million, or 7.0%, during the three months ended March 28, 2020 compared to the three months ended March 30, 2019. This decrease was primarily due to the decreased sales of Telecom and Datacom of $49.7 million and Lasers of $11.5 million, offset by increased sales of Consumer and Industrial of $31.1 million.
OpComms net revenue decreased by $18.6 million, or 4.9%, during the three months ended March 28, 2020 compared to the three months ended March 30, 2019. This decrease was primarily due to decreased sales of Telecom products partially offset by higher sales of 3D sensing products for mobile devices. Our Datacom sales slightly decreased, due to the sale of our Datacom transceiver module business, but such decrease was offset by significant increase in sales of Datacom chips.
Lasers net revenue decreased by $11.5 million, or 20.9%, during the three months ended March 28, 2020 compared to the three months ended March 30, 2019, primarily due to lower revenue from kilowatt class fiber lasers.
Net revenue increased by $149.8 million, or 12.9%, during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019. This increase was primarily due to the increased sales of Telecom and Datacom of $81.7 million and Consumer and Industrial of $89.7 million, offset by decreased sales of Lasers of $21.6 million.
OpComms net revenue increased by $171.4 million, or 16.9%, during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019. This increase was primarily due to increased sales in Telecom products, driven by the acquisition of Oclaro, as well as increased sales in 3D sensing products for mobile devices.
Lasers net revenue decreased by $21.6 million, or 14.7%, during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019, primarily due to decreased sales of our kilowatt class fiber lasers.
During the three and nine months ended March 28, 2020, our net revenue was concentrated with two customers, who collectively accounted for 37% and 42% of our total net revenue, respectively.
During the three and nine months ended March 30, 2019, our net revenue was concentrated with three customers, who collectively accounted for 44% and 52% of our total net revenue, respectively.
Although the magnitude of the impact of COVID-19 on our business operations remains uncertain and difficult to predict, and this remains a highly dynamic situation, we have experienced and will continue to experience in subsequent periods, disruptions to our and our customers’ businesses that will adversely impact our business, financial condition and results of operations.
Revenue by Region
We operate in three geographic regions: Americas, Asia-Pacific and EMEA. Net revenue is assigned to the geographic region and country where our product is initially shipped. For example, certain customers may request shipment of our product to a contract manufacturer in one country, however, the location of the end customers may differ. The following table presents net revenue by the three geographic regions we operate in and net revenue from countries within those regions that represented 10% or more of our total net revenue (in millions, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Amount
|
|
% of Total
|
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
38.6
|
|
|
9.6
|
%
|
|
$
|
29.7
|
|
|
6.9
|
%
|
|
$
|
118.9
|
|
|
9.1
|
%
|
|
$
|
72.3
|
|
|
6.3
|
%
|
|
Mexico
|
33.2
|
|
|
8.2
|
|
|
53.5
|
|
|
12.3
|
|
|
88.3
|
|
|
6.7
|
|
|
164.8
|
|
|
14.2
|
|
|
Other Americas
|
1.4
|
|
|
0.3
|
|
|
0.9
|
|
|
0.2
|
|
|
3.2
|
|
|
0.3
|
|
|
2.7
|
|
|
0.2
|
|
|
Total Americas
|
$
|
73.2
|
|
|
18.1
|
%
|
|
$
|
84.1
|
|
|
19.4
|
%
|
|
$
|
210.4
|
|
|
16.1
|
%
|
|
$
|
239.8
|
|
|
20.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hong Kong
|
$
|
125.9
|
|
|
31.3
|
%
|
|
$
|
124.1
|
|
|
28.6
|
%
|
|
$
|
404.2
|
|
|
30.8
|
%
|
|
$
|
289.6
|
|
|
25.0
|
%
|
|
South Korea
|
63.3
|
|
|
15.7
|
|
|
23.6
|
|
|
5.5
|
|
|
239.9
|
|
|
18.3
|
|
|
154.9
|
|
|
13.3
|
|
|
Japan
|
35.8
|
|
|
8.9
|
|
|
50.0
|
|
|
11.6
|
|
|
110.4
|
|
|
8.4
|
|
|
129.2
|
|
|
11.1
|
|
|
Other Asia-Pacific
|
77.2
|
|
|
19.2
|
|
|
98.4
|
|
|
22.7
|
|
|
248.8
|
|
|
19.0
|
|
|
234.4
|
|
|
20.2
|
|
|
Total Asia-Pacific
|
$
|
302.2
|
|
|
75.1
|
%
|
|
$
|
296.1
|
|
|
68.4
|
%
|
|
$
|
1,003.3
|
|
|
76.5
|
%
|
|
$
|
808.1
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMEA
|
$
|
27.4
|
|
|
6.8
|
%
|
|
$
|
52.7
|
|
|
12.2
|
%
|
|
$
|
96.8
|
|
|
7.4
|
%
|
|
$
|
112.8
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
$
|
402.8
|
|
|
|
|
|
$
|
432.9
|
|
|
|
|
|
$
|
1,310.5
|
|
|
|
|
|
$
|
1,160.7
|
|
|
|
|
For the three and nine months ended March 28, 2020, net revenue from customers outside the United States, based on customer shipping location, represented 90.4% and 90.9% of net revenue, respectively.
For the three and nine months ended March 30, 2019, net revenue from customers outside the United States, based on customer shipping location, represented 93.1% and 93.7% of net revenue, respectively.
The increase in our net revenue from the United States during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019 is mainly due to the acquisition of Oclaro, which had a higher concentration of customers who manufacture in the United States, as well as a change in shipment destination for some shipments to one of our large customers from Mexico to the United States. During the nine months ended March 28, 2020, our net revenue from South Korea increased due to higher demand in 3D sensing products, while net revenue from Hong Kong increased as a result of higher sales of 3D sensing products and Datacom chips.
Our net revenue is primarily denominated in U.S. dollars, including our net revenue from customers outside the United States as presented above. We expect revenue from customers outside of the United States to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities. However, regulatory and enforcement actions by the United States and other governmental agencies, as well as changes in tax and trade policies and tariffs, have impacted and may continue to impact net revenue from customers outside the United States.
Gross Margin and Segment Gross Margin
The following table summarizes segment gross margin for the three and nine months ended March 28, 2020 and March 30, 2019 (in millions, except for percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
Gross Profit
|
|
Gross Margin
|
|
Gross Profit
|
|
Gross Margin
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
OpComms
|
$
|
161.8
|
|
|
$
|
143.5
|
|
|
45.0
|
%
|
|
38.0
|
%
|
|
$
|
550.1
|
|
|
$
|
397.5
|
|
|
46.4
|
%
|
|
39.2
|
%
|
|
Lasers
|
21.6
|
|
|
25.3
|
|
|
49.7
|
%
|
|
46.0
|
%
|
|
56.2
|
|
|
63.6
|
|
|
44.7
|
%
|
|
43.2
|
%
|
|
Segment total
|
$
|
183.4
|
|
|
$
|
168.8
|
|
|
45.5
|
%
|
|
39.0
|
%
|
|
$
|
606.3
|
|
|
$
|
461.1
|
|
|
46.3
|
%
|
|
39.7
|
%
|
|
Unallocated corporate items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
(4.3
|
)
|
|
(3.2
|
)
|
|
|
|
|
|
(12.6
|
)
|
|
(11.7
|
)
|
|
|
|
|
|
Amortization of acquired intangibles
|
(13.9
|
)
|
|
(28.1
|
)
|
|
|
|
|
|
(38.8
|
)
|
|
(33.3
|
)
|
|
|
|
|
|
Amortization of fair value adjustments
|
(1.5
|
)
|
|
(14.5
|
)
|
|
|
|
|
|
(5.8
|
)
|
|
(15.8
|
)
|
|
|
|
|
|
Inventory and fixed asset write down due to product lines exit
|
(2.3
|
)
|
|
(19.4
|
)
|
|
|
|
|
|
(6.0
|
)
|
|
(19.4
|
)
|
|
|
|
|
|
Integration related costs
|
0.3
|
|
|
(2.8
|
)
|
|
|
|
|
|
(3.1
|
)
|
|
(2.8
|
)
|
|
|
|
|
|
Other charges (1)
|
(4.0
|
)
|
|
(12.5
|
)
|
|
|
|
|
|
(25.5
|
)
|
|
(39.0
|
)
|
|
|
|
|
|
Total
|
$
|
157.7
|
|
|
$
|
88.3
|
|
|
39.2
|
%
|
|
20.4
|
%
|
|
$
|
514.5
|
|
|
$
|
339.1
|
|
|
39.3
|
%
|
|
29.2
|
%
|
(1) “Other charges” of unallocated corporate items for the three and nine months ended March 28, 2020 primarily include costs of transferring product lines to new production facilities, including Thailand of $0.4 million and $8.5 million, respectively. We also incurred excess and obsolete inventory charges driven by the decline in demand from Huawei of $0.1 million and $12.8 million during the three and nine months ended March 28, 2020. In addition, there were expenses of $1.6 million related to COVID-19 outbreak during the three and nine months ended March 28, 2020, which include incremental costs for payroll expense such as overtime pay, facilities costs such as gloves, masks and temperature gauges, and under-utilized capacity at certain facilities, in which manufacturing output was impacted. These COVID-19 related costs are offset by benefits realized from government credits for employers’ payroll tax. During the three and nine months ended March 30, 2019, “other charges” of unallocated corporate items included costs of transferring product lines to Thailand of $12.0 million and $38.7 million, respectively.
The unallocated corporate items for the periods presented include the effects of amortization of acquired developed technologies and other intangibles, share-based compensation and certain other charges. We do not allocate these items to the gross margin for each segment because management does not include such information in measuring the performance of the operating segments.
Gross Margin
Gross margin for the three months ended March 28, 2020 increased to 39.2% from 20.4% for the three months ended March 30, 2019. The increase was primarily driven by better gross margins within Datacom, due to the sale of our Datacom transceiver module business, which had lower margins, and increased revenue from our Datacom chip products, as well as increased revenue from 3D sensing products for mobile devices. In addition, for the three months ended March 28, 2020, we had lower acquisition related costs such as amortization of acquired intangibles of $14.2 million and amortization of fair value adjustments of $13.0 million, as well as lower inventory and fixed asset write down charges due to product lines exit of $17.1 million.
Gross margin for the nine months ended March 28, 2020 increased to 39.3% from 29.2% for the nine months ended March 30, 2019. The increase was primarily driven by better gross margins within Telecom, due to the acquisition of Oclaro, better gross margins within Datacom, due to the sale of our Datacom transceiver module business and increased revenue of our Datacom chip products, which have higher margins, and increased revenue of 3D sensing products for mobile devices. In addition, for the nine months ended March 28, 2020, we had lower amortization of fair value adjustments related to the Oclaro acquisition of $10.0 million, as well as lower inventory and fixed asset write down charges due to product lines exit of $13.4 million.
We sell products in certain markets that are consolidating, undergoing product, architectural and business model transitions, have high customer concentrations, are highly competitive, are price sensitive and/or are affected by customer seasonal and mix variant buying patterns. We expect these factors to continue to result in variability of our gross margin.
Although the magnitude of the impact of COVID-19 on our business operations remains uncertain and difficult to predict, and this remains a highly dynamic situation, we have experienced and will continue to experience in subsequent periods, disruptions to our and our customers’ businesses that will adversely impact our business, financial condition and results of operations.
Segment Gross Margin
OpComms
OpComms gross margin for the three months ended March 28, 2020 increased to 45.0% from 38.0% for the three months ended March 30, 2019. The increase was primarily driven by better gross margins within Datacom, due to the sale of our Datacom transceiver module business, which had lower than average gross margins, and increased revenue from our higher margin Datacom chip products, which have higher than average gross margins, and increased revenue of 3D sensing products for mobile devices.
OpComms gross margin for the nine months ended March 28, 2020 increased to 46.4% from 39.2% for the nine months ended March 30, 2019. The increase was primarily driven by better gross margins within Telecom, due to the acquisition of Oclaro, better gross margins within Datacom, due to the sale of our lower margin Datacom transceiver module business and increased revenue of our higher margin Datacom chip products, and increased revenue of 3D sensing products for mobile devices.
Lasers
Lasers gross margin for the three months ended March 28, 2020 increased to 49.7% from 46.0% for the three months ended March 30, 2019. This increase was primarily driven by the streamlining of our manufacturing supply chain related to our kilowatt class fiber products.
Lasers gross margin for the nine months ended March 28, 2020 increased to 44.7% from 43.2% for the nine months ended March 30, 2019. This increase was primarily driven by the streamlining of our manufacturing supply chain related to our kilowatt class fiber products.
Research and Development (“R&D”)
R&D expense decreased by $9.0 million, or 15.6%, for the three months ended March 28, 2020 compared to the three months ended March 30, 2019. The decrease in R&D expense was primarily due to the decrease in payroll related expense of $1.9 million and the decrease in R&D materials of $2.3 million, as a result of the sale of our Datacom transceiver module business. In addition, we had $1.8 million increase in non-recurring engineering credits from customers.
R&D expense increased by $14.5 million, or 10.7%, for the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019. The increase in R&D expense was primarily due to the increase of $9.1 million in investments in key product lines and R&D materials. In addition, payroll related expense increased by $8.5 million mainly due to the acquisition of Oclaro, partially offset by the sale of our Datacom transceiver module business. These increases were offset by $2.4 million higher non-recurring engineering credits from customers.
We believe that continuing our investments in R&D is critical to attaining our strategic objectives. Despite the uncertainty related to COVID-19 and the global economic outlook, we currently plan to continue to invest in R&D and new products that we believe will further differentiate us in the marketplace and expect our investment in R&D to increase in absolute dollars in future quarters.
Selling, General and Administrative (“SG&A”)
SG&A expense increased by $6.1 million, or 11.1%, during the three months ended March 28, 2020 compared to the three months ended March 30, 2019. The increase in SG&A expense was primarily due to the increase in payroll related expense of $2.8 million, stock-based compensation of $2.4 million, integration related costs of $3.7 million, offset by lower discretionary travel and trade shows of $2.0 million, primarily due to COVID-19 restrictions.
SG&A expense increased by $29.5 million, or 19.5%, during the nine months ended March 28, 2020 compared to the nine months ended March 30, 2019. The increase in SG&A expense was primarily due to the increase in amortization of intangibles of $14.2 million and integration related costs of $9.8 million as a result of Oclaro acquisition, as well as the increase in payroll related expense of $13.8 million, offset by lower discretionary travel and trade shows, primarily due to COVID-19 restrictions in the three months ended March 28, 2020.
From time to time, we expect to incur non-core expenses, such as mergers and acquisition-related expenses and litigation expenses, which will likely increase our SG&A expenses and potentially impact our profitability expectations in any particular quarter.
Restructuring and Related Charges
We have initiated various strategic restructuring events primarily intended to reduce costs, consolidate our operations, rationalize the manufacturing of our products and align our business in response to market conditions and as a result of our acquisition of Oclaro in the second quarter of fiscal 2019.
During the three and nine months ended March 28, 2020, we recorded $2.7 million and $4.9 million, respectively, in restructuring and related charges in our condensed consolidated statements of operations. The charges were mainly attributable to severance charges associated with the decision to move certain manufacturing activities from San Jose, California to our facility in Thailand.
During the three and nine months ended March 30, 2019, we recorded $21.1 million and $30.2 million, respectively, in restructuring and related charges in our condensed consolidated statements of operations, primarily attributable to severance and employee related benefits associated with the wind down of operations for Lithium Niobate modulators and Datacom modules resulting in $18.0 million of severance charges and $1.6 million of lease restructuring charges. During the three and nine months ended March 30, 2019, we also recorded restructuring charges primarily associated with acquisition related synergies. In addition, the nine month period charges included severance and employee related benefits associated with Oclaro’s executive severance and retention agreements. These retention agreements provided, under certain circumstances, for payments and benefits upon an involuntary termination of employment.
Any changes in the estimates of executing our restructuring activities will be reflected in our future results of operations.
Impairment charges
In the third quarter of fiscal 2019, we announced our plan to discontinue the development of future Datacom transceiver modules which impacted the Milpitas and Shenzhen Datacom module teams. While we expect strong growth in Datacom volumes in the future, gross margins at the transceiver market level are lower due to extreme competition. Following the Oclaro acquisition, we have a differentiated leadership position across a range of photonic chips on which the Datacom, wireless, and access markets critically rely.
During the three and nine months ended March 28, 2020 and March 30, 2019, we recorded $2.5 million, $2.5 million, $30.7 million, and $30.7 million, respectively, in long-lived asset impairment charges in connection with the above plan.
Interest Expense
For the three months ended March 28, 2020 and March 30, 2019, we recorded interest expense of $15.6 million and $11.3 million, respectively. The increase in interest expense during the three months ended March 28, 2020 as compared to the three months ended March 30, 2019 was mainly driven by the increase in amortization of the debt discount and contractual interest expense of $10.8 million due to the issuance of our 0.50% Convertible Notes due in 2026 (the “2026 Notes”), offset by the decrease in contractual interest expense on our term loan facility of $6.2 million, which was fully repaid in the second quarter of fiscal 2020.
For the nine months ended March 28, 2020 and March 30, 2019, we recorded interest expense of $45.3 million and $24.9 million, respectively. The increase in interest expense during the nine months ended March 28, 2020 as compared to the nine months ended March 30, 2019 was mainly driven by amortization of the debt discount and contractual interest expense incurred from our 2026 Notes, as well as the loss on early extinguishment of debt of $8.0 million, which represents the write-off of the issuance costs in conjunction with payback of our term loan facility in the second quarter of fiscal 2020.
Other Income (Expense), Net
The components of other income (expense), net are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Foreign exchange gains (losses), net
|
$
|
0.7
|
|
|
$
|
(1.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(1.0
|
)
|
|
Interest income
|
5.2
|
|
|
3.9
|
|
|
12.6
|
|
|
10.0
|
|
|
Other income (expense), net
|
15.8
|
|
|
2.3
|
|
|
15.6
|
|
|
2.7
|
|
|
Total other income (expense), net
|
$
|
21.7
|
|
|
$
|
5.2
|
|
|
$
|
27.9
|
|
|
$
|
11.7
|
|
For the three and nine months ended March 28, 2020, other income, net increased by $16.5 million and $16.2 million, respectively, as compared to the three and nine months ended March 30, 2019, mainly driven by a gain on the sale of Lithium Niobate modulators business of $13.8 million. The transaction was completed in the third quarter of fiscal year 2020.
Unrealized Gain on Derivative Liability
We recorded $8.8 million of unrealized gain on Series A Preferred Stock derivative liability for the nine months ended March 30, 2019. On November 2, 2018, all 35,805 shares of our Series A Preferred Stock were converted to common stock with the outstanding balance of the embedded derivative liability reclassified to additional paid in capital. There will be no further adjustments to “unrealized gain (loss) on derivative liability” due to this conversion. For further discussion of our derivative liability, see “Note 11. Non-Controlling Interest Redeemable Convertible Preferred Stock and Derivative Liability” in the notes to condensed consolidated financial statements.
Provision for (Benefit from) Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
|
March 28, 2020
|
|
March 30, 2019
|
|
Provision for (benefit from) income taxes
|
$
|
5.2
|
|
|
$
|
(8.2
|
)
|
|
$
|
19.6
|
|
|
$
|
(1.6
|
)
|
We recorded a tax provision (benefit) of $5.2 million and $(8.2) million for the three months ended March 28, 2020 and March 30, 2019, respectively, and $19.6 million and $(1.6) million for the nine months ended March 28, 2020 and March 30, 2019, respectively. We recognized a discrete tax benefit of $4.1 million during the three months ended March 28, 2020 from the release of uncertain tax positions related to the fiscal 2016 U.S. federal income tax return as a result of the expiration of statute of limitations during the quarter. Our estimated effective tax rate for fiscal 2020 differs from the 21% U.S. statutory rate primarily due to the income tax benefit of the earnings of our foreign subsidiaries being taxed at rates that differ from the U.S. statutory rate as well as the U.S. federal R&D and foreign tax credits, partially offset by the income tax expense from non-deductible stock-based compensation and the tax effect of Global Intangible Low-Taxed Income (“GILTI”), Base Erosion and Anti-Abuse Tax (“BEAT”) and subpart F inclusion.
Contractual Obligations
The following table summarizes our contractual obligations as of March 28, 2020, and the effect such obligations are expected to have on our liquidity and cash flow over the next five years (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
Total
|
|
Less than 1 year
|
|
1 - 3 years
|
|
3 - 5 years
|
|
More than 5 years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
$
|
4.9
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
1.8
|
|
|
$
|
2.1
|
|
|
Finance lease liabilities, including imputed interest
|
4.0
|
|
|
3.9
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
Operating lease liabilities, including imputed interest (1)
|
80.6
|
|
|
13.5
|
|
|
24.0
|
|
|
16.5
|
|
|
26.6
|
|
|
Pension plan contributions (2)
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Purchase obligations (3)
|
257.2
|
|
|
255.3
|
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
Convertible notes - principal (4)
|
1,500.0
|
|
|
—
|
|
|
—
|
|
|
450.0
|
|
|
1,050.0
|
|
|
Convertible notes - interest (4)
|
41.3
|
|
|
5.9
|
|
|
12.7
|
|
|
12.2
|
|
|
10.5
|
|
|
Total
|
$
|
1,888.5
|
|
|
$
|
279.1
|
|
|
$
|
39.7
|
|
|
$
|
480.5
|
|
|
$
|
1,089.2
|
|
(1) The amounts of operating lease liabilities in the table above do not include any sublease income amounts nor do they include payments for short-term leases or variable lease payments. As of March 28, 2020, we expect to receive sublease income of approximately $5.9 million over the next three years.
(2) The amount in the preceding table represents planned contributions to our defined benefit plans. Although additional future contributions will be required, the amount and timing of these contributions will be affected by actuarial assumptions, the actual rate of returns on plan assets, the level of market interest rates, legislative changes, and the amount of voluntary contributions to the plan. Any contributions for the following fiscal year and later will depend on the value of the plan assets in the future and thus are uncertain. As such, we have not included any amounts beyond one year in the table above.
(3) Purchase obligations represent legally-binding commitments to purchase inventory and other commitments made in the normal course of business to meet operational requirements. Refer to “Note 17. Commitments and Contingencies” in the notes to condensed consolidated financial statements.
(4) Includes principal and interest on our 0.25% Convertible Notes due in 2024 (the “2024 Notes” and together with the 2026 Notes, the “Notes”) through March 2024, and principal and interest on our 2026 Notes through December 2026. We have the right to redeem the 2024 Notes and the 2026 Notes in whole or in part at any time on or after March 15, 2024 and on or after December 15, 2026, respectively. Refer to “Note 12. Debt” in the notes to condensed consolidated financial statements.
As of March 28, 2020, our other non-current liabilities also include $18.1 million of unrecognized tax benefit for uncertain tax positions. We are unable to reliably estimate the timing of future payments related to uncertain tax positions and therefore have excluded them from the preceding table.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as such term is defined in rules promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Financial Condition
Liquidity and Capital Resources
As of March 28, 2020 and June 29, 2019, our cash and cash equivalents of $688.3 million and $432.6 million, respectively, were largely held in the United States. The total amount of cash outside the United States as of March 28, 2020 was $84.7 million, which was primarily held by entities incorporated in Japan, the United Kingdom, the British Virgin Islands, Hong Kong, and Thailand. Although the cash currently held in the United States as well as the cash generated in the United States from future operations is expected to cover our normal operating requirements, a substantial amount of additional cash could be required for other purposes, such as capital expenditures to support our business and growth, including costs associated with increasing internal manufacturing capabilities, particularly in our Thailand facility, strategic transactions and partnerships, and future acquisitions. Our intent is to indefinitely reinvest funds held outside the United States, except for the funds held in the Cayman Islands, Japan and Hong Kong, and our current plans do not demonstrate a need to repatriate them to fund our domestic operations. However, if in the future, we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, or the cost to bring back the money is insignificant from a tax perspective, we may determine that cash repatriations are necessary or desirable. Repatriation could result in additional material taxes. These factors may cause us to have an overall tax rate higher than other companies or higher than our tax rates have been in the past. If conditions warrant, we may seek to obtain additional financing through debt or equity sources. To the extent we issue additional shares, our existing stockholders may be diluted. However, any such financing may not be available on terms favorable to us, or may not be available at all.
As of March 28, 2020, our condensed consolidated balance of cash, cash equivalents, and restricted cash increased by $256.2 million, to $688.8 million from $432.6 million as of June 29, 2019. The increase in cash, cash equivalents, and restricted cash was mainly due to cash provided by operating activities of $401.6 million and cash provided by financing activities of $332.5 million, offset by cash used in investing activities of $477.9 million during the nine months ended March 28, 2020.
As of March 30, 2019, our consolidated balance of cash and cash equivalents, including cash classified within assets held-for-sale, decreased by $39.0 million, to $358.3 million from $397.3 million as of June 30, 2018. The decrease in cash and cash equivalents was mainly due to cash used in investing activities of $725.3 million, principally related to cash used to acquire Oclaro; partially offset by cash provided by financing activities of $484.1 million, primarily related to $490.8 million in proceeds from a term loan, net of debt issuance costs, used to fund the Oclaro acquisition, and cash provided by operating activities of $202.4 million during the nine months ended March 30, 2019.
Operating Cash Flow
Cash provided by operating activities was $401.6 million during the nine months ended March 28, 2020. Our net income was $140.1 million for the nine months ended March 28, 2020. Cash provided by operating activities was generated primarily from $232.8 million of non-cash items (such as depreciation, stock-based compensation, amortization of intangibles, amortization
of debt discount and debt issuance costs on our term loans and convertible notes, and other non-cash charges), and $28.7 million of changes in our operating assets and liabilities. Changes in our operating assets and liabilities related primarily to a decrease in inventories of $48.3 million offset by an increase in accounts receivable of $23.8 million.
Cash provided by operating activities was $202.4 million during the nine months ended March 30, 2019. Our net loss was $10.6 million for the nine months ended March 30, 2019. Cash provided by operating activities was generated primarily from $210.0 million of non-cash items (such as depreciation, stock-based compensation, unrealized (gain) loss on derivative liability, amortization of intangibles, amortization of discount on the 2024 Notes, amortization of the debt issuance costs on the term loan, amortization of fair value adjustment in connection with the acquisition of Oclaro, net amortization of discounts and premium on investments, and impairment charges and others), and $3.0 million of changes in our operating assets and liabilities.
Investing Cash Flow
Cash used in investing activities of $477.9 million during the nine months ended March 28, 2020 was primarily attributable to purchases of short-term investments, net of sales and maturities of $427.9 million, capital expenditures of $64.9 million, and payment for asset acquisition of $4.0 million, offset by proceeds from sale of product lines of $18.9 million.
Cash used in investing activities of $725.3 million during the nine months ended March 30, 2019, was primarily attributable to $619.8 million in cash payments to acquire all outstanding shares of common stock of Oclaro, net of cash received through the acquisition of Oclaro. In addition we had capital expenditures of $80.5 million, payment for asset acquisition of $1.3 million, and purchase of short-term investments, net of sales of $23.7 million.
Financing Cash Flow
Cash provided by financing activities of $332.5 million during the nine months ended March 28, 2020 resulted primarily from the proceeds of the issuance of the 2026 Notes of $1,042.4 million, net of issuance costs, offset by the repurchase of shares of our common stock of $200.0 million and repayment of our term loan facility of $497.5 million.
Cash provided by financing activities of $484.1 million during the nine months ended March 30, 2019, primarily resulted from $490.8 million of proceeds from a term loan, net of debt issuance costs, used to partially finance the Oclaro acquisition, $4.7 million from the issuance of common stock under the employee stock plan; partially offset by the repayment of capital lease obligations of $6.1 million, tax payments related to restricted stock of $2.4 million, a payment of an acquisition related holdback of $1.0 million, and dividend payments on our Series A Preferred Stock of $0.7 million.
Liquidity and Capital Resources Requirements
We believe that our cash and cash equivalents as of March 28, 2020 and cash flows from our operating activities will be sufficient to meet our liquidity and capital spending requirements for at least the next 12 months. However, if market conditions are favorable, we may evaluate alternatives to opportunistically pursue additional financing.
There are a number of factors that could positively or negatively impact our liquidity position, including:
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global economic conditions which affect demand for our products and services and impact the financial stability of our suppliers and customers, including the impact of COVID-19;
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fluctuations in demand for our products as a result of changes in regulations, tariffs or other trade barriers, and trade relations in general;
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changes in accounts receivable, inventory or other operating assets and liabilities, which affect our working capital;
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increase in capital expenditures to support our business and growth;
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the tendency of customers to delay payments or to negotiate favorable payment terms to manage their own liquidity positions;
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timing of payments to our suppliers;
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factoring or sale of accounts receivable;
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volatility in fixed income and credit, which impact the liquidity and valuation of our investment portfolios;
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volatility in foreign exchange markets, which impacts our financial results;
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possible investments or acquisitions of complementary businesses, products or technologies, or other strategic transactions or partnerships;
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issuance of debt or equity securities, or other financing transactions, including bank debt;
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potential funding of pension liabilities either voluntarily or as required by law or regulation; and
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the settlement of any conversion or redemption of the 2024 Notes and the 2026 Notes in cash.
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